Is Regulation the X-Factor for Mass NFT Adoption?

Back in the 1990s, making a purchase online was a risky business. At the time, entering your precious credit card details onto a website you’d barely heard of, banking on the fact that an unknown retailer would send you your goods once they received your money, seemed like a major risk.

The fact that a book, DVD, and CD eventually arrived in your mailbox seemed like no less than a miracle.

Jump forward a quarter century, and e-commerce isn’t just viewed as a de-risked proposition; it’s completely non-remarkable. In a world in which

Amazon is the biggest retailer, it’s almost unimaginable that people once viewed online shopping as the Wild West of retail.

Today, we might compare the world of NFTs to online retail in the 1990s. Sure, there is plenty of excitement in the space, as early adopters have flocked to shell out their hard-earned cash for non-fungible tokens.

But for the average person the concept of NFTs seems both tough to wrap their head around — and, more importantly, risky as an acquisition.

Some of this has to do with the maturity of the technology. After all, e-commerce has been a part of people’s lives for some time now, while NFTs emerged far more recently. But part of it also has do with the rules that help regulate them.

So, the question is, can regulation help NFTs reach mass adoption?

Get Ready to Regulate

One of the biggest crazes in the crypto world, NFTs refer to unique tokens that can be stored and transferred on the blockchain, which allow individuals to manage and transfer ownership of digital or physical assets.

Most of the high-profile NFTs have been digital images (a collage called “Everydays: the First 5000 Days” sold at auction in 2021 for $69.3 million, making it both the most expensive NFT and one of the most expensive works of art by a living artist).

However, they have also been used to sell other goods — including land, other luxury goods, and more.

But while information in mainstream media mean that most people have heard the term NFT, most people are unfamiliar with the topic of regulation in the world of NFTs.

There’s a good reason for this, too: Right now, there is no regulation. At least, no specific regulation.

Rules do apply, of course. An NFT that is minted with the goal of creating investment returns available to members of the public will likely fall under securities laws. Under U.S. law, an NFT may be classified as a security if it is purchased with the expectation of making money from someone else’s work.

That would make NFTs subject to U.S. securities laws and the jurisdiction of the Securities and Exchange Commission (SEC).

Meanwhile, publicly offered NFTs are subject to consumer laws that are designed to protect against commercial practices considered unfair, while there are also tax implications based on the type of transaction.

But when it comes to regulation created explicitly to focus on NFTs, this is still unknown territory.

Lawmakers are in the same situation as your average person on the street: they don’t fully understand exactly what NFTs are. In this way, it’s a bit(coin) like the cryptocurrency market — particularly in its early days — with lawmakers scrambling to keep pace with changing technology.

This was confirmed by SEC Chairman Gary Gensler in September 2021 when he testified before Congress that, at present, “we just don’t have enough investor protection in crypto finance, issuance, trading, or lending… [I]t’s more like the Wild West or the old world of ‘buyer beware’ that existed before the securities laws were enacted.”

The Mainstreaming of NFTs

For a core group of early adopters (although probably not those who are spending millions of dollars on the most valuable NFTs out there), this Wild West aspect of the current NFT landscape is part of the appeal.

But for NFTs to truly go mainstream and achieve popular acceptance and adoption, it’s important that buyers and sellers can place the proper trust and confidence in them.

In fact, regulation can be viewed as the sole way to protect buyers and sellers from criminal actions in the NFT market, and may even be the x-factor for mass adoption.

There are multiple risks that currently exist in the NFT space. Concerns about value and possible volatile speculative bubbles is one of the most frequently cited, especially given how new and immature the market currently is.

Part of this relates to confusion over the distinction between asset ownership and copyright: a particular piece of artwork like a video or image can be widely copied, even if a buyer owns the non-fungible asset.

Other fears or risks can involve the illiquidity of the market (it’s slower to trade assets than is the case with, for instance, selling crypto), risk of fraud (the anonymity of buying and selling of NFTs making them a money laundering risk), and more.

Some of the challenges in this space won’t be solved by more regulation — but some very well could be. As noted, currently NFTs can exist in a kind of no man’s land, defined in the UK as “unregulated tokens” because they are neither security tokens nor electronic money. However, recognizing NFTs and adding rules to govern them will add a sense of legitimacy that could help trigger a surge of interest in the field.

Possible Timelines

Regulation could drive NFT marketplaces to perform background checks and validation of NFT minters. That would decrease the probability of scams. More broadly, it would help shift NFTs away from being considered a high-risk corner of the cryptocurrency space to a means for securely and transparently tracking and transferring ownership of high-value physical and digital assets.

When this all happens remains to be seen. But it’s better to assume sooner rather than later. The U.S. Department of Justice has recently announced plans to create a National Cryptocurrency Enforcement Team (NCET) that will investigate and prosecute cases involving criminal acts related to cryptocurrency.

Although this does not directly refer to NFTs, high profile stories about both NFT sales and, not infrequently, scams, means that they won’t have escaped anyone’s notice.

NFTs represent an exciting, groundbreaking example of blockchain technology in action.

At the very least, NFTs promise to shake up the art market, and could even assist in cracking down on illegal activity in this area. Explicit categorization and more focused, targeted guidance from authorities will mean potential NFT actors won’t have to be quite so cautious about NFT investments and purchases.

For this reason, more regulation will help the NFT market to develop in both a safe and stable manner allowing for innovation to flourish, but safeguarding both creators and buyers alike.

That’s a big win for everyone involved.