26 April 2022

Spotlight on: NFTs

You can’t go far online these days without reading about, or being sold, NFT hype. Big consumer brands, sporting, cultural stars and influencers are all in on the act, with global trade in these digital products last year estimated at $US23 billion.

NFTs are Non-Fungible Tokens. Fungible means it’s interchangeable like a dollar coin. An NFT is a unique digital token. 

Qantas recently launched a range of NFTs of images of its aircraft as part of a frequent flyer marketing campaign, while New Zealand art auction house Webb’s offered its first NFTs for auction earlier this year. Read more about the first New Zealand art NFT auction

Other big corporates and tech giants are now developing and selling NFTs as a potential new way to connect with customers.

Think of NFTs as similar to collecting stamps, sports memorabilia or works of art.

While NFTs aren’t cryptocurrencies themselves, they are often bought and sold using cryptocurrencies. Like cryptocurrencies, proof of ownership and trading history of an NFT happens on a blockchain (decentralised data ledger).

It is always important to understand what you’re buying and to not get caught up in jargon. Not all NFTs are the same, some NFTs can merely be a link to a digital image hosted on a website, and websites can shut down. Remember anyone can also copy a digital image and use it as a screensaver on their phone or as an avatar.

You’ll only be the official owner of the NFT. You may not own the underlying asset or any rights to use it.

If it’s too good to be true

Scammers can take advantage of NFTs in a number of ways - such as creating NFTs using stolen digital artwork. As NFTs are ‘non-fungible’, it can also be difficult for the genuine artist to ‘remove’ it and stop scammers.

Some businesses may also make false promises that the NFTs will represent something in the future like a digital item in a ‘yet-to-be developed’ video game or project. A very common type of scam related to NFT projects is the ‘rug-pull’, where the founders simply disappear with whatever funds they have amassed at the time.

We’ve even heard of NFTs containing malicious code that can hack your wallet, so be careful if you suddenly find a free new NFT in your wallet. 

There aren’t many regulations around NFTs, so do your research and be careful. It’s important to note that without regulations, there are very few, if any, ways to seek legal recourse or remedy if something goes wrong in this space. If you are going to dabble in it anyway, it pays to look for the more reputable, larger exchanges when buying or selling.

Given the transnational nature of the internet, you may also wish to consider the particular country that the offer originates from, and research what, if any, regulations are in place there that may offer you some protection.

We’re in an exciting new phase of technology with the rapid digitisation of finance, banking and investing.  It’s likely we’ll see the typical booms and busts, overblown hype, mispricing and disappointment.

NFTs are already providing collectibles for fans of sporting teams, fashion labels, cultural stars and celebrities. But there have also been cases of frustrated consumers who pre-purchased NFTs that didn’t deliver on the quality artwork they were expecting. 

And it’s likely NFTs using blockchain technology are likely to become more sophisticated than the simple artwork currently on offer, so the advice right now is while it's possible to have fun with NFTs, be careful!

More about NFTs  

NFT are tokens connected to digital works of art or other real-world items and sold as unique digital property. It could be an image, a video clip, skins or weapons for gamers.

Most NFTs are currently paid for on the Ethereum blockchain, which has Ether, or ETH as a unit of currency. Ethereum is the second largest cryptocurrency after the original Bitcoin.

Once an NFT is purchased, it can be traded. NFTs can be bought and traded on online marketplaces, either by auction or at a fixed price. When an NFT is sold, it is transferred from the digital wallet of the seller to the buyer’s wallet.

Many NFTs are highly speculative collectibles – with some people finding them fun and entertaining to buy, own and trade, but with no guarantees or protections. In a new market like we’re seeing now with NFTs there’s also a heightened risk of scams and fraud, with many offers promoted and sold to younger people.

"While you might hope your NFT increases in value and you can one day sell it for a profit, that doesn’t mean you’re buying a financial product. NFTs don’t have the same kind of protection that you’ll see with regulated financial investments. You make money trading NFT’s when you find someone else who is willing to pay more for it than you did.” Binu Paul, Specialist Lead, FinTech - Financial Markets Authority

NFTs are sometimes pitched as investment opportunities, implying that it can bring you profits in the future, so it pays to be careful before spending your money.

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