NFT: From a speculative resource to a practical tool

Do you remember NFT – the mesmerizing acronym that became a big talk on the day it was born?

The evergreen $40 billion 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 too 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 fallen by more than $100 million, or 20%, in only one month.

So, was it all worth the hype?

The hype discredited NFT and distorted the benefits of this unique technology. Most collectors never realized they were just paying for air. A blockchain record containing the metadata of a digital file, which is 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 furthermore that it is debatable to what extent this violates their copyright. An NFT is not actually a work per se, but only 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 authorization, may infringe the rights of the originator. After all, a series 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 correctly, for their intended purpose. NFTs can have real practical applications in many areas. In the arts and, more generally, in works subject to intellectual property rights, NFTs can evolve from ephemeral “autographs” and subcultural entertainment to digital expressions of real-world claims, such as exclusive intellectual property rights. In particular, blockchain has long been used for this very purpose in many jurisdictions.

How does it work? If you wish to secure any intellectual property rights, in digital or analog form, you must sign a contract with an author or rights holder. But how do you know you’re dealing with a real licensee and not a crook? This is where ledgers come to your aid, offering a complete and up-to-date register of creative works and their rights holders.

Blockchain is probably the best technology for such an application.

Each registration of an object and its rights is essentially a non-fungible token whose authenticity is guaranteed by consensus between network nodes that include authoritative representatives of the intangible market and relevant government agencies. Licensing or transfer of exclusive rights can be in the form of a smart contract, which in many jurisdictions has been seen as a paper transaction. In this way, it is not the artwork that is “tokenised”, but the IP right to it. It will be a full-fledged digital resource.

However, the possibilities of NFT are actually much wider.

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 registered by banks, authorities and other participants in the network. The data cannot be deleted or corrected, so the legal entity can start its business immediately after the token is created.

“NFT” can cover all types of legal entities. It is no longer necessary to choose between a for-profit and a non-profit organization, 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 company itself is an object of digital rights, which can be managed, and rights can be redistributed on national or global platforms. Finally, the NFT operates as a “digital avatar”, the underlying token for transactions, rights ownership, disputes and more.

An NFT company is incorporated when its purpose, partner contributions and ownership data are registered in a public blockchain. Founders can create such a registration directly from the smartphone, which can authenticate a person, including through biometrics. It is imperative 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 start operations. All company rules, including decision-making procedures, responsibilities and so onis laid out in a smart charter and is enforced automatically.

We don’t have to wait long for the benefits of NFT to show. Firstly, the requirements for 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 permission should be granted for the business. 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 synchronized with the transfer of ownership. Finally, corporate governance will become fully transparent, with responsibilities automatically assigned to members, as all substantive procedures are embedded in the smart charter.

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

Some jurisdictions already legalize NFT companies. For example, the corporate law of the US state of Delaware allows such decentralized 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 organizations also receive a “corporate shield” that limits their liability and are recognized as founders of the LLC. Finally, more recently, DAO legislation has been passed in the Marshall Islands, where NFT companies are also granted LLC status. In addition, the municipality is creating a separate fund that will provide definitions and rules for agreements, the use of smart contacts and help to integrate NFT companies into the economy.

By working together, the tokenization of financial assets, intellectual property and (corporate) communications rights can produce powerful synergies and provide a huge advantage in global competition for creative capital. A complete digital infrastructure will create a completely new marketplace, free from the constraints of the traditional economy and government bureaucracy. In this way, 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.