Design and operation of Digital Assets and Non-Fungible-Tokens.

Asset, value and ownership are constructs that are fundamental to any economic framework yet often taken for granted. The exponential growth of digital assets and tokenization mean this can no longer be the case. The paradigm shift that started with the advent of blockchain technology in 2009 is now in full force now and showing no signs of relenting. Unfortunately, the regulatory and legislative circles have adopted a reactive approach. They were caught off-guard during the cryptocurrency bull market of the 2017-18 and fell short of providing timely advice to investors and the public in general. It was only after initial coin offerings (ICOs) became the norm that the Canadian Securities Administrators (CSA), its US counterpart, the Securities and Exchange Commission (SEC), and other national bodies hastened to come up with guidelines on crypto securities. The question of distinguishing between security and utility tokens still elicits conflicting responses from financial experts. The SEC vs Ripple (XRP) lawsuit is a case in point. The situation is even more uncertain when it comes to the so called non-fungible tokens (NFTs). While fungible tokens such as bitcoins are indistinguishable from each other, each NFT represents a unique asset. The origins of this token class trace back to the introduction of coloured bitcoins in 2013-14 and, more famously, to Crypto Kitties’ launch on Ethereum in 2017. The technical specifications have been advanced significantly since by the blockchain and cryptocurrency community, but there has been a hush on regulations and standards development. Even the self-proclaimed digital asset trade organizations like the Chamber of Digital Commerce are yet to produce any NFT guidelines. In addition to disrupting our understanding of what constitutes an asset, NFTs are also redefining the notions of ownership and value. In March 2021, Beeple (Mike Winkelmann) sold an NFT of his artwork "Everydays - The First 5000 Days" for USD 69 million which is the third highest price paid to a living artist. The transaction involved neither the transfer of the physical artwork nor any copyrights. In fact, anyone can freely download the image associated with this NFT. An NFT of a video clip of LeBron James sold for more than USD 200,000 on NBA Top Shot despite not including any IP rights. The Hyperledger Global Forum 2021 features a new class of NFTs called utility NFTs that can implement complex business logic. However, collectors have spent billions on NFTs that can be described as digital equivalents of autographed posters. When recently petitioned to provide clarity on the regulatory status of NFTs, the SEC released a memo on April 12 stating “The issue of when an NFT is a security is unclear… NFTs have tremendous potential to revolutionize industries including, sports, music, and entertainment. However, NFTs do not function as traditional securities and do not fit clearly under the existing regulatory framework.” This poses significant potential risk for digital asset collectors, investors and marketplaces. Wyoming, one of the most progressive jurisdictions for digital assets, defines them as follows: “Digital asset means a representation of economic, proprietary or access rights that is stored in a computer readable format, and includes digital consumer assets, digital securities and virtual currency.” (SF0125 - Digital assets-existing law, Wyoming) The law goes on to define various kinds of digital assets and is one of the best attempts to-date to characterize them. However, despite being passed in July 2019, it already feels dated. This can be attributed to the pace of innovation in the blockchain space as well as not having sufficient technological input. Canada is even further behind on legal and regulatory fronts. It is, therefore, imperative that an adaptive standard is developed for digital assets, particularly NFTs, by involving key stakeholders from the legal, regulatory, technical and financial communities. The formation of a CIOSC technical committee provides an ideal vehicle to achieve this goal. With ongoing maintenance, such standards would provide clarity on the scope of these assets, ownership rights and when they infringe on to securities regime. The standards developed would form the basis of a national regulatory framework and potentially ISO certifications for digital assets, NFTs and their marketplaces.