Non-fungible tokens: Latest craze among crypto-rich art collectors

Retail investors should stay away given the high volatility

The market for crypto art, also called non-fungible token (NFT), is the latest craze online. In February, a crypto art named Nyan Cat meme sold for 300 Ethereum, or about $590,000. Twitter’s Jack Dorsey sold his first tweet for millions. 

Digital artist Michael Joseph Winkelmann, professionally known as Beeple, sold a piece last month for nearly $70 million using an NFT. To make NFTs available to Indians, Binance-owned WazirX, a cryptocurrency exchange, launched India’s first NFT platform earlier this week. 

What is NFT?

It is a unique digital asset that can be bought and sold like any other piece of property. It can be artwork, music, video footage, and the like. Think of these digital tokens as certificates of ownership for virtual or physical assets.

Nischal Shetty, founder, WazirX, says, “NFTs are unique tokens. They are not replaceable by another ‘identical’ item. So, no two digital art pieces are the same.”

Creators can place their digital assets for auction over the blockchain-based NFT marketplace. If you are an artist, you can create a piece of art, create an NFT for it, and then sell it. Buyers can buy these creations, either as collectibles or for the purpose of trading.

Difficult to forge

You get digital ownership (copyright). If you buy art in the real world, there’s a paper which states that the piece of art belongs to you. On blockchain, unlike paper, there’s no chance of forgery. 

NFT and blockchain also make the asset liquid and easily tradeable.

Rishi Anand, partner, DSK Legal, says, “An owner or licensee of the artwork (which is being tokenised into NFTs) is entitled to the ‘bundle of rights’ under the Indian Copyright Act, 1957, including the right to reproduce in any form, issue copies, create derivative work, and transfer ownership of such copyright work. Accordingly, creating or selling NFTs of the artwork in which one has no copyright will be illegal.”

Regulatory twilight zone    

This new asset class comes with a high price volatility. Average prices for NFTs have tumbled massively from their peak values in February.

There is also little clarity on how these instruments will be regulated.

Suvigya Awasthy, associate partner, PSL Advocates & Solicitors says, “The legal position on taxability of NFTs is still unclear since the government is yet to act on the modalities of how crypto-related market dealings will be pursued in India.”

Should you invest?

Given the nascent character of this asset class, most people should stay away from it until it evolves and gains wider acceptance. The massive prices being quoted in the international media for the sale of digital art pieces have the feel of a speculative mania. 

Before shelling out your hard-earned money, think hard about whether the piece of artwork underlying the token has any intrinsic value, and whether that value can sustain and grow.

Investing in art has been a rich man’s game in India so far.

Ranjit Dani of Think Consultants, a wealth management firm, says, “Investing in art can be lucrative, but only for someone who understands this space well. Only ultra-high networth individuals (UHNIs) should invest in this asset class at present.”

UHNIs have experience of investing in art and they can also afford professional advice in this space. Dani, too, is of the view that retail investors should avoid this asset class.  

If you decide to buy, remember you can only pay for these digital assets using cryptocurrencies.