Perspectives: Are NFTs Hype or the Next Big Thing?

If people weren't curious about non-fungible tokens (NFTs) before, the $69.3 million sale of a work by the artist known as Beeple has more than crypto-geeks paying attention.

Non-fungible tokens represent unique assets, which could be physical or digital. Startups have sprung up to offer artists a way to sell individual pieces of art as an NFT with a unique identifier, noted in a decentralized ledger built on the recordkeeping technology known as the blockchain, to prove both its creator and its owner as it changes hands. 

People can trade NFTs, but their broader, long-term value for investors and companies isn’t clear. I was with KPMG when Overstock.com™, an audit client, decided it was going to get behind blockchain in a big way and then raise money with an initial coin offering (ICO) in 2017. My blood pressure has never been the same. At the time, cryptocurrencies and blockchain were just beginning to be understood, and limited regulatory guidance existed on how to do it right. As one of the first in line to try something like that, the scrutiny from FINRA and the SEC was intense. They immediately had questions about how to account for the cryptocurrencies, how an offering would work, how the ICOs would settle, and how the transfers would work. It was like Pictionary, where we eventually drew out flowcharts of how it would go. Several comment letters and an ICO later, it was deemed a success. Since that time, NFTs have gained attractiveness in the market. 

Sean Stein Smith, an Assistant Professor at Lehman College, CUNY, has raised questions about non-fungible tokens from an audit, tax, and financial reporting perspective. Yet he also describes them as an innovation that could unlock wealth creation and liquidity from assets where that didn’t exist before, even if it feels like a flavor of the month right now. 

“I think it's hype. It's a novelty,” said Bill Rosenblatt, founder of GiantSteps Media Technology Strategies and an expert on copyright issues in the digital age.

"Basically, what you're trying to do here is re-introduce scarcity in an Internet world where scarcity is not the rule—it's the exception,” Bill said. "There have been various attempts to reintroduce scarcity in the Internet world. This is just the latest in a series of them, and none of them have been very successful.”

What's next

The market for NFTs still has a ways to go to become as popular as a cryptocurrency like bitcoin.

For federal tax purposes, the Internal Revenue Service has said virtual currency is treated as property. But from an accounting standpoint, Ben Taylor, CEO of the accounting software company SoftLedger, notes the Financial Accounting Standards Board in October 2020 decided not to take up cryptocurrency because it hadn’t been material for many companies yet. NFTs are likely even further from getting FASB’s attention yet. "I do think that NFTs will ultimately be an important technological innovation," Ben said. "They just aren't financially material to the FASB at this point because there isn't a significant amount of business activity involving NFTs."

That’s not to say NFTs haven’t been popular among individuals. CryptoKitties, a game in which players build their own digital kittens based on the Ethereum blockchain, gave gamers a way to prove ownership of what they created.

“It would be nice to have records of ownership that are easily accessible to everyone instead of controlled by single private entities—and that are indisputable and immutable,” Bill said.

Keep an eye on trading of NFTs for a hint of the future of these assets for mainstream buyers.

One more thing

While it’s still early days for NFTs, don’t count out valuable potential uses for blockchain, such as managing supply chains, royalties, or real estate titles. Steve Soter discusses some of that with Ben in the Off the Books podcast. 

What do you think? What’s the future of NFTs? If there’s more to say on the topic, we’ll post it here on the blog. Subscribe so you’re in the loop.

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