If an NFT buyer does not garner exclusive ownership when buying an NFT then why even invest in an NFT in the first place? How does one even become an NFT creator or buyer? These questions are adding to the ambiguity surrounding the world of NFTs. As our traditional industries have already begun to partake in NFT sales, we are faced with evaluating the viability of fractionalized NFTs as a potential in bringing liquidity to the market for NFTs.
Currently, the NFT market is not very liquid. First, NFT sales seem to run in a marginalized bubble that fails to represent the real-world market since only those with knowledge about the risks and regulations surrounding NFTs are likely to participate, and due to the high price of such NFTs. Additionally, in many cases buyers trade NFTs for swaps as opposed to cash, which further dampens the incentive to invest. The primary incentive for investing in NFTs is for the unique quality each work offers. Since many NFTs are uncommon, and artists typically issue a small number of limited edition NFTs for sale, consumers are more inclined to pay more for limited edition items.
Fractionalized NFTs seemingly alleviate some of these concerns. Specifically, with a fractionalized NFT, a token is broken down into sub NFTs, each of which represents one single NFT. As a result, each piece becomes cheaper and the barrier to entry is inherently lowered. Upon fractionalizing NFTs, however, NFTs begin to look like securities. Since there is no universal definition for the term “security,” and because it is defined broadly, fractionalized NFTs may very well be classified as securities as per the SEC regulations. In fractionalizing an NFT, one subsequently borrows or lends against an asset and generates interest. In turn, a financial product is created, one that must then be registered as securities and subject to the same real-world rules. Unlike most NFTs currently in existence, a security token offers a direct distribution of revenue and the expectation of appreciation arising from the efforts of a third party. Securities must be owned by a specific person to be traded, they must be traded on a specific special licensing platform, and they must be sold in accordance with competent authorities. Thus, a fact-specific analysis that hinges on individual characteristics is necessary to determine whether an NFT is a security.
Assuming a fractionalized NFT bears more resemblance to a security token than not, failure to comply with the regulatory framework of security tokens has serious consequences for NFT issuers, as they now run the risk of selling unregistered securities. Moreover, promoters may be considered unregistered underwriters and thus subject to sanctions by the SEC. As a result, it is essential to understand that while NFTs hold special value, they carry the potential of entering the “security token universe” through fractionalization. Indeed, fractionalized NFTs may not be as secure as one might assume.
Works Cited
https://crypto.writer.io/p/why-do-people-buy-nfts?s=r
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