After crypto crash, NFTs face litmus test

Cryptocurrency
Photo credit: Federal Trade Commission

In an unregulated NFT market, little or no legal recourse is available for artists in fraud cases

By Kiran N. Kumar

Last year Christie’s sold nearly $150 million worth of NFTs, but this year registered merely a $4.6 million sale so far, including the latest one on June 28.

NFTs, or non-fungible tokens, usually tracked on blockchain ledgers for genuine owners, contain references to digital files such as digital art, sports cards, music videos, and audio among others.

The list of brands being trademarked includes the NYSE, Star Trek, Panera, Walmart, Elvis Presley, Sports Illustrated, Ticketmaster, and Yahoo. The US Patent and Trademark Office received more than 1,200 trademark applications this year compared to just three in 2020.

Read: Sam Bankman-Fried vs JP Morgan: Saviors of new centuries? (June 27, 2022)

In fact, the NFT market grew dramatically to more than $17 billion in 2021, up by 21,000% over 2020 total of $82 million, despite criticism for their frequent use in art scams.

But soon after the crypto crash, The Wall Street Journal reported in May that the NFT market is also “collapsing” with daily sales of NFT tokens declining at 92% since Sept 2021. Being the most speculative, NFTs faced the imminent downturn with no savior in sight, it added.

One such glaring example is when the digital rights to the first-ever tweet from Twitter co-founder Jack Dorsey that was sold in March 2021 for $2.9 million, received the top bid of about $12,600 this year and, of course, it was not accepted.

Its owner Sina Estavi, the chief executive of Malaysia-based blockchain company Bridge Oracle, however, denied the failure of the auction as a sign that the market is deteriorating. “I will never regret buying it because this NFT is my capital,” he said.

Similarly, a digital print from the Bored Ape Yacht Club collection, whose members include Jimmy Fallon and Justin Bieber, hit the lowest floor price — down by 77% or $97,250 since the May 1 peak of $420,000.

Read: Cryptocurrency: A serious threat; Blockchain: A revolution underway (July 6, 2021)

Fraud, Money laundering and plagiarism
In February 2022, a study by the US Treasury confirmed that there was some evidence of money laundering risk in the high-value art market through “the emerging digital art market, such as the use of non-fungible tokens (NFTs).”

Next month, two people were charged for the execution of a $1,000,000 NFT scheme through wire fraud.

In some cases, the art works were sold by others as an NFT without permission from the creators. Following the death of artist Qing Han in 2020, her identity was assumed by a fraudster who made her works available for sale as NFTs.

The BBC reported a case of insider trading at the NFT marketplace OpenSea. An employee bought specific NFTs before their launch, with prior knowledge that those NFTs would be promoted by the company anyway.

Being an unregulated market, little or no legal recourse is available for artists in such fraud cases. In other words, it’s resembling a Ponzi scheme, in which early adopters profit at the expense of those buying in later. Even Bill Gates early this month termed the NFTs as “100% based on greater fool theory”.

Beginning of the end of NFTs?
Now, many NFT owners are finding their investments are worth significantly less than when they bought them.

An NFT buyer who purchased a Snoop Dog curated NFT, titled “Doggy #4292,” in April for about $32,000 worth of the cryptocurrency ether, received the highest bid of $210 or 0.0743 ether in a latest auction, while the asking price was $25.5 million.

Even lack of search interest in NFTs is evident from Google Trends where it has fallen roughly 80% compared to last year.

Some have attributed the downfall of NFTs to the imbalance between supply and demand as there are about five NFTs for every buyer.

According to the analytics firm Chainalysis, as of April end, there have been 9.2 million NFTs sold, which were bought by 1.8 million people.

Another factor cited was a dearth of market intelligence as collectors are struggling to predict the trajectory of blue-chip NFT art unlike the collectible tokens.

Dealers of NFT auctions may deny the downtrend and assert that the timid sale this week could be a sign that the art market is recalibrating value for its digital artists.

Read: Crypto founders face falling valuations, pulled deals amid market volatility (June 16, 2022)

Nicole Sales, Christie’s business director of digital art sales, sees the downtrend as an effort by collectors who are sifting the best digital artists from the rest, “consolidating around a canon more likely to survive the tumult of the broader cryptocurrency markets.”

Speaking at the NFT.NYC convention last week, she suggested that the current market atmosphere is “less than ideal” for pricing works by NFT artists, but exuded confidence that it is bound to recover in the long run.

“It’s about the art now, not the speculators,” she insisted.

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