Understanding NFTs and Crypto
NFTs, or non-fungible tokens, are one-of-a-kind digital assets that can be bought and sold like any other cryptoasset. The distinction is that NFTs are non-interchangeable, and unlike Bitcoin, they have unique properties that mean no two are the same. Part of the attraction to this trending form of crypto relates to its ability to digitise collectables. Here, Charlotte Gregory, and Sallyanne Caswell look at the opportunities and risks presented by crypto and NFTs.
Examples of NFTs include a recent piece of digital art by Beeple which sold for a staggering £69m, the first-ever posted tweet which sold for £29m, and the first NFT music album released by the Kings of Leon.
Displaying a 400% growth rate in February 2021 alone, it is no surprise that NFTs rank highly on the agendas of investment firms. In recognition of this, NFT Investments Plc has applied to become the first NFT-focused firm to launch on the Aquis Stock Exchange (AQSE) in London.
NFT Investments Plc is investing in NFTs directly and building up a portfolio that aims to provide shareholders with a return on their investment. Over 200 million ordinary 5p shares in the company will be listed on the AQSE, with the float expected to value the firm at around £25m.
As an evolving technology, developing in a largely unconventional market, the regulations surrounding cryptoassets can be difficult to navigate.
Those creating and investing in NFTs need to be aware of the rights being granted by tokens, particularly where such rights involve profit sharing or other rights akin to traditional equity securities. Close attention must be paid to the qualities of the token as this will dictate whether baseline regulation through only the Anti Money Laundering regulations will apply, or whether more onerous regulations apply.
Possession of NFTs is stored on the blockchain with ownership linked to two pieces of code associated with a “wallet”. If this “wallet” is hacked or the access codes lost, the NFT will become inaccessible by the owner and will effectively be lost. This means investors are vulnerable to losing substantial sums of money from breaches of their cybersecurity.
Such cybersecurity risks open up a world of opportunities for insurers, with potential for insurers to underwrite crypto-related risks. Despite the incredible business opportunity presented by offering such cover, only 4% of the entire cryptoasset market is insured. In part, this lack of coverage can be attributed to the volatility of the tokens, which can have immense intra-day value swings, and therefore be difficult and risky propositions for insurers.
Though there are risks, NFTs and cryptoassets generally, are here to stay. For those insurers and investors looking to participate in the NFT market, a full understanding of their operation and the regulatory implications is a necessary first step.
If you have further questions on any of the above or would like to know more about the opportunities presented by NFTs and crypto, our team is happy to help, you can contact us here.
