What To Make Of NFTs?

Soccer legend Cristiano Ronaldo is one of a number of athletes issuing NFTs (Photo courtesy Binance.com)

The world of NFTs is making big news of late, and not for the right reasons. It’s leading some to question whether they hold any value and if, in fact, the entire NFT market is collapsing and heading toward oblivion.

It was only a few short years ago that non-fungible tokens burst into the collective consciousness. These blockchain-supported digital assets were viewed by some as a rare collectible and by others as shrewd investments. Artists, major sports figures like Tom Brady and Cristiano Ronaldo, and even legendary teams such as Juventus and Manchester United, got in on the ground floor by issuing their own NFTs and people bought into the concept. 

Due to their scarcity, the NFTs were considered to hold significant value as a collectible. Buying, trading and selling of NFTs was encouraged by the sites that were issuing them.

It was seen as a fun and unique way to get involved in the blockchain and cryptocurrency, rather than to simply buy Bitcoin etoro and other sites are selling.

However, as is generally the case with both collectibles and investments, a few people got very rich and the majority of us ended up devastatingly disappointed.

So what’s up with NFTs? Are they done like dinner, or still a tasty method to invest in the blockchain? 

Are NFTs Collectibles Or Securities?

DraftKings Reignmakers NFTs include Tom Brady and Wayne Gretzky (Photo courtesy DraftKings/Autograph).

At the heart of the current NFT dispute is the ongoing battle over whether they are collectibles or securities. Prominent American sports betting and daily fantasy sports company DraftKings may end up having to answer this question in a court of law.

A class-action suit filed in Massachusetts against the sports betting giant alleges that non-fungible tokens are investment contracts. Lawyers representing DraftKings were unsuccessful at getting the case dismissed, meaning, in all likelihood, it will be heading to trial.

Justin Dufoe, a purchaser of NFTs through DraftKings, originated the suit. He has successfully argued that NFTs pass the Howey Test and thus qualify as securities.

The Howey Test is a legal framework outlined by the US Supreme Court. It is designed to determine whether a financial transaction qualifies as an investment contract and therefore should be regulated as a security. It sets forth four specific requirements:

• It is an investment of money
• There is an expectation of profits from the investment
• The investment of money is in a common enterprise
• Any profit comes from the efforts of a promoter or third-party

The argument made successfully in court is that the value of the NFTs were directly tied to the DraftKings Marketplace. Launched in 2021, the DraftKings Marketplace is where you could go to acquire NFTs called DraftKings Reignmakers. Reignmakers is a fantasy sports game that was played with NFTs. The first DraftKings Reignmakers collection was issued in conjunction with NFL legend Brady.

Emphasis here is on the word ‘could.’ As of this week, the DraftKings Marketplace is no more. “After careful consideration, DraftKings has decided to discontinue Reignmakers and our NFT Marketplace, effective immediately, due to recent legal developments,” an email sent to DraftKings Marketplace customers read. “This decision was not made lightly, and we believe it is the right course of action.” 

In conjunction with this decision, DraftKings is offering all Reignmakers customers a buyout option for their NFT purchases.

Dapper Labs Already Paid Price

Legal battles love to cite precedents, and that could prove to be bad news for DraftKings. Already, Dapper Labs, the company behind NBA Top Shot NFT digital collectibles, has paid out $4 million to settle a similar class-action suit out of court.

In this instance, customers also argued that the Top Shot NFTs were unlicensed securities. As part of the settlement, NBA Top Shot customers agreed that they could never again claim that the product was in fact a security.

Will The US Government Regulate NFTs?

Ultimately, the question those who’ve invested in NFTs would like definitively answered is whether the US government in fact considers the product to be a security. In general, regulatory bodies across the globe, such as the U.S. Securities and Exchange Commission (SEC), are aligning to view crypto assets as a security.

According to the SEC, a digital asset is “an asset that is issued and transferred using distributed ledger or blockchain technology.” 

Congress has granted a mandate to the SEC to regulate certain items as securities, and NFTs are on that list. However, there are exceptions to every rule, including this one. If an NFT is sold to you as merely a unique collectible, that’s fine. However, if it is marketed as an asset that will provide a return on investment, it falls into the same category as a savings bond and should be regulated as a security.

It’s not merely the SEC that is taking an interest in NFTs. With such digital commodities as Twitter founder Jack Dorsey’s first Tweet selling at auction for $2.9 million, eyebrows have been raised among government organizations in the regulatory business who want to ensure that things are on the up and up and they are getting their share of the pie.

Among these prominent government bodies are the US Treasury Financial Crimes Enforcement Network (FINCEN), the US Commodities Futures Trading Commission (CFTC), and the Internal Revenue Service (IRS). They are all seeking to get put into place methods for the tracking of NFT transactions.

Should You Invest In NFTs?

The wise collector is treating NFTs as they would any other collectible. Don’t purchase a Cristiano Ronaldo or Tom Brady NFT with the thought of squirreling it away to pay for your kid to go to college. Buy it because you’re a fan of these sporting icons and it’s a novel keepsake.

As with any collectible, value is in the eye of the beholder. Yes, a 1952 Topps Mickey Mantle rookie card sold for $12.6 million. In reality, though, it’s merely a photo and stats printed on a piece of cardboard. To the non-Mantle fan, it’s not worth all that much. 

If you treat NFTs like any other collectible, as a treasured item relating to something that you love, then by all means invest. If you’re looking for NFTs to make your fortune, odds are you’re going to be sadly disappointed.