The biggest threat to NFTs isn't the market crash

The biggest threat to NFTs isn’t the market crash 

Key Points 

  • Non-Fungible Token (NFT) adoption and investment has increased significantly and across a range of markets, most notably in sport e.g. through football partnerships. 
  • Popular and political discourse increasingly represents NFTs as a homogenous cryptoasset class. This increases the risk that NFTs are included within plans to regulate ‘financial’ cryptoassets. 
  • Recent turbulence in the value of cryptoassets, caused by the collapse of an algorithmic stablecoin, has heightened concern around investor protections within the crypto market. Further volatility could push policymakers to regulate more widely and see HM Treasury retreat from its ambition for the UK to be a home to crypto. 
  • Issuers and investors in NFTs should be alert to the risk of kneejerk regulation. We recommend considering a proactive stance to inform policymakers and regulators on the different properties and types of NFTs, the steps to manage risk and how to harness their growth potential within the UK’s wider digital ambitions. 

State of Play 

The market for NFTs – uniquely identifiable digital files verified on blockchains – has grown rapidly to a value of around $35 billion. The variation in NFTs and their offer to consumers is extensive. In some cases, NFTs represent musicians experimenting with revenue-sharing rights and backstage experiences. In others, they represent sports teams offering the opportunity to vote on customisable aspects of the home stadium. The Premier League’s expected announcement of its first official NFT partnership will be a milestone for NFT licensing. 

Yet, NFTs are increasingly represented as a homogenous cryptoasset class in popular and political discourse. Strikingly, HM Treasury’s raft of crypto announcements last month positioning the UK as a global hub for cryptoassets, included plans for the Royal Mint to issue an NFT alongside new regulation of stablecoins. Factors distorting perceptions of NFTs include: 

  1. Their adjacency to cryptocurrencies and association with cryptoassets / tokens
  2. Price volatility driving speculative trading
  3. Characteristics similar to financial securities e.g., utility NFTs. 

A policy and regulatory response

The crash in the crypto market this month, primarily driven by the collapse of algorithmic stablecoin Terra Luna, has brought the whole market into sharp focus. A ripple effect has seen large price movements across most major tokens. Although volatility is not a new feature of cryptoasset prices, a sustained sell off will affect how regulators and policymakers view digital assets going forward.  

While a sustained sell off could deter NFT investment, a longer-term problem for issuers and investors is the poor understanding of the sector among policymakers. Without a clear distinction, NFTs risk being captured by work underway by regulators. For instance, HM Treasury could extend the Financial Conduct Authority’s (FCA’s) work on cryptoasset financial promotions and expand the scope of its own consultation later this year on the wider cryptoasset ecosystem. This may get confused should other parts of government, including the Department for Digital, Culture, Media and Sport (DCMS), take an interest in the impact of NFTs in sport and on digital platforms as a new form of content. More broadly, the recent turbulence in the market may affect the Government’s pro-crypto agenda and, with further economic turmoil on the horizon, the UK could see a significant retrenchment of ambition.

To date, the UK has avoided a broad-brush approach to regulation. The FCA has sought to raise awareness of the risks rather than to limit consumers’ access to cryptoassets, in part to avoid cloaking digital assets in regulatory legitimacy. Instead, intervention has focused on stamping out money laundering and shaping a policy response to regulate the promotion of digital assets to protect consumers. For policymakers and regulators alert to the differences in NFTs, the existence of risk may not be reason enough to intervene, and while the NFT market remains contained to a relatively small group of people the total exposure might not warrant additional rules.

Flint view

NFTs are currently subsumed in a broader narrative around speculation and price volatility but, like the wider digital asset universe, their use cases are many and varied. Yet, at their root many argue they are exemplars of the further digitisation of our economic and social experience and where they add utility to those experiences, they could be here to stay.

The announcement of a Royal Mint-issued NFT alongside the promotion of a wider series of cryptoasset initiatives is indicative of all digital assets being grouped together in policy terms. Purpose and practicalities notwithstanding, NFTs are evidently part of the Government’s ambitions. 

Business and investors should seek early and proactive engagement with HM Treasury and other policymakers and regulators. The aim should be to inform and educate them on NFTs and their difference from other cryptoassets and tokens, in particular the non-financial benefits of digitising our economy, which is at the core of NFT use cases. Regulators should be encouraged to approach NFTs on a case-by-case basis and recognise that speculation is neither unavoidable nor undesirable and in fact part of market development with any new economic activity. 

Authors

This piece was written by Flint Manager Anna Trevers and Flint Consultant Jonny Sandler with input from Flint Director Simon Horner. To find out more about how Flint can help you navigate the risks and opportunities of these developments, please get in touch. 

Leave a Reply

Your email address will not be published.