Non-fungible tokens, known as NFTs, have become the latest craze in the digital asset space. Leveraging the same blockchain technology that powers popular virtual currencies such as Bitcoin and Ether, issuers are creating digital assets intended to serve as unique electronic certificates of ownership of intangible digital assets, such as digital art, music, sports memorabilia, or of tangible real-world collectibles.
Like traditional virtual assets, NFTs are digital tokens primarily issued on public, or decentralized, blockchains. They can be bought and sold in peer-to-peer transactions or through physical or decentralized platforms. They are often designed as so-called “smart contracts” that are programmed to automatically perform certain functions, such as forwarding a portion of each resale price to the original artist.
Transactions in NFTs are validated through a consensus mechanism that helps to ensure that each NFT is authentic and not an unauthorized copy. Unlike traditional virtual assets, however, each NFT contains unique information and cannot be directly substituted on a like-kind basis with other NFTs, as can Bitcoin with other Bitcoin or, in the real world, dollars for dollars.
NFTs can be electronically traded in a game by the participants first assigning a value to an NFT and exchanging like-valued NFTs for one another.
A Regulatory Patchwork and Unclear Laws
Collectors are buying and reselling NFTs with a fury. From a market capitalization of $41 million as recently as 2018, NFTs grew to a market capitalization of at least $338 million in 2020 and are on pace to substantially exceed that amount this year.
Most recently, individual NFTs have exchanged hands at staggering prices: An NFT reflecting a digital art collage by the digital artist Mike Winkelmann (more commonly known as Beeple) sold at the Christie’s auction house for $69 million on March 11; Twitter founder Jack Dorsey’s first tweet sold as an NFT in mid-March 2020 for $2.9 million; while an NFT highlight card featuring a dunk by LeBron James recently sold for $200,000.
Dapper Labs, a blockchain-based “experiences” design company and creator of the CryptoKitties collectibles digital game, recently raised $250 million and currently values itself at $2 billion attributable to the popularity of the TopShot digital collectibles game that the National Basketball Association recently created in partnership with it.
As with virtual assets, however, the laws governing NFTs are not always clear. Purchasers may not always be receiving what they think they are buying, and both purchasers and original artists may have fuzzy recourse when their expectations regarding what they thought they were purchasing or linking to an NFT turn out not to reflect reality.
No U.S. regulator has to date formally asserted jurisdiction over NFTs, although many different domestic regulators assert oversight over different aspects of digital assets—from the Financial Crimes Enforcement Network…