Wednesday, July 21st, 2021
Are you interested in NFTs? You will have to use them eventually. What does your future hold?
NFT stands for “non-fungible token.” It’s a record on a blockchain of the ownership and transfer history of an asset. Blockchain technology is attractive because it creates an unalterable computer record of information. Cryptocurrencies are used to buy and sell stuff on blockchains. The blockchain keeps a record of the sales prices and cryptocurrency transfers.
You probably have heard of popular NFTs such as digital art, the digital version of sports trading cards (such as NBA Top Shot), and selling weapons and land in video games.
While those things might not interest you, future NFT uses will be unavoidable. That’s because NFTs are a great way to authenticate a credential, record ownership and transfer of an asset, and sell tickets.
Consider credentials. Anything you might put on your resume or your LinkedIn profile could be recorded in an NFT. Doing so would stop resume fraud. Your high school and college diplomas might be NFTs. Any award you win, certification you achieve, and job you hold might be recorded in an NFT. Your resume might become an amalgamation of such NFTs.
Also consider transactions in assets for which title records are kept. The titles to your house and car might be recorded in NFTs, along with bank liens. All sales might occur in a blockchain marketplace, including recording the purchase price and making payment in digital currency. Right now, titles to cars are recorded at the DMV, and house titles are recorded in city or county courthouses. Technologically, this could move to a blockchain.
NFTs also are becoming popular for entertainment experiences. For example, sports teams offer NFTs in which the buyer gets a digital asset (perhaps a limited-edition digital depiction of a championship ring) plus real-world experiences, such as special seats at a game or interactions with players.
Eventually, NFTs will be used for commonplace consumer ticketing. Perhaps you’ll buy an NFT for your ticket to Disney World. The NFT might contain digital art as a memento of your visit and serve as your ticket. It might come with extras such as park access before or after regular hours or character meetups. You might buy and trade such NFTs in a marketplace. Disney might take a cut of all resales, because NFT technology enables this.
What will your experience as an everyday NFT user be like? Expect to deal with anti-money-laundering laws and, sometimes, securities laws.
Concerning money laundering, the law requires banks and investment houses to watch for transactions that might be the proceeds of criminal activity. These laws eventually will apply to cryptocurrency transactions.
When a transaction is above $10,000, a financial institution has an obligation under “Know Your Customer” laws to gather the customer’s name, address, Social Security number, and a copy of a driver’s license or other government ID.
It is illegal to structure a transaction to avoid such reporting. Financial institutions must report suspicious activity to the government. Eventually, NFT and other cryptocurrency transactions will be subject to such rules, just like when you make a big deposit or withdrawal at a bank.
Then there are securities regulations. Under the law, something is a security if it is an investment in a common enterprise where future value is determined by a promoter or third party. That’s why a stock is a security. You buy a stock hoping it will go up in value because of the business efforts of the company.
Securities laws might cover the marketplaces for NFTs, and perhaps even some individual NFTs depending on how they are structured and promoted. For example, the company offering NBA Top Shot, Dapper Labs, is being sued in a class action by people claiming it’s selling securities because of how Dapper Labs operates its resale marketplace and promotes the value of its NFTs.
What will securities regulation of NFTs mean for you, the consumer? It will be the same thing you encounter today as an investor.
Securities offerings must be registered with the government and are tightly regulated. Securities law requires extensive risk disclosures to prospective purchasers. There will be certain risky NFT-based assets that only certain qualified investors may buy. The law will prohibit ownership of certain kinds of price-volatile NFT-based assets in 401(k) and other retirement accounts.
Eventually, NFTs will take over much of your life credentials, transactions, and ticketing. It will be a digital Brave New World.
Written on July 20, 2021
by John B. Farmer
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