Wang Yongli, former vice president of Bank of China: We must treat NFTs with caution

This article is sourced from 8btc, authored by Wang Yongli.

Entering 2021, NFT (Non-Fungible Token) rapidly gained popularity overseas, with trading prices soaring. For instance, a pair of socks was sold for $150,000 on the Uniswap trading platform; the first five English words tweeted by Twitter's founder were auctioned for $2.5 million.

On March 11, Christie's auctioned the NFT digital artwork "Everydays: The First 5000 Days" for over $69.34 million, including taxes and fees, creating a massive impact worldwide and pushing NFTs to a peak. This also became a significant driving factor for the substantial price increases of cryptocurrencies like Bitcoin and Ethereum during the same period.

Many believe that with technological advancements, everything can become an NFT, and NFTs will become an important application scenario for blockchain, driving the development of the virtual world "Metaverse" (which may be more appropriately translated as "Digital Universe"), allowing the virtual world to truly come alive and coexist with the real world. This has generated a lot of interest in NFTs, attracting international celebrities, internet influencers, well-known trading platforms, and research institutions.

The NFT craze quickly spread to China, heavily promoted by self-media, igniting high enthusiasm among creators, trading platforms, investors, and many others. Some trading platforms claimed they would create a Chinese-style NFT application market, aiming to build a trillion-level consumer blockchain ecosystem.

Alibaba's Taobao launched NFT auctions for digital artworks on May 20 and June 20, but the impact was minimal and did not receive widespread attention.

On June 23, Alipay and the Dunhuang Academy jointly launched two NFT digital paintings (Wu Liu Qi payment code skin NFT) on Ant Blockchain, with each NFT limited to 8,000 pieces, priced at "10 Alipay points + 9.9 yuan." They were quickly sold out and began trading on some platforms, with prices on the "Xianyu" second-hand trading platform reaching as high as 1.5 million yuan each.

On June 24, the cryptocurrency trading platform "Binance" announced the launch of a dedicated Binance NFT trading platform, starting the auction of Andy Warhol's "Three Self-Portraits" NFT at 6 PM Hong Kong time. Within less than five minutes of the auction starting, the bidding price reached $2.52 million.

This has sparked a new wave of creation and speculation in digital goods in China, even as the country strictly controls the mining and trading speculation of cryptocurrencies like Bitcoin, with NFTs emerging as a significant force. This requires extreme caution; one must not blindly follow the trend and must strengthen regulation.

Must Accurately Grasp the Essence of NFT

Some translate NFT as "Non-Fungible Token," which is actually inappropriate. As non-fungible and indivisible items, NFTs cannot become general equivalents or unified accounting units (NFTs cannot be aggregated), so they can never become currency or tokens. In this regard, NFTs are fundamentally different from network-native digital cryptocurrencies like Bitcoin (which are essentially "digital assets"). NFTs cannot be traded or realized without cryptocurrency or fiat currency.

In fact, NFTs are a unique digital (coded) encrypted proof of rights derived from blockchain technology, containing several rules and information, used to indicate the ownership of a digital item. Therefore, translating NFT as "Non-Fungible Warrant" is more appropriate.

Different types of NFTs contain different rules and information:

Digital art NFTs include creator information, issuance quantity, rights rules (some NFTs only sell ownership without copyright, while others sell both ownership and copyright, and the specific copyright handling may vary, which involves the rights of original creators and investors and needs to be clearly identified), storage address (on a designated blockchain platform), etc.

Game item NFTs, based on the content of digital art NFTs, also include attributes, levels, rarity, and other information.

Must Clarify the Basis for NFT Pricing

A pair of socks sold for $150,000, the first five English words on Twitter sold for $2.5 million, and a piece that compiled 5,000 days of daily digital artworks sold for over $69 million. What factors led to these prices?!

Undoubtedly, looking solely at the basic items of these NFTs (a pair of socks, five English words, a compilation of previously published digital artworks), it is impossible for them to have such high prices!

So, can these items, combined with NFTs as encrypted proof of rights, see their prices increase dozens, hundreds, thousands, or even infinitely?

Clearly, a pair of socks, regardless of the rights encryption technology used, is unlikely to see its price skyrocket; the person who tweeted the first five English words is well-known, and whether a rights proof like NFT is needed is questionable; a new piece that compiles 5,000 daily digital artworks, combined with an NFT proof of rights (which does not imply that all 5,000 works have been protected by rights proof), does not have a reasonable basis for such a dramatic price increase.

Thus, the only reasonable explanation for these high prices is the power of belief and the result of speculation.

Some say that many people are eager to invest in NFTs, one important reason being to showcase their leading position in the digital world and seize the potential profits that may significantly appreciate after the NFT craze. They may go to great lengths to exaggerate the value of NFTs and even engage in mutual speculation to inflate NFT prices, strongly exhibiting "pyramid scheme" characteristics, with significant investment risks.

In fact, since April, the enthusiasm for NFTs overseas has significantly weakened, with trading volumes drastically reduced, and many have recognized the price bubble and compliance risks associated with them. Among them, Coinbase's founder Fred Ehrsam stated: "90% of NFTs created may lose value in the next 3 to 5 years, becoming nearly worthless. This is similar to the situation of early internet companies in the late 1990s."

Strengthening Understanding and Regulation of NFTs

In China, NFTs are a completely new concept. Although they serve as a type of encrypted proof of rights generated using blockchain technology, which can enhance asset rights protection and promote transaction circulation, encouraging beneficial exploration, the lack of clear official guidance and regulatory rules has led to serious exaggeration and misleading issues in many self-media reports.

As the country strictly controls the mining and trading speculation of cryptocurrencies like Bitcoin, the rapid rise and large-scale investment in NFTs, especially participation in overseas NFT investments, also pose significant risks. There is a need to strengthen accurate explanations of NFTs, enhance investor education for the public, reinforce the responsibilities of trading platforms, and strengthen the full-process regulation of NFT products and transactions, particularly imposing strict penalties for related false advertising, internal speculation, financial fraud, illegal asset transfers, and money laundering.