1、Regulating NFTs Striking the Balance between Business Innovation and RisksE X ECU TIV E SUMMARYW HITE P A P ER/JANUARY 2024Research into the opportunities and risks of NFTs,and considerations for policymakers is based on interviews with industry and regulatory representatives across different jurisd
2、ictions.This report,developed through a mixture of primary and secondary research,aims to explore the NFT landscape with reference to why and how regulators and lawmakers should take an interest in this industry and follow its development closely.There are strong incentives to protect consumers and
3、to ensure that taxes are collected appropriately.Yet at the same time,it will be important for regulators and policymakers to work alongside NFT players to ensure they support and encourage entrepreneurial experiments in this space.Entrepreneurs are looking for home bases for their companies that of
4、fer certainty and stability when it comes to regulation.There is an excellent opportunity to encourage this economic activity,while ensuring that companies operate within guidelines.We are grateful to the leading industry representatives and policy/regulatory experts that met with us to explain thei
5、r perspectives over several hours of interviews.A full list of acknowledgements is included in appendix b.Digital Currencies Governance Group(DCGG)a trade organisation representing digital assets issuers and service providers in both the UK and EU.Our mission is to facilitate an open dialogue and en
6、courage communication between policymakers and digital asset experts to support the design of a sound and proportionate regulatory framework that ensures safety for all market participants.INSEAD Business School-as one of the worlds leading and largest graduate business schools,INSEAD brings togethe
7、r people,cultures and ideas to develop responsible leaders who transform business and society.Our research,teaching and partnerships reflect this global perspective and cultural diversity.With locations in Europe(France),Asia(Singapore),the Middle East (Abu Dhabi),and North America(San Francisco),IN
8、SEADs business education and research spans four regions.Our 162 renowned Faculty members from 40 countries inspire more than 1,300 degree participants annually in our Master in Management,MBA,Global Executive MBA,Specialised Masters degrees(Executive Master in Finance and Executive Master in Change
9、)and PhD programmes.In addition,more than 10,000 executives participate in INSEAD Executive Education programmes each year.INSEAD continues to conduct cutting-edge research and innovate across all our programmes.We provide business leaders with the knowledge and awareness to operate anywhere.Our cor
10、e values drive academic excellence and serve the global community as The Business School for the World.For more information,visit www.insead.edu.This report has benefited from the extensive resources and insights provided by the digitalINSEAD initiative.For more detailed information,you can visit di
11、gitalINSEAD.Chief EditorsJoshua Townson Head of UK Policy at DCGGMina Iotova EU and UK Policy Analyst at DCGGProfessor Peter Zemsky Eli Lilly Chaired Professor of Strategy and Innovation,INSEADProfessor Frdric Godart Associate Professor of Organisational Behaviour,INSEADDr Lisa Simone Duke Lecturer,
12、writer and researcher at Lisa Duke SrlAbout the document and acknowledgementAbout the authors Regulating NFTs:Striking the Balance between Business Innovations and Risks2What is a Non-Fungible Token(NFT)?NFTs are relatively new types of digital assets that are designed to represent ownership of some
13、thing that is unique and scarce,whether that be tokenised physical assets,rare digital resources,shares,or practically anything else.Enforced by smart contracts,NFTs cannot be replaced with another identical token and the scarcity of the NFT is provable on publicly visible blockchains.What is a bloc
14、kchain?A blockchain is a distributed and immutable digital ledger that is responsible for recording transactions and tracking the movement of digital assets on its network.Primarily,blockchains were used to track financial assets but today,there are a growing number of use cases as the blockchain is
15、 an efficient way to store value.What does non-fungible mean?Similar to major digital assets like bitcoin,NFTs are stored as data on a blockchain and held in NFT-compatible wallets.NFTs differ from other digital assets through a characteristic known as“non-fungibility”which essentially means it is u
16、nique and non-interchangeable given each NFT has its own specific set of attributes that make it distinct from other tokens.Why do NFTs have value?Since NFTs are unique and can vary in their rarity,desirability,and utility,a market has developed around highly sought-after NFTs,where collectors and t
17、raders buy and sell NFTs with the value set by speculation,supply and demand,and other factors.Like many collectibles,the worth of a NFT is set by how much somebody is willing to pay for it.How are NFTs being used?The number of potential use cases for NFTs continues to grow.Popular use-cases include
18、 representing individual works of art,a form of digital art or collectibles,in-game assets,land/property ownership,brand loyalty certificates,ticketing,or in supply-chains.There are many examples that will continue to grow and develop.What are the benefits of NFTs?NFTs have the potential to support
19、growth and innovation in the economy,increasing engagement between artists and fans,brands and customers,and providing/exchanging certification of ownership across a range of asset classes.This has the potential to transform a wide spectrum of sectors ranging from the carbon credit market to real es
20、tate and art.What are the risks of NFTs?Consumers may not fully understand the risks involved in purchasing NFTs for speculative purposes,or the related rights embedded in NFTs.Illicit actors could exploit the marketplace for money laundering purposes,or to conduct scams.Why regulate?Where an NFT re
21、presents a financial services activity,existing regulations are likely to apply.Specific guidance on when an NFT falls under existing regulations is important to provide regulatory clarity.Given their non-fungible nature,however,NFTs are closer to artworks and collectibles,or related to non-financia
22、l services activities where less stringent regulations should apply.The following page lists several recommendations for policymakers to consider,which are explained in more detail in chapter 6.FAQsRegulating NFTs:Striking the Balance between Business Innovations and Risks3Financial services As a pr
23、iority,regulators should focus on producing NFT-dedicated guidance on the specific characteristics that may result in the issuance,purchase,or trading of an NFT being treated as a regulated financial services activity.Policymakers should consider whether existing securities laws should apply to f-NF
24、Ts,or whether the development of a modified set of requirements should apply.The fungibility of an NFT should not be the sole determinant of whether or not financial services regulations should apply.The economic reality,utility and full suite of characteristics must be assessed on a case-by-case ba
25、sis.Non-financial services NFTs should not be regulated as a distinct asset class and applying financial services regulations is often inappropriate due to NFTs non-fungible characteristics.A case-by-case approach should be adopted,aligning with rules from analogous traditional sectors.Governments s
26、hould monitor developments and engage with NFT marketplaces to better understand the potential threats of intellectual property infringement and the role of industry self-regulation.Clarity should be provided on the legal status of NFTs and digital assets as a form of property.Governments and regula
27、tors should consider establishing an expert advisory panel to provide opinions on the application of legal and regulatory frameworks to NFTs as the technology continues to develop.Guidance on NFT taxation with regard to calculation methods and taxable entities should be provided to promote legal cer
28、tainty.Governments and regulators should consider developing sandbox initiatives to allow brands and issuers to experiment with new NFT technologies and applications,while also providing increased training to staff on NFT products and services.Policy Considerations and RecommendationsRegulating NFTs
29、:Striking the Balance between Business Innovations and Risks41 What are Non-Fungible Tokens(NFTs)?2 Understanding the NFT Landscape3 Utility of NFTs4 Mapping the Risks and Opportunities of NFTs5 NFT Regulation6 RecommendationsAnnexGlossary of Terms612182833464952Table of contentsRegulating NFTs:Stri
30、king the Balance between Business Innovations and Risks5What are Non-Fungible Tokens(NFTs)?1Regulating NFTs:Striking the Balance between Business Innovations and Risks6In this section,we describe and define NFTs,explore their characteristics and categorisations and trace the mechanics of NFTs from c
31、reation to ownership.NFTs are built on blockchain technology and involve smart contracts.Blockchain1 is a type of shared database(also known as a distributed ledger technology)that stores information in blocks linked together across a peer-to-peer network.Decentralised blockchains are immutable once
32、 data is entered into the block,it is irreversible.Blockchains are mostly known for cryptocurrencies such as Bitcoin.Crypto wallets2 are essentially password managers for digital assets.They store private keys(passwords not coins)that help people use the blockchain.Non-custodial wallets refer to all
33、 types of storage solutions where the owner is the only one who can access and control their funds.While custodial wallets are controlled by a third-party provider such as a marketplace,an exchange,broker,or a crypto bank.Hot wallets are software apps that can be downloaded to a desktop or mobile de
34、vice;the private keys are stored online.Cold wallets are hardware devices that look like a USB stick that have to be attached to a computer;the private keys are stored on the device.Description of NFTsThere is no single definition of an NFT and researchers and analysts have made different attempts a
35、t defining them.These include identifying properties such as uniqueness and indivisibility:“a peculiar type of token that is indivisible and unique”.3As a contract“a cryptographic4 token issued on a blockchain associated with a smart contract”,5 and“unique,digital items with blockchain-managed owner
36、ship”.6As proof of ownership or representation:“a unique digital asset stored on the blockchain7 that serves as proof of ownership or authenticity for a digital or physical item/right”;8“digital assets containing unique identification codes that verify ownership”,9 and“blockchain-based records that
37、uniquely represent pieces of media”.10For simplicitys sake,we will use the definition given by INSEADs expert Professor Pavel Kireyev,who defines an NFT as“a digital certificate of ownership”.11NFTs exist on blockchain technology and are made possible through“smart contracts”.A smart contract contai
38、ns the address of the issuer,the name of the token,the unique identifier of the token and the functions of the smart contract,as well as a link to the underlying file which could be stored on a storage blockchain,a centralised database,or on an open-source peer-to-peer file distribution protocol kno
39、wn as InterPlanetary File System(IPFS).12Non-fungible means each NFT is distinct and cannot be replicated or replaced by another token.In this regard,an NFT is like physical objects such as a ticket to seat B23 in the stalls for the Nutcracker ballet or the painting The fighting Temeraire by JMW Tur
40、ner,RA.This compares to fungible things which include fiat currencies where a 5 note can be exchanged for another 5 note or cryptocurrencies,which,like NFTs,are stored on blockchain,but unlike NFTs can be exchanged on a one-to-one basis.Technology Standards of NFTs13NFTs utilise token standards supp
41、orted by various blockchains such as Ethereum,Algorand,Polygon,Solana,and Tron.The largest and most established ecosystem for NFTs is Ethereum-the first blockchain that could support NFTs as it enabled the creation,storage,programming and trading of these tokens and is home to the largest exchange,O
42、penSea.While the Ethereum ecosystem is decentralised,it still requires someone to set the rules and standards that define what is possible on the blockchain.The core developers created a subcategory of improvement proposals called Ethereum Request for Comments(ERC)that define the technical standards
