Science & Tech Spotlight: Non-Fungible Tokens (NFTs)

 

Tech Spotlight: Non-Fungible Tokens (NFTs)

Fast Facts

What's an NFT?

NFTs or non-fungible tokens are digital certificates of ownership that represent digital or physical assets. Currently NFTs are mainly used for digital artwork. For example an NFT for digital collage sold for $69.3 million in March 2021.

Many NFT buyers wish to resell NFTs for profit and while all investments carry risks NFTs may carry additional risks as there is no legal and regulatory framework that clearly applies to them.

New uses for NFTs are emerging and revenue from NFTs could exceed $130 billion by 2030. Federal workers may need more expertise to help protect consumers.

Abstract NFT collage

Highlights

Why This Matters

Revenue from NFTs could exceed $130 billion by 2030 and NFTs can help power the digital economy. However despite the media attention and celebrity endorsements very little is known about them and there is speculation and fraud in the current market. Federal workforce also lacks NFT expertise Difficulty meeting statutory and regulatory challenges.

The Technology

what is it? A non-fungible token (NFT) is a digital identifier similar to a certificate of ownership that represents a digital or physical asset. Generally speaking non-fungible assets are unique and not interchangeable with other assets. NFTs like original paintings have their unique value. by contrast Fungible assets are interchangeable such as dollar bills or units of cryptocurrency.

Currently the technology is most widely used for digital collectibles such as NFTs for digital collages which sold for $69.3 million in March 2021. The use of NFTs in other applications is emerging (see Figure 1). For example NFTs could provide a decentralized marketplace for music or other areas Creative work that allows creators to receive revenue for digital assets directly and automatically rather than through a third party.

How does it work? NFTs typically rely on the following technologies:

• 
  
• A blockchain is a
•  decentralized digital ledger that uses cryptography such as encrypting data to enhance the security and durability of transactions.

• An NFT marketplace is a website where you can create and buy NFTs - similar to other online platforms that allow users to do business with each other.

• A digital wallet is a contactless payment application that can store payment identification cards in the form of NFTs.

To create or mint NFTs creators upload digital files such as images photos or music to the marketplace. The marketplace executes the code to create a unique identifier — an NFT — and add it to the blockchain that verifies that it stores and tracks it. Once created NFTs can be sold Destroy or keep records as evidence of ownership. Typically buyers use digital currencies to buy NFTs but fiat currencies can also be used for other assets or credits.

Most NFTs are not assets themselves. In the case of physical assets they represent ownership of the asset. For digital assets they represent ownership of a unique code linked or associated with the asset's metadata - information about the asset such as its creation date size or its location stored on the Internet. In the case of a digital 

image others may be able to see the asset or even download a copy but the NFT can prove which digital image is the original and can be combined with other information to show who owns the NFT.NFTs rely on smart contracts — computer code that automatically executes transactions when specified conditions are met. For example a smart contract could stipulate that the original creator will receive a certain percentage of all subsequent sales of the NFT.

How mature are you? NFTs were first created for digital images in 2014 but interest in them expanded in 2021. One firm estimates that 360,000 people hold 2.7 million NFTs between February and November 2021
. According to the market research firm the market size of NFTs will be worth $50.1 billion in 2021 It could reach $130 billion or more by 2030 largely due to growing demand for decentralized marketplaces and digital collectibles.

Some academics believe that current NFT buyers are primarily interested in reselling NFTs for profit. As with collectibles such as first edition books and sports cards rarity and popularity can drive the value of collectible NFTs.

NFTs may also provide opportunities for a wider community of artists and creators. For example they can help artists sell their work without relying on third parties such as galleries. Decentralized marketplaces allow artists to fully profit from their art and interact directly with buyers around the world world. It allows buyers to support the artist's free expression and autonomy.



Other NFT applications are emerging. For example some researchers suggest that storing electronic health records as NFTs could give patients more control over who can access their data and when or how it is shared. A company is using NFTs to track and monitor consent for clinical trials. Individuals will be able to track and monitor their consent agreements in real-time across disparate data sources. The company says this will give individuals control over their personal information and allow flexibility in managing their consent. The company also believes that it will increase Increase efficiency by reducing redundancy and the need for human involvement.

• What are your concerns? 

• Areas of focus for current NFT use may affect public trust and may hinder its expansion into emerging areas. Some users of the technology have purchased collectible NFTs with the goal of making a profit but like other investments NFTs carry financial risks and have Shows price volatility. Cryptocurrencies that fluctuate in value are often used to buy and set the value of NFTs and can exacerbate this volatility. NFTs are vulnerable to artificial prices such as celebrity endorsements and illegal activity. For example the NFT owner can set Multiple digital wallets sell NFTs to themselves thereby inflating the perceived value of NFTs.

• The federal government and private industry have also identified concerns related to NFTs. In March 2022 the President issued Executive Order 14067 to develop a whole-of-government approach to addressing risks and leveraging digital assets and their potential benefits underlying technology. Additionally in March 2022 the Justice Department charged two people with a $1 million fraudulent scheme after promising to collect NFTs from investors and then transferring all raised funds without offering to collect them. have at least one insurance company Consider options that cover fraud and other NFT-specific risks. Additionally some government organizations are considering how to protect consumers and inform them of the risks of NFTs. In April 2022 the Joint Conference on Global Tax Enforcement issued a report on how to identify money laundering and other illegal use.

• 
  NFTs can also pose a risk to privacy. For example without proper safeguards assets in a personal digital wallet could be publicly visible which could reveal identifiable information. Users may also receive unwanted or illegal NFTs such as those related to obscene content Because some transactions do not require recipient approval.
  
  Another concern is the federal government's chronic difficulty in hiring and retaining a high-quality tech workforce. Some researchers suggest that sufficient expertise can help inform policymakers as they consider what actions need to be taken to regulate NFT。
  
  

  Opportunities

• Decentralization. NFT creators and buyers can interact and set transaction terms without third-party involvement which allows creators to retain a larger share of profits.

• digital economy. NFT applications can improve the efficiency of the digital economy. For example they can facilitate the processing of records help businesses attract startup funding and help match fundraisers with donors.

Challenges

• investment risk. Like other investments NFTs carry financial risk and may have pricing volatility. Additionally when individuals buy NFTs on the internet they may not be warned about the risks as they would with traditional investments.

• illegal activity. Criminals can exploit users through fraudulent activities to steal NFTs or the assets used to buy them. Smart contracts can pose similar cybersecurity risks.

• privacy. NFT information in distributed digital ledgers and digital wallets may be publicly visible and reveal personally identifiable information.

• Lack of federal expertise. 
• NFTs are developing rapidly. Many in the federal workforce may not understand the current and emerging uses of different sectors which can make identifying and resolving statutory and legal challenges more difficult.

Policy Context and Questions

• What if policymakers could do anything to better protect individuals or entities using NFTs including through the use of regulatory or criminal enforcement mechanisms?

• How can policymakers improve the expertise of the federal workforce to address the use of NFTs and clarify the applicability of the current legal and regulatory framework to current and future uses of NFTs?