The US-based NFT trading platform, Cent, which stunned an unsuspecting public by selling an NFT of Jack Dorsey’s first ever tweet on Twitter for £2.1 million has recently suspended trading of (most) NFT assets because “people were selling tokens of content that did not belong to them”, with its co-founder Cameron Hejazi admitting this was a “fundamental problem” in the fast-growing digital assets market. Whilst the Cent marketplace has stopped general NFT sales, the part specifically for selling NFTs of tweets, which Cent calls “Valuables” (sic) is still operating.

“There’s a spectrum of activity that is happening that basically shouldn’t be happening – like, legally” said co-founder Hejazi, highlighting three main problems:

  • People selling unauthorized copies of other NFTs (aka Counterfeiting)
  • People making NFTs of content which does not belong to them (aka Fraud)
  • People selling sets of NFTs which resemble a security (aka Securities Fraud)

Additionally there is (at least) a fourth problem – there has been substantial reported activity where the same party buys/sells their own NFTs (so-called wash-trading) in order to make the NFT market or asset appear more valuable/popular than it actually is. In a market where (quite apart from the value of the asset it points to) the token itself has virtually no value other than the public interest in it and so this amounts to serious market manipulation. This is a form of securities fraud which has been illegal in the US since 1936.

Hejazi was apparently not trying to downplay the situation when he described these issues as “rampant,” with users “minting and minting and minting counterfeit digital assets.” “It kept happening. We would ban offending accounts but it was like we’re playing a game of whack-a-mole… Every time we would ban one, another one would come up, or three more would come up.”

It appears that there is potential systemic and market risk in a marketplace which cannot effectively prevent users fraudulently trading on its systems and the liability for any losses incurred might seem to be a troubling future possibility for the operators of such platforms.

Its not difficult to see the appeal of the model: It seems to follow naturally from the notion that the one thing better than making money from things you make/buy/sell is making money from things that OTHER PEOPLE make/buy/sell.  A model delivering huge financial sucess to Amazon MarketPlace, Apple AppStore and eBay in recent years.

After all, NFTs require neither physical storage space nor distribution network, require neglible power and no materials to make, require no maintenance and yet (currently) sell for what can only be described as “incredible” prices (i.e., not believable). If you are an exchange or trading platform for NFTs than you don’t even need to expend any effort on creating the assets in the first place. What modern digital company wouldn’t want a piece of that emerging market? For those old enough to remember buying virtual t-shirts and virtual baseball caps for real money in Second Life – we seem to be heading back to the digital store to buy more digital stuff – one wonders whether this is primarily because our lives and our homes are already full to the brim of the physical stuff  that we’ve been buying for the last decade or two.

How can firms continue to grow and place products in markets that are already choking with stuff and where the cost of manufacturing, materials, offsetting pollution and disposal of waste are becoming such hot topics? The answers to these problems may become more visible as more global brands join the NFT gold rush focussed on selling us pointers/receipts to things we don’t actually own. Amazon solves this problem elegantly as they increasingly sell products manufactured stored shipped by other people and as they move from paper books (assets which we actually own when we buy them and can be sold or given away) to Kindle eBooks which we do NOT own but rather license from Amazon. Whilst licenses vary beteeen platforms and can change over time essentially the rights to read an ebook typically end with the death of the orginal customer. Makes you wonder what will happens with NFTs: will they be “bearer instruments” like a bond that anyone can carry around or named contracts like modern equity registers? Will they be timeless like a book or time-bound like an ebook license? So many questions… 

With Coca-Cola, Gucci and Nike featuring among companies to have already sold NFTs, Nike has even bought a virtual sneaker maker to sell digital shoes  (no mention of where our digital socks or our digital feet will be coming from).  Alphabet-owned company YouTube has said it will explore NFT features, presumably to further license and monetise the huge amounts of digital content on its platform (perhaps as an alternative to ad revenues) or the confusing YouTube Red aka YouTube Premium. 

Confidence issues however are more widespread then just around a single platform.  The biggest NFT marketplace, OpenSea, currently valued at $13.3 billion, said last month more than 80% of the NFTs minted for free on its platform were “plagiarized works, fake collections and spam.” For the avoidance of doubt an OpenSea spokesperson did confirm that “It is against our policy to sell NFTs using plagiarized content”. This will perhaps be of minimal comfort to anyone who has already handed over good money for a fake NFT, has seen valid NFTs of their copyright works illegally minted or more generally to the investors behind OpenSea. One wonders if the connection between (the) OpenSea and the traditional home of pirates occured to the marketing department at the time they were choosing a name or if indeed the universe really is powered by irony as some have suggested.

 More recently “at least three opportunists exploited the OpenSea loophole Monday, making away with over $1 million worth of ether in ensuing NFT sales, according to blockchain analytics firm Elliptic. One user (jpegdegenlove), paid roughly $133,000 for seven NFTs, before flipping the digital collectibles on OpenSea for $934,000 of ether.”  The issue is being characterised as a “UI Issue”. According to Blockworks OpenSea reportedly had a bug in its marketplace that destroyed 42 NFTs last year, but was fixed within a day. 

Despite the fairly obvious conclusion that markets littered with fakes, stolen assets and fraudsters are not only “problematic” (but are perhaps to be avoided entirely), sales of NFTs have nevertheless rocketed to around £18 billion in 2021, leaving many baffled (including the author) as to where the money is coming from and why so much of it is being spent on items that do not physically exist and which typically anyone can view online for free.

Its a very very good question.

