Within danger lies the opportunity
For the past couple of years, NFTs have been the heart of crypto-related debate worldwide, and more and more players on the digital market scene have been stepping up.
I’ve written plenty about how every gaming house and his buddy is now riding (or having plans to ride) on the coattails of NFT. Yes, it’s currently in a bit of a dip in form (80% sales drop isn’t really a bit, but the context of crypto removes the justification for hysterics) after the hype passed its test in February, amounting to monthly sales of 3.4 billion on OpenSea, and reaching its all-time high, we have to ask ourselves a simple question. Are there any safety nets if we fall out of the bandwagon?
For instance, to use the driest yet most obvious of examples, when we conclude contracts with other people, we reach a private agreement dependent on our free will. However, if something goes really against the law or is bad for us, we have regulations set in place to seek protection. Without regulations laid down, we need a lot of trust. And trust can be a hard thing to find in financial markets. We can only live in a bubble for a short period of time, ignorant of dangers that may reside within the same tech we adore.
Bristle if you may, but when the Hong Kong cybersecurity watchdog issued a warning at the beginning of 2022 involving risks associated with NFTs and the Metaverse as the crucial security threats, it had a valid reason. It warned that risks would be greater as the value of cryptocurrencies continues to climb the financial ladder. Even taking into account that it is not possible to forge a non-fungible token and that it is easy to trace one, the market is still vulnerable to other types of foul play. Aside from the theoretical possibility that anybody can mint a token out of a file and pass it off to other buyers, there is a plethora of possible manipulation games that may happen in the digital market.
Another obvious example, but let’s consider wash trading. Wash trading happens when someone artificially boosts up the price of a digital asset by opening multiple accounts and trading with themselves. Such play has already been linked to the emergence of NFTs, and such shady traders made nearly $8.9 million in 2021 by finding ways to artificially pump up the value of their digital assets. Other types of scams are, for example, fake marketplaces, phishing scams, rug pull and pump and dump scams. And lest we think we’re too smart to fall backward from a rug pull, they’re just so easy to do. We could feel as safe and assured us we could ever be, confident a project is going somewhere, but all it takes is for a bad actor to change their mind overnight to pull the rug out from under you.
The evidence is already there: rug pulls present one of the newest threats to buyers that reportedly led to a loss of approximately $2.8 billion in 2021. Sounds bad, right? That’s just what we know of. The shame, guilt, and humiliation of investors who won’t report their losses prevents us from ever knowing the true extent of NFT scams.
If (or when) that happens to you and there is no one that should hear your legal cry, respond appropriately and regulate the market, are we really living in a bubble or has it burst?
The good news is that within danger lies the opportunity. Technological solutions can only go that far without being regulated. While at times we fear that regulations may stifle technology, we should also be aware that it gives us a safe playing ground to prosper. This is particularly important for blockchain gaming, which exists as companies and teams of people working as an enterprise, with undeniable commercial interests.
And for those who argue that criminal codes didn’t stop crime, competition rules didn’t put an end to foul market plays, the point is never to make them impossible, but to keep them in check, and make it safer for users (yeah, gamers, the backbone of any gaming effort, right?).
Regulatory Approaches to NFTs
OK, so if we agree regulations could help, let’s start with the EU. Back in 2020, the European Commission adopted a digital finance package along with a proposal for the regulation of digital assets known as the Markets in Crypto assets Regulation or simply, the MiCA Proposal. MiCA is Europe’s response to a gap in financial services regulation since many digital assets have been falling right outside the scope. As mentioned before, one of the main objectives of such safety nets is to create a regulatory framework that is indeed innovative and technologically-friendly. On one hand, authorities had to ensure a decent and all-covering regulation with a common approach across the market, and on the other hand, it was significant not to create any more obstacles on the road to the emergence and applications of novel tech solutions.
Therefore, MiCA includes some regulations that would be applicable to NFTs and for the first time in the EU’s legislative history defines crypto assets. NFTs are likely to fall into the ‘catch-all’ category of other digital assets, but we won’t know yet since it is still in the proposal phase. However, MiCA will regulate public offerings, admissions of crypto assets on trading platforms, licensing of service providers, and the implementation of market abuse rules to such businesses.
The United States, the other big player on the scene, took a more immediate approach. Namely, the SEC views digital assets in the same manner as other traditional assets to establish whether they are securities. The Securities Act 1933 encompasses a really broad definition of securities that is enough to cover NFTs for now. The US has been actively using its longstanding legislation for new causes and has already banned a number of marketplaces for being implicated in money-laundering schemes.
When it comes to China, the approach differs from the West. The development of the NFT movement has been lagging due to strict restrictions on cryptocurrencies and digital assets posed by the authorities, yet the market has been booming. While holding cryptocurrencies and assets on a tight legal leash may lead to fewer probabilities of danger, such policies could stand in the way of large-scale NFT adoptions. Only time will tell which approach will provide more benefits in the longer run, and which one we should adopt internationally to create rich soil for tech innovations and legal certainty as well.
But there may come a time when blockchain gaming developers may need to make a choice. And I think those who are proactive will end up being the cream of the crop.
