“A year of great change” was how IAL Director, Alexander Herman, described 2022 in the IAL blog’s customary review of the year. Change has certainly been no stranger to those invested in NFTs and other crypto markets over the past year or so, with prices fluctuating wildly and markets extremely volatile. The soaring prices of 2020 gave way to plunging markets in the final quarter of 2021 which continued on into 2022, causing serious concern for those experiencing the rocky ride. Reports suggested that NFT sales dropped by more than 90% from August 2021 to March 2022. Stories of NFT scams, thefts and copyright infringement suits heightened the fears and seemed to confirm beyond doubt that the NFT world was not for the feint hearted.
The much-reported collapse of cryptocurrency exchange FTX in autumn 2022 was devastating for the many victims and has resulted in criminal charges against the company’s senior officials for securities violations. It is not the first such incident however, and most likely won’t be the last. The fall of Canadian crypto exchange, QuadrigaCX in 2018 also left high and dry the many investors who had entrusted their savings with the company. The story is compellingly told in a Netflix documentary, for those interested to find out more (‘Trust No-one: Hunt for the Crypto King’, Dir. Luke Sewell).
Against this worrying backdrop, the recent decision by a UK Parliamentary Committee (the House of Commons Select Committee on Digital, Culture, Media and Sport)* to instigate an inquiry into the operation, risks, and benefits of NFTs and the wider blockchain is timely. The Committee’s ‘call for evidence’, which ran for several weeks from November 2022 and closed early this month (6 January), focused on the risks NFTs pose for investors. The Committee asked what harms NFT investment might entail, whether the UK’s current ‘light touch’ regulatory measures are sufficient and, on the positive side, whether NFT speculation might also entail benefits for individuals and society.
As outlined in a response submitted by the IAL to the inquiry, whilst it would be misleading to suggest that the NFT market is entirely unregulated, legislation specifically directed at controlling NFT trading is currently rather conspicuous by its absence. The authorities have generally taken a functional approach which, put simply, seeks to regulate NFTs according to what they do, rather than treating them as an asset class per se. Thus, NFTs which act like a share in a company will fall within the so-called ‘regulatory perimeter’ of the UK’s financial regulator, the Financial Conduct Authority (FCA). This might be the case where a share in a digital artwork is offered for sale, with the purchasers standing to profit from higher prices when the work is re-sold.
Whether this approach is sufficiently robust has clearly become a matter of concern. The risks for those investing in crypto assets which fall outside of current regulatory measures are self-evident. Not only are they at the mercy of extreme market volatility, they are also vulnerable to illicit activity – the evidence for which is seems to increase by the day. A brief scan of NFT news stories from 2022 reveals cases of thefts, hacks and scams such as ‘rug pulls’ (involving the illicit removal of funds paid for NFTs) and ‘wash trading’ (where the same person lies behind both the sale and purchase of a given NFT to drive up prices). Unsurprisingly, in some of these cases the parties involved have ended up facing each other in the courtroom. See for example the 2022 cases of Osbourne v. Persons Unknown and OpenSea which we reported on the blog here and Tulip Trading Ltd v. Bitcoin where the proceedings to date have been mainly about jurisdiction but where fundamental principles about the responsibilities of blockchain developers towards the users of their platforms are at issue. The vulnerability of those who trade their digital art through NFTs to copyright infringement is also a cause for concern. Examples which demonstrate a general misunderstanding of some of the core tenets of copyright law have arisen with alarming frequency.
How best to tackle the many and varied risks inherent in NFT markets in no easy task. Does the answer lie in increased regulation? Or are there other ways of addressing the concerns? Could some form of self-regulation be an alternative, and how might this operate? Or are there laws already in place which can be applied to the new digital environment? These are undoubtedly some of the key questions which members of the DCMS committee will be considering when they review the information supplied in response to the call for evidence. In truth, the next steps will likely involve exploring a combination of all of these avenues.
What is fast becoming apparent is that inaction is not an option. When we first reported on the now famous sale in March 2020 of an NFT by digital artist Mike Winkelmann (aka Beeple) for $69 million, the Jury was out as to whether the NFT phenomenon was merely a flash in the pan or the beginning of a new era. Despite the market failing to maintain the prices of those early, heady days, it now seems clear that in some shape or form, NFTs are here for the long haul. As such, the protection of the many stakeholders involved seems deserving of the attention it now looks set to receive.
For more on NFTs, see my article in our quarterly journal Art Antiquity and Law, ‘NFTs: An Overview of Law and Regulation’. Articles from Art Antiquity and Law are usually only available to subscribers due to licensing terms, but we are happy to make available a significant portion of the NFT article through this link. The full article can be bought at 50% discount with this code: nft2022
* UPDATED 2 February 2023 to clarify that this is not a UK government inquiry, but an inquiry by a Parliamentary committee (the House of Commons Select Committee on Digital, Culture, Media and Sport).
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