Is it time to start taking NFTs seriously?

The Non-Fungible Token (NFT) market has exploded in recent years, with NFTs now being available in a variety of forms, from games and music to film and digital art. With market growth continuing to surge and regulation on the way, is it time we started to take NFTs seriously? Business Leader investigates.

How big is the NFT market?

2021 really was the year for NFTs, with the NFT market exploding in size to reach a value of $41 billion. To put this growth into context, it was worth $340 million at the end of 2020.

According to Dusan Kovacic, Chief Investment Officer at Rockaway Blockchain Fund, investment in NFTs last year also soared 12,878% compared to 2020, reaching a total of $4.8bn.

“Simply put, the NFT market has exploded in popularity,” explains Kovacic. “Last August, NFTs had more than $1 billion volume across all platforms per week. Investment in NFTs soared 12,878% in 2021 compared to 2020, reaching $4.8bn. This is all part of the wider blockchain industry’s market growth, with global blockchain deals shattering records in 2021. Funding grew 713% year-over-year as investors backed crypto and NFT start-ups. In fact, NFT was the buzzword of the year in 2021.”

Will the NFT market continue to grow in 2022?

Having experienced such incredible growth in 2021, it’s a wonder whether the NFT market will continue this trajectory in 2022. But with the developments we’re currently seeing in the space, this could be possible.

This year, we’ve already seen Legia Warsaw become the first football club to partner with an official NFT agency, whilst Real Madrid star Vinícius Júnior became an official partner with Metaverse and NFT community Overality.

Moving away from the sporting world, there is plenty more to expect from NFTs in 2022. Mike Kessler, the CEO of Tokenise, explains.

“NFTs have grown exponentially in the last few years, and they will continue to grow at a rapid pace. It may have started with concepts of ownership of digital art, but as we see this emerging asset class mature, we’ll see it being applied to more and more things – I’m thinking about music, culture, streaming, and sporting events, for instance. The possibilities for NFTs are almost endless.

“I think the name ‘NFT’ will give way to ‘digital collectibles’. With that will come the emergence of multiple types of collectibles, maturing the whole market. In the Metaverse, where digital ownership of assets is encouraged, NFTs will enable people to own art, land and property, growing their digital identity and ‘real estate’.”

According to Kessler, Tokenise could also be one of the world’s first stock exchanges for security tokens, which are another exciting development in the NFT world.

“Tokenise is set to be among the world’s first stock exchanges for security tokens,” explains Kessler. “While we won’t be dealing in single NFTs, we can fractionalise (‘tokenise’) NFTs, turning them from non-fungible to fungible securities. That would unlock ownership by more people, which might encourage greater take up over time.

“Let’s take an example. The Beeple piece of art sold for $69m could, in theory, be fractionalised into 69 million units, creating a security out of those fractions, which are then fungible. Those tokens could be traded on an exchange like Tokenise and we’d use our tech partners ScribeStar to build their prospectuses and the documentation suite for regulatory purposes.”

According to Dusan Kovacic, Ukraine is also set to mint an NFT after being invaded by Russia.

“This war has certainly highlighted many use cases of decentralised technologies, and the Ukrainian government has clearly recognised how they can be used – channelling them into raising aid to defend themselves from the Russian invasion,” continues Kovacic.

“The NFT minted is just one example of how blockchain has been creatively and effectively utilised by Ukraine, with around $100m in aid donated via crypto and a decentralised autonomous organisation (DAO) – an organization represented by rules encoded as a transparent computer program – set up to raise funding for the Ukrainian Army.

“Other countries will surely now be looking at the potential uses of NFTs, but it is not just countries looking at new use cases. There are huge implications in particular for the creative economy, with NFTs enabling owners to express their likes, interests and social status with verifiable proof of digital asset ownership. This provides new ways for creators to interact directly with their fan base, and automatically earn royalties from the secondary sales.”

Barriers to growth and NFT regulation

Clearly, there are incredible opportunities available in the world of NFTs, which gives the market an excellent chance to continuing growing throughout 2022. But there are barriers too, particularly when it comes to regulation of the market.

According to Kessler, a lack of understanding is another issue. He explains: “At the moment, NFTs attract people who understand technology more than most, and those who already use crypto, particularly Ethereum. That means that potential investors may be put off by a lack of understanding of crypto – things like setting up a MetaMask wallet or converting to and from fiat money.

“As a result, I think we’ll soon see a shift to being able to buy and sell NFTs using normal fiat currencies, enabling more people to enter the market without a level of knowledge or the extra steps needed to hold crypto.”

However, Shukyee Ma, Founding Member of Overality, highlights one area where a lack of understanding is particularly prevalent.

