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Thorny issues about valuing NFTs (Non Fungible Tokens)

About this issue
This issue is based on recent work we have carried out in the blockchain markets, applying skills and experience we have gained from valuations of brands, intellectual property (IP), intangible assets and businesses over the last 30 years. It also reflects the views of others involved in the blockchain markets. We have a background of working for professional consulting firms and businesses rich in intangible assets. Our specific skills and knowledge are in the fields of global business development, accountancy, finance, marketing, valuation and dispute resolution.

The increasing popularity of, and problems surrounding, NFTs has prompted questions as to how or if they could be valued.

What are NFTs?
NFTs are forms of legal IP rights and obligations. They are digital assets that represent real objects like art, music, films and videos. These digital assets are collectible and are registered on a decentralized blockchain, mainly Ethereum. Each NFT consists of a digital file, such as an image. This file is paired with a smart contract, an encrypted, unchangeable contract that sets out the rights of ownership and authenticity of the NFT. As each NFT is unique, NFTs differ from blockchain cryptocurrencies such as Bitcoin, where all Bitcoins are the same as each other.

William Shatner
As an example, William Shatner (Captain Kirk in Star Trek) offered 120,000 NFTs featuring images from his life and career on the WAX blockchain, which sold out in minutes. The NFTs had rights to images including headshots and characters from his early acting days, other moments such as him hugging Leonard Nimoy (Spock), and bizarrely an X-ray of William Shatner’s teeth. Owners of the NFTs could then:

  • Sell them on a marketplace.
  • Trade them with anyone.
  • Trade with some confidence that every NFT is certified authentic, unique, and cannot be altered - although the legal rights can actually be uncertain.
  • View an NFT’s ownership and trading history.
  • Display their collection on social media.

What is copyright?
When creating a work of art, the artist automatically gains the copyright to that work of art. Copyright literally means the right to copy, but has come to mean the body of exclusive rights granted by law to copyright owners for protection of their work. It generally lasts for 70 years after the death of the artist. When a work of art is sold as an object it can be seen as a way of generating revenue from the associated copyright, and the copyright is not typically sold with the work of art. Another important way of generating revenue from such copyright is by licensing rights, such as to produce prints of the work of art. Copyright needs to be sold or licensed in a written contract.

Where NFTs can be bought
Some significant online platforms for buying and selling NFTs are OpenSea, Rarible, SuperRare, and Mintable. OpenSea is one of the largest, where users are able to trade a number of different digital collectibles, relating to art, music, domain names, trading cards and many more. The costs of transacting NFTs can be significant compared with amounts being invested. In addition there are risks. For example, HERMÈS has sued over the collection of 100 MetaBirkins NFTs that include images of furry versions of its famous BIRKIN bag. HERMÈS has claimed that the MetaBirkins creator is a digital speculator who has been using the famous BIRKIN brand for use in creating, marketing, selling, and facilitating the exchange of NFTs. These rip off HERMÈS’ BIRKIN trade mark by adding the generic meta prefix, which refers to virtual worlds and economies where NFTs can be traded.

Conclusion about assessing NFT values
There are a number of challenges when assessing values of NFTs, namely:

  • Defining and understanding the legal and commercial rights associated with the NFTs.
  • Predicting future cash flows relating to those rights, particularly if there is a disconnect between anticipated future cash flows and the reason for investment (such as building a collection).
  • The high price volatility of crypto currencies used for buying and selling NFTs.
  • Researching useful information on prices paid for comparable NFTs. As each NFT is unique close comparisons may not be possible, and transaction costs can be high, thus distorting any research and analysis.

Such challenges are also usually present to some extent when valuing other types of IP such as trade marks and patents. Although difficult and subjective, IP valuation techniques can be used to arrive at a more informed assessment of value, if that is required.


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Contributor: Thayne Forbes
Publication: Intangible Business