The Financial Markets Authority (FMA) says it’s a case of “buyer beware” when it comes to purchasing non-fungible tokens (NFTs).
NFTs are virtual assets which use blockchain technology, allowing for the ownership and tradability of anything digital – be it videos, memes or online artworks.
These virtual assets are “minted” and established as unique files on a digital ledger (the blockchain) which provides an unfalsifiable record of ownership that can be traded.
NFTs have been gaining in popularity worldwide, with high value transactions frequently making headlines.
They have also captured the attention of local buyers, with an auction held by Webbs auction house that ended on 1 February said to be the first major auction of NFTs in New Zealand. The sale fetched more than $127,000 for two NFTs derived from photos of artist CF Goldie, which had been estimated to reach up to $8000 each.
Big corporate brands have also been moving into the asset class, with global airline Emirates announcing plans last week to roll out its own NFT project as another way to connect with customers.
Financial Market Authority financial technology specialist lead Binu Paul said these assets had been attracting a lot of hype, especially online, and the regulator wanted to make sure people knew what they were getting into.
“It comes down largely to what people are trying to achieve by putting money into an NFT. If you’re a hobbyist or you are buying an NFT as a collectible – that’s fair enough, you are pretty much getting bragging rights to a particular NFT.
“But if your expectation is that you are going to get some kind of financial return then you have to ask yourself, what’s going to drive the price of that NFT above what I paid for it?
“If my only answer is: ‘Someone else is going to pay me more than what I paid for it’, then I am not really making an investment choice, I am literally speculating that price is going to go up in the future.”
Paul said the biggest risk with NFTs was that their price was driven by sentiment rather than economic factors.
They were also largely unregulated, leaving no recourse for people if things went wrong, he said.
The FMA has received complaints about scams that have taken advantage of the excitement surrounding NFTs.
In some cases people had handed their money over to an entity that was releasing a new NFT, only for the seller to disappear, along with the funds, and leaving the buyer with nothing, he said.
“That risk is not limited just to NFTs or crypto tokens, it applies to any items.
“Scammers are just using whatever topic is the hype of the season and they are using it as a form of clickbait to draw people in to the scam.”
However, the FMA was not discouraging people from buying NFTs.
Paul said if people wanted to get into these assets and were aware of their risk, it was probably best to do it through a local platform which was regulated by the FMA.
For those buying NFTs from overseas, Paul said they would be wise to purchase them through a well-known platform with an established track record.
“The fact is anyone with a device and access to the internet can deal with anonymous and faceless entities on the web, so I think it comes down to a case of buyer beware.”