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What you need to know about NFTs

Unless you live in a cave, you’re almost certainly aware of a new internet phenomenon called non-fungible tokens (NFTs). The media hasn’t been able to get enough of this topic since a South Carolina artist sold a digital collage last March for the staggering sum of $69.3 million. Even more mind-boggling is the fact that the creation can be freely copied and posted by anyone.

Many people are getting rich off of NFTs right now. In December nearly 29,000 collectors banded together to pay $91.8 million for a single piece of digital artwork. It was the highest price ever paid for a work by a living artist in any medium. Last year The New York Times’ Kevin Rose sold a NFT of one of his columns for more than $1 million (the proceeds went to charity).

So maybe the art world has lost its collective mind, but should that mean anything to those of us who work at a desk all day? In the short term, no. But it’s worth understanding what NFTs are because real-world business uses will emerge after the hype has subsided.

Just data

A NFT is simply a digital asset that lives on a blockchain. It can be used in digital rights management to establish ownership and to track changes in ownership over time. Blockchain is a secure, distributed database that enables transactions to be conducted directly between two or more parties with a high degree of fidelity, even if the participants are anonymous. It’s most commonly associated with cryptocurrencies, but there are many other uses.

A NFT doesn’t have to be a work of art. It can be a Word document, an audio recording, a PDF, or even a tweet. “There’s no difference between a NFT and a document with metadata,” said Nick Donarski, CEO of ORE-Systems and a veteran of cybersecurity and blockchain technology.

What’s important about NFTs is that they establish ownership in an immutable fashion, and that’s where it gets interesting for businesses.

Consider this scenario: You work for a company that makes kitchen utensils, and you’ve just come up with a revolutionary new design for a can opener. You’re worried that someone else could get hold of your idea and commercialize it before your company does. By registering your design as a NFT, you can establish beyond a doubt that your design came first. The date and time stamp on the digital token, which is the smart contract that governs the use of your asset, proves that.

Or suppose you buy computer chips from a factory in China. You want to create a secure chain of custody so you can be sure chips haven’t been tampered with on their journey. You can create a NFT for the shipping record, “so each time it changes hands, it creates an immutable timestamp that can be queried and tracked,” Donarski said. “By doing that in a single system you no longer have documents on a shelf. It all becomes seamless across the life of the business.”

Costs vary according to scarcity but can range from as low as one dollar to as much as several hundred dollars. You can specify how many copies of the digital asset can be created and any royalties to be charged. You can also track ownership of NFTs you create if they change hands. “There will always be the risk of pirated versions, but you will always know who is authorized to own the asset,” Donarski said.  

Legal forecast: foggy

It sounds like NFTs are on the road to making patents and copyrights obsolete, but don’t get too excited just yet. “The courts haven’t done much in this area, and there isn’t a lot of regulation in the U.S. yet,” Donarski said. “There are effectively no laws governing the use of blockchain.”

There are technical hiccups that could wreak havoc. “The NFT is connected to the digital asset via a link. However, if the digital asset is deleted or the server hosting it fails or otherwise goes offline, the link will break and the NFT that remains will be worthless because it would no longer be associated with the digital asset, and there is no way to back up the NFT,” wrote Pratin Vallabhaneni, a partner at the Washington-based law firm White & Case.

NFTs are closely tied to digital wallets. That can be a single point of failure, as there are people who have lost fortunes because they forgot their wallet passwords.

There’s also no guarantee that the owner of a NFT is the same person who created the digital content. “Nothing stops you from taking an image off the internet and creating a NFT,” Donarski said. “We can’t stop infringement of intellectual property. That’s the owner’s responsibility.”

Despite the negatives, it’s probably a good idea to start creating NFTs of your most critical data. The cost is modest, the process is straightforward, and the legal issues will get sorted out over time. You may not be able to sell your PowerPoint slide deck for $70 million, but at least you can be sure that it’s yours.

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