This piece was co-authored by Keith Oliver, head of international, and Caroline Timoney, commercial litigation and civil fraud legal researcher at Peters & Peters LLP.

‘NFT’ became the buzzword of 2021, and Collins Dictionary word of the year, after an 11,000% rise in its usage. In September 2021, around 225,000 NFTs were sold on average per week as the market took note of the sale of a collage by digital artist Beeple for £50.3 million at Christie’s in March 2021. Currently the most expensive NFT sold is Pak’s The Merge, which made $91.8 million on the NFT decentralised marketplace Nifty Gateway. Investors were keen to jump on this bandwagon, as were musicians, artists, corporations, and celebrities who all scrambled to find the next “big thing.” But has the market moved on?

NFTs, or non-fungible tokens, are registered on the blockchain to prove ownership of digital assets. They are one-of-a-kind with no physical or product equivalent, although recent NFTs have sometimes been accompanied with a related physical experience or product, for example using NFTs as access to a film or backstage passes to meet the band. Other definitions of an NFT have included digital works of art or creative content, unique sneakers in a limited-run fashion line, domain names and in-game content. Undoubtedly, there is potential for digital artists and merchandising opportunities to be explored. There are also extensive possibilities for fraud.

In January, New York art collector Todd Kramer lost NFTs valued at $2.2 million to hackers, while OpenSea, the world’s largest NFT market, lost NFTs valued at approximately $1.7 million to an alleged phishing scam. Other fraudulent practices have also been discovered including fake schemes, wash trading and the artificial inflation of the asset’s value in a ‘pump-and-dump scheme’. The NFT may also be sold to more than one buyer each of whom has paid a premium to be the sole owner of a valuable commodity.

Buying an NFT means buying a unique item, comparable to owning an original painting rather than a print, and this gains a stamp of authenticity through the record on the blockchain. Only copyright owners can offer an NFT of their work but attaching an NFT to a digital piece (the ‘minting’ of an NFT) is fairly straight-forward and there is no requirement in the transaction to prove ownership of copyright. Owners can verify their identity through a social media handle or hide behind pseudonyms while both legal and illicit transactions are difficult to trace, which does not provide much security for investors.

Recently there has been a noticeable downswing in the NFT market – perhaps in light of scams, or growing awareness of the lack of security. Google searches on the term ‘NFT’ have fallen about 80% since their peak in January 2022, while there are about five available NFTs on the market for every buyer – a definite imbalance between supply and demand. In this dwindling market, the announcement from the government that the Royal Mint will release an NFT this summer definitely surprised commentators, although it is timed to coincide with the establishment of stable coins in the UK. Perhaps the adoption of NFTs by the Treasury will stabilise the market and introduce a level of security and certainty for investors?

Investors would take heart from the recent High Court case of Lavinia Deborah Osbourne v (1) Persons Unknown (2) Ozone Networks Inc Trading as Opensea. Osbourne, the owner of two unique digital artworks from the Boss Beauties series, had been able to trace the stolen NFTs to two separate wallets and applied to the High Court to obtain a proprietary freezing injunction. The court agreed, confirming that NFTs (like cryptocurrencies) will be treated as property in English courts, giving comfort to NFT owners, and providing additional legal protections for investors if NFTs are misappropriated or otherwise compromised.

The UK is not the only country flirting with digital currencies. Bitcoin is now legal tender in the Lugano region of Switzerland, El Salvador and the Central African Republic. Digital currencies have also been issued by the Bahamas and the Eastern Caribbean Central Bank. Ironically, cryptocurrencies were first imagined as an alternative to the regulated financial system and have now been co-opted by state actors.

The tension between the ‘wild west’ of rival cryptocurrency exchanges and governments has led to increasing regulatory efforts. For example, in the US, the Secret Service has now launched a cryptocurrency awareness hub and the DOJ announced the first director of its National Cryptocurrency Enforcement Team. The investor is, however, the gambler here with limited recourse in the face of international swindlers.

Despite the High Court’s ruling, the NFT market remains unregulated and speculative. For many the bubble has burst and NFTs that sold initially for millions of dollars are failing to find a market. Is the Royal Mint too late to join the craze?

Possibly – although established artists report brisk sales, and fundraising initiatives for the Ukrainian government continue to attract buyers. The recent sale of 10,000 unique Bored Ape NFTs by Yuga Labs on the Ethereum blockchain was trolled by Elon Musk, but Yuga Labs’s subsequent sale of 55,000 plots of metaverse land raised $320 million. The buyer frenzy was such that it caused an Ethereum system outage. Some investors are obviously still keen on the concept but have become selective in the types of NFT they are willing to buy.

With the acceptance of crypto and NFTs as property in the UK courts, investors have a range of legal tools including proprietary injunctions, disclosure orders and worldwide freezing orders to follow their assets. However, these are often found to be lost to fraud, and frequently irretrievably lost. The Wall Street Journal is pessimistic on their demand, with an article published this month wondering if this was the end for NFTs, while Bloomberg reported in March that daily sales had dropped 83% since January, with the average selling price falling to under $2,000. Notwithstanding the dwindling market, the process of creating and selling NFTs remains a gift to fraudsters and dishonest wrongdoers.

With the current scrutiny of language in our diverse world, it is interesting to note that words with ordinary meaning to the layperson have become standard to the digital world such as ‘minting.’ Although ‘NFT’ has been a buzzword in the digital sphere, all these terms have now become common parlance with their new alternate meanings.

On this theme, one of the most recognised criminal law terms is ‘defendant of NFA’, NFA short for no fixed address. There is a perverse and bizarre resemblance to ‘NFT’ which cynics might think is less than coincidental. We will leave you to draw your own conclusions. However, if the UK government is determined to engage with NFTs, investors will need a serious caveat emptor mentality.