“The barriers to consumer entry to the NFT market are Web 3.0 knowledge, high gas fee, and use of the digital wallet. In Web 3.0, more user-friendly tools are being developed to offer lower gas, meta-ID, and multi-chain wallet to increase NFT adoption,” says Ma. “Overeality is also developing the programmable NFT (Smart NFT container) to add more utilities to NFT and combine DeFi with the NFT market, which incentivizes consumers to purchase NFT as the equipment of Metaverse.”

Kovacic concurs that understanding is an issue. He says: “A barrier for NFTs from breaking even further into the mainstream is understanding, and I think there is certainly an educational piece needed because it can be difficult to explain how NFTs work and what their real-world benefits are.”

However, he also believes infrastructure and fraudulent activity are additional barriers.

“There are currently relatively few exchanges dedicated to NFTs, so we need more developers to create more infrastructure to enable increased global uptake of NFTs,” continues Kovacic.

“Authenticity is also a problem, with examples of scamming in the NFT space. We need developers building tools to help determine the authenticity of NFTs to strengthen the reputation of the sector and support its growth.”

Earlier this year, HMRC seized three Non-Fungible Tokens and arrested three people on suspicion of attempting to defraud the tax department of £1.4m, so fraudulent activity is a very real risk. However, according to Ma, regulation of the NFT market will reduce the chance of fraud, and it looks set to increase this year.

She comments: “Regulation is very important for the NFT market, especially in ensuring less NFT fraud. NFTs might have the risk of being an asset or security, as NFT is a decentralized programmable protocol.

“As U.S. President Joe Biden signed the executive order on the regulation of Bitcoin and other digital assets, it is reasonable to say that the regulation is being improved. Yet, we would like to consider this as an improvement on the NFT industry because clear regulations would eventually help to standardise and legalise the market.”

Kovacic agrees that Biden’s move is good for the NFT market.

“At Rockaway Blockchain Fund, we are supportive of regulation of the blockchain space generally – as long as it supports and fosters innovation, rather than stifling it,” continues Kovacic.

“It’s a really positive sign that President Biden has signed an Executive Order on Ensuring Responsible Development of Digital Assets, which suggests the US is looking to take a constructive approach in regulation. This will help to continue legitimising digital assets, including NFTs, and will set the tone globally for other governments and regulators deciding how to respond to the sector’s growth.”

So, what’s next for NFTs?

Whilst it’s too soon to tell if increased regulation in the US will lead to regulation elsewhere, many will be wondering where NFTs will go next.

Some analysts predict the market will be worth more than $80 million by 2025, whilst Viktor Fischer, Managing Partner of Rockaway Blockchain Fund, believes the UK could become the blockchain capital of Europe.

He says: “The UK has talented developers who are equipped to work on the next phase of innovations in the blockchain space, cementing the UK’s reputation as an incubator for talent. Together with London’s status as a global financial hub, the UK has the capital and expertise for investors excited about the opportunities for the automation and digitalisation of financial services presented by blockchain technologies.

“Traction metrics in Web3 are growing with similar growth rates as the early days of the internet. For example, daily active addresses on Ethereum grew from 200,000 in January 2020 to 550,000 as of today, increasing about 65% year-on-year. This means there is huge demand for tech talent in Web3, with job postings mentioning blockchain in the UK at an all-time high and seeing growth of 400% since 2020.

“Blockchain investments are also growing, with investments coming into the UK last year totalling $1.6 billion from 250 investors into over 500 start-ups.

“The UK already has a European-leading tech sector. In 2021, the UK’s tech sector attracted £29.4 billion worth of investment, a 2.3x increase on 2020, with over 72% of this originating outside the UK. This was more than double that of Germany (£14.7 billion) and three times as much as France (£9.7 billion). In total, the UK accounts for £89.5 billion of investment into the European tech ecosystem, underscoring why the UK is a natural home for blockchain development.”

However, according to Kessler, there are regulation barriers which could limit NFT adoption in the UK.

“Certain jurisdictions, like the UK, treat blockchain transactions as needing registration to conduct those activities. Although NFTs generally aren’t seen as securities – they’re treated as commodities like retail goods – what will happen over time is a lack of understanding over what constitutes a ‘collective investment scheme’ will start to cause real problems.

“When you hold a single NFT, that’s fine. But when we start creating NFTs from things like parcels of land, that creates a collective investment scheme, which is supported by case law in the UK and Europe. So, naivety to very complex regulations and how they apply to NFTs is a significant barrier to adoption.

“Being tied to crypto helps because it’s trustless and truly borderless as a global currency. But the flipside of that is massive fluctuations in the value of crypto currencies. Then there’s the nefarious activities associated with NFTs. We’ve seen examples of washing, where people are selling NFTs effectively to themselves to cheat the market.

“But, if some of these problems can be mitigated and NFTs can be used correctly, they could become global tools to make products or collectibles more accessible, to more people.”

Whatever the future holds for NFTs, both in the UK and globally, it’s impossible to ignore the sheer size, diversity and potential of the market. So, despite the potential barriers to further growth, it is definitely time to start taking NFTs seriously.