NFT Mania: can you insure a multi million dollar NFT?
Interestingly, the concept for non fungible tokens was originally developed in 2014 in a hack-a-thon by Anil Dash, CEO of Glitch and artist Kevin McCoy. The first digital transaction was worth $4. Not really NFT mania, but fast forward a few years and the improvements in blockchain and cyrpto currency had given rise to NFT mania. The duo developed this process with the thought of protecting artists. But has this been achieved? How do NTF’s work and what does the artist or seller and the consumer or buyer really need to know?
Fast forward to 2021, following improvements to the efficiency of the Ethereum network and a boom in the value of many cryptocurrencies, the sale of digital collectibles via NFT is everywhere from the ridiculous $2.5 million dollars for, “just setting up my twttr” by Jack Dorsey, to the jaw dropping $69 million for Beeple’s Everydays – The First 5000 days by Christies’ in March 2021.
What is an non fungible token?
There are many complicated definitions but the easiest to understand is a definition by Mark Ting, from Foundation Wealth:
Non-fungible = one of a kind;
T= unit of currency on the blockchain.
How does it work and how do you buy a NFT?
Digital art or assets are uploaded and verified and there is only one original certificate of ownership. Each NFT is unique and can not be duplicated. This ownership is recorded on a digital ledger known as a blockchain. NFT’s can be bought with various currencies or even a credit card, but most platforms use some kind of cryptocurrency. A popular choice is Ethereum. One place to start if you you want to buy an NFT is Rarible or Open Sea. For an in-depth explanation on how to go about owning your own NFT, check out, “How to make, buy and sell NFT’s” by Todd Haselton.
What are the risks with buying NFT’s?
There are many things a NFT buyer should be aware of before venturing down the path of purchasing a piece of art, music or any other digital item.
Copyright ownership and royalties: Purchasing a NFT does not mean the buyer has copyright ownership or royalties. What you are buying is the digital version, not the ownership. So artists have the right to their copyright. In addition, if you sell that NFT, the artist gets a cut of the profit on that specific NFT.
The model of art ownership implied by NFTs has been a matter of some debate. The fact of ownership needs to be established, Michael Connor writes for Rhizome and explains, “The implication of all of this is what it means to own an artwork governed by an NFT is not some settled fact. Ownership needs be defined alongside the sale of an NFT, via a standard contract or another kind of smart contract.”
Authenticity: make sure you are actually buying from the artist. Where there is demand their are sharks. There are lots of incidences where people are selling other artists works sometimes under the artist name without any express or implied permission.
Insurance: This is another grey area, the legal and insurance world has not completely caught up to the fast moving world of the internet. At Reliance Insurance we have reached out to over 25 managing general agents and to date in early 2021 we currently have not found an underwriter to cover the risk. In short, NFT’s are not currently insurable.
Non-fungible tokens insurance policies do not exist. However, this will change but insurance companies will need to find a way to determine the value and potential risk. As with tangible art, a NFT for a digital asset can change value over time.
NFT mania value will only exist if the housing mechanism remains stable. What happens if the digital vault gets compromised, disappears or goes out of business? Everyone is well familiar when Gerald Cotton, the 30-year-old founder of a Canadian cryptocurrency QuadrigaCX who died suddenly, and the whereabouts of some C $180m in cryptocurrency was no longer accessible. Subsequently, it was discovered that Mr. Cotton committed fraud and now, tens of thousands of QuadrigaCX users are wondering if they will ever see their funds again.
Is a NFT a good investment?
Mark Ting does not think a NFT is a good investment and only the very wealthy should use them as a means of wealth storage. But he also thinks NFT’s are around to stay, the use is evolving and the NFT allows artists to have control of their art. It eliminates the need for the middle man. The artist is in complete control of what they want to release. This could be a big disruptor – specifically in the music industry. According to Rolling Stone Magazine, The Kings of Leon were one of the first bands to release an album as a NFT. The beauty of this is the band has created value adds such as access to limited edition to vinyl and front row concert seats (when we can go to concerts). NFT mania, can help fuel fan mania! Many fans will move to support artists and start to jump on the opportunity for bragging rights from their favourite artists. This is a good thing, not?
Additional NFT Mania Resources
Foundation Wealth: How do non fungible tokens work
Rhizome:Â Another new world
The Atlantic: NFT’S weren’t supposed to end like this
CBC: Crypto exchange Quadriga was a fraud and founder was running Ponzi scheme, OSC report finds
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