NFTs, What Are They and What Are They For: A Guide for Non-tech Users Part 3 — Legal and Technological Issues
We’ve talked about what NFTs are in the first part, and who are those who mint and buy them in the second. However, let’s not get carried away by the current excitement and have a second and look at a few of the legal and technological issues with this technology.
A more conservative, down-to-Earth perspective
You might think that NFTs are a scam, or a bubble. For sure, those big auctions seem too incredible to be real. Some might even call different activities of selling NFTs and donating the proceeds to certain charities, a form of tax avoidance. You are perfectly right to feel sceptical about this phenomenon because the parallels to the tulip mania are astonishing, especially if you are a Boomer. Also, you might see the similarities with the Beanie Babies mania from the 90s, if you are GenX. And you might have already seen something like this in the ICO bubble from 2017, if you are GenZ.
Today, everyone in the blockchain community is happy because the NFT trend seems to be going parabolic. But, if something happens because of some sort of international scandal or, potentially, because of the government stepping in, then the NFT market will inevitably crash — so you should tread with caution on this newly discovered market.
Concerns about how NFTs fit in the existing legal / regulation structure?
A very important element that people sometimes disregard when selling the idea of NFTs is the fact that they are not regulated, and it is very unclear if and where they fit in the existing legal and regulatory structure. There is no precedent and no official guidance from any government, as far as I am aware.
These might be some issues that are worth investigating further in terms of regulatory frameworks:
- Taking into consideration that the content of a non-fungible token is public and viewable by everyone, but at the same time only one entity can own that NFT, we could compare those tokens with a digitally authenticated note that says that a certain person is the owner.
- Now, looking at customer protection, one of the issues with NFTs is the fact that many consumers are confused and, perhaps, have no idea what it is that they’re buying, especially when NFTs are becoming popular with an increasingly younger audience. In addition to that, the fact that people sell and buy NFTs, most of the time, without following any know-your-customer/anti-money laundering procedures is raising questions about the legitimacy of this market.
- Also, NFTs might run into US sanctions laws, which forbid US residents or citizens from conducting business with individuals or entities from sanctioned nations.
- Regarding the possibility of counterfeiting, sellers might offer on the market something digital that isn’t an NFT, but simply lives on a blockchain, as a lot of users would have no way of knowing if they are not sophisticated enough to know how to check. It might be that scammers decide to sell randomly generated images or sell NFTs that are tied to a different blockchain than the one advertised. What’s more, nothing is filtered, people can also mint NFTs of work they don’t create (and dupe buyers) — but if that happens, the original artist can easily prove he/she is the creator by showing some recordings or time-stamped emails with him/her creating that artwork.
- Now, in respect to securities laws, NFTs might run into problems with that as well, especially if people buy then on the expectation that the NFTs will rise in value.
- Last, but not least, we need to discuss the concerns regarding copyright and intellectual property. No doubt, the big NFT creators don’t believe that what you are selling is the copyright or the master of the artwork. However, some small NFT creators might fall into the trap of paying for the creation of the NFT thinking that what they upload in the blockchain is copyrighted automatically. Of course, some people that don’t really know how NFTs work, might spend millions buying an NFT thinking that they are buying the intellectual property or the copyright of that thing.
Some artists or NFT platform developers think that the government is already drafting legislation to protect NFT artists and soon NFTs will be protected by the law, but, on this matter, only time will tell.
Are there any worries about the limitations of the technology?
What a lot of people don’t realise is the fact that a non-fungible token is basically something that looks like a unique serial number with some metadata attached.
The serial number of a certain NFT (also known as a token ID), is automatically generated on the blockchain, at its creation, by the smart contract that governs the group of NFTs in which that particular NFT stands. The smart contract also keeps a record about ownership that can be understood as “token ID X” belonging to the “address Y” controlled by someone.
One interesting, widespread problem is the fact that NFT collectors tend to lose access to their NFTs, meaning the artwork cannot be sold or transferred out of that account ever again. Alternatively, it might be that the user that owns a particular NFT still has the keys of his/her account, but the blockchain service fees are too high and he/she can’t afford to transfer the NFT to anybody. This could preclude small artists from minting NFTs in the first place.
The metadata of the NFT (a piece of text or a link) is also recorded on the blockchain at the NFT creation and cannot be changed or erased. In my view this isn’t necessarily a limitation of the technology, but a small problem that could easily be solved with a good UI. For example, after you send an email there is no way to stop it but some email providers like Gmail delay the transmission to allow the user to change his/her mind. Something similar could be tried for the NFT creation and included in the graphic interface.
One important technical element, that no one is talking about, is the fact that the assets of almost all the NFTs are stored in the wrong places, as in, either on centralised cloud infrastructure, on distributed file systems that cannot guarantee any decent data availability (e.g., IPFS) or on emerging barely secured blockchains.
For example, if we take a closer look at the Nyan Cat auction page, we can see that the description of the NFT, along with the animation MP4 file are both stored on IPFS. Because the content stored on IPFS is growing exponentially ,while the number of IPFS nodes that use large storage doesn’t grow as much, some regular or small files will not be available all the time, while certain large files will disappear completely, especially if they are quite old. For example, the $69 million NFT by Beeple JPEG asset that I have mentioned previously, can be accessed relatively fast on certain IPFS gateways, like the Makersplace Gateway, while on other gateways, like the IPFS.io gateway or Astyanax gateway, the image is almost inaccessible. Unfortunately, we are just at the beginning of this technology, and there aren’t that many distributed file-system networks with high availability. There is even a tool called Checkmynft, that will help any NFTs makers see how well they were created, and how strong the platform that holds the assets is.
Final remarks
I’ve been in this space for some time, and I’ve seen a lot of interesting projects, some yet to grab public attention. It was remarkable seeing a few artists here and there taking the time to learn about crypto, and occasionally making an art piece about Bitcoin. However, I’ve never seen so many artists coming into this space, all at once, and not only artists but musicians, game designers and social media influencers. They are usually the ones paving the way for a technology going mainstream, so their interest should be welcomed, I think.
In regard to whether the NFTs market will grow in value, I don’t know what to say… maybe it will, maybe it will not (just like in avant-garde art, in technology innovation only time tells what lasts).
Maybe this is all just some sort of irrational bubble, who knows? If you think they are cool and worth collecting, don’t go and buy them immediately, and definitely don’t rush into this! Do your own due diligence research because this article is not financial advice.
Last but not least, as I said before, I decided to tokenise the intro image from the first part. The resulting NFT can be found here.
