The digitalization era has moved at a breakneck pace in the past decade, with the cryptocurrency fad taking the world by storm in 2009. Amid a clampdown by global regulators on fraud and money-laundering concerns, the crypto trade subsequently took a back seat.
But the industry regained momentum thanks to the advent of initial coin offerings, which give startups an alternative channel to raise funds and avoid market regulations; and security token offerings, which are seen as a more-secure investment platform for investors.
The latest craze involves nonfungible tokens, or NFTs, which are being promoted as the digital answer to collectibles. Collectors, investors and speculators have pumped billions of dollars into blockchain-based, NFT-related artworks for profit, while NFT creators, especially digital artists, are monetizing and carving out their niche in the crypto space.
Critics, however, have warned of another bubble in the making, like that of cryptocurrencies, saying that art could be taken out of the equation.
Hong Kong, a city that always embraces change, has also seen an NFT community spring up recently. A local soccer club — Resources Capital Football Club — has become the first Asian soccer team with NFTs after a deal in July with OliveX, a digital health and fitness company.
Meanwhile, K11 Art Mall has produced in collaboration with Hong Kong-based online platform 9GAG the world’s first meme NFT artwork — In Memes We Love — which was then sold for 9.00 Ether (US$27,900); and the South China Morning Post has launched the blockchain standard Artifact for recording historical records on the blockchain, giving enthusiasts a chance to own and trade historic moments reported by the newspaper.
NFTs are unique, uninterchangeable items, as opposed to shares, commodities and dollar bills, which are fungible. NFTs are created or minted using a smart contract protocol and held in a wallet on a blockchain. By design, each NFT has a different and distinct value, such as for photos, stamps, trading cards or audio.
“Can NFTs be a breakthrough in the art market? That is a most definite yes,” said Pindar Wong, chairman of VeriFi (Hong Kong), an internet financial infrastructure consultancy and chief architect of the Belt and Road Blockchain Consortium.
“It is not all doom and gloom. There is tremendous value in these experiments,” he said.
Not everyone may understand the genre, but the NFT market does have capital potential. Investors spent US$754 million on an array of NFT-related artworks, memes and gaming projects in the second quarter of 2021 — up 48 percent quarter-on-quarter and 34 times more than that for the same period last year — a report by NonFungible.com shows. The figures do not include sales of NBA Top Shot collections or Nifty Gateway digital art collectibles, as well as off-chain sales by leading auction houses like Christie’s and Sotheby’s.
At London-based Christie’s, a digital work of art — Everydays: The First 5000 Days, created by Mike Winkelmann, known professionally as Beeple — went under the hammer for a record US$69 million in March. It was the third-highest price achieved for a living artist, according to Christie’s.
“We were surprised by the sale’s success,” said Francis Belin, president of Christie’s Asia Pacific. “We were very excited about it, but we could hardly say we thought we could sell for that price. And, I think, it’s a sign of the times.”
New York City-based OpenSea — the world’s largest digital marketplace for crypto collectibles and NFTs — has seen roaring trade, ringing up transactions worth US$1.18 billion from July 21 through Aug 20, according to data compiled by blockchain sales tracker DappRadar.
“The growth is incredible,” said Hamish Barnes, growth and community lead at OpenSea. “We always thought this was going to happen although we didn’t necessarily think it’s going to happen so fast,” he said.
The sales were fueled by a bigger and enthusiastic community of celebrities, enterprises and artists, Barnes said.
“Lots of new communities are discovering the potential of NFTs,” he said. “We have got brands and individuals, pop stars, artists from various communities, and industries exploring the place and working out how to make use of the technology.”
“It’s the result of the synergy,” said Sylvia Wang, a young patron at K11 Kunsthalle and consultant at ArtBiz Asia — a business-to-business platform based in Macao. She believes the current NFT bull market is due to the efforts of sectors like finance, technology and art. “The sudden focus on the NFT market at the beginning of this year came from those auctions at Christie’s,” she said.
Digital aesthetics are grabbing the attention of crypto clientele that, in turn, has fueled the industry, OpenSea’s Barnes noted.
“The digital currency market does come in waves. Last year, the prices (of cryptocurrencies) had been low and there hadn’t been much external interest. But since early this year, people are coming back to the market. Trading activity has gone up, with NFTs having stirred up that interest,” he said.
Having taken a roller-coaster ride, with investor enthusiasm partially driven by crypto celebrities like the American business magnate Elon Musk on one side, and clampdowns by regulators worldwide on the other, the value of cryptocurrencies has shot up again since the first quarter of this year.
