Tomorrow's Challenges: Non-Fungible Tokens
by MadNinjaSkills
Non-Fungible Tokens (NFT) have taken asset and art collecting into the digital world.
This happened without clarification on the dangers of fraud and theft that can occur with such assets that are typically transferred through decentralized sources and without overseen provenance.1 The decentralized nature of NFT transactions and lack of technical knowledge in the cryptocurrency space in general - with NFT marketplaces instead catering to massive consumer demand - can make those marketplaces liable for negligence.
To start understanding what exactly non-fungible tokens2,3 are, and what purpose they might serve, a person must first understand the definition of "non-fungibility," and secondly, what distinguishes a "cryptocurrency" from a "token".4
Fungibility5 is defined as the ability for one item to not stand out as unique or independent from another one. If someone buys a pack of gum with a five dollar bill, that five dollar bill will be perceived the same way as any other bill of the same value. The point is that by being "non-fungible," the token is defined as 'rare," "unique," "one-of-a-kind," and "original;" and that scarcity is what theoretically drives the demand value of the NFT higher.
Next: What is a token?
A token is a coin that predominantly utilizes a smart contract,6 as opposed to a cryptocurrency that is used strictly for standard monetary transactions like the on-chain lightning layer of bitcoin - or like bitcoin that is frequently used as a store-of-value (as cited by MicroStrategy CEO Michael J. Saylor7).
A smart contract basically serves a purpose on a specific blockchain that is superior to a transactional or commercial value. Here's a non-digital analogy to a smart contract: If a person puts money into a parking meter, they're basically creating a non-digital version of a smart contract in that they're paying for the purpose of parking for an allocated amount of time.
"Tokens" differ from "cryptocurrencies" in that tokens descend from the native cryptocurrency of a blockchain that covers the token's transaction fees - and also the tokens are executing smart contracts instead of primarily executing basic commercial and transactional methods of exchange.
The first major boom or "bull run" of NFTs began with the graphic artist Beeple (Michael Winkelmann)8 selling his NFT artwork "The First 5,000 Days" at a Christie's auction for more than 69.3 million dollars. When asked by Business Insider if there's any reason why people should pay a staggering amount for a work that might be downloaded as a JPEG image, Beeple agreed, "Well, that's not a totally invalid argument." He said earlier in the interview, "We value things so that if everybody wants them, they have value. I mean, like, what makes a Louis Vuitton purse have value? It's just a brown leather purse. [...] So, it's sort of like saying, 'Do you think a web page has value?' Well, I don't know. It could be.9"
This makes a ruling like Shaw v. The United States more difficult to acknowledge because "value" is made entirely subjective. Even film director Quentin Tarantino questioned how NFTs could at all supersede the value of the original posters and JPEG images.10
When he launched a campaign with the Secret Network to auction NFTs inspired by his film Pulp Fiction11, Miramax immediately blocked the sale under the claim that the company held the film's rights - bringing the notion of NFT's alleged immutable trademark and/or ownership under scrutiny.12
What became of the NFT "ownership" received by many bidders who spent more than several thousand dollars of cryptocurrency each for Tarantino's NFTs? They received no NFT ownership whatsoever.13 With this instance of trademark being very vague and inflexible, even NFT artists with honest intentions can find themselves in civil court when in a similar situation because there are no checks and balances for trademarks on NFTs yet that are already in place for things like musical albums, films, or book series that are protected in an official capacity by entities like the U.S. Patent and Trademark Office.
The ecosystem of NFTs is so new and the concept of what an NFT "is" as an actual medium is so vague and unformalized that it would be easier for "patent trolls" to stop the sales of certain NFTs without there being a clear uniform definition for what an NFT actually is under U.S. law and actual legal protections and consequences in place for NFT artists, distributors, and buyers.
The main takeaway is that the U.S. judicial system finds it difficult to create constant legislation and/or consumer protections for cryptocurrencies and digital tokens because neither falls under property that can be protected such as property that qualifies underin rem or even quasi in rem jurisdiction.
The digital assets are peer-to-peer14 so, with or without government scrutiny, their economic flow is mainly under the watch of normal citizens (as opposed to the FCC monitoring broadcast transmissions or the IRS evaluating a source of cash flow). The assets are well known for their extremely brief transaction period (as opposed to having to wait a few days for a wire payment to go through or a stock sale to settle)15 as well as their portability (since the assets are a cumulation of ones and zeros that have substance and form when they're pulled up on a hard drive or a smart phone - as opposed to gold coins or bars of palladium that are more difficult to transport16).
Both of these factors have allure in the cryptocurrency space because it makes the digital assets harder to seize in case an individual wants to hold onto them for the long term. The drawback is that without knowing how to legislate assets that do not take a clear three-dimensional shape and form,17 it's very difficult to protect digital asset consumers who mean well when they have any instances of theft, malice, or manipulation to cope with as a result of investing and dabbling in digital assets. The IRS has regularly taxed digital assets - cryptocurrencies and NFTs - as property.18 Despite the U.S. government's inconsistent feelings towards cryptocurrency and difficulty with it in the past, it has been able to profit off of the cryptocurrency space.19,20
For everyone to not be manipulated into purchasing counterfeit saved JPEGs or AVIs of NFTs on the secondary market, they can just analyze the trademark and copyright metadata imprinted on the blockchain from the transaction listing on the EtherScan.io website.21
The problem is that most of the people in the NFT space don't know how to inspect a smart contract22,23,24 or what to look for on the transaction history on EtherScan.25 An attacker can easily create a duplicate NFT marketplace26,27 and use a malicious constructor28 in the smart contract attached to their fraudulent NFT to create a backdoor in the victim's wallet and steal all their cryptocurrencies and NFTs.