43、 for the creation of tokens,smart contracts,applications,and wallet formats on Ethereum.All the tokens that are created must follow the standards set by these ERCs.Today,there are three standards most common on Ethereum:ERC-20,ERC-721,and ERC-1155.ERC-20 is the token standard that allows developers
44、to create fungible tokens,which means one unit of a token can be interchanged with any other unit of that token because they represent the same value.Given NFTs are non-fungible,they are not typically designed via this standard.As the use-cases of blockchain expanded,there was a need to tokenise and
45、 represent unique data on the blockchain.The ERC-721 standard emerged as the primary format for NFTs,which possess a unique value.Both these token standards allow for one smart contract to support a single type of fungible or non-fungible token.This can be time consuming as it requires writing a new
46、 smart contract to deploy a new token.This led to the establishment of the ERC-1155 token standard,enabling developers to create fungible,semi-fungible,and non-fungible tokens using the same standard.It also enables multiple types of individually configurable Regulating NFTs:Striking the Balance bet
47、ween Business Innovations and Risks7tokens.For example,an NFT game could be developed using the ERC-1155 standard to provide the fungible in-game currency and NFTs for unique in-game assets.Characteristics of NFTs14NFTs have seven important characteristics:1.Non-fungibility:the primary attribute of
48、an NFT is its non-fungibility.This means each NFT is unique and is marked by a distinct digital signature or represents specific digital content like art or collectibles.2.Blockchain Foundation:NFTs are built on blockchain technology which records and authenticates each tokens details,ensuring secur
49、e and verifiable ownership.153.Immutability:An NFTs blockchain data is permanent and unchangeable,offering high security and trust in its authenticity and ownership.4.Provable scarcity:Creators can determine the specific number of rare items versus common items by programming this into the smart con
50、tract code.This characteristic is important as it can increase the price of rare items.5.Ownership and Provenance:NFTs establish a new form of digital ownership.The blockchain provides a transparent history of ownership and any associated transactions(sales or transfers),enhancing traceability.6.Pro
51、grammability:NFT smart contracts execute specific actions under specific conditions.This feature adds functionalities such as embedded royalties,ownership transfers and special customer-experience-enhancing features like access to invitation only online or physical events.7.Interoperability:Due to t
52、he standardisation of NFTs on blockchains,NFTs can be used across various platforms and applications,enhancing their utility in different virtual environments.This means they can also be traded on open marketplaces and sell in any currency.Categorisation of NFTSThere is no commonly held taxonomy of
53、the multiple use cases of NFTs.Some analysts have characterised speculative versus non-speculative,16 while others have looked at NFTs tied to physical or purely digital categories.17 Our research draws on different attempts to characterise existing use cases,but it should be noted that some NFTs cr
54、oss the different categories,which adds to the difficulty in proposing an exact taxonomy:LabelDescriptionExamplesAuthenticationNFTs can represent digital identities or certifications,providing a secure and immutable way to verify credentialsA Breitling watch now comes with an NFT warrantyTraceabilit
55、yThese NFTs trace origins and history by validating,for example,a digital ID such as across a supply chain.They are often found in private blockchainsOne example is to integrate an NFT into product labelling,packaging or tags for verification as the product journeys through the supply chainOwnership
56、These are the most common and relate to(1)physical goods such as ownership of a luxury watch(this is linked to authentication by NFT certificate),and(2)ownership of digital goods,such as those found in virtual worlds and gaming.1.Breitlings NFT warranty also proves the owner of the watch.2.These NFT
57、s are used to create,buy,and sell items such as armour,weapons,and characters RoyaltyTracking ownership,management,and governance of assets with a view to managing royalty revenues in digital environmentsJacques Green,an electronic musician,minted a music track and generated$27,000 in royalties Loya
58、ltyNFTs used to build and reward loyalty with a brand Starbucks Odyssey loyalty programme offers members journeys of different activities such as interactive games or fun challenges to deepen knowledge of coffee and Starbucks.Members are rewarded for completing journeys with a digital collectible jo
59、urney stamp(NFT)Regulating NFTs:Striking the Balance between Business Innovations and Risks8LabelDescriptionExamplesSingle useThese have little resale value and include NFTs that are“burned”after use Tickets to events,single year memberships,gaming items with no secondary market valueReusableThis is
60、 the largest NFT category and includes digital fashion,music,art,collectibles,avatars etcetera.and for art can include anything from static images to interactive 3D modelsNBA Top Shot,Bored Ape Yacht Club,CryptoKitties,CryptoPunks,private club memberships,tickets that transform into additional uniqu
61、e experiences/content to fans beyond the physical experience of a concert or event,and album art that offers access to other content,amongst othersPerpetualsThese represent a digital location such as land in a virtual worldThe Decentraland metaverse offers users the opportunity to buy land using NFT
62、s to certify ownershipReal assetThese have an underlying physical real asset and could be listed on an NFT market.These include crowdfunding or management of real assets or fractionalizing ownership across a groupNikes CryptoKicks using NFTs to prove ownership of a physical shoe PreservationDigitisi
63、ng and protecting cultural artefacts,giving them immutable status on a blockchainAny object in a museum or even an image of,for example,the great pyramid of Giza could be tokenized for preservation.Creating,Selling,Owning and Disposing of an NFTWith the growth in NFTs,platform-based mechanisms to tr
64、ade NFTs have been developed.These platforms act as marketplaces and are built on the idea that,similar to physical content,digital content can also be scarce(limited in quality)and can be meaningfully owned and traded.High profile platforms including OpenSea,Rarible,Top Shot,Nifty Gateway,SuperRare
65、,Sorare and Blur have been launched.Using blockchain technology,they verify provenance to ensure the NFT is original and offer a range of services as storefronts and auction houses.To verify every transaction on the blockchain,there is a gas fee(akin to an admin fee)charged.Reducing or removing gas
66、fees has become a thriving industry of its own with new protocols such as Layer 2 protocols20 being launched to cope with this challenge.In addition to gas fees,marketplaces generate their revenues in three ways:commission fees,T-Bonds,subscriptions.Commission Fees:The most typical way is to take a
67、commission from the seller and fees range from 2.5%on OpenSea(for NFTs created using OpenSea)to 3%on Paddle8.Rarible imposes a 1%service fee for both buyers and sellers on each transaction,while SuperRare charges a 3%marketplace fee on each SuperRare purchase.21 Blur.io launched in October 2022 is d
68、esigned to cater to professional markets and offers zero platform fees and optional royalties.Because of this,it quickly stole the leadership crown from OpenSea for NFTs by volume.22 NFT T-Bonds:23 These are smart contracts that contain fungible assets which are locked until a predetermined set of c
69、onditions are met,such as a certain date,when they are unlocked.Subscriptions:These are emerging as a new way for NFT marketplaces to monetize.These include listings of valuable tokens,pooled watchlists with historical returns,daily summary emails etcetera.24Researchers25 have categorised NFT market
70、places across a spectrum from streamlined to augmented.Streamlined platforms include OpenSea and Rarible,host auctions and fixed-price sales and target a wide user base.They offer users the ability to pay in cryptocurrencies and with credit cards.Augmented marketplaces are niche players with a wide
71、range of services for creators and consumers alike.These services include minting(NFT creation),marketing,curation,pricing recommendations,portfolio trackers and even games.Sorare,for example,focuses on digital sports cards and hosts fantasy football(soccer)competitions.Regulating NFTs:Striking the
72、Balance between Business Innovations and Risks9Source:Selected company websites.Acquiring an NFT:The journey of an NFT starts in the mind of the creator and/or IP owner and goes through different stages from creation to either allocation to an owner directly or is sold through a marketplace.Either o
73、wners hold the NFT in their crypto wallets or they can sell it on a secondary market to other owners.The diagram below from Bain&Company,illustrates a simple Journey of an NFT.Example of an NFT journey starting with project initiation,followedby the minting process before entering the buying and sel
74、ling cycleFigure 1Source:Bain&Company,adapted from the World Economic ForumNote:This figure is not exhaustiveSoldAllocationProject creatorMarketplaceOwnerMarketplaceOwnerCustodyOwnerCustodyCustodyNFT creationProject initiationSecondary marketPrimary marketIP ownerExamples of MarketplaceOffersCategor
75、y of PlatformLinkOpenSeaRange of NFTs including music,movies,games,and artStreamlinedopensea.ioBlurCatering to professional NFT traders Streamlinedblur.ioSuperRareDigital artANifty GatewayLimited-edition NFT drops with famous brands and artists for exclusive collectionsSRaribleCommunity-owned market
76、place where anyone can create and sell NFTsSPaddle8Artwork,collectibles and NFTs from both established and emerging artistsANBA Top ShotNational Basketball Association for NBA collectiblesASorareFootball,NBA,Major League BaseballA NFTs:Striking the Balance between Business Innovations and Risks10Cre
77、ating and Selling an NFT:26The creator can use any multimedia file such as a digital painting,text,audio,photo or video in digital format such as.JPEG,.PNG,.PDF,.MP3,.MP4 etcetera.The process of creating an NFT is known as“minting”,which is effectively writing a digital item to the blockchain by ass
78、igning metadata to the NFT.A critical choice is the number to be created as value depends on uniqueness,particularly for collectibles.A creator must decide the number as it is programmed into the smart contract and cannot be changed once the token is minted.A creator will need a digital wallet with
79、some cryptocurrency in it before they can create their NFT.Most people create through an existing marketplace which offers them an automatic“create”function,whereby the creator simply uploads their file,gives their NFT a name and descriptions and clicks the create button.To sell NFTs the owner can d
80、o this through a fixed price sale or an auction.The Blockchains Distributed Ledger Technology(DLT)27 ensures that each NFT is unique and that its ownership is securely recorded.Destroying an NFT:NFTs cannot actually be destroyed due to their immutability.Instead,to destroy an NFT,they can be removed
81、 from circulation by being burned.This means that they are sent to an address that no one owns,known as a“black hole wallet”.Essentially,while the NFT remains in existence on the blockchain,it cannot be accessed.28The reasons for burning an NFT are to clean up a wallet;29 to manipulate scarcity and
82、therefore price or to exchange for physical products instead,which Damien Hirst did by burning the NFT representations of physical paintings;30 to create media/consumer interest in a brand/marketplace31 or game32;or to comply with a legal judgement as the SEC ordered Stoner Cats to do in 2023.33Regu
83、lating NFTs:Striking the Balance between Business Innovations and Risks11Understanding the NFT Landscape2Regulating NFTs:Striking the Balance between Business Innovations and Risks12NFTS have developed from experiments on blockchain,through a boom and bust hype cycle,to todays landscape where they a
84、re moving towards mainstream applications.This section explores the history of NFTs and the landscape today with a showcase on Ledger,a global platform for digital assets and Web3.History of NFTs:Pre-History The Early Days(2012-2016)NFT historians point to 2012 and“coloured coins”34 as the very firs