The price of bitcoins, for example, has soared more than 270 percent year-on-year in August, while ether, the native cryptocurrency of the Ethereum network, on which NFTs are typically held, has shot up about 600 percent, according to the CoinDesk Bitcoin Price Index and the CoinDesk Ether Price Index. As a result of the mania, anything that is even remotely adjacent to crypto, including NFTs, is being swept up.
Despite the glamor, there are worries about a possible crash. At face value, people are paying six-to-eight-figure sums for works that can be seen and shared by anyone online freely.
However, Barnes believes that most buyers are driven by love instead of financial reasons. “It’s about collecting, that sense of enjoyment and sharing that ownership, sharing the fact that you are in on the item — I’m buying into an artist journey.”
Industry experts say the easy and often free accessibility of digital artwork has, in a way, undervalued the genre, while NFTs have added the crucial layer of safe transaction ability, scarcity, and authenticity.
Christie’s believes the NFT system is the “right technology” for digital art, which can be easily copied and pasted, to make transactions involving such art safer.
“The creation of digital art has been around for 40 to 50 years, but it never had the technology to free and empower its safe transaction which, I think, is what NFTs are bringing,” said Belin.
Analysts believe the nature of NFTs could end piracy in the digital space. “In the digital world, you wouldn’t know if something is a copy of something else primarily because the copy is almost perfect. The cryptocurrency was the first to prove that these decentralized ledgers have this property,” Wong said.
“In the case of nonfungible tokens, they are actually unique for some fractional representation of whatever digital assets they claim to have.”
The blockchain environment has offered NFTs two distinct benefits — an unchangeable record of transactions and the uniqueness that could technically prevent digital artworks from being replicated, said a recent report by Hong Kong-based law firm King and Wood Mallesons.
Besides the revenue generated by the digital work’s initial sale, NFTs allow the creator to get a royalty payment each time the work is sold as each transaction can only be made with a corresponding transfer to the creator.
“It’s a revolution for the art industry,” said Wang, the ArtBiz Asia consultant, referring to technology’s merit in opening up a revenue stream for digital artists. “NFTs can ensure that creators, including artists or music composers, can have a portion of the revenue from every subsequent transfer, which could encourage their creations,” she said.
Analysts said the experiments could also speed up the monetization of artwork. “What’s important is the time from the art creation to the time it is monetized; in other words, the time for an artist to get paid for his or her work is shrinking,” said VeriFi (Hong Kong)’s Wong.
“What it means for IP owners is that there is a new business model,” he said, explaining that the digital format could invert the market structure — from being driven by a supply chain that is dominated by buyers, to a demand chain in which artists create their work on demand.
A blockchain and cybersecurity lawyer believes that NFTs could mean a greater possibility of commercializing IP rights.
“It should allow for fractional ownership and participation in fractional elements of IP portfolios. This will open up the ability to create new products, to commercialize in different ways and to provide access to these assets for a new range of investors and commercial operators,” said Scott Thiel, partner at global law firm DLA Piper and head of the firm’s Asia technology practice.
However, Thiel warns that NFT buyers should know what their rights are when they buy an NFT as the purchase does not necessarily mean transferring the IP rights of that item.
“Many people are under the misapprehension that buying an NFT will either give them ownership of an underlying physical asset or indeed unrestricted rights in the copyright or other intellectual property rights that may subsist in the artwork. In the absence of effective legal agreements, an NFT purchaser might not get any of these rights,” he warned.
“A single NFT of a single asset owned by a single owner is completely unregulated in Hong Kong,” Thiel said, adding that it would be helpful to receive more guidance from regulators.
Barnes noted that market prices are slightly inflated at the moment. “Over time, in three to five years, prices may come down, but there may be more trading overall,” he said.
Wang said “the market is a mixture of good and bad”.
“An artist coming out of nowhere and releasing a piece that is then sold at a sky-high price — this, at face value, is just too speculative,” she said. In her view, NFT communities, including marketplaces and auction houses, are obliged to select “fine” artworks with both market and academic values for collectors to educate the untamed market.
“When people talk about NFTs (artwork), they always talk about NFT, NFT. They never say art and NFT,” said Belin, from Christie’s Asia Pacific.
“But at the end of the day, you are buying art, you are buying a drawing, buying a collage, buying a piece of music. And it is not the NFT itself that is valuable. It is the piece of art that is valuable because it is important, it has relevance and it is significant,” he said.
“Good art is desirable; bad art isn’t. And bad digital art with NFT is still bad digital art.”
