NFTs in business
NFTs in business—non-fungible tokens—are the frequent talk of the tech world these days. They can take a variety of forms and can serve many purposes. Sure, they’re collectibles, memes, and digital artifacts in gaming. But their potential business application scan certainly extend further than that. The fact is companies are currently only beginning to scratch the surface of the potential use cases for this technology.
In the realm of business, NFTs hold the potential to reshape the landscape of contracting, offering a glimpse into the future. Parties can now record their rights and obligations on blockchains through these non-fungible tokens. Moreover, NFTs have the power to revolutionize our understanding of ownership, acting as a groundbreaking solution for digital rights management. This innovation allows for ownership verification to become more accessible and programmable, enabling the inclusion of new and efficient forms of commercial arrangements that are both faster and more secure. NFTs in business offer a promising avenue for transformative advancements in the way we conduct transactions and manage assets.
NFTs, and the distributed blockchain networks behind them, represent
a breakthrough in digital rights management as well as digital
representations of assets. Here are just some of the other possible
breakthroughs NFTs could drive:
- Building a bridge between the digital and physical worlds to authenticate and provide evidence of a transfer
- Democratizing ownership of digital collectibles—for example, the creation of
new ways to monetize art, photographs, music, intellectual property (IP), and more
- Selling digital items—homes, high-end sneakers, streetwear, and more—for use with avatars in gaming and online worlds
- Developing “super wallets” that allow an NFT owner to keep a verified record of all licenses and rights, along with product warranties, event tickets, access passes for secure locations for work or leisure, and more
- Securing the ticketing industry against fraud, providing a percentage of secondary sales revenue to performers or venues, and creating
- Extending and monetizing brands in new ways for both existing and new customer bases
- Offering utility services—for instance, serving as a VIP card granting access to a secret concert, membership in an exclusive community, or special discounts on products
This point-of-view paper provides a broad window into the different features of NFTs and their many potential uses. In so doing, it sees NFTs as much more than a passing social craze. Instead, it digs deeper to understand how companies might capitalize on the features of NFTs to enhance current strategies and processes and what regulatory and risk, as well as accounting and tax, issues they should pay close attention to, and how they might explore new territory and uncover new growth opportunities.
NFTs in Business: Preliminary high-level considerations
Are NFTs right for your business?
The use of NFTs should first and foremost align with your overall business strategy. So, it’s best to begin with the problem you’re trying to solve or the opportunity you’re trying to seize. Think of NFTs as a problem-solving tool, whether it’s for document storage and validation, IP distribution, digital identity, access tokens, issuing collectibles, or another use case. In other words, start with the business objective and then look for those aspects of the technology that help the company achieve that goal. All too often, companies adopt NFTs as a cool tool and then start to explore which business problems they may solve. Instead, begin with the end in mind to help avoid unnecessary difficulties and risks in implementation. And remember that the supporting standards and technology of NFTs are highly
malleable, so design the technology to fit your needs. Don’t adapt your needs to the technology.
Then test the use case against its alignment with the value you intend the NFTs to drive. Put simply: Are NFTs the right fit technologically to drive the desired outcome? Understanding the technology and how it drives value can allow you to find or develop those use cases that yield superior results.
Once a use case is clearly identified, consider how NFTs may be one of several available solutions. Ask yourself and your team, is there a uniqueness to the “what” we are creating Is there a need for trust in the ownership and authenticity of the thing? Is there a need to enforce rules autonomously through the digital asset’s life cycle (for instance, royalties and contract clause execution)?
After you have established that these are, in fact, the real requirements, then explore additional considerations. Is there a need for decentralized control of the asset versus sing a centralized corporate database to store and manage the asset(s)? How will the use of NFTs change your processes, and how will these differences affect the way you engage with customers and launch marketing campaigns? Do you need new monetization schemes? What are the tax and accounting implications? What are the regulatory implications, and do you need a license?
Risk and strategy
As always, from the outset, risk should be a priority consideration. It’s tempting to seek value in a range of NFT applications and to boost the NFTs’ value through creative means. But the promises of utility can also come with regulatory risk. For example, fractionalizing NFTs, making them more broadly available, will likely increase regulatory risk. Part of the problem in assessing risk lies with the novelty
of this space. The regulatory environment is only beginning to evolve and, in the near term, will surely lag use cases. So, without explicit guidance, issuers should craft a set of compliance routines for their NFT practices that can be clearly
defended if the need arises.
