Published last month, Steven L. Schwarcz, Duke University School of Law, has authored a paper on NFTs, Tokenization, and the Monetization of “Things”.
The emergence of digital assets has empowered digital securities as well as other digital assets that may, or may not, have value. First, we had utility tokens, where a digital asset aimed to have a monetary value while facilitating a service, and now we have things like non-fungible tokens or NFTs – digital collectibles.
Schwarcz posits that investors have been attracted to things like NFTs due to the hype and excitement of being engaged with something new. But new does not always mean better, according to Schwarz, and markets or marketplaces supporting these digital assets remain nascent, or even non-existent creating problems for purchasers who may not completely understand the risk of buying a highly illiquid digital item.
Schwarcz states that NFTs make big promises but they “create enormous liquidity risk for investors.”
Now, regarding fractionalization of investment interests like debt securities or equity securities – these could provide benefits without the affiliated liquidity risk of novel markets. Blockchain technology may lead to greater access or financial inclusion.
Either way, Schwarcz believes they should all be regulated “to preserve their benefits and to minimize their risks.”
The paper is a quick read and available here.