The digital economy is steadily entering the financial market’s spotlight with all-time high levels in the cryptocurrency market, the SEC’s approval of the first Bitcoin Exchanged-Traded-Fund and the evolving impact of blockchain’s role in decentralized finance. However, considering the market inflationary pressure and the economic impact of the coronavirus pandemic, many investors consider NFTs as an alternative way to obtain diversification benefits and hedge their portfolios against the systematic risk of the current macroeconomic environment.
What is an NFT?
Non-fungible tokens or NFTs are digital assets with unique identification codes that provide proof of ownership over virtual files such as photos (digital art), videos (sports moments) or audios, among others.
Similar to cryptocurrencies, NFTs are based on blockchain technology, which offers users a simplified transaction procedure to access these assets by removing intermediary institutions and directly connecting artists with their audience. However, physical and cryptocurrencies are fungible (replaceable), meaning that they can always be traded or exchanged one for the other making them a medium for commercial transactions. In comparison, the NFTs’ market represents unique and irreplaceable tokens, making it impossible for one non-fungible asset to be equal to another.
The current market for NFTs is mainly based around collectables, such as digital artwork, but with the technology advancements, NFTs are extending their presents in other industries. For example, the NBA’s Top Shot product is a market where investors can trade and collect famous NBA moments in a digitalised card form. This blockchain-based system generated more than $230 million in sales and recorded a single transaction value of $200,000.
Do NFTs qualify as EIS?
No, NFTs do not qualify for the EIS scheme, as they are personal property and not underlying shares in a company. However, UK start-up companies that create, develop or facilitate the transactions of the NFTs and their underlying technologies may be eligible for the EIS and SEIS.
In this way, the EIS’ shares in a company that assist the developments in the NFTs ecosystem represent a diversification method for market participants, accessing this new market without owning tokens and getting exposure to the high risk associated with these products.