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NFTs and Cryptocurrency

By Bart Galvin

 

Digital assets such as Bitcoin and non-fungible tokens (NFTs) are transforming global capital markets and the art world, with market capitalization reaching $2 trillion and digital artworks packaged through NFTs regularly selling for millions of dollars. As these assets gain prominence in the marketplace, it is increasingly important to understand why these assets appeal to investors, how they represent value, and how they function under the hood.

 

NFTs and Digital Art

NFTs have exploded in popularity in the past year, with notable examples like CryptoPunks, which are collectible, algorithmically generated pixel artworks, as well as the works of Mike Winkelmann (known professionally as Beeple), who recently sold a piece of NFT art at a Christie’s auction for $69 million.

Bart Galvin

An NFT is a unique digital token representing an interest in something else, which could be a piece of art, a share of stock, a stream of royalties, or even, in the case of Unisocks, entitlement to a physical pair of socks. NFTs are ‘non-fungible’ because, unlike cryptocurrencies, they aren’t interchangeable — your NFT corresponds to the specific entitlement or right to the underlying thing.

The eye-popping price tags of many digital-art NFTs poses the question: what exactly are you buying when you purchase an NFT? In its most basic form, an NFT is simply verifiable proof that you are the purchaser of whatever the NFT represents. But the devil is in the details. The rights granted by an NFT are entirely up its creator, so some NFTs have strict terms and conditions that prohibit exhibitions or commercial use of the art, while others might grant you the copyright in the work.

 

Cryptocurrency and the Rise of Bitcoin

Bitcoin has been the most prominent cryptocurrency since its introduction in 2008, but many other cryptocurrencies exist, such as Ethereum, an important part of many ‘smart contracts,’ and Tether, which is pegged to the value of the U.S. dollar. Bitcoin accounts for about half of global cryptocurrency market capitalization.

At the end of March, the price of one Bitcoin was approximately $60,000. Unlike a cryptocurrency like Tether, the value of Bitcoin can fluctuate wildly. Indeed, it has increased tenfold in the past year, dwarfing its previous peak of $17,000 in December 2017. The value of Bitcoin is determined almost entirely by what purchasers believe it is worth, and investors speculate on that value, driving price fluctuations. These price fluctuations can have a snowball effect, whereby widespread speculation in Bitcoin that drives the price upward can lead investors to believe Bitcoin will be adopted more widely, leading to further speculation that its value will increase.

 

Why Do People Care?

Cryptocurrencies and NFTs represent a fundamentally new way of transacting. The reason is in the revolutionary qualities of their underlying technology: the ‘blockchain.’ A blockchain can be thought of as a tamper-resistant digital store of data, constructed using computer cryptography and distributed among participants over the internet. Here’s what makes the blockchain special, and why people are jumping on board.

First, the blockchain allows parties to transact without intermediaries. No banks or clearinghouses are needed to execute or verify transactions since the underlying technology ensures that transfers are reliable, practically irreversible, and publicly verifiable.

“In the world of blockchain technology, Bitcoin and digital-art NFTs are the tip of the iceberg. There are already countless blockchain-based technologies, and new ones are invented every day.”

Second, blockchain transactions are not limited by jurisdictional or national boundaries. The transaction’s terms are dictated by computer code, not local law. Perhaps more importantly, the code is self-enforcing, which limits opportunistic behavior. Parties do not need to appeal to the judicial system to enforce an agreement because it happens automatically.

Third, blockchains are not subject to a central point of control or a central point of failure. Blockchains work by interconnecting users running the same software over a peer-to-peer network on the internet. No one party controls the blockchain. All new transactions are shared over the network, and they become final only when a majority of users determines that the transaction is valid. If a user doesn’t own the digital asset they’re trying to transfer, or tries to transfer it twice, the transaction will be rejected.

Fourth, blockchain transactions are publicly visible and verifiable. A blockchain serves as a ledger of transactions and all the transactions that came before them, allowing anyone to view and verify the trail of activity occurring over the network.

Fifth, blockchains allow parties to transact pseudonymously (not quite anonymously), without needing to trust or even know each other. All you need to know is your counterparty’s digital address or ‘wallet.’ And because transactions are practically irreversible and verified by the consensus of the network, the opportunities for fraud are heavily curtailed.

