For many, non fungible tokens (NFT) seem more like something out of a video game rather than a new economic asset. NFTs are a new type of digital commodity most similar to a collectible piece of art. Despite the promise and excitement surrounding these assets, some legislators would like to regulate and tax NFTs before they have even had a chance to make a significant impact.
Understanding an NFT’s fungibility also helps to underscore the topic itself. In economics, something that is “fungible” is generally replaceable with other versions of itself while retaining its value. For example, United States currency is fungible in that my $1 bill will have equivalent value to yours, barring any unique misprints or value-increasing modifications. Alternatively, NFT’s are non-fungible because they cannot be replaced or compared in the same way. Just as there will always be a single original Mona Lisa, a single NFT will be the only one of that NFT. Thus, NFTs are more comparable to collector’s pieces rather than physical or digital currencies.
The NFT market operates like many markets, it trades on low supply and high demand. NFTs in particular trade on the supply side, offering a limited number of tokens overall, with each individual token being different from another.
However, NFTs are unique in that there is little digital protection of the asset – anyone can right-click the image to download the file to their computer. It would be exponentially more difficult to create an exact digital copy of the Mona Lisa.
NFTs and their unique nature might not be of much concern when trading consists of fringe transactions of $3 each, or even free, but this market becomes a serious issue for legislators and owners when NFTs are sold for $69 million.
With the interest and money floating around NFTs, certain members of Congress and Biden administration officials have tried to step in by proposing federal regulations. Legislators have formed a bi-partisan Congressional Blockchain Caucus of over 30 members to help make better recommendations for cryptocurrency laws, with some floating the idea for a bill paralleling the restrictive regulations in the EU.
Similarly, officials recently threatened to use the expansive provisions under the Dodd-Frank Act to control current behaviors, while the U.S. Treasury Department rushes to finish a regulatory framework within the next year. Some regulators even want to declare crypto-assets like NFTs and their hosting platforms “systemically important” to the U.S. financial system, restricting them with the same guidelines for credit card companies and banks.
NFT regulations would be redundant and limit growth and innovation in the industry. The U.S. already has a whole slew of regulations covering aspects of trading NFTs, like those involving intellectual property, buying and selling volatile commodities online, money laundering, and auctioning artworks. If they wanted to, governments could apply these already existing processes and legislation to monitor the sale of NFTs. For example, recent scandals in the NFT community involving insider trading pose little need for new regulations. Governments could apply existing insider trading laws to regulate activity, which administrators have already spent years researching and modifying to ensure appropriate design.
In truth, we understand very little about blockchain and crypto-related economics. In the past ten years, many academics have written about blockchains from a computer science perspective. However, discussions involving blockchain, crypto-assets, and economics, are fewer and farther between, with the oldest mention of the term “blockchain economics” stemming from an experimental paper only five years old. Beyond simply coining terms, formalized research into crypto-assets and blockchain economics has only recently started to pick up speed.
Jumping the gun on NFT regulation would harm NFT ecosystems and crypto-developments on the whole. Not only do regulations fit to handle these developments already exist, but still-evolving research into the nature of blockchains, NFTs, and cryptocurrency suggests that legislators’ acts today would very likely harm the digital financial world for years to come.