85、t“experiment”of using Bitcoins language to store small amounts of metadata on the blockchain that represented asset manipulation instructions.The first“NFT as a concept”is credited to artists Jennifer and Kevin McCoy who partnered with tech entrepreneur Anil Dash,to establish the provenance of a dig
86、ital piece of art and sell it in its digital form.They minted“Quantum”on the Namecoin blockchain in 2014.It was largely forgotten about until 2021 when McCoy promoted it and it was sold by Sothebys in June 2021 for over$1 million.35 In 2015,Spells of Genesis was released as the first blockchain-base
87、d game using trading cards by EverdreamSoft on the Bitcoin blockchain.36 In 2016,Rare Pepes emerged,a collection of digital collectible cards of illustrations of Pepe the Frog.This kickstarted the first crypto art market as some were sold on eBay.37Bitcoin is still used for the storage of metadata t
88、hat can be employed,for example,to authenticate luxury products as in the case of Woleet and Ulysse Nardin watches,thus overlapping with NFT uses.“Woleet and Ulysse Nardin:Taking Blockchain to the Luxury Watch Market”.Creation of NFT Standards(2017-2020)or Year ZeroThe first significant implementati
89、on of NFTs occurred with the launch of CryptoPunks38 in June 2017.It grew from a project on the Ethereum blockchain by Larva Labs who created the standard ERC 20.CryptoPunks consisted of 10,000 unique pixelated collectible characters.The collection gained significant attention from investors and the
90、 public who could purchase one of the 10,000 collectibles on a blockchain marketplace using a digital wallet which made the collection more accessible.39Figure 2Source:https:/ and 2018 were two defining years when the standards of ERC721 and ERC1155 were created and enabled the functionality of NFTs
91、 on the Ethereum blockchain.CryptoKitties developed by Dapper Labs in Canada40 is considered to be the first“mainstream”application of NFTs and launched the standard ERC 721.CryptoKitties is a blockchain-based virtual game that allows players to adopt,raise and trade virtual cats.The Generation 0 ca
92、ts were sold in a Dutch Auction which was pioneering for blockchain.41 Other blockchain technological developments that were created for the game included an on-chain breeding algorithm inside a closed-source smart contract and randomness of breeding.It became so popular that it caused congestion on
93、 the Ethereum network,which was too slow to process the transactions.The popularity of CryptoKitties suggested both a potential market demand for NFTs in this space and the need for scaling solutions for NFTs to manage demand.Such was their popularity that other developers created their own applicat
94、ions on top of it including accessories“KittyHats”and“Kitty Race”where the cats could race each other to win ETH.Regulating NFTs:Striking the Balance between Business Innovations and Risks132017 also saw the first platform marketplaces specialising in buying/selling NFTs42 such as Opensea.io.OpenSea
95、 offers users the ability to create NFTs.It operates an NFT secondary market for sellers either at a fixed price,best price or top-down auction.Similarly founded in 2017 and launched in 2018 is SuperRare,a social network for the art world.Other art market based platforms followed including Rarible a
96、nd Async.art(2019),Nifty Gateway,Artblocks and Foundation.app(2020)and Hic and Nunc(2021).Play-to-earn game“Axie Infinity”43 was launched in 2018,offering a new model to NFT consumers.In 2020 a virtual world called“Decentraland”44 was launched.a virtual world where players could buy plots of land an
97、d associated accessories,construct buildings etcetera,all done by building NFTs.The breakthrough for NFTs began in earnest in 2020,when the USs leading Basketball Association,the NBA,partnered with Dapper Labs to create NBA Top Shot.These NFTs featured basketball video clips,similar to conventional
98、sports trading cards.The average sale price of an NBA Top Shot peaked at$181.81 in March 2021.Brands including Hublot,Louis Vuitton,Lamborghini,Ulysse Nardin,Burberry,Franck Muller,Balenciaga,ba&sh,and Nike also started to explore NFTs(see chapter 3 for more details).It is considered that the COVID-
99、19 pandemic and lockdowns had a role in boosting consumer interest in NFTs.45 The shift from physical activities to the internet and working-from-home rather than commuting gave people additional time to explore digital worlds and more disposable income to invest into crypto currencies.The increase
100、in awareness of NFTs was also influenced by celebrities posting about them on various social media platforms where discussions about NFTs were prevalent.Explosive Growth,Scams&the Bubble Bursts(2021-2022)March 2021 was a busy month for NFTs.Major headlines were made around the world when digital art
101、 NFT“Everydays:The First 5,000 days”,a collage of 5,062 vector works by Beeple sold for$69.3 million at Christies.It was the first sale of digital artwork offered by a high-profile auction house.This pivotal event significantly raised the profile of NFTs globally into the public consciousness.46 Tha
102、t month US rock band Kings of Leon was the first major band to release an album as an NFT,in partnership with YellowHeart,they offered concert perks and audiovisual art.18“golden tickets”were minted containing unique art 12 of which were placed in a vault with six auctioned.Twitter co-founder,Jack D
103、orsey,sold an NFT image of his first tweet for$2.9 million in an auction.He donated the proceeds to charity.47Figure 3Source:https:/guide.cryptokitties.co/guide/types-of-cats/exclusive-catsCryptoKittiesRegulating NFTs:Striking the Balance between Business Innovations and Risks14Another set of 10,000
104、 NFT collectibles known as the Bored Ape Yacht Club(BAYC)by Yuga Labs launched in April 2021.Each ape had distinctive traits and characteristics.These NFTs are not only collectibles but also grant membership to an exclusive club,offering access to special events.Unlike other NFTs,owners of these tok
105、ens have full rights to use their ape in any project they choose,including music,TV,books,films,and other media.Ape owners often use their ape as an Avatar,and they have become a cultural phenomenon in the NFT community.The collection is considered as a prominent,and one of the most profitable examp
106、les of NFTs.48 Bored ape#8817 was sold for$3.41 million.49 Scarcity,high demand,celebrity endorsements and community engagement drove up demand for BAYC NFTs,creating rapidly growing price inflation.In June 2021,CryptoPunks were in the news when Sothebys sold NFT no.7523,the only CryptoPunk with a s
107、urgical mask,was sold for$11.8 million.50 In December 2021,“The Merge”by artist Pak sold for$91.8 million through online auction platform Nifty Gateway.51Throughout 2021 consumer brands across the spectrum from FMCG,luxury goods,media and entertainment started issuing NFTs.Typically,these NFTs were
108、linked to real products or art renderings,as well as warranties.Some brands launched NFT games(see chapter 3 for more details).The NFT bubble is considered to have begun in January 2022 when trading volumes reached$17.6 billion(a 21,000%increase over 2021),with the numbers of buyers increasing by ne
109、arly 3,000%and sellers by 3,700%.52 Yet the price inflation for NFTs was not sustainable.In April 2022,Reuters reported signs of an NFT“crash”53 but it was only in September 2022 that the bubble burst and trading volumes fell by 97%.Three reasons were suggested to have caused the fall in value:price
110、 decline alongside trading volumes;lack of long-term value;and a decline in public interest.54The NFT marketplace also suffered from scammers looking to exploit nave buyers by hyping up prices using social media and then disappearing.A rug pull55 is a scam promotion of a crypto token on social media
111、 that creates excitement and inflates the price.At a certain point,the scammer sells and the price drops,often to zero.One of the more notorious rug pulls took place in October 2021.Leveraging off the Bored Apes Yacht Club,the developer“Evil Ape”minted 10,000“Evolved Apes”which were supposed to be p
112、art of a blockchain game.Evil Ape disappeared after selling the NFTs leaving buyers with worthless.JPEGs and no game.The scammer earned about 798 ETH,approximately$2.7 million.In January 2022,the Big Daddy Ape Club organised collectors to mint“Big Daddy Ape Club”NFTs except no NFTs were minted.The s
113、cammers made off with 9,136 SOL(Solana blockchain currency)equal to$1.3 million of collectors money.The NFT drop had been“verified”by Civic,a verification company.Other rug pulls include Mercenary(2021)which scammed$760,000,Blockverse which scammed 793 ETH($1.9 million)and Frosties(2022)($1.1 millio
114、n scammed).Two men were later arrested by the FBI for the Frosties scam.Celebrities were not immune to scammers,Ozzy Osborne announced an NFT collection in January 2021,“CryptoBatz”.These were a series of 9,666 digital bats and gained wide media coverage and were promoted on Twitter.When CryptoBatz
115、changed its URL,the old URL Figure 4Figure 5Source:https:/en.wikipedia.org/wiki/Everydays:_ the_First_5000_Days#/media/File:Everydays,_ the_First_5000_Days.jpg.Source:https:/ First 5,000 days by BeepleBored Ape#8817Regulating NFTs:Striking the Balance between Business Innovations and Risks15was not
116、deleted,nor were tweets pointing to the old URL.Scammers realised and promoted the old URL,tricking would-be purchasers into revealing their private keys and then draining their wallets.56 The prevalence of scammers and the apparent ease of scamming nave users,have added to calls for greater consume
117、r protection.There was also a case of insider trading.Nate Chastain,OpenSeas head of product,resigned after using insider knowledge about which NFTs would be featured on OpenSeas homepage,by purchasing them cheaply in advance and selling them at higher prices once they were listed.He was convicted a
118、nd sentenced to three months imprisonment.Chastain was previously convicted at trial of wire fraud and money laundering.57NFT Marketplaces and Todays LandscapeAfter the 2022 bubble burst,2023 saw a significant market decline in NFT trading,although a range of companies,sports clubs,and media and ent
119、ertainment companies continued to enter the NFT marketplace,likely as part of increasing use of digital channel marketing strategies to raise brand awareness and build fan bases and consumer loyalty(see Chapter 3 for more details).Towards the end of Q4,the broader cryptocurrency market enjoyed a mor
120、e positive outlook and the NFT market started to follow with increased trading volumes.58 However,between October and November,there were quite a lot of fluctuations in price,with the average NFT price dropping by 42%to approximately$150 in November.59 Notably,there were fewer buyers than sellers ac
121、tive in the market,suggesting supply outstripping demand.60 Collectibles continued to dominate albeit with a slight dip,while art NFTs benefitted from a remark by Elon Musk about some NFTs not being on blockchain61 which allegedly sparked increased NFT trading.At the same time,Utility NFTs,linked to
122、 passes offering exclusive access,became increasingly popular,such as Art on Internet offered by the Red Bull Velocity Pass.62Analysts following the market suggest that the outlook for 2024 is that NFTs will evolve beyond collectibles with utility NFTs expanding in popularity.These more dynamic NFTs
123、 encourage and allow consumers and fans to engage more closely with the underlying brand or offering63 and may thus be more attractive to consumers and fans alike.Case study:Ledger Bringing Security to NFT Owners and BrandsAmidst the scamming and security issues,Ledger is trying to bring greater sec
124、urity and knowledge to both users and brands.Ledger(),was created in 2014 to support consumers to store and manage their digital assets(crypt currencies and NFTs)securely.The company focuses on developing a variety of products and services to enable both individuals and companies to securely buy,sto
125、re,swap and manage their digital assets.The company is known for its hardware wallets and has sold about 6 million to date.Hardware wallets offer greater protection as the key is stored on the wallet rather than online.Leveraging its reputation for security,Ledger provides a user-friendly platform w
