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Authors

Nieh, Haley

Abstract

Non-fungible Tokens (NFTs) are exploding in the marketplace and are not losing momentum anytime soon. Artists, athletes, celebrities, and even brands and luxury houses are rolling out NFTs. With this excitement, a great deal of profit is being generated; the market cap of NFTs is expected to grow from $3 billion in 2022 to $13.6 billion in 2027 (a compound annual growth rate of 35 percent).1

Blockchain technologies are an empowering platform for democratization of financial instruments and transactions. Cryptocurrency has received some regulation from the United States Securities and Exchange Commission (SEC), but clarity and regulation of NFTs have yet to be developed. A key hurdle around deciding whether to regulate NFTs stems from categorization of NFTs as commodities or securities or neither. This paper is not meant to propose any substantive regulatory or legal policies; rather, to investigate the foundation of NFTs and the ecosystem it occupies in order to begin to think about whether to regulate them.

With that said, I attempt to introduce a framework of factors that I utilize to analyze whether NFTs are more like stocks, less like stocks, or not at all like stocks in terms of their ability to act as a security. The factors that are weighed are: valuation strategies or ecosystems (such as social media and trading bots), platform or transactional capacity (such as blockchain as a platform, brokerages and exchanges), and finally investment potential or the expectation of investment (such as risk and profitability). This is the first part of my two-part analysis. Because I conclude NFT markets do not look like traditional markets in certain key respects, I look to analyze NFTs under the Howey Test under an investment contract catch-all instead. In sum, NFTs can be a security under the Howey Test, I analyze the Bored Ape Yacht Club NFT as a case study of this. The promise of community and buying into a community with perks, clout and influence, as well as potential profit off the NFT itself satisfies the elements of the Howey Test.

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