To many NFT-enthusiasts, the decentralised nature of blockchain technology is appealing, allowing users to create and trade digital assets without a central authority controlling the activity, though it appears that a lack of a central authority may, ironically, be NFT’s single biggest weakness if it cannot quickly and successfully assert a credible and trustworthy way of creating and trading digital assets. Cent has talked about putting centralised controls in place whilst they figure out how to make the platform work.

Who are they for?

Much has been made of the ability for musicians and artists to recoup some of their diminishing copyright revenues as art and content production has increasingly moved into the world of streaming and downloads – the question, however, remains what can you DO with a token for an asset:

  • That potentially everyone else has access to anyway (without paying)
  • That confers no control nor ownership rights over the original asset

There seem to be a few reasons so far:

  1.  Speculate with it – i.e. attempt to re-sell it while the price is still going up. Otherwise, like a game of pass-the-parcel , the market may eventually determine the asset’s price is largely determine by buzz  (see Wash-Trading) rather than any underlying value and is now worth less than you paid for it. This makes NFTs feel like a quick-in-quick-out trading opportunity with the guy holding the NFT parcel when the music stops potentially badly out of pocket.
  2. Gain attention (participate) with it – i.e. derive a vicarious pleasure and attention from owning something that notionally links you with a famous item or person whether or not the certificate is eventually worth more than you paid for it. There is a story about US actor John de Lancie (who played the iconic Star Trek character known as “Q”) appearing at an auction of sci-fi memorabilia despite feeling very ill with the flu whereupon a fan paid $60 for his unfinished glass of water in order to obtain “a copy of the Q-Virus.” People will, it seems, buy virtually anything if the story behind it is suitably compelling. John de Lancie accepted the $60 on behalf of a charity and has fully recovered whilst little is known about where the virus is now.
  3. Support art/culture with it – i.e. find a method of supporting artists and content producers who have had previously rivalrous goods like albums, CDs and videos replaced by non-rivalrous and heavily-pirated digital versions. NFTs might be a method to support artists though a connection to older works/pieces but whether this is more attractive and represents a better relationship between the artist and the fans than something like a Patreon subscription remains to be seen,

Other than appeasing die-hard Star Trek fans (which is probably not the primary market the NFT exchanges are looking at) the more interesting question for the longevity of NFT is whether you can invest in them – given they don’t age or degrade (unlike the assets they point to). There will never be fewer of them (only more) and like signed books, albums, autographs and celebrity-owned items, the risk is that they are (currently) easy to fake and thus the market is full of counterfeits. Remember even a valid NFT isn’t the real thing- only a certificate. Its like buying the certificate for a Hendrix guitar but not actually the guitar … I’m not sure I see the attraction.

Critics have observed that in a poorly regulated market NFT’s may also be a convenient method to soak up (or even launder) large amounts of cash that individuals and organisations would prefer local tax authorities knew little about. Anti-money laundering groups are doubtless keeping a close eye on this space since a recent US Treasury report on money laundering and art works.

Looking back to the evolution of earlier electronic financial markets 1980’s-1990’s there were undendeniably widespread problems in understanding how the markets worked and how the assets should be priced. NFTs may experience these same problems as markets develop with early wild over-pricing being replaced by more conservative methods and practices. 

Broader block-chain technologies and digital currencies based on proof-of-work or proof-of-control are doubtless interesting approaches with growing applications (albeit some with ugly environmental costs) and NFTs are part of this broader landscape.  Without better regulation and processes the current NFT landscape may be no more than the latest get-rich-quick scheme for traders to get in and out before the markets collapse. With better understanding tools and regulation we might be seeing the formation of new markets in novel digital assets that will actually hold value and fund arts/business for longer term investors to capture and increase value over time.

Time will tell how quickly the NFT Goldrush can be made safe and secure for the general public and the general investor but for now anyone putting up serious cash in an unproven market for an uncertain digital token is living in the wild west.

It is perhaps worth noting that the only people who consistently make money in the wild west during the gold rushes were the businesses selling shovels.


Terms/ Concepts

NFTs (or Non-Fungible Tokens) are crypto assets that record the ownership of a digital asset such as an image, video or text. Anyone can create, or “mint,” an NFT, however ownership of the token does not usually confer control over or ownership of the underlying item nor is there (as yet) a reliable method of ensuring that the individual minting the NFT has any right to do so especially where they do not own the original underlying asset.

Fungible: Despite having serial numbers Notes/Bills (incl pound notes and dollar bills!), stock certificates, bond certificates and similar physical financial certificates are handled de facto as though they are identical and can be freely swapped for another bill, note or certificate of the same denomination – they are fungible-  i.e. equivalent/interchangeable. NFT’s however represent unique and NON-Fungilble records which are interesting because of their unique nature.

Rights: When we paint a watercolour scene on paper and sell it we no longer have the painting after the sale: the purchaser does. These are “rivalrous goods” such that EITHER I have the painting or the buyer does. Digital goods in contrast may be “non-rivalrous” in that if we paint a digital portrait and sell the image we can still have what is effectively the SAME image as the purchaser after the sale – differences between two copies of an unsigned digital image file can range from tiny to non-existent. Digital rights, especially around non-rivalrous goods like digital assets may be poorly defined/understood in many areas leading to misunderstandings around what rights/materials the buyer is obtaining.

Scams: Despite the intention to digitally certifiy individual ownership reliably, reports of scams, counterfeits and so-called “wash trading” have become commonplace. Individuals are minting reproductions of supposedly unique NFTs pointing to underlying assets, minting NFTs pointing to assets (including artworks) over which they have no rights.

Wash trading: “wash trading” is where the same individual is on both sides of the trade (buy and sell) which attempts to paint a misleading picture inflating the apparent interest in an asset and thereby inflating the perception of the asset’s value and liquidity.