The promising future of NFTs is still changing

The author is affiliated with Professor, HEC Paris, and a member of the EU Blockchain Observatory

When it comes to NFTs, the art and digital gaming world has been on a roller coaster lately. The dominance of non-fungible tokens in these markets has also attracted most of the attention. Many believe that the next big breakthrough will be to designate ownership of virtual goods in the metaverse. But what if NFTs could also offer solutions in cumbersome, archaic systems to secure property rights, thus freeing value from tangible assets?

Such possible transformative use of NFTs is only vaguely beginning to take shape on the economic and legal horizon. Technically, they are unique cryptographic tokens that exist on a blockchain and cannot be replicated. Unlike cryptocurrencies, they cannot be traded or exchanged for equivalent. By “twinning” an NFT with a particular version of a digital work, it becomes possible to distinguish it from its innumerable other versions and thus ascribe to it a distinctive value, which provides proof of ownership to a single identifiable holder.

NFTs already represent and “tokenize” physical objects, objects such as works of art and luxury goods, expand the properties of their ownership into the digital world and allow more efficient and secure transactions. Real estate experiments are now being carried out as a new way of obtaining the necessary liquidity in a system that has historically been hostage to transaction costs.

The fact that NFTs can serve as unchanging proof of ownership and origin can help solve a persistent problem when it comes to real estate in developing countries. Peruvian economist Hernando de Soto argued early on the potential of blockchains to establish a cost-effective mechanism for formalizing property rights for the poor. This will, he estimates, unlock $ 10,000 of previously “dead capital” around the world.

It also seems increasingly possible that joint ownership and crowdsourcing investments in NFTs can be used to support the preservation of world heritage sites, national artistic masterpieces or endangered biological diversity zones.

Practitioners are still trying to understand exactly how NFTs fit into or interfere with existing legal notions and, consequently, what the current legal and tax treatment should be. Fractional ownership and instruments for syndicating property rights is not a new concept: NFTs are just their latest avatar. The novelty, however, is that these blockchain-based tools provide the prospect of disintermediate (economic and administrative) new markets for creators and holders of otherwise non-negotiable physical assets.

This prospect raises important questions about governance. Although each NFT that represents a particular value share in the associated asset can be traded easily and individually, what is the basic framework needed to guarantee the preservation and integrity of the underlying asset as a whole? When will they become safety instruments? What rights do the holders have with regard to the asset and what obligations do they have towards any other holders?

Well-documented challenges remain elsewhere, including the reliability and safety of blockchains, the interoperability of different blockchains and, extremely importantly, the large environmental footprint of NFT extraction. Fraud and market manipulation are also on the rise. Regulators are reluctant to find the right approach, given the need not to stifle innovation while trying to exercise oversight. Neither the EU’s markets for regulating cryptocurrencies nor the proposed US crypto bill explicitly refer to NFTs.

These technical, legal and regulatory considerations should take much more of the debate. It is not impossible that NFTs can become important new instruments for a fraction of assets, far beyond digital art, and into the realm of more tangible depots to create and distribute wealth. For now, however, they are still changing.