NFT: From a speculative asset to a practical tool

Remember NFT – the mesmerising acronym that became a major talking point the day it was born?

The $40 billion evergreen market, multi-million dollar lots, exhibitions, auctions, and endless talk that “NFT art will transform the world”?

By the end of 2022 it had become embarrassing to mention: NFT sales had hit a one-year low in November and deals for OpenSea, Magic Eden, X2Y2, LooksRare and Solanart NFT had dropped by more than $100 million, or 20%, in just one month.

So, was it all worth the hype?

The hype discredited NFT and distorted the benefits of this unique technology. Most collectors never realised that they were just paying for air. A blockchain record containing the metadata of a digital file, something sold by exchanges and marketplaces, does not in itself give you any copyright in the work. Many artists have been surprised to learn that abusers are aggressively selling ‘tokens’ of their work, and, moreover, that the extent to which this infringes their copyright is debatable. Indeed, an NFT is not a work per se, but simply a line of code containing metadata. Even WIPO does not consider itself qualified to judge the extent to which the creation of an NFT, even without authorisation, may infringe the rights of the author. After all, a string of numbers is not a reproduction or even an adaptation of a work.

But does this mean it’s time to say goodbye to non-fungible tokens as a technology? I’m sure it doesn’t. We just have to use them properly, for their intended purpose. NFTs can have real practical applications in many areas. In the arts and, more broadly, in works subject to intellectual property rights, NFTs can evolve from ephemeral ‘autographs’ and subcultural entertainment into digital expressions of real-world claims, such as exclusive intellectual property rights. Notably, blockchain has long been used for precisely this purpose in many jurisdictions.

How does it work? If you want to secure some intellectual property rights, in digital or analogue form, you need to sign a contract with an author or rights holder. But how do you know that you are dealing with a true rights holder and not a crook? This is where ledgers come to your assistance, offering a complete and up-to-date registry of creative works and their rights holders.

Blockchain is probably the best technology for such an application.

Each record of an object and its rights is essentially a non-fungible token with its authenticity guaranteed by the consensus of network nodes that include authoritative representatives of the intellectual property market and relevant government agencies. The licensing or transfer of exclusive rights can be in the form of a smart contract, which in many jurisdictions has come to be seen as the equivalent of a paper transaction. In this way, it is not the work of art that is “tokenised”, but the IP right to it. It becomes a fully-fledged digital asset.

However, the possibilities of the NFT are in fact much broader.

With non-fungible tokens, even a legal entity can become a digital asset. A company registered with an NFT is a blockchain accounting record that is simultaneously recorded by banks, the government and other participants in the network. The data cannot be erased or corrected, so the legal entity can start its business immediately after the token is created.

“NFT” may cover all types of legal entities. It is no longer necessary to choose between a for-profit and a non-profit organisation, LLC or JSC. Everything is determined solely by the company’s goals and decision-making procedures, encoded in a non-fungible token. At the same time, the NFT corporation itself is an object of digital rights, which can be managed, and rights can be redistributed on national or global platforms. Finally, NFT operates as a “digital avatar”, the underlying token for transactions, rights ownership, disputes and more.

An NFT company becomes incorporated when its purpose, partner contributions and ownership data are recorded in a public blockchain. Founders can make such a record directly from their smartphone, which can authenticate a person, including through biometrics. It is crucial that all relevant authorities, i.e., tax, financial, judicial, licensing and registration authorities, are part of the blockchain consensus. Consensus means that the company has met all legal requirements and can begin operations. All company rules, including decision-making procedures, responsibilities et cetera, are laid out in a smart charter and are automatically enforced.

We don’t have to wait long for the benefits of NFT to materialise. Firstly, the requirements of different branches of law for different types of legal entities are automatically included in the smart charter. Secondly, the authorities can easily check the company’s compliance with the articles of association, list of founders, ownership or property rights and decide whether to issue a permit for the company to operate. Thirdly, the company is spared the need for lawyers and intermediaries, as all the rules are clear and straightforward.

In the medium term, as the banking system adopts blockchain, NFT will allow instant entry and management of a bank account using a digital avatar. The transfer of IP rights will be synchronised with the transfer of ownership. Finally, corporate governance will become fully transparent, with responsibility automatically allocated to its members, as all material procedures are embedded in the smart charter.

In the long term, NFT companies will create an entirely new market for the IT industry, encouraging the replacement of obsolete hardware and software with advanced technology and enabling businesses to operate in a multi-currency environment, including the use of cryptocurrencies. The public sector will also gradually move to digital data and asset management. Analogue registers will give way to digital corporate profiles. Businesses will use technology to grow seamlessly from a sole trader to a corporation. At the same time, company records will become transparent and accessible to investors, and securities will be replaced by tokens.

Some jurisdictions are already legalising NFT corporations. For example, corporate legislation in the US state of Delaware allows such decentralised entities to be regulated as limited liability companies. The state of Wyoming has passed a special law on DAOs (Decentralised Autonomous Organisations, which is one of the names of NFT companies). Members of such organisations also receive a “corporate shield” limiting their liability and are recognised as founders of the LLC. Finally, more recently, DAO legislation has been passed in the Marshall Islands, where NFT corporations are also granted LLC status. Moreover, the local government is setting up a special fund that will provide definitions and rules for agreements, the use of smart contacts and help integrate NFT companies into the economy.

Working together, tokenisation of financial assets, intellectual rights, and communications (corporate) rights can produce powerful synergies and provide a huge advantage in global competition for creative capital. A complete digital infrastructure will create an entirely new marketplace, free from the constraints of the traditional economy and state bureaucracy. In this way, the NFT can go beyond the bubble inflated by speculative traders and PR agencies to become an effective tool for the digital transformation of the national and global economy.

Endre Birich
Endre Birich
Endre Birich is the CEO of the Kettari Foundation in Israel, a new generation of tech venture investors focussing on digital creators and digital creative industries` products. They have been successful in launching projects for digital nomads in the South Caucasus and Western Balkans displaced by the war in Ukraine.