NFTs - Buyer Beware

Non-fungible tokens are unique digital assets that utilize blockchain technology to record ownership and evidence of authenticity of the unique good or asset. How are NFTs different from fungible tokens like Bitcoin? Each NFT is unique and cannot be traded for an identical token, so it isn’t currency as much as it is like unique property.

Upland has taken this quite seriously and created an app that allows you to “ buy and sell real estate” in the form of a NFT. For example, I could theoretically go purchase a digital deed to a property that is identified on the map hosted by Upland, as either available for purchase for the first time, or up for sale by the current owner. Much like real property, once you own the digital property asset , you can choose to sell it at a price of your choosing. You can either put it up for sale at a price similar to the surrounding properties of similar size, or you can list it at a higher price. Who knows, maybe you purchased someone’s childhood home and they really want to own this NFT for sentimental value. Sections of the map are being released in phases. Much like real property, you can earn digital currency on your properties. The amount you earn varies depending on many factors, including whether or not you have “developed” the property. This digital currency can then be converted into USD or used to purchase more NFT properties on the map.

NFTs are also used to authenticate and facilitate the sale and purchase of digital art and collectibles by creating a unique cryptographic key contained within each digital token. This cryptographic key verifies the content file as being genuine and establishes a record of ownership as it is transferred on the blockchain – theoretically allowing it to be transferred without risk of fraud.

Much like in real estate transactions, the marketplace which hosts the NFT transaction earns a commission. For example, if you want to buy a piece of property on UPLAND listed as 10,000 UPX, you may have to pay something similar to 11,300 UPX -- the difference being the commission to the marketplace.

CONCERNS

So, this new development is interesting, but what are the concerns?

Well, for one, the NFT market is growing very rapidly without the safeguards that are typically associated with regulated financial instruments. Part of this is because they don’t fit into the traditional parameters associated with financial instruments.

What are some regulations that may apply?

- An NFT marketplace could be subject to anti-money launders /Bank Secrecy Act obligations and securities laws obligations.

- Intellectual property

- Tax Law

- Data Privacy Laws

- Consumer Protection

Be aware, the NFT marketplace is not yet fully examined by regulators in charge of consumer protection, like the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission ( FTC).

This means that many NFTs could be propagating misinformation and relying on false advertising. This means you may not know exactly what you are buying when you buy the NFT and your recourse may be limited by the fine print in the terms of conditions in each marketplace which typically aims to limit their liability for potential counterfeits, fraud or user malfeasance.

Does this mean you shouldn’t delve into the NFT marketplace?

No, this means you need to be aware of the risks involved in jumping into an emerging market such as this.

Does this mean these marketplaces are completely unregulated?

Absolutely not. However, the regulation is not as developed or integrated YET as it is in other financial sectors. However, the FTC has already taken action against a Bitcoin funding team (in 2018) and other companies for allegedly facilitating fraud and/or failing to take steps to crack down on fraudulent money transfers.

Similar to Federal regulators such as the FTC , each state has their own set of statutes modeled to promote consumer protection. State banking authorities which regulate money services businesses also have jurisdiction would could reach the sale, redemption, storage and trading of digitcal currencies which are involved in NFT sales.

If you are contemplating starting your own NFT marketplace, or even participating in this new marketplace, it is wise to consider the federal and state regulators who will undoubtedly and eventually pay more and more attention to these transactions as their popularity grows. It is recommended to start your marketplace with all the measures in place, as if it is fully regulated. This will save you much headache in the future. Please reach out to an attorney who can assist you in this matter.

As a consumer, keep in mind, that you may not yet have the same protections as you might have in the traditional financial sectors. As with all investments, proceed with calculate caution, aware of all the risks.