Beyond risk and the other considerations enumerated above, developing a strategy is key. The technology issues are probably the easiest part of incorporating NFTs into your strategy. That’s why outlining clear goals and objectives for the adoption of NFTs can be essential. Tying those goals and objectives to the larger business strategy with clear milestones and measurable metrics can enable your team to monitor the initiative, assess progress, and pivot if needed. All that must
happen in tandem with understanding a dynamic regulatory landscape, planning so you can minimize accounting risk, developing implementation strategies that align with existing tax laws, creating the communication and stakeholder management plans, refining customer engagement strategies, and more. And all that must happen before any minting of NFTs. So spend the time necessary to create a detailed and clearly defined road map with appropriate milestones and metrics to measure success along the journey.
Digging deeper on NFTs in Business
What is an NFT, exactly?
Before proceeding any further, it’s worth delving into more detail about the exact nature of NFTs. An NFT might be described as a capsule containing creator-generated content. It is locked on a blockchain and cannot be replicated; only the holder can authorize its transfer. In short, non-fungible tokens are a bundle of rights stored within a unique digital asset. They can take the form of pictures, videos, music, contracts, data, whatever—each with individual signatures that make them unique. Unlike many digital items that can be infinitely reproduced, each NFT is unique and its authenticity and ownership can only be verified through the blockchain on which it resides.
An NFT is a smart contract—a small program that is signed and written to the blockchain in the same way a transaction is written to the blockchain. This is important since it is signed (verifiable) and immutable (auditable). It has a data structure and logic that execute based on events, and everyone can see the code and understand the expected outcomes from the smart contract execution. (Note: Standards have been developed to create and issue smart contracts onto the chain.)
Each smart contract is unique and capable of storing information and reacting to events. For example, it’s possible to mint a NewFrontierPresents_3D_Assets token, sell that token to someone else, trace its ownership lineage (if desired), and collect royalties on the secondary market (again, if desired)
When designing an NFT, it’s important to consider:
- What functionality you want to embed.
- What the NFT will represent as an asset, as this will affect your monetization scheme, its impact on your financials, and any potential tax implications.
- How you outline the objective for the NFT when developing a monetization scheme. A detailed outline will help you define the possible deployment scenarios and
considerations, including initial issuance or sale, secondary market considerations, and ongoing customer engagement and interaction.
Issuers can use multiple blockchains to create and launch NFTs. Understanding the blockchain capabilities—including baseline capability, scale, interoperability, security, and fees, as well as the product road map—is important when selecting the blockchain or the marketplace built upon a specific blockchain. If using a marketplace from which to launch your NFTs, be sure you know the underlying fee structure, interoperability with other marketplaces, and scalability. It’s also important to give full attention to how NFT design decisions may impact tax and accounting questions—and to loop those corporate functions into the design process from the beginning.
An NFT is a smart contract—a small programDeloittle
that is signed and written to the blockchain in the
same way a transaction is written to the blockchain.
Who owns the rights to an NFT?
Since an NFT, at its core, is a bundle of rights, it is critical that you confirm who is managing those rights appropriately before you issue the NFT.
An issuer has many options for how to embed rights. The decision often depends on whether an NFT is set up to transfer ownership or to grant access to a subset of rights. With embedded rights, it is crucial to take stock of regulatory considerations, including securities laws, tax, and accounting, and to determine clearly what rights are being transferred or granted. Above all, make sure that you own the rights to the underlying media in the first place.
Even for digital collectibles, the rights vary for holders. They range from the basic right to view and display the NFT to the commercial rights of the underlying IP being transferred to the NFT holder. The high demand and occasional high prices for NFTs may imply the granting of owner rights to the underlying artwork or IP—after all, anyone can “own” a copy of an ordinary JPEG. But copyright ownership may not always be a part of the deal.
NFTs in business may enable a revenue share or represent partial or fractionalized interest in a digital or physical asset. All of which may trigger securities laws and/or be subject to regulation. The total effect is clear: You and your team should constantly assess increasingly complex and frequent questions about how to leverage and handle such digital assets. A case in point is licensing. With issuers still exploring the full potential of NFTs and since their use cases continue to expand, there’s no standardized licensing language for digital assets. Rights can be broad or limited, with pros and cons for each scenario.
Concluding thoughts on NFTs in Business
The full potential of NFTs still remains to be explored. Their popular uses in the gaming and sports environments represent only a fraction of the many possibilities offered by NFTs. But the more companies develop and test new use cases, the clearer it seems that NFTs in their many forms—current and future—may radically change the way we engage and record the transfer of digital rights and obligations, a development that could redefine the very nature and boundaries of modern commerce. For companies with an appetite for change, NFTs already present an opportunity to engage with a tech trend that can help them create fresh revenue streams and reach new customers and stakeholders. For the immediate future, corporate leaders should give some consideration to the kind of goals and strategies NFTs can help them create, whether it’s extending a brand, generating revenue, bolstering customer loyalty, rolling out a marketing campaign, or elevating digitized commercial activities.