What are NFTs and what commercial opportunities do they offer?

Non-fungible tokens (NFT) have been making headlines as a new form of digital asset that can be traded and collected.

While frequently connected to celebrities and artists, some businesses are unlocking their potential as a new route to customer engagement.

Collins Dictionary even labelled NFT as their Word of the Year 2021.

NFTs are made possible through technologies such as blockchain and the internet.

Initially appealing to collectors of digital items – such as the $2.9 million paid for the world's first-ever tweet on Twitter – brands such as McDonald’s are getting in on the NFT act.

The fast food brand used NFT technology as the basis for customer rewards as part of its marketing efforts to celebrate 40 years of the McRib.

Even the Royal Mint is working to create an NFT as part of an effort to present the UK as a crypto-friendly business environment.

But what do you need to know about NFTs, and can they offer an additional revenue stream for your business?

What are NFTs?

NFT stands for non-fungible token.

This is a digital asset that is part of a blockchain with a 'token' attached.

A 'token' is the digital asset's ownership record, which is stored on a blockchain.

A blockchain is a technology that acts as a kind of digital ledger.

It records ownership of each unique digital asset in an unchallengeable and secure way.

How do they work?

Central to NFTs is the ability to label a specific instance of a digital asset as genuinely unique.

Usually, digital items such as photos, videos, animations, and documents can be endlessly duplicated.

An NFT determines that one of those instances is the genuine original.

Even if many copies are made of the asset, an NFT determines that one particular digital asset is the original version.

NFTs can be traded similarly to physical objects, with ownership passing between people and businesses.

NFTs are be used for a variety of digital assets, such as:

• digital works of art such as photos, images, and digital paintings
• virtual real estate and property within virtual spaces
• collectable items, such as virtual models
• in-application items, such as avatar clothing in a video game.

However, they are becoming attractive to businesses looking to assign digital assets to others, such as customers, that have value in a similar way to giving physical gifts to customers.

Some NFTs are sought as collectables.

As they are original items, they have a rarity that can increase their value – similar to how a painting may increase in value.

Buyers also have exclusive ownership rights, as an NFT can only have one owner.

How do you make, buy and sell NFTs?

NFTs can be created (or 'minted') with digital assets representing tangible or intangible items, including art, animation, videos, music, and even Tweets.

Once made, creators can open a shop on several online NFT marketplaces to sell their work, the most popular NFT marketplaces including Rarible and OpenSea.io.

Some NFTs can sell for hefty amounts of money.

An NFT created by digital artist Beeple was sold by Christie's for $69 million in 2021.

To buy NFTs, customers need a digital wallet to store cryptocurrencies and NFTs.

You can then purchase NFTs from several online NFT shops and marketplaces.

The pros and cons of NFTs

There are both pros and cons to non-fungible tokens.

Pros:

• allows creators to sell their work more easily
• reduces piracy as there is one 'true' version of a digital asset
• makes the divided ownership of digital assets easier
• anyone can invest in NFTs
• blockchain technology is highly secure
• can be more environmentally friendly as no physical assets are created.

Cons:

• scammers can exploit the lack of consumer knowledge about NFTs
• pricing and trading can be wide-ranging as the market has limited pricing experience
• NFTs are not regulated, meaning buyers could lose their capital
• unlike the NFT itself, the blockchain technology that currently supports them requires vast amounts of computer energy, which can negatively impact the environment.

NFT commercial opportunities for business

Since an NFT can be 'minted' from any digital asset, the opportunities for businesses to jump on board are endless.

Companies are exploring how creating unique digital assets can be an income driver or form part of marketing activities.

Types of NFT opportunities could include:

Creating unique virtual objects that can be bought and sold

Nike launched Nike CryptoKicks in 2022, which enabled digital designs as part of the footwear in exchange for redeeming an NFT that was given, for free, to select customers.

Collectables and rewards

NFTs can be used as the digital equivalent of collectable objects, such as toys or models.

Restaurant chains, sports brands, and entertainment businesses can create virtual NFT models of items buyers can purchase, collect and resell later at a hopefully increased value.

Authentication

While almost exclusively digital, NFTs can be assigned to any object that requires authentication.

This can be documentation, such as identification documents or certification, through to attaching NFTs to records within the supply chain to prove ownership of goods throughout the shipping and delivery process.

Limited edition items

Companies can create unique works, such as artwork, photography, and ebooks that can be assigned a limited number of NFTs.

This means digital objects can be sold as limited editions, or even single, unique editions, and may be able to command a high price depending on demand and rarity.

Raising capital

Some businesses may be able to exchange previously hard-to-value digital assets as NFTs to raise finance.

Intellectual property – from inventions to music catalogues – can be digitised and offered to investors as NFTs in exchange for real-world capital.

Brand building

Offering customers the chance to download and own a unique digital item, such as virtual toys and goods, can be a way to increase brand engagement.

While NFTs are an answer to proving ownership of primarily digital assets, it's worth seeking independent, professional financial advice before investing in cryptocurrency, blockchain, and NFT-related technologies.

The Financial Conduct Authority does not regulate NFTs, and that means your business could lose any money it invests in NFTs, both in their creation and through purchasing and ownership.