The developing and fascinating world of digital assets is engaging a more widespread audience with Collins Dictionary recently announcing its word of the year as “NFT”, the acronym for ‘non-fungible token’. “Crypto”, the abbreviation of ‘cryptocurrency’ also reaching Collins’ top ten list.

“Tokens”, as we most commonly know them are used on a daily basis around the world. Although they are not currency in the more traditional sense, (such as sterling or US Dollars) a token can be traded at a fixed or flexible rate, for example, Nectar points or Air Miles.

The characteristic of fungibility is whether or not an item is mutually interchangeable with another. Typically, we may see fungible items traded on a commodities exchange, for example, oil or gold. Non-fungible items however are those that are unique in some way and are not directly interchangeable with another, such as original artwork, houses and diamonds. Accordingly, an NFT is defined by Collins as “a digital certificate of ownership of a unique asset, such as an artwork or a collectible”.

NFTs exist on a blockchain, a digital ledger that records transactions and contracts in a network. This is the same technology that underlies cryptocurrencies, which are exchanged to purchase NFTs. Cryptocurrencies such as Bitcoin and Ethereum are fungible tokens and can be traded on exchanges, unlike NFTs.

NFTs are increasingly being used across the world, particularly for digital works of art. Memes such as “Charlie Bit My Finger” and “Side-eyeing Chloe” have sold for tens or hundreds of thousands of pounds. The NFTs can contain authentication and a smart contract which may include, a royalty agreement or payment(s) for any future sale of the token. As a result, it is envisaged that contractual disputes will arise from these transactions.

As the use and value of NFTs increase, it is inevitable that related fraud will escalate too, as we have seen with cryptocurrencies. Often, and as we see with other internet scams, NFT fraud preys on the trust of others online, replicating marketplaces, social media profiles, customer support, often creating Ponzi and Pyramid schemes. Over the past year we have seen numerous scams, including a fake NFT hosted on Banksy’s own website, and Jeff Nicholas, who described how his digital wallet was hacked when he was seeking help on OpenSea, a marketplace for NFTs.

These new investment opportunities offer fraudsters a vast new playground so is the future really that bleak? It always takes time for the educational aspect to follow. As more people come to understand the technologies and the investment opportunities, they become alive to the key elements to watch out for. In addition, companies will need to bolster their resilience to cyber-attacks and hacking to ensure it, and its users, mitigate vulnerabilities. Further, the NFT market awaits specific regulation and clarifications from the courts in this developing area regarding the treatment of NFTs and the associated rights; in the interim, drawing on and interacting with existing laws. It is certainly a space to watch.