 

The Future of Blockchain Technologies

In the world of blockchain technology, Bitcoin and digital-art NFTs are the tip of the iceberg. There are already countless blockchain-based technologies, and new ones are invented every day. The blockchain is highly flexible and has tremendous untapped potential for consumer transactions, private contracts, corporate structuring, securities and derivatives, and even public administration. If your business is not using the blockchain yet, it’s only a matter of time.

 

Bart Galvin is an attorney at Bulkley Richardson, where he is a member of the Blockchain and Cryptocurrency practice group; (413) 272-6200.

Banking and Financial Services

More Than Just Bitcoin

By Matthew Ogrodowicz, MSA

 

‘Blockchain’ is a term used to broadly describe the cryptographic technology that underpins several applications, the most widely known of which is Bitcoin and other similar cryptocurrencies.

Matthew Ogrodowicz

Even though it is the largest current application, a survey conducted on behalf of the American Institute of Certified Public Accountants (AICPA) in 2018 found that 48% of American adults were not familiar with Bitcoin, Ethereum, or Litecoin, three cryptocurrencies among those with the largest market capitalizations. The largest of these, Bitcoin, currently sits at a market capitalization of approximately $355 billion. If half of all adults are unfamiliar with this largest application, it is safe to assume that even fewer know about other ways the technology could be used — including for some of the region’s major industries.

Three of these largest industries in Western Mass. are healthcare, manufacturing, and higher education. In each of these industries, the secure and verifiable information network created by blockchain can provide efficiencies. This network, essentially a public ledger, consists of a series of transactions (blocks), which is distributed and replicated across a network of computers referred to as nodes. These nodes each maintain a copy of the ledger, which can only be added to by the solving of a cryptographic puzzle that is verified by other nodes in the network.

The information on the ledger is maintained by another aspect of cryptography, which is that the same data encrypted in the same way produces the same result, so if data earlier in the chain is manipulated, it will be rejected by the other nodes even though the data itself is encrypted. Thus, an immutable chain of verifiable, secure information is created, capable of supporting applications in the aforementioned fields.

Each of these industries can benefit from the blockchain’s ability to host ‘smart contracts.’ A smart contract is a digital protocol intended to facilitate, verify, or enforce the performance of a transaction. The simplest analogue is that of a vending machine — once payment is made, an item is delivered. Smart contracts would exist on the blockchain and would be triggered by a predefined condition or action agreed upon by the parties beforehand. This allows the parties to transact directly without the need for intermediaries, providing time and cost savings as well as automation and accuracy.

Combined with the security and immutability noted earlier, smart contracts should prove to be a valuable tool, though there is still work to be done in codifying and establishing legal frameworks around smart contracts. Other applications of blockchain technology are more specifically applicable to individual fields.

In the field of healthcare, blockchain’s ability to process, validate, and sanction access to data could lead to a centralized repository of electronic health records and allow patients to permit and/or revoke read-and-write privileges to certain doctors or facilities as they deem necessary. This would allow patients more control over who has access to their personal health records while providing for quick transfers and reductions in administrative delay.

In the field of manufacturing, blockchain can provide more supply-chain efficiency and transparency by codifying and tracking the routes and intermediate steps, including carriers and time of arrival and departure, without allowing for unauthorized modification of this information. In a similar fashion, blockchain can provide manufacturers assurance that the goods they have received are exactly those they have ordered and that they are without defect by allowing for tracking of individual parts or other raw materials.

Finally, in the field of higher education, blockchain could be used to improve record keeping of degrees and certifications in a manner similar to that of electronic medical records. Beyond that, intellectual property such as research, scholarly publications, media works, and presentations could be protected by the blockchain by allowing for ease of sharing them while preserving the ability to control how they are used.

And, of course, blockchain development will be a skill high in demand that will benefit from the creation of interdisciplinary programs at colleges and universities that help students understand the development of blockchain networks as well the areas of business, technology, law, and commerce that are impacted by it.

For these reasons and many more, businesses should feel an urgency to increase their knowledge of blockchain’s impact on their industries while exploring the potential dividends that could be reaped by a foray into an emerging technology.

 

Matthew Ogrodowicz, MSA is a senior associate at the Holyoke-based accounting firm Meyers Brothers Kalicka, P.C.

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