126、here users can securely manage their digital assets,including NFTs.This is supported by a Live marketplace app.The company partnered with Tag Heuer and NFT projects such as RTFKT and DeadFellaz for the marketplace.Ledgers hardware wallets integrate seamlessly with the NFT marketplace.This attracts n
127、ewbies and experienced users.In 2022,Ledger marketplace was the worlds first secure-mint which enabled“clear signing”of transactions rather than“blind signing”.Clear signing offers users greater transparency.They can view all transaction details,preventing common scams such as phishing.The company h
128、as formed strategic partnerships with artists,creators and other marketplaces,which has helped Ledger to expand its offerings and visibility in the NFT community.These include Hublot,Fendi,and Grant Yun.As well as offering secure hardware devices and a marketplace,Ledger has developed an educational
129、 tool so that anyone who wishes to enter the digital asset marketplace can develop their knowledge.The company believes that with the freedom of digital sovereignty,financial liberty,decentralisation and ownership through crypto currencies and NFT the Web3.0 world,also comes the great responsibility
130、 of security awareness,self-custody,and asset management.Increasingly,as we noted earlier,there is an increasing number of scams and hacks that individual crypto investors and NFT holders should also be aware of to avoid them as much as possible.Through its products and services,the company seeks to
131、 educate consumers about how to protect themselves in the Web3.0 world.It launched Ledger Quest a gamified,fun and engaging way to learn about Web3.0 and how to protect users from scams and hacks.Regulating NFTs:Striking the Balance between Business Innovations and Risks16Figure 6Source:Ledger docum
132、ents.Quest categoriesPartner questsBranded quests,exclusive to partner brands.Designed and co-created to provide the highest quality of onoarding experience and rewards.Community questsCommunity owned quests,exclusive to token holders.Designed to provide creators with the tech and content they need
133、to educate and reward their community membersAcademy questsLedger ecosystem quests.Accessible to the broader Web3 community.Designed to educate people on related products and servicesThrough a series of quests,developed as time-bound quizzes,users educate themselves to win NFT proof of knowledge rew
134、ards while learning about how to create and invest in NFTs responsibly.When each quest is successfully completed,users are given an NFT“Proof of Knowledge”,as shown in the graphic.Figure 7Source:Ledger documents.POK NFT design(examples)Regulating NFTs:Striking the Balance between Business Innovation
135、s and Risks17Utility of NFTs3Regulating NFTs:Striking the Balance between Business Innovations and Risks18NFTs have been issued for many different uses.In this section we explore two main uses NFTs used for activism and NFTs used by brands across different industries with a focus on luxury goods/art
136、 world,FMCG/food,retail,entertainment,and sports.NFTs&Activism64As a global,decentralised platform,NFTs are increasingly being used for social and political activism.Artists,in particular,have been dropping NFT collections with proceeds then being donated back to charities.Members of the Russian fem
137、inist protest punk rock group,Pussy Riot,are also using NFTs for activism.In March 2021 they launched“PANIC ATTACK”and in September that year“ACAB”;333 NFTpieces on Open Sea via SuperRare.The collection featured a piece titled“Virgin Mary,Please Become a Feminist”.Proceeds were used for feminist act
138、ivism.Collectors received additional perks such as free tickets to their concerts.Similarly,“Women Rise”is a collection by Maliha Abidi,activist and artist who aims to empower women and advocates for social justice.The collection is 10,000 pieces of randomly generated NFT art pieces representing wom
139、en worldwide who have supported gender equality,girls education,and mental health in marginalised societies.The proceeds were donated to the Malala Fund charity for girls education.The Women in Innovation Fund,co-founded by Reckitt,invests women-led healthcare startups in Africa using NFT sale proce
140、eds.In April 2021,US whistleblower,Edward Snowden auctioned“Stay Free”which raised over$5.4 million,which was donated to the Freedom of the Press Foundation to further their cause.Black Lives Matter hosted an NFT digital art fair of black creators.Conservation firm PLCnetworks and carbon credit exch
141、ange Coorest,partnered to tokenize real animals at game reserves and privately owned conservation parks in Africa.Collectors can own an“elephaNFT”or a“lioNFT”.The NFTs provide monthly“proof-of-life”verification of the animal.70%of the funds raised from the NFTs go the reserve/conservation area.Ukrai
142、ne DAO raised$8 million in two days from the sale of an NFT of the Ukrainian flag in 2022.Celebrities also used NFTs for charitable funding,including Kate Moss and Cara Delevingne for female empowerment.Jack Dorsey,co-founder and former CEO of Twitter,sold an NFT of his first tweet for$2.9 million a
143、nd donated the proceeds to Covid-19 relief.65Brands Entering the NFT MarketplaceDespite the boom and bust over collectibles,brands continue to enter and be active in the NFT market,particularly luxury goods companies.66 This section looks at the brands and the types of activities that they are engag
144、ing in through NFTs.We spotlight five industries in particular:Luxury goods/art world,FMCG/food,retail,entertainment,and sports.There are compelling business reasons for brands to enter the NFT market.We can see two distinct but linked drivers for brands and their customers:(1)for the technological
145、functionalities that are inherent to NFTs,and(2)as part of a brands marketing/customer engagement strategy.We explore both drivers and end with a summary of some of the major brand NFT activities across the five different industries.NFT Technology Functionality for Brands and ConsumersHere,we can se
146、e three main use cases for NFTs:Traceability:Being able to trace the provenance of raw materials is particularly helpful to a brand,for example,with regards to ESG reporting.This may be the more utilitarian use of NFTs,but it could be a useful functionality to enhance a brands supply chain activitie
147、s and as evidence to support their ESG reporting.67Proof of ownership:NFTs offer proof of ownership that can be linked to warranties for repairs.Often warranties come as slips of paper or require customers to register online through a website as an additional step in the purchasing process.These are
148、 not ideal as warranty cards get lost or customers forget to register.When a product does need repairing,often it is unclear as to who the owner needs to contact,particularly for a luxury product.In 2016,to alleviate the frictions around warranties and provide proof of ownership,Woleet,a French digi
149、tal notary solution using blockchain,teamed up with Ulysse Nardin.Together,they offered customers blockchain-based certificates of ownership for their Ulysse Nardin watches.These are not NFTs per se but illustrate the functionality of blockchain.INSEAD case study:Woleet and Ulysse Nardin:Taking Bloc
150、kchain to the Luxury Watch MarketRegulating NFTs:Striking the Balance between Business Innovations and Risks19In 2022,luxury watch brand Breitling enhanced its customer experience of purchasing by creating a digital passport that includes proof of ownership and warranty support and gives full transp
151、arency over the sourcing of raw materials.Breitling partnered with Arianee,a Web3.0 company that offers its customers digital product passports,membership and loyalty tokens and utility collectibles.Authentication:Many brands suffer from counterfeiting of their products.The US Patent and Trademark O
152、ffice estimates global counterfeit goods total around$1.7-4.5 trillion each year.68 Being able to authenticate that a product is genuine by creating a digital twin,will be helpful not only in reducing criminal activity but also to give a brands customers peace of mind.69 For example,LVMH announced i
153、n 2019 that it would be launching its own blockchain(with smart contracts-NFTs)to authenticate and trace origins of materials for its brand Louis Vuitton and Parfums Christian Dior.70 The plan was to extend this to LVMHs circa 60 other luxury brands.Authentication offers a further functionality enha
154、ncement:proof of authenticity for secondary market sales.Should a customer decide to sell the product on,their buyer will also benefit from an NFT authenticating that the product is genuine.In 2020,for example,French fashion brand,ba&sh integrated a resale solution supported by Arianees blockchain i
155、n partnership with second-hand platform,Reflaunt.On the brands French website,a“resell”button was located next to items listed on a customers online account.Clicking the button created a digital certificate for the item,enabling it to be listed on various resale marketplaces with the identification
156、certificate transferred to the new owner,ensuring authenticity of the product.For more details see INSEAD case study“Creating Value with Blockchain&NFTs:Arianee leading the transition to Web3.0 with digital product passports”.Similarly,Italian watchmaker Panerai announced it would include an NFT dig
157、ital passport along with every watch purchase after October 2023,with the passport being transferrable to the next owner in the event of resale.71Brands Using of NFTs as Part of Their Marketing/Customer Engagement StrategyBeyond the technological aspects,the strongest driver to use NFTs for many bra
158、nds is for brand building and enhancement purposes.We can see both advantages for brands but also for consumers.Advantages for consumers from branded NFTs:1.Exclusive access and additional content:manybrands are offering utility NFTs where only holders ofthese NFTs can access this content or experie
159、nce.Anheuser-Busch,for example,hosted a physical eventoffering free beer,tours and performances throughNFTs.72 Tiffany&Co launched its NFTiff collection forholders of CryptoPunk NFTs only.Tiffanys exclusiveopportunity enabled holders to purchase a pendantof diamonds and gemstones for 30 ETH per piec
160、e.73Turner Prize winning artist,Damien Hirst,used NFTsas digital copies of physical artworks created byhis assistants and sold for$2,000 each.Buyers hada year to decide whether to trade the NFT for thephysical artwork and burn the NFT or to burn thephysical artwork and keep the NFT version.INSEADcas
161、e“Damien Hirst:From Sharks to NFTs and the Luxurification of the Art World”explores Hirsts entryinto the NFT marketplace.2.Ownership and value appreciation:consumers benefit through ownership of a digital asset with an expectation that it might appreciate,although as we witnessed withthe CryptoKitti
162、es bubble,this is not guaranteed.3.Social and community engagement:NFTs canoffer consumers the experience of being part of acommunity of like-minded people and/or making apositive societal impact through their brand choices.Social Impact examples include Taco Bell whichpartnered with Rarible in 2021
163、 to mint 25 digital artpieces “transformative taco”.The owner of each NFTreceived a$500 Taco Bell gift card to spend at anylocation.Taco Bell donated all the proceeds to the LiveMs Scholarship.While toilet paper brand Charminpartnered with Rarible to mint NFTP(Non-fungibleToilet Paper)to support the
164、 Direct Relief Charity.INSEAD case study:Creating Value with Blockchain&NFTs:Arianee Leading the Transition to Web 3.0 with Digital Product PassportsINSEAD case study:Damien Hirst:From Sharks to NFTs and the Luxurification of the Art WorldRegulating NFTs:Striking the Balance between Business Innovat
165、ions and Risks20From a community-building perspective,sports fans are passionate about supporting their clubs and collecting merchandise such as team outfits and trading cards.Moving into the digital world,several sports teams and clubs have offered their fans NFTs.The Dallas Mavericks,for example,i
166、ssued NFTs to game attendees building a sense of community while attracting them to come to the game.The Sorare platform is a blockchain NFT gaming platform that offers fans of football(soccer),basketball(NBA),and baseball(MLB)the opportunity to play fantasy leagues.Fans buy cards at auctions,tradin
167、g them on a secondary market,and can win cards as prizes in tournaments.INSEADs case on Sorare traces how the founders,fans of physical collectible football cards themselves,built Sorare and now partner with major clubs across the world.Advantages for Brands offering NFTs:Most brand NFTs originally
