The world was not ready for cryptocurrency; India is still not.
Just when we’re seemingly in sight of some predictability as regards its legitimacy (or illegality, fingers crossed whichever camp you’re in, unless it’s the one in favour of balanced regulation, in which case, good luck), the digital world is awash with a new beast – ‘Non-Fungible Tokens’, or NFTs.
Allow us to take you through some of the fundamentals and eventually the nuances to this seemingly absurd phenomenon that you may or may not have heard of or scoffed at already.
Where do we begin?
A quick primer for those of you not to familiar with cryptocurrency – the technology that makes it viable is known as ‘blockchain’, a digital ledger of sorts that is held by multiple people at multiple points and therefore less likely to be tampered with due to this innovative form of peer review (it is also why the term ‘decentralised’ is thrown about a lot in this context). Now, irrespective of whether or not governments like the idea of currency they can’t control, they definitely like the idea of blockchain itself since, well, it’s a gateway to data – lots of it. Once tied to a digital asset, such as title deeds that have been digitised and dematerialised (akin to share certificates), all transfers and pricing related data (to name a few) can be recorded and more importantly, not be tampered with (unless the Indian government centralises the data in order to maintain its reputation for exigency). The potential applications of blockchain are limitless and the government’s still in the process of setting up a ‘viable’ national framework.
Now a quick primer for those of you not yet familiar with NFTs – use blockchain technology embedded (and recorded by a trade platform for visibility, like a sub registrar’s office that tells the public who owns what land) in digital media and what we have is a unique digital file that, while replicable, will always be legitimately held by the owner of the relevant blockchain. What is the point, you may ask? Utilise blockchain to achieve this purpose and accord ownership of a specific digital asset to an entity and what we have is a unique token representing the digital asset. Tokens for different digital assets are of course not interchangeable or ‘fungible’, hence the name. What’s the point, you may still ask – when it comes to art, having the original is sacrosanct whether one is a collector or an investor and the world is quickly realising that attributing NFTs to digital art is giving rise to the art market in the digital dimension.
Tokens for different digital assets are of course not interchangeable or ‘fungible’, hence the name.
Okay, so how is this different from Cryptocurrency (apart from sounding even more ludicrous)?
Well, we’ve already gone through how NFTs, simply put, aren’t fungible; so, there’s no possibility of anyone inventing a new ‘coin’ based on the process. NFTs may share their technology with cryptocurrency, but they are not currency at all. Or are they?
Humans have historically valued art in ways incomprehensible but to the eyes of the fraternity. Some get art, some do not, but the fact remains that in addition to real estate, art represents one of the fundamental avenues for investment in the civilised world. Some may even say that art reserves represent a special kind of currency amongst certain sections of society. Art may not be fungible nor universally acceptable as a mode of payment, but it most certainly is valuable when put through an auctioning or valuation process. In digital form, trading barriers are far lesser than in physical form and when a technology like blockchain comes along and makes a market for digital ‘originals’ possible, what we have is a form of tradeable digital assets that make up for their lack of liquidity by attributing their legitimacy to original creators of the works while also having a mechanism to check authenticity already in place.
Just keep in mind that the market for NFTs involve the same people who would rather have an original artwork rather than its reproduction, no matter how similar the two may be. Is art subject to speculation? Sure. Can a distinction be drawn between speculation in NFTs to speculation in cryptocurrencies? Absolutely.
One of the biggest arguments against cryptocurrency is its lack of basis on any underlying asset – Bitcoin has value because we attribute value to it (and also because of the declining supply model it employs wherein it is progressively more resource intensive to mine more coin). NFTs genuinely place their value on specific digital assets; while the value of such art itself is rife with speculation and as absurd as this may sound, NFTs actually seem a lot more rational than cryptocurrencies if one’s viewing it through the ‘underlying asset’ looking glass.
Just keep in mind that the market for NFTs involve the same people who would rather have an original artwork rather than its reproduction, no matter how similar the two may be.
Do we have legal and regulatory mechanisms in place to monitor the buying and selling of NFTs?
The simple answer? No. Those with ‘money laundering’ arguments with respect to cryptocurrency already know that art has been used as a form of money laundering since time immemorial. It is truly hard to place a ‘correct’ value on art (though the Indian government has historically been very trigger happy when it comes to taxing ‘luxury items’). Further, any proposed legislation or regulation currently in the ether only seeks to cover currencies; unless the definition of a ‘currency’ itself is widened (a fundamental characteristic of a currency is that it be fungible), NFTs are bound to slip through any legislative or executive net focused on banning (or regulating) cryptocurrencies. India is of course also in the process of creating a national framework / strategy for blockchain, but NFTs themselves do not seem to be in the government’s radar just as yet. As a famous saying goes, “you don’t know what you don’t know“.
As a famous saying goes, “you don’t know what you don’t know“.
At this stage, think of NFTs as being special trading cards being exchanged between those in schools – they are tangible goods that hold value to their market and teachers have not gotten wind of the shenanigans just as yet. Of course, whether or not one buys or trades in NFTs going forward is dependent not only on one’s risk appetite but also the kind of school one goes to.