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Non-Fungible Tokens or NFTs as they are popularly known, are being implemented in different ways by organisations depending on what their strategic goals are. For big brands such as Taco Bells, MacDonalds, Pizza Hut, Lamborghini, or KFC with its ‘finger lickin good’ collection, NFTs have been used as a way to market themselves and stay ahead of the competition. For many start-ups, scientists, film makers and entrepreneurs who are trying to raise capital for their projects, NFTs have been used as an alternative way to raise capital.
Conventionally, capital has been raised by issuing equity in a business and thus the owners have to give away a percentage of their shares. Alternatively, the company borrows money, typically from a bank, or issues a debt instrument, which is bought by a third party. NFTs now offer an alternative source of capital and at the same time can help build a cohort of people that are more engaged and are already or wish to be part of a community that supports/believes in the organisation that is issuing the NFTs. According to Dusan Kovacic, Chief Investment Officer at Rockaway Blockchain Fund, investments in NFTs last year soared 12,878% compared to 2020, reaching a total of $4.8bn.
A Hollywood film, called Zero Contact, starring Anthony Hopkins, has turned to NFTs to help raise the finance to create the film.
Also in the entertainment sector musicians have used NFTs such as the band the Kings of Leon who sold three different tokens:
one with their new album,
one for live show perks such as front row tickets for life,
third contains exclusive audio visual art.
NFTs have been used by other owners of intellectual property (IP) to raise capital by creating digital versions of their IP. However, it is not just works of art but it could also include an organisation’s brand/ image rights as seen by the UK Premier Football league which is looking to sell over £430million of NFTs.
Even jewellery gemstones are being packaged and sold as NFTs. This potentially makes the ownership of diamonds and other precious gems more available globally, and as the metaverse grows in popularity no doubt some avatars will we to ‘show off their bling’ as they wander around virtual lands. There is then no reason why people will not want to trade these digital NFTs in the same way people trade physical gems.
This new model of raising capital using NFTs is beneficial to both the business and owners of IP as well as investors. For the seller of NFTs, it gives them the opportunity to raise capital without potentially relinquishing equity in their company. For NFT buyers it enables them to own a unique digital representation of an asset which may appreciate in value and or can be sold at a future date as well as potentially giving the buyer other benefits such as access to see a movie, concert, football match etc.
There is also another benefit for the creators of NFTs and that is to create an ongoing stream of income, similar to the royalty revenues enjoyed by musicians and the film industry. If the NFT is constructed in the right way every time the NFT is traded the original issuer of the NFT can earn a percentage of all future sales. Unlike selling a picture or a gemstone at an auction or to a dealer where the seller receives a one-off amount of money an NFT can be programmed to generate income on every subsequent sale of the NFT.
As with many investments, the financial success of an NFT depends on the confidence of buyers and their belief they have that they are able to sell the NFT for a higher price at a later date. Thus, the success of an NFT project dramatically improves if there is an active community/fan club as there are likely to be buyers in the secondary market. Building a vibrant community usually starts with defining who the target audience is, this is important to building value for a project. Then a vision can be shared with the community explaining what the project is and how they stand to benefit from it. Social media platforms are usually the preferred way to communicate and inform potential community members about a forthcoming NFT. Discord Telegram, Twitter and Reddit are the main platforms that NFT issuers use, although You Tube, TikTock and Instagram also can be useful platforms to raise awareness and interest. Pitching to potential buyers is not easy and increasingly we are seeing influencers even Artificial Intelligence influencers are being engaged to promote NFTs. It is important that even after the NFTs have been issued to maintain a vibrant community and keep them updated and assured that the project has longevity.
The usage of NFTs as a financial instrument has only just begun, and no doubt we will see more innovative ways evolve. Although NFT price volatility is a constant, NFTs offer a way to help build businesses and create memorable customer experiences. NFTs are increasingly being used by global brands as well as individual owners of IP as a way to digitally engage with existing fans as well as new people. Being online, NFTs offer a way to reach people regardless of national borders and boundaries thus potentially expanding the reach of the NFT issuer. As we begin to see the metaverse gain traction and more attention, NFTs could become a key component to trade and swap value in these virtual landscapes. However, NFTs are not without challenges in the form of high transaction fees, especially when using the Ethereum blockchain and the issuers need to be mindful of potential regulation of NFTs. Interestingly in the USA authorities have charged a former OpenSea employee with insider trading in NFTs "by using confidential information about what NFTs were going to be featured on OpenSea’s homepage for his personal financial gain." Insider dealing regulation is usually relevant for securities, is this s sign that US regulators believe NFTs are securities? Another factor issuers need caution over is that when NFTs are issued they are not classified as a type of collective investment scheme, which would mean they would potentially mean the issuer would need to be regulated. Copyright is another factor as the issuer of an NFT needs to be mindful of.