168、focused on image,video or audio collectibles but increasingly they are using utility NFTs to build relationships and increase loyalty with their customers through customer engagement strategies.Brands Utility NFTs offer not just a digital representation but give users access to special events and ad
169、ditional offerings/experiences.These integrate the physical and digital worlds to create new“phygital”(physical and digital)experiences and ownership.1.New marketing channels and influencer marketing:the internet has expanded the number of channels that brands can exploit to market.NFTs are a furthe
170、r channel in the digital world.GenZ and Millennials are very much at home in the digital world active in the metaverse or through gaming,others follow influencers on Instagram and TikTok.Younger generations who follow influencers,in particular,have a strong interest in the brands promoted by the inf
171、luencer they follow.74 Thus,they may have high awareness of certain brands,even if they do not have the spending power of older generations(this applies particularly to GenZ).Some brands who traditionally appeal to older generations are considering how to entice younger audiences by partnering with
172、brands and characters who have high recognition with this demographic.For example,Christian Louboutin partnered with Marvel to use NFTs to modernise its brand image and appeal to younger generations.Consumers purchase the shoes and accessories and are given NFTs as a bonus.752.Balmain partnered with
173、 Mattel to create 50 Barbie and Ken dolls styled in Balmain and accompanied with NFTs of Barbie avatars for consumers to own a digital part of the collection.While younger generations may not have the purchasing power of their parents,owning a digital collectible of a sneaker or handbag could be one
174、 step towards physical ownership later and planting seeds for brand loyalty.Balmain has two NFT collections featuring sneakers from its physical collection.Balmains Creative Director,Olivier Rousteing is a pioneer on social media and has transformed Balmain into a fashion powerhouse thanks to his st
175、ylistic and digital acumen.He has the largest number of Instagram followers of any designer(9.9 million).INSEAD case study“Olivier Rousteing at Balmain:From Instagram to NFTs,Digital Leadership in Style”explores Rousteings use of social media and NFTs to promote the Balmain brand.3.Audience engageme
176、nt,building loyalty and brand awareness:there is intense competition amongst brands fighting for share of consumer attention and to build brand loyalty.It is becoming harder to keep the attention of consumers who are also likely to shift to other brands if their loyalty is not sufficiently rewarded
177、with new offerings and experiences.76 Brands are looking to utilise NFTs to offer new ways to engage audiences both existing and new consumers with something different and special.American rock band Kings of Leon launched an NFT album with access to exclusive experiences,for example.Starbucks create
178、d a seasonal hype for its pumpkin spiced latte by launching“Pumpkin Spice Latte”NFT digital stamps through its Odyssey loyalty programme.Retailer,Macys,offered free NFTs to promote its events.While Amazon is preparing to launch NFTs tied to real world assets.77 Entertainment companies such as Warner
179、 Brothers,Marvel,Paramount and Netflix have all offered NFTs relating to their movies and/or TV shows and characters to keep viewers interested beyond the transmission of the movie/TV show.Luxury goods companies,they have extensive connections to celebrities and can offer NFTs that give access to ex
180、clusive events or collaborations with celebrities and artists to elevate their brand experiences.784.Data collection and market insights:similar to other digital channels,NFTs offer brands the opportunity INSEAD case study:Sorare:Bringing Fantasy Sports into the Metaverse with NFTs and Blockchain Te
181、chnologyINSEAD case study:Olivier Rousteing at Balmain:From Instagram to NFTs,Digital Leadership in StyleRegulating NFTs:Striking the Balance between Business Innovations and Risks21for data collection and market insights.Starbucks,for example,uses its Odyssey loyalty programme to track customer pre
182、ferences and behaviours.795.Generating revenues:ultimately brands are looking for new sources of revenue to drive growth.For brands in the NFT space,NFTs are another initiative in their digital growth strategy toolkit.There are numerous examples of brands generating revenues from dropping NFT collec
183、tions.Dolce&Gabbana,for example,sold their Collezione Genesi NFT of nine unique NFTs for$5.7 million,while Gucci auctioned its Aria project for$25,000.80 Tiffany generated$4.76 million in royalties from NFT sales.81 Nike generated$185 million in revenues through various NFT collections.Additionally,
184、Nikes NFT collectible business resulted in$91.2 million in royalties.NBA Top Shot(National Basketball Association)amassed more than$1 billion in revenue through its collection of digital NFT cards.82NFTs are still a nascent channel for brands but as both brands and consumers are looking for new ways
185、 to engage with each other,it is likely that NFTs will continue to play a role in many brands digital channel strategies.The following tables provide an inexhaustive selection of NFT activities across different industries.Luxury goods embracing art,authenticity and ownershipYearNFTDetails2016Damien
186、Hirst“The Currency”art collection2018HublotHublot Loves Art series with Maxime BuchiVacheron ConstantinAnnounces it will use NFT to authenticate and track its watches2019LamborghiniNFT game“Lambo Run”with Salesforce blockchainLouis VuittonAnnounces it will use NFTs to authenticate and track luxury g
187、oodsUlysse NardinNFT warranty certificate for all new purchases2020BurberryNFT art project“Burberry Blanket”with digital artist Danny SangraFranck MullerNFT watch“Free the Bid”BalenciagaNFT art project“Afterworld,the Age of Tomorrow”ba&shResale certificate of product authenticity2021GucciNFT art pro
188、ject“Aria di Libert”Dolce&GabbanaNFT art project Louis VuittonNFT game in partnership with BeepleGivenchyNFT collectibles to celebrate Pride MonthJimmy ChooNFT sneaker auction and mystery boxesKarl LagerfeldHolders could mint one of 777 digital avatars of LagerfeldBalmainVogue Singapore Flame DressR
189、egulating NFTs:Striking the Balance between Business Innovations and Risks22Source:https:/ avatars in partnership with MattelTiffany&CoNFTiff collection dedicated to CryptoPunk holders only a pendant of diamonds and gemstones for 30 ETH per pieceBreitlingDigital warrantiesLacosteGenesis Pass NFTs go
190、lden tickets to a virtual universe;NFTs for product drops and ownership certificatesHublotHublot Loves Art series with Takashi Murakami2022PradaTime Capsule NFTs claimed after buying physical merchandiseYves Saint Laurent10,000 YSL Beauty Golden Blocks NFTs that open the door to the brands Web3 comm
191、unityLouis VuittonPFP NFT Collection limited edition for players of Louis:The Game Web3 experience and levelled upSalvatore FerragamoCelebrating its new store in Soho,New York,visitors could customise and mint unique NFTs with costs covered by the brandBurberryBlankos Block Party NFT collection&soci
192、al space2023BalmainUnicorn digital sneakers with VIP experiencesLouis VuittonCollection of“Treasure Trunks”Regulating NFTs:Striking the Balance between Business Innovations and Risks23FMCG&Food increasingly moving into NFTs to build customer loyalty and support charitable workYearNFTDetails2019NIKEF
193、iles blockchain patent for product authenticity,launches CryptoKicks,NFT-based customizable sneakers2021Taco BellNFT collection including real-world digital gift cardsP&G5-piece collection on Rarible,proceeds to charity Direct ReliefCoca-ColaCollection inspired by its history and cultureBurger KingR
194、eward programme“Keep it Real”McDonaldsSet of NFTs to celebrate McRib and promote Shanghai restaurant openingBudweiserCollection of 1936 unique digital beer cansAdidasTokens for real world merchandise in collaboration with Gmoney,Bored Ape Yacht Club and PUNKS ClubLOralCollection to showcase gender i
195、ssues in the digital space2022Puma4 cat-themed projectsGAPNFT hoodiesMACCollection to raise funds for its NGO MAC Viva Gam FundEvian20 NFTs with creator Sara Shakeel for Somerset House Young Talent FundWendysCollection based on menuUnileverNFTs to raise awareness of inclusivity in the metaverseStell
196、a ArtoisLimited edition packages to sponsor horse racingStarbucksLoyalty programme redeems for experiences and discountsNike19,000 bundles of digital and physical Cryptokicks iRLs Nike Trillium Lace Engine holders had priority access to purchase four limited editions of the iconic trainers2023Starbu
197、cks“First Store”collectionFlyfish ClubNFT-holders-only restaurant in New York.The NFT grands holders unlimited access to a private dining room in an iconic locationSources:multiple websites https:/ NFTs:Striking the Balance between Business Innovations and Risks24Retail particularly ecommerce and ma
198、jor brands entering the marketplaceYearNFTDetails2021Alibaba GroupMarketplace for artists IPWalmartTrademarks for future metaverse trading2022SelfridgesVirtual store in Decentraland CVSTrademarks to set up virtual health clinicMajid Al FuttaimDigital wallet infrastructureHarvey NicholsVirtual displa
199、y for NFT pieces for purchase on-siteShopifyEnables NFT tradingEbayOwn NFT collection and marketplaceMacysFree NFTs to promote its eventsHome DepotTrademarks in preparation for NFTsIKEAProperty care initiative through NFTs2023AmazonPreparing launch of NFTs tied to real world assetsSources:https:/the
200、tokenizer.io/2021/08/18/alibaba-launches-its-nft-marketplace-to-trade-intellectual-property/;https:/ NFTs:Striking the Balance between Business Innovations and Risks25Sources:https:/ used both by clubs and playersYearNFTDetails2020NBATop Shop collectibles2021Green ParkMixing gaming with sportsMLBCol
201、lections with Candy DigitalLaLigaPartnership with Sorare fantasy sports game that includes NFT collectables to represent real playersMcLaren Racing F1 TeamNFT platform with TezosDallas MavericksNFT rewards to game attendees2022Australian OpenNFTs to capture real time actionsLiverpool Football ClubNF
202、Ts for fan engagementAutographNFTs to enable athletes to sell autographed NFT collectablesParis St Germain FCCollection of players in new kitsFC BarcelonaFirst NFT sells for$693,000 at Sothebys in New YorkLionel MessiCollection based on career with Argentinas national team2023UKs Premier LeaguePartn
203、ership with SorareRegulating NFTs:Striking the Balance between Business Innovations and Risks26Media&Entertainment increasing interest in NFTsYearNFTDetails20213LAUNFT album with 33 unique NFTsKings of LeonNFT album with access to exclusive experiencesWarner BrosCollection based on movie Space JamNe
204、w York TimesAnnounces Kevin Roose column NFT auction for charityRave Family Block FestFirst NFT virtual music festival ParamountCollectables based on TV shows with RecurMarvel Collectables based on charactersCannes Film FestivalZero Contact released as an NFT2022DisneyNFT collection with VeVeRoyalMa
205、rketplace for buying/selling percentages of songs as NFTs for future royaltiesNetflixMinigame for Stranger Things season with NFTs as rewardsDead of WinterProduction funded by 10 pieces of digital artworkCoachella music festivalNFT collection that granted customers lifetime festival passes,unlock ex
206、clusive on-site experiences or redeem physical itemsSources:https:/ NFTs:Striking the Balance between Business Innovations and Risks27Mapping the Risks and Opportunities of NFTs4Regulating NFTs:Striking the Balance between Business Innovations and Risks28Understanding and balancing opportunities for
207、 economic growth whilst managing critical associated risks will be key for the future development of the NFT space.This section explores some of the present and possible risks and opportunities that NFTs may pose across different marketplaces.As new applications emerge,there is potential for even mo
208、re to develop.Therefore,continuous interaction and cooperation among regulators,businesses,and consumers are essential to ensure that proper safeguards are established.OpportunitiesAs NFT adoption continues to grow,it is important to observe the emerging opportunities of NFTs for fostering innovatio
209、n,economic growth and benefitting society at large across several key areas.Strengthening and disrupting the real economyStraying away from the narrative of“a solution in search of a problem”often associated with emerging products in the digital assets space,NFTs have the potential to substantially
