During the last few months there has been a matter that has generated great interest among finance professionals, Youtubers and the most famous art galleries: we are of course talking about NFTs, which is an acronym for “Non Fungible Tokens”.
To understand what NFTs are, it is necessary to consider first the technology that lays at their foundation, namely blockchain.
In summary, blockchain refers to a database – meaning a group of data organized in accordance with defined criteria – which is formed by “blocks”, that is sequences of individually identifiable information which, instead of being stored in a single central server, are distributed in identical replications on the terminals of those who have installed the related computer protocol.
Those who access and partake in the blockchain, which is open and freely accessible by anyone, can find information presented in numerical sequences which acquires value inasmuch as it is certain and basically unchangeable. This result is achieved via several levels of protection, the first of which is that altering a single block necessarily requires “reprogramming” the sequence of the entire chain, which is made even more difficult by the presence of cryptographic instruments.
The unchangeable nature of the individual blocks of information guarantees the reliability of transactions which are carried out by exchanging the blocks, without the need for an external entity to check or approve those transactions.
In this sense, it is clear why this technology has found widespread use in the field of digital currency: every transaction that is performed on the blockchain is registered in the individual blocks in full transparency, without fear of theft or manipulation.
Within this context, NFTs perform an additional function, which is to enable the transfer of this certainty – attributable to each individual block of the blockchain – to other digital contents, such as images, videos, and GIFs. Instead of exchanging something similar to a coin, which carries a certain value but may be exchanged with anything else, thanks to NFTs it is possible to transfer a good which is un-substitutable (for example, let us think of a collector’s item).
The advantage that such technology may have is evident, insofar as it eliminates the need to perform long checks for establishing the authenticity of information or digital content, especially if we consider the importance of digital databases managed by public entities.
For this reason, renown artists and other famous people have begun offering for sale on dedicated digital platforms their videos, artistic creations of various kinds and even mere tweets, all of which has been “transformed” into NFTs.
The feedback from the public has gone beyond any expectation, thereby generating great profits, in some cases even in the range of millions[1]. In exchange, purchasers have obtained ownership of those videos, images, and so on.
NFTs therefore appear to be introducing a new horizon of possibilities for the world of artistic production because they can guarantee in the digital world – which, by definition, is a world of identical copies subject to unlimited reproduction – the existence of a single original that remains unchangeable in time.
Also, thanks to NFTs content creators now have a source of revenue as well as an easy-to-use instrument that allows them to prove ownership over their works and, at the same time, to transfer the right of ownership to third parties.
A space in which NFTs are already used is that of online gaming, where players can buy weapons or other “unique” objects to be used or exchanged during gaming sessions. However, it is also reasonable to speculate a wider use of NFTs in the field of industrial property; for example, let us think about the possibility of using such instrument in order to prove the prior use of an industrial machine, thereby invalidating a third party patent and transforming in NFT the related YouTube video which would come to represent unalterable and unassailable evidence of the prior divulgation of the machine within the market.
That being said, there are some aspects surrounding NFTs that would need to be further analysed and kept into consideration.
Firstly, the authenticity and ownership of NFT content is in turn based on declarations of the interested parties, who in general should be the authors or at any hand the owners, or licensees, of the rights of economic exploitation over the work. Currently, there are platforms where users are asked to register and that enable the execution of transactions which guarantee transparency as to the actual ownership of contents, but in theory anyone could create an NFT that incorporates digital content belonging to someone else. There is no initial check on the actual ownership of the asset which the user intends to transfer via NFT and this is a circumstance that may lead to disputes concerning the property of the content being transferred.
Further clarification is also necessary with regard to the tax regime applicable to such instruments (especially as concerns the possible profits obtained via NFT sales) before they become a widespread tool in the creative sphere.
Finally, another point to be considered concerns the rights of consumers who, after having made a purchase, do not have the possibility of retracing their steps by exercising their right of withdrawal which is provided for distance purchases (including of course online purchases).
Once we set aside the euphoria – which at times has been mostly speculative – that has been brought about by these new instruments, in our view NFTs may represent a potential shift in our lives, especially with regard to all those services and goods that are premised and require a certification of authenticity of information and digital contents, such as ownership, origin, rights of temporary utilization.
However, in order for these instruments to be used on a widespread scale, it is necessary that – on the one hand – platforms introduce and guarantee an efficient system of checks as to the ownership of the transferred asset in order to avoid possible disputes, and – on the other hand – it is also necessary that the legislator intervene so as to provide for specific guarantees to protect purchasers (like the aforementioned right of withdrawal) and, in general, a coherent ad hoc regulatory system (which should include, among other things, a tax regime adapted to the nature of NFTs).
[1] A famous case is that of the artist Beeple, who sold via the auction house Christie’s his work “Everydays: The First 5000 Days” at a price exceeding USD 69 million, and that of Jack Dorsey, the founder of Twitter, who sold the first tweet in history at a price of USD 2,9 million.