Beware pitfalls of trading in NFTs (Opinion)

Jason Loh Seong Wei and Tan Tze Yong are from EMIR Research, Kuala Lumpur .

The website indicates that 23.9 per cent of Malaysian Internet users currently own non-fungible tokens (NFTs), a collectible digital asset that acts as a unique digital certificate of authenticity and ownership for virtual items verified on blockchain technology.

Some popular NFT applications include art, music, videos and virtual property. revealed that total daily sales of NFTs reached US$411 million up to Aug 29 last year.

At the time of writing, the total daily sales are between US$50 million and US$150 million.

There are, however, several issues with NFTs that needs unravelling.

First, purchasing a NFT does not mean you have copyright of the creation. According to copyright laws in various countries, buyers aren’t entitled to reproduce, translate, adapt and edit the creators’ work unless they have permission from the creators.

In other words, accusations of copyright infringement are valid if you try to use the purchased NFT for commercial purposes without authorisation or approval.

Second, celebrities have contributed to popularising NFTs in the mainstream, but this exacerbates the problem of NFT price volatility.

For instance, sales of Bored Ape Yacht Club NFTs have surpassed US$1 billion due to increased interest from celebrity collectors such as NBA star Stephen Curry and hip-hop artist Eminem.

Besides them, Taiwanese pop icon Jay Chou’s friend released 10,000 Phanta Bear NFTs through a joint venture fashion company with him, with each bear sold for 0.26 ethereum (ETH), equivalent to US$1,000.

After the bears were snapped up in less than 40 minutes, Jay Chou’s recording company had to clarify that he wasn’t involved in the business.

After that, the average price of one Phanta Bear NFT dropped from the highest point of 7.8717 ETH to the current 1.4152 ETH within two months — a massive dip.

Therefore, seekers should remember not to jump on the bandwagon blindly.

Third, in pursuance of Malaysia’s Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order (2019) made under the Capital Markets and Services Act 2007, a digital token is a digital representation which is recorded on a distributed digital ledger, whether cryptographically-secured or otherwise.

Since NFTs rely on blockchain technology (distributed digital ledger), they can be definitively categorised as digital tokens.

Under Section 3 of the 2019 order, a digital token needs to fulfil all requirements laid out in the order before it can be classified as a security.

As laid out under Section 3(1): A digital token is one which:

(a) is traded in a place or on a facility where offers to sell, purchase, or exchange of, the digital currency is regularly made or accepted;

(b) a person expects a return in any form from the trading, conversion or redemption of the digital currency or the appreciation in the value of the digital currency; and,

(c) is not issued or guaranteed by any government body or central banks as may be specified by the Commission, is prescribed as securities for the purposes of the securities laws.

Those interested in NFTs should research and trade at their own risk as there’s no clear framework to resolve disputes arising from trading NFTs as securities.

FOURTH, beware of frauds and scams. Currently, everyone is free to upload their NFT products even without any verification, creating a loophole for criminals to profit by copying or imitating the work of famous creators.

In a case that shocked everyone, a scammer imitated the painting style of famous anonymous British graffiti artist Banksy and made it into an NFT, then sold it to a collector for more than US$300,000.

Fortunately, the scammer returned the money to the collector. Tom Robinson, chief scientist and founder of cryptocurrency analysis company Elliptic, pointed out that the action of buyers bidding on OpenSea, the largest NFT market, is irreversible.

That is to say, scammers masquerading as sellers can quickly transfer cryptocurrencies elsewhere after the transaction is done and then exchange them for the common currency. 

At this point, the buyer will not be able to recover the lost money. Therefore, people are urged to pay closer attention to the background of NFT sellers and only buy from verified merchants.

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