210、strengthen the real economy and add value to existing utility in various industries.One such area is the carbon market and carbon credits as part of global efforts for offsetting greenhouse gas(GHG)emissions and meeting climate objectives.Carbon credits are permits that enable public and private ent
211、ities to produce an amount of carbon emissions up to a certain cap that can afterwards be traded if that cap is not reached.This promotes capital flows to environmentally-friendly projects around the world.Yet,in the real economy,from an administrative standpoint,carbon credit sales are long and cos
212、tly processes that involve a high level of due diligence and multi-party participation,and could be vulnerable to fraudulent or manipulative practices like replication.To address this gap,market players have kickstarted initiatives for minting or purchasing carbon credits as NFTs to enable the benef
213、it of uniqueness and trust within carbon credit sales,reducing risks of duplication and promoting transparency.NFTs in this context allow for the visualisation of necessary data,as well as the record of movement through the value chain,in a matter of seconds,thus alleviating the burden of prolonged
214、bureaucratic procedures and bolstering the overall efficiency of the process.Another sector that is benefitting from NFT adoption is real estate.In 2022,a Florida home became83 the first in the U.S.to be auctioned off as an NFT,selling for more than US$650,000.The transfer of home ownership via an N
215、FT offers numerous efficiencies,including fractionalization(which could still guarantee utility rights),reduced settlement times,automated compliance,data transparency,and reduced initial capital requirements and broader investor base,when considering it as a speculative asset.Jurisdictions,such as
216、the UAE,are beginning to explore methods to encourage real estate tokenization given the importance of the real estate sector to their respective economies.Real estate may also exist in digital formats,with land sales on different metaverses also increasing as an activity.Another significant advanta
217、ge of embracing NFTs lies in its promotion of democratisation and opening up new opportunities for artists and collectors,with NFT artwork serving as a notable example.In the conventional non-digital art realm,investing in artwork has historically posed limitations and high costs for the average ind
218、ividual,creating formidable barriers to entry.Contrastingly,the NFT space allows for the fractionalization of artwork,enabling consumers to acquire small fractions of an art piece at a more affordable price.This not only broadens investment opportunities but also facilitates the commercialization of
219、 artistic works,fostering liquidity in the market.The democratisation extends beyond the buyers realm to benefit artists as well.Within the NFT ecosystem,artists gain a more democratised platform to sell their artwork and receive royalties,a feat often challenging in the traditional art market.Addit
220、ionally,it serves as a conduit for bolstering the legitimacy of digital artists and emerging creators,affording them a more efficient and open avenue to monetize their creative endeavours.In essence,NFTs contribute to a more inclusive and accessible landscape,both for art enthusiasts seeking investm
221、ent opportunities and for artists striving for recognition and fair compensation in the digital age.Proof of OwnershipThe immutability and transparency inherent in NFTs,as facilitated by blockchain technology,empower individuals to establish unequivocal ownership of digital assets,services,or knowle
222、dge.This capability was previously unattainable without reliance on centralised platforms.The transparent record of ownership not only safeguards against unauthorised use but also protects users from potential exploitation by third parties.Traditional scenarios often see ordinary users receiving no
223、compensation for their digital activities,while third-party platforms profit from user data.NFTs,however,provide a mechanism to validate user activity,ensuring fair compensation for contributions and safeguarding intellectual property.Regulating NFTs:Striking the Balance between Business Innovations
224、 and Risks29AuthenticityThe unique and immutable nature of NFTs facilitates the authentication of assets,products,and individuals,offering significant value to consumers who prioritise provenance.NFTs can also serve as unforgeable identifiers for individuals on the internet,representing their identi
225、ty on the blockchain.This inherent authenticity verification promotes more confident consumption and is particularly valuable in industries where the genuineness of goods is paramount,such as the art and collectibles market.In these contexts,NFTs establish a verifiable and immutable record of owners
226、hip,provenance,and authenticity,thereby enhancing asset value and protecting against counterfeiting or fraud.TransparencyNFTs contribute to transparency and economic security by providing a clear and transparent record of all transactions and interactions associated with a specific asset.This transp
227、arency surpasses what traditional,centralised marketplaces can offer,helping to reduce fraud and manipulation and fostering increased trust in the market.Moreover,the transparency of NFTs enables consumers to easily track and comprehend the history of their digital assets or purchases,breaking down
228、silos of central control in traditional marketplaces.Overall,the use of NFTs provides legal certainty and security for consumers,empowering them to transact and consume confidently in the digital realm.Promoting new forms of activismNFTs have created a new avenue for activism and charitable funding
229、for various causes in the digital domain-from social causes to ongoing conflicts as discussed in Chapter 3.Fostering community-buildingAs outlined in Chapter 3,another key benefit of NFTs is that they have the ability of enhancing the connection between businesses and consumers,offering unique engag
230、ement opportunities for fans and customers with brands,and fostering loyalty and community.NFTs promote a better and more holistic understanding of a brands consumers,which in turn informs the improvement of the offering of a relevant good or service.RisksMarket VolatilityVolatility is observed in a
231、ll crypto markets,with regular mini-crashes,recoveries,booms,and price corrections.Some consumers may not fully understand the risks involved in investing in NFTs and the potential outcome for a market crash.A recent study from DappGambl examined NFT market movements and considerations for downturns
232、.An analysis of over 73,000 NFT collections demonstrated84 that 95%of them(69,795 collections)have a market value of 0 ETH,essentially making these collections worthless,which was attributed to a surplus of supply over demand.Careful due diligence of propositions and understanding of the market woul
233、d be necessary,beyond initial hype,for consumers to make informed investments to mitigate the risks emerging from these crashes,particularly price fluctuations or loss of value.Market volatility could also be a by-product of technological risks.In particular,smart contracts and underlying Blockchain
234、s could exhibit vulnerabilities or be exposed to malicious cybersecurity attacks.These can be more prominent in the case of inefficient or nonexistent auditing processes of the smart contract code or the general infrastructure.On this end,technological vulnerabilities can negatively impact the value
235、,accessibility or overall security of an NFT,which may lead to increased market fluctuations.Yet,it is worth noting that these technological risks are commonplace in any emerging and fast evolving market,as such transparency and education to promote consumer awareness are a necessity.Money Launderin
236、gIllicit actors could exploit the anonymity and lack of harmonised AML measures within the NFT ecosystem to facilitate money laundering and terrorist financing,for example by using layering techniques to obscure the source of funds and reduce traceability.Considerations regarding money laundering an
237、d terrorist financing in NFTs have already been indicated by international standard-setting bodies such as the Financial Action Task Force(FATF),which we explain in more detail in the next chapter.To address money laundering risk,companies operating within the NFT market should be empowered to make
238、use of the transparency and traceability of Blockchains to build structures to swiftly detect and track suspicious Regulating NFTs:Striking the Balance between Business Innovations and Risks30transactions to tackle illicit activity.Blockchain analytics tools can be important for tracing such transac
239、tions and mitigating those risks.NFTs conferring ownership rights to digital artwork typically do not fall under the current AML regulations applicable to high-value art dealers,which predominantly cover physical artworks such as paintings and sculptures.Since NFTs represent ownership,whether of a d
240、igital or physical asset,it is reasonable,from a policy standpoint,for consumers to enjoy similar protections as they would in transactions involving tangible assets.Nevertheless,the effectiveness and scope of these consumer safeguards in the context of NFTs remain uncertain.A thorough,independent a
241、nalysis of existing consumer protections is essential to determine whether legislative adjustments are necessary,encompassing considerations such as the sufficiency of current financial services regulations.ScamsIllicit actors may also take advantage of the anonymity characterising Blockchain techno
242、logy,and by association NFTs,as incumbent traditional sectors are already subject to strict regulatory frameworks.Due to its novelty and,at the same time,rapid growth,NFT marketplaces may not have the capabilities to enforce mature or sufficiently consumer protection mechanisms,which gives rise to b
243、roader regulatory concerns.We explore the most prominent practices and potential risk scenarios that individuals and businesses should be mindful of in relation to NFTs below:Wash trading:Artificially inflating the price of an NFT.This type of fraud is usually done by the issuer or seller with the o
244、bjective to create a misleading appearance of high demand,usually through transactions from wallets under their control(selling,buying and reselling),to increase the monetary value and popularity of the NFT when seen by the end-user.Rug pulling:A type of fraud that occurs when creators advertise the
245、 sale(usually as yielding returns)of an NFT to attract investment,and after garnering funds from consumers from initial sales,prematurely close off or intentionally deflate the value of the project,resulting in investors losing funds or ending up with NFTs that hold minimal or no value at all.As dis
246、cussed in Chapter 2.Market speculation:Speculative practices in the NFT market(the holding,buying or selling of an NFT to affect price movements with the objective of making future profit)may give rise to high price volatility and significant losses for investors due to potentially erratic fluctuati
247、ons.Insider trading:As with traditional sectors,NFT marketplaces can be prone to insider trading,which implies the use of privileged non-public information by individuals to use or trade that information to facilitate making investment decisions that allow for unfair advantage in profit-making over
248、the rest of the marketplace users.This is more likely to occur in the absence of stricter rules or policies that prohibit such insider trading.In August 2023,a former product manager at the largest NFT marketplace to date-OpenSea-was sentenced85 in the U.S.to three months in prison for buying NFTs p
249、rior to those being listed on the platform,which was recorded as the first case of insider trading in the sector.Misleading InformationMisleading information about potential gains from investing in NFTs poses a significant risk,as advertisers and influencers targeting vulnerable individuals could ex
250、acerbate the potential harms.Protecting consumers from deceptive practices,false advertising,and inflated narratives surrounding the value of NFTs is important.Misleading claims and advertisements that unscrupulously guarantee specific values or returns should be mitigated through regulatory oversig