What's worse is that the impostor can store the victim's NFTs on a hardware wallet like a Trezor wallet and then the victim can't get those original artworks back and is out of money.29 Plus it's harder for the courts to prosecute because they'd need to know where the hardware wallet is that uniquely signs for the execution of the transaction and force the attacker to return the NFT to its rightful owner.
By creating a marketplace for NFTs with no awareness of legal consequences, NFT markets are opening themselves up to major scrutiny. When it comes to collectible NFTs, some of the technological foresight of the users could probably be presented if, for example, "The user must be running their own node.30,31"
This would provide less liability for that NFT dealer in similar ways that investors are required to have a certain amount of capital to start investing in specific highly valued assets on E-Trade or Fidelity. That user would also be likely to be more technologically adept with the subjects of NFTs and cryptocurrencies. Also, legislation against celebrities heavily endorsing technological projects they know nothing about might help.32,33 The legislation would be similar to "money transmitter"34 requirements that have been used against individual buyers and sellers of cryptocurrencies who acted as if they performed business in an official capacity such as the kind a CPA or other licensed official would.
Also, something should happen to introduce how smart contracts ought to be treated in the courts, since they are not treated as officially binding legal contracts. Even if NFTs are only a bubble that might not garner the same attention in the future, non-fungible tokens may have introduced the legal and judicial systems to new advancements in the contexts of blockchains and smart contracts that were very necessary for technological legislation to progress into the 21st century.
References
1.) $1.7 Million in NFTs Stolen in Apparent Phishing Attack on OpenSea Users, The Verge, Russell Brandom
2.) What is an NFT? Non-Fungible Tokens Explained, CNN Business, Jazmin Goodwin
3.) Non-Fungible Tokens (NFT), Ethereum.org
4.) What's the Difference Between a Cryptocurrency and a Token?, Medium, Parker McCurley
6.) What are Smart Contracts on the Blockchain and How They Work, Investopedia, Jake Frankenfield
7.) Don't Sell Your #Bitcoin Unless.. - Michael Saylor (YouTube)
8.) Beeple: "The First 5000 Days", Christie's Online Auction Listing
9.) Beeple Explains the Absurdity of NFTs | So Expensive (YouTube)
10.) Thoughts on Tom Bilyeu explaining NFTs to Quentin Tarantino? (YouTube)
11.) Announcement: Announcing the Tarantino Community Drop!
12.) Quentin Tarantino's Secret NFTs, The National Law Review
13.) Inside the Fight Over the 'Pulp Fiction' NFT, Variety, Gene Maddaus
14.) How Bitcoin's Peer-to-Peer Cash System Was Revealed 11 Years Ago, Jamie Redman
15.) Explained: How Bitcoin Transactions Compare to FedWire, Protos Staff
16.) The Case for Bitcoin: High Portability
17.) Bitcoin is an Actual Coin: Myth, Fact/Myth, Thomas DeMichele (First paragraph: "Bitcoin isn't a literal coin; it's a list of transactions recorded on a shared digital public ledger called a 'block chain.' All 'coins' are stored in digital bitcoin 'wallets' and can be verified against the ledger.")
18.) Cryptocurrency Taxes, Investopedia, Joe Liebkind
19.) Biden's Cryptocurrency Framework is a Step in the Right Direction, CoinTelegraph, Mitesh Shah
20.) Why Cryptocurrency Regulation is Actually 'A Good Thing' for Investors, According to These Experts, Time, Alex Gailey
21.) Right Click, Save As? NFTs Explained!, Medium, keepfischin
22.) Anatomy of an NFT Smart Contract, Medium, Crypto Futurist
23.) Anatomy of Smart Contracts, Ethereum.org
24.) Introduction to Smart Contracts, Ethereum.org
25.) Tokens, EtherScan.io
26.) How to Build an NFT Marketplace - Solidity Tutorial (for Beginners) [2022] (YouTube)
27.) Code an NFT Marketplace Like OpenSea Step-by-Step [ERC-721, Solidity] (YouTube)
28.) Ethereum Smart Contract Backdoored Using Malicious Constructor (YouTube)
29.) How to Store NFTs on a Hardware Wallet, Trezor Blog
30.) Running Your Own Bitcoin Node, Ethereum Node, Lightning Network Node - aantonop Q&A (YouTube)
31.) Mastering Ethereum: Should I Run a Full Node?, Andreas Antonopolous
32.) Celebrities are Running the Biggest NFT Scam Ever (YouTube)
33.) Jimmy Fallon Faces LAWSUIT After NFT Scam On Live TV (YouTube)
34.) Money Transmitter Licensing for U. S. Crypto Companies, Kelman Law