NFT’s have been the flavor of the month this year in Nakamotoland. This Nth order crypto technology is built on top of “smart contracts”, which are built on top of blockchains, and enables anyone to buy and—more important—sell cryptograpically unique digital tokens. Basically, these are Internet enabled box tops.
As I have remarked before, this is hardly groundbreaking economics. The main “innovation” is that pretty much anyone can do it. And pretty much anyone is doing it.
This fall we are shocked—shocked!—to learn that NFT markets are not necessarily trustworthy. For example, the widely used NFT marketplace Openseas has been rocked by an insider trading scandal [1]. It seems that one of the executives there was secretly buying new assets just before they were featured on the front page, and then selling them on the initial bump.
It turns out that this is not illegal, and apparently not against company policy until he was caught. It couldn’t be illegal because NFT’s are basically unregulated, and NFT market places are completely unregulated. They may look like conventional commodity trading, but they differ in one crucial respect: securities laws do not currently apply. You’re on your own. Good luck.
This has been a bit of a black eye for Openseas and NFTs overall. I mean, if the punters realize that they are being ripped off, they might walk away. Or they might sue. Or the gendarmes might move in.
This goes to show, you can’t trust Openseas, or any other NFT marketplace.
What? Wait! Nakamotoland is specifically and fundamentally about making finance trustworthy via “trustless”, decentralized technology. NFT’s use Ethereum (in the case of Openseas), so they are decentralized and “trustless”, no?
The problem is, of course, that the marketplace (Openseas in this case) is not decentralized, nor is it “trustless” in the Nakamotoan sense. Trading on Openseas or similar platform uses cryptocurrency and blockchain-based executable contracts, but the actual transactions are done on a perfectly conventional on line system. An online system run be a company, with a handful of Carbon-based units including a “head of product”.
| NFT Market (e.g. OpenSeas) | Centralized X |
| NFT | Decentralized |
| “Smart Contract” | Decentralized |
| Cryptocurrency | Decentralized |
| Blockchain | Decentralized |
| Public Key Cryptography | Decentralized |
If NFT markets operate pretty much the same as any other online market, shouldn’t they be regulated to assure fair play for customers? That’s certainly a good question.
As Will Gottsegen comments, regulatory oversite would be a good thing for customers and for the industry itself [2]. Needless to say, the brilliant innovators who run NFT markets are strongly opposed to making them follow the same rules as everybody else. Who wants government agents and lawyers sticking their noses in this gazillion dollar bonanza? But, as Gottsegen says, “To help build that trust, oversight may be a price companies are willing to pay”.
“The crypto industry has a notoriously antagonistic relationship with regulation, but if NFTs are going to take off in a more mainstream way, buyers need to know they’ve got a fair shot.”
(From [2])
I’d say that regulation is coming, probably pretty soon, like it or not.
However, I have to wonder just how well the NFT craze will fare if they become more like conventional assets. Carefully accounted, audited. Taxed. Etc. If the overheads get too high, why bother with NFTs? Why not just buy and sell conventional assets?
At least some, and possibly a lot, of the interest in NFTs is the DIY simplicity, that lets anyone do it. If the bar for trading gets too high, then it will price out the millions of little people who make NFTs different and interesting. If NFTs become something that only celebrities and corporations can do, they are nearly pointless because celebrities and corporations already can do this stuff without NFTs.
It’s a dilemma. Unregulated NFTs let anyone (including me) play the game. But regulation is necessary to make the game fair for the little guy (like me). But regulation may well push little guys (like me) out.
I dunno.
- Will Gottsegen (2021) Insider Trading Allegations Rock OpenSea, NFT Marketplace Responds. Coindesk, https://www.coindesk.com/business/2021/09/15/insider-trading-allegations-rock-opensea-nft-marketplace-responds/
- Will Gottsegen (2021) OpenSea Scandal Shows Need for More NFT Regulation. Coindesk, https://www.coindesk.com/policy/2021/09/20/opensea-scandal-shows-need-for-more-nft-regulation/
Cryptocurrency Thursday
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