251、ht,fostering a more informed and secure environment for participants in the NFT market.Advertising rules typically exist across different markets,although it is important for the various regulatory agencies to invest resources in monitoring and educational initiatives to promote a well-informed mark
252、etplace.Intellectual PropertyRelated to the above,consumers need to be better informed about what they are purchasing and what they can do with their NFT,without infringing the rights of the platform of NFT creator.Systems for IP protection are not well developed for two major reasons:(1)existing IP
253、 laws in national contexts are not well-adapted to the realities of NFTs and(2)the global nature of the industry makes it challenging to harmonise IP protections across borders.In September 2023,the UKs Digital,Culture,Media and Sport(DCMS)Committee highlighted86 the major points in relation to pote
254、ntial IP challenges in the NFT space,which dissected the scale of risk observed in the market and specific creator and investor concerns.The considerations are outlined below:Copyright infringement:The unauthorised issuance(“minting”)of copyrighted works.Copyright holders cannot benefit from“notice
255、and takedown”procedures,as infringed material could easily reappear considering the digital domain context.In principle,as outlined87 in Regulating NFTs:Striking the Balance between Business Innovations and Risks31evidence provided to the DCMS Committee,minting an NFT from an existing creative work
256、without the explicit permission of the creator would constitute a breach of copyright,but clear guidelines for IP protection are lacking.In practice,there is currently limited clarity on whether the creator of the underlying work or the person who minted the NFT holds the copyright to it;legal prote
257、ction could at this stage be seeked on a case law basis,however there has not been sufficient evidence to inform strong legal principles on the issue.Lack of consumer certainty over the ownership of the underlying asset:The level of clarity over ownership of the underlying asset is currently seen as
258、 weak,causing confusion for investors.Buyers of NFTs often misunderstand that buying an NFT constitutes the transfer of the copyright attached to it as well,which is not the case unless the creator specifically specifies that within the smart contract or another agreement that is deemed legitimate i
259、n legal terms.Thus,it appears not initially clear for investors as to how to distinguish between the ownership of the certificate of the artwork(the NFT bought)and the ownership of the underlying copyright.Further resales down the line could strip the initial creator from compensation stemming from
260、royalties.Customers should therefore be properly informed as a risk mitigation measure.In traditional creative industries,it is commonplace that,at base level,IP rights can be assigned or transferred through affirmative actions by creators in writing and through signature to hold legal weight.In the
261、 context of NFTs,this can be achieved through embedding the right to IP protection within smart contracts,however it is not a harmonised or standardised practice.Moreover,it is not clear whether all smart contracts can be programmable to satisfy these objectives and prevent IP infringement.Therefore
262、,the transfer of rights might not be as easily facilitated in the Blockchain context and operational challenges can arise.As the NFT market grows,these principles,operational structures and practices could become more refined,but at this stage,it is important that individuals that mint an NFT,as wel
263、l as buyers,understand that in principle the copyright of the artwork is not transferred by default,and specific agreements tailored to the Blockchain context are necessary in order to prevent IP infringements.Potentially,a self-regulatory organisation or code of practice setting minimum standards t
264、hat includes better transparency and education of their collaborators.Terms and conditions for collaboration should be deemed unreasonable and therefore unenforceable.Instead,collaborators should require independent legal advice before signing a contract which gives away their rights to their work.E
265、nergy ConsumptionThe emergence of NFTs presented concerns regarding the ecological impact of the underlying Blockchains(primarily the Ethereum blockchain in the case of NFTs),and the way the existence of NFTs further exacerbates the issue of rising carbon footprint of the issuance of digital assets
266、as a whole.Yet,since Ethereums“Merge”of September 2022,the new proof-of-stake consensus mechanism,the energy intensity and consumption of the Ethereum blockchain,and by association NFTs,has been significantly reduced.Drawing the lineThe adoption of NFTs and their spread across multiple industries ca
267、n bring significant benefits to society and meet various consumer demands.At this stage,new use-cases are being continuously shaped,which carries certain risks from an operational,marketing or ownership standpoint.Yet,it seems that the majority of these risks can be attributed to the nascent nature
268、of the sector,where specific safeguards,either from the industry or the regulatory side,to tackle these risks are still being developed.In this case,incumbent actors and products benefit from long-standing practices and regulatory frameworks to address similar risks to consumers,and the novelty of t
269、he NFT sector allows for establishing ways to deal with such risks in a way that is aligned with the realities of the ecosystem.We discuss this issue more in-depth in the next section of this report.Overall,when these challenges are addressed and the specific opportunities of NFTs are leveraged,this
270、 ecosystem has the potential to usher in continuous economic growth,inclusivity and positive change in the way people interact with the digital and physical domains.Regulating NFTs:Striking the Balance between Business Innovations and Risks32NFT Regulation5Key regulatory considerations and global pe
271、rspectivesRegulating NFTs:Striking the Balance between Business Innovations and Risks33The Task for Regulators:The rapid adoption of emerging technologies like NFTs presents a unique challenge for policymakers:crafting and adapting suitable regulations that safeguard both consumer interests and busi
272、ness innovation.Navigating this dynamic landscape demands regulatory agility,adaptability,and a deep understanding of the intricacies and applications of digital assets and their underlying tech.A crucial aspect of this is the ongoing debate around NFT regulation.As discussed earlier,NFTs function a
273、s an agnostic infrastructure,establishing provenance and uniqueness of assets.Therefore,any regulatory framework must avoid conflating NFTs as a specific asset class or associating them solely with speculative cryptoassets.However,while most NFTs,e.g.,digital collectibles,artwork or tickets,do not h
274、ave a financial nature,some tokens marketed as NFTs may more closely resemble financial instruments.Scrutinising the characteristics and function of each NFT is crucial to determine if existing regulations apply or new ones are needed.A primary concern is identifying when an NFT crosses the line int
275、o a financial services activity,triggering stricter authorization requirements.Debates surrounding fungibility and token purpose significantly influence how regulators interpret applicable rules.Financial services,or bespoke cryptoasset regulations,are more likely to apply when a large class of NFTs
276、 that are largely indistinguishable from each other are minted and traded as a financial services instrument with no price differentiation between the different tokens.Beyond the question of financial services activity,additional discussions surround the potential need for bespoke regulations for no
277、n-financial NFTs.These discussions could consider investor protection and market integrity frameworks to safeguard consumers from risks like wash trading,market manipulation,and transparency issues,as raised by one interviewee.These debates might gain more prominence during periods of high NFT marke
278、t volatility or if concerns emerge around intellectual property,copyright,or ownership rights.Regulatory Perceptions:Unlike fungible assets,which are readily marketable,NFT sales depend on their utility and unique value,generally resembling non-financial products such as digital collectibles or artw
279、ork more than financial instruments.This consensus emerged consistently during our interviews,where the distinct nature and utility of NFTs was emphasised in comparison to traditional instruments or other tradeable cryptoassets.Supporting this,the UKs HM Treasury stated in a consultation on future c
280、ryptoassets regulation:NFTs are more akin to digital collectibles and artwork than a financial services product.So,in the same way the sale of art is not regulated as a financial services activity,the government considers that in general activities in connection with NFTs are not appropriate for reg
281、ulation as a financial service.88The EUs Markets in Crypto-Assets(MiCA)regime further strengthens this perspective by explicitly excluding NFTs due to their unique value and non-interchangeability.The Monetary Authority of Singapore(MAS)echoes this stance,considering NFTs a non-priority and currentl
282、y outside their scope beyond existing Payment Services and Securities laws.As an interviewee mentioned,companies can easily obtain legal opinions in Singapore to clarify if their NFTs fall under digital payment token definitions and avoid unnecessary regulation,demonstrating in a manner the ambiguit
283、y involved in assessing the application of existing rules to NFTs and the role of legal professionals in the marketplace.The UAE,with its diverse virtual asset regulatory regimes,also leans towards light-touch regulation for NFTs,following the logic that regulation is generally determined by NFTs re
284、al-world application and may be deemed an investment or payment token if used for such purposes(e.g.,if the NFT is popular on financial services markets it closely resembles a financial instrument).The Dubai Virtual Assets Regulatory Authority(VARA)recently mandated that NFT marketplaces acquire a V
285、irtual Assets Exchange and/or Broker-Dealer Licence,and NFT issuers need a VARA Licence or approval.VARA retains flexibility to adapt their approach and has been praised for its engagement and understanding of the cryptoasset market.As VARA is the only bespoke regulator for virtual assets,other juri
286、sdictions must rely on traditional financial services regulators to assess and apply financial services rules that may apply to NFTs.Considering this widespread perspective and the economic reality that NFTs rarely serve payment purposes,truly non-fungible tokens are unlikely to be captured by finan
287、cial services or current crypto-specific regulations.The focus then shifts to determining whether an NFT resembles an investment contract or regulated activity.This requires a nuanced assessment of its utility and characteristics,with fungibility being a key factor under existing and proposed financ
288、ial services regulatory frameworks.Regulating NFTs:Striking the Balance between Business Innovations and Risks34One policymaker summarised:“Many regulatory elements can be explored,but the financial aspect is not a priority as financial regulation always comes last.”Nevertheless,financial services r
289、egulations are strict and costly,so understanding when existing rules or new cryptoassets frameworks apply to NFTs is paramount.The French financial regulator,the Autorit des marchs financiers(AMF),acknowledges this difficulty,summarising a view consistently shared with us that NFTs do not easily fi
290、t into existing definitions,prompting them to analyse each NFTs characteristics to determine applicable regulations.The general perception correctly remains that NFTs are unlikely to be used for financial services,although the possibility that an NFT that provides rights to a financial asset or oper
291、ates in a similar way to a financial instrument ought to be subject to very different regulation.This requires a case-by-case approach where the characteristics of that token are the determining factor.A Case-by-Case Approach:The Financial Action Task Force(FATF)sets standards for the prevention of
292、money laundering and terrorist financing,providing authorities with the power to investigate based on the frameworks of their respective jurisdictions.Many of the regulators we spoke with highlighted the importance of these regulations in developing rules as they apply to NFTs.The FATF stated in the
