Our ‘textbook’ discussion of how regulation can be justified was in the context of market failures. Using this lens, most of the historical cases seem pretty straightforward (at least in retrospect!). But (how) should regulation address something novel like non-fungible tokens (NFTs) or, more generally, cryptocurrencies?
First question — what IS an NFT? Although discussed mostly in the context of works of art, basically an NFT can be anything digital and unique (hence the ‘non-fungible’ bit). To date, most NFTs have been in Ethereum blockchain, but, more generally, NFTs are not like cryptocirrencies since they store extra information, which means they are not inherently interchangeable the way bitcoin or dogecoin or ETH coin would be. In the first half of 2021, people were astonished that a digital flower had sold for $20,000, a sock for $60,000, and a LeBron James clip for $99,999. Since then, many NFTs have sold for many millions of dollars, including a number of pieces by the digital artist Beeple and Cryptopunks. At the end of October, someone even bought an NFT for $530 million (granted, it was from themselves!). Some might say that this is absurd but even the normally skeptical Economist recently sold an NFT for $420,000 (for charity). NFTs have also been criticised for being environmentally harmful (much like bitcoin) with few benefits for either consumers or artists.
A new piece in HBR tries to make the case that NFTs offer a new ‘asset class’. Kacyzinski and Kominers argue that ‘NFTs have fundamentally changed the market for digital assets.. NFTs don’t just provide a kind of digital “deed.” Because blockchains are programmable, it’s possible to endow NFTs with features that enable them to expand their purpose over time, or even to provide direct utility to their holders. In other words, NFTs can do things — or let their owners do things — in both digital spaces and the physical world.In this sense, NFTs can function like membership cards or tickets, providing access to events, exclusive merchandise, and special discounts — as well as serving as digital keys to online spaces where holders can engage with each other.’
Obviously, NFTs are just the latest incarnation of the broader enthusiasm for all things digital, and cryptocurrency has a much longer history of . authorities warning about volatility or how cryptocurrencies can enable ponzi schemes. Indeed, many critics have warned that crypto itself has many characteristics of a pyramid scheme or even a cult.