293、ir 2021 Updated Guidance for a Risk Based Approach:Virtual Assets and Virtual Asset Service Providers:NFTs are generally not considered to be Virtual Assets(VAs)under the FATF definition.However,it is important to consider the nature of the NFT and its function in practice and not what terminology o
294、r marketing terms are used.Some NFTs that on their face do not appear to constitute VAs may fall under the VA definition if they are to be used for payment or investment purposes in practice.Other NFTs are digital representations of other financial assets already covered by the FATF Standards.Countr
295、ies should therefore consider the application of the FATF Standards to NFTs on a case-by-case basis.89The FATF guidance resonates with national regulators,highlighting that most NFTs likely fall outside the scope of traditional financial services regulations.This perspective was confirmed in our int
296、erview with the Malta Financial Services Authority(MFSA).They explained that truly non-fungible NFTs pose limited risks in financial markets and are unlikely to be used for payment or investment.Technical terms should be well understood by regulators such that the different classes or subsets of NFT
297、s are not conflated or confused.It is also important to consider whether the activities are genuinely the same,particularly as Decentralised Finance business models continue to test the boundaries.NFTs may not be regulated based solely on their non-fungible characteristics,which has the potential to
298、 create an unclear regime and create inconsistencies with outcomes-based approaches towards regulation given an NFT may provide rights to an underlying regulated activity.In this scenario,an NFT may more closely resemble a security token subject to regulatory oversight.Regulatory guidance is importa
299、nt,and by examining individual aspects like fungibility,transparency,and ownership rights,a clearer understanding emerges,enabling a tailored regulatory approach for each NFT.Bespoke Regulations-MiCA:Globally,regulators are navigating the challenge of integrating crypto into existing frameworks or c
300、reating entirely new ones.The EUs Markets in Cryptoassets(MiCA)Regulation(EU)2023/1114)exemplifies a bespoke approach specifically designed for cryptoassets not covered by current financial regulations.MiCA focuses on transparency,disclosure,authorization,and transaction supervision for those involv
301、ed in issuing,trading,and providing cryptoasset services,with a focus on transparency,disclosure,authorization,and transaction supervision.Interestingly,MiCA deliberately excludes truly unique and non-fungible tokens like digital art and collectibles.However,a crucial caveat was added later NFTs tha
302、t can be fractionalized,belong to large series,or represent fungible assets are excluded from the exemption due to their potential financial services use.This focus on futureproofing is further evident in MiCAs requirement for the European Commission to present a report on latest crypto asset develo
303、pments by late 2024.This report,as our interviewees explained,will encompass topics like:Appropriate regulatory treatment of NFTs and marketplaces.Defining the boundary between financial and non-financial NFT use-cases.Assessing Anti-Money Laundering(AML)protections for the NFT sector.The findings o
304、f this report could potentially inform future revisions of MiCA,known as MiCA II.Regulating NFTs:Striking the Balance between Business Innovations and Risks35It is important to note that despite MiCAs existence,EU member states still have the legal freedom to implement stricter regulations.In late 2
305、023,the French National Assembly voted in favour of a law90 aiming to secure and regulate the digital space,otherwise called the“Sorare Act”.This new development marks a step towards the establishment of a regulatory framework dedicated to games integrating NFTs and monetisation models,creating a ne
306、w category of games under French Law bringing in new requirements such as an identity check and prohibition on social media promotions to minors.This move was met with positivity from the industry in separating Web3 gaming platforms from gambling.France is one of the first jurisdictions to create a
307、specific regime for companies using NFTs as part of their games with an objective to provide certainty to the industry.Financial Services Regulations:In the absence of dedicated NFT or crypto-specific legislation,stakeholders in the NFT space find themselves obligated to evaluate their projects with
308、in the frameworks of existing financial regulations,which may be updated to include other cryptoasset activities.This process often involves scrutinising the rights associated with NFTs to determine their regulatory status within a specific country,leveraging guidance from national regulators or gov
309、ernments.The UK stands out for integrating qualifying cryptoassets into existing financial services regulation.This move aims to place cryptoassets on an equitable footing with other financial services activities.At present,an NFT could be regulated if it amounts to:“Specified Investments”:under the
310、 Financial Services and Markets Act 2000(Regulated Activities)Order 2001(which will include additional cryptoasset activities in the future).Financial Instruments:under the Markets in Financial Instruments Directive(MiFID)if the tokens amount to financial instruments.E-money:Under the Electronic Mon
311、ey Regulations 2011(EMRs)if the tokens amount to e-money.Payment Services:Within the scope of the Payment Services Regulations 2017(PSRs).In the UK,alignment with MiFID II activities means that if an NFT meets the definition of a financial instrument then it will also fall within the UKs regulatory
312、regime.Similar to the UK,Singapores MAS provides guidelines on digital token offerings based on existing laws like the Securities and Futures Act 2001.However,NFTs are generally considered exempt due to their non-fungible nature,unless sold within financial services markets.Financial services regula
313、tions lack global harmonisation.MiFID II,for example,leaves the definition of a financial instrument open to interpretation by EU member states,potentially leading to regulatory arbitrage and challenges for firms operating across borders.Collaboration between regulators,bilaterally and with internat
314、ional organisations,is crucial to establish clear guidelines for NFT marketplaces.The U.S.takes a fragmented approach,with different regulations across states and several bills under development in Congress.While collaboration between federal and state regulators is expected to increase,much of the
315、debate remains around whether an NFT or cryptoasset constitutes a security under the Securities and Exchange Commission(SEC).The U.S.Supreme Courts Howey Test serves as the basis for this determination,a process in place since 1946.An investment contract,and therefore a security,must meet four condi
316、tions:Investment of money Common enterprise Reasonable expectation of profits Profits primarily derived from the efforts of othersApplying this test to cryptoassets has sparked significant debate and uncertainty given its broad nature.The SEC has also begun taking enforcement action against NFT proj
317、ects classified as investment contracts under the Howey Test,creating further confusion across the market.This is not unique to the U.S.,and retrofitting existing financial services definitions and laws to NFTs creates numerous difficulties.Regulatory Action by the SEC:In 2023,the SEC took action ag
318、ainst two NFT projects,alleging they violated securities laws.They argued that the NFTs constituted investment contracts based on promises of increased value and smart contract royalties paid to the issuer,leading to a reasonable expectation of profits for purchasers.However,Commissioners Pierce and
319、 Uyeda dissented,questioning the application of the Howey Test.They argued that the NFTs were not company shares and did not generate dividends,and compared the situation to selling collectibles with promises of increased value.This disagreement highlights the controversial nature of applying the Ho
320、wey Test to NFTs and raises questions about whether enforcement action is always warranted.Regulating NFTs:Striking the Balance between Business Innovations and Risks36This legitimate concern regarding customers losing money,however,is not a sufficient basis to pull the matter into our jurisdiction.
321、we do not routinely bring enforcement actions against people that sell watches,paintings,or collectibles along with vague promises to build the brand and thus increase the resale value of those tangible items.91Even if the NFT sales fit neatly within the U.S.Howey Test,it still raises questions as t
322、o whether enforcement action is warranted.As this is the first NFT settlement,the action taken by the SEC raises difficult questions and as emphasised in Commissioner Pierce and Uyedas statement“the Commission should have grappled with these questions long ago and offered guidance when NFTs first st
323、arted proliferating”.The lack of specific guidance on NFT applications has led industry leaders to seek no-action letters from the SEC.This desire for regulatory clarity underlines the industrys preference for clear parameters over operating in a regulatory void.Fractional NFTs:Fractional NFTs(f-NFT
324、s)introduce a fresh regulatory consideration into the equation.By dividing ownership into smaller shards,they introduce aspects of fungibility and commonality among shard holders.This raises crucial questions:Collective investment schemes:If the seller retains control,could an f-NFT be considered a
325、unit within a collective investment scheme,necessitating regulatory oversight?Securities:Does the F-NFT resemble a security?Derivatives and beyond:Do f-NFTs resemble derivatives like options or futures,depending on how profits or income are shared or pooled?Applying the U.S.Howey Test to f-NFTs furt
326、her complicates things.Selling shards could satisfy the“common enterprise”criterion,potentially reclassifying a non-security NFT as a security,as Commissioner Peirce warns.The key question becomes:do purchasers reasonably expect profits derived from the efforts of others?This hinges on factors like
327、how distributions and appreciation occur,especially in the secondary market.Therefore,a thorough evaluation of the entire transactions economic reality is essential.This includes scrutinising offer terms,distribution plans,economic incentives for buyers,digital asset holder and issuer participation
328、in profits,the existence of a secondary market,and whether the issuers efforts directly influence expected returns.Owning an NFT in anticipation of its scarcity increasing its value resembles traditional investments like art collecting.This expectation alone unlikely triggers the need for regulation
329、.However,when combined with factors like the issuer retaining a portion of publicly sold NFTs and actively marketing them for secondary market profits,the transaction begins to resemble an investment contract and potentially a security,akin to shares in a common enterprise.It is important to remembe
330、r,as highlighted in an interview,that existing financial services definitions and tests were not designed for NFTs and cryptoassets.Applying them directly might not be the best solution.Recognizing diverse fractionalization methods and their varying levels of risk and commonality is crucial for deve
331、loping appropriate regulatory frameworks that fit the complexities of this evolving landscape.To illustrate the nuances involved,consider two scenarios:French artist Agorias collaboration92 with Ledger on fractionalized generative art allows purchasers to own portions of a larger artwork as desired.
332、This innovative engagement model for collectors does not introduce significant commonality or fungibility among shard holders,potentially keeping it outside the realm of financial instrument regulation.Example 1 Agoria Fractional Generative Art:Regulating NFTs:Striking the Balance between Business I
333、nnovations and Risks37The regulatory determination should therefore hinge on an objective analysis of the economic reality of the transaction and the characterization of the instrument in commerce as outlined by the offers terms.If a promoter or third party plays a pivotal role in managerial efforts crucial to the enterprises success,and investors anticipate profit,it is likely to be categorised a
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