Challenges

While Non-Fungible Tokens (NFTs) offer a low-cost means to realize value from creative works, their distributed and anonymous nature also creates potential issues such as abuse and crimes, posing significant risks for consumers, investors, and businesses.

1. Intellectual Property Issues

A leading concern with NFTs is the difficulty in evaluating and determining individual ownership rights to an NFT before purchase. There have been cases of pre-existing digital art being stolen, minted as an NFT, and sold without the permission of the actual owner. This raises challenges in establishing authenticity and ownership of digital assets, as well as disputes regarding the actual ownership of the asset across multiple NFT platforms.

2. Security and Privacy Issues

NFT platforms have become targets for hackers aiming to steal digital assets or obtain sensitive information from users. Attacks on NFT markets and systems have been reported, and there are vulnerabilities in the storage of off-chain data and potential privacy leaks involving user identity. Ensuring the security and privacy of NFT transactions and systems is a crucial area for research.

3. Scam and Fraud

The rise of NFTs has also increased scams and fraudulent activities. Sellers may provide misleading or false information, leading consumers to purchase fraudulent or plagiarized digital assets. Due to the irreversible nature of blockchain-based transactions, victims of fraud may have little recourse to recover their losses.

4. Concerns about NFTs Representing Physical Assets

NFTs representing physical assets such as real estate or precious metals raise legal risks and implications. The implementation and legal frameworks for coupling physical assets and their digital representation require further research. Questions arise regarding ownership, legal implications, and determining market value for such NFTs.

5. Pricing Stability/Volatility Risks

NFTs are traded globally and exhibit high volatility, posing stability risks for the financial market. Understanding the factors contributing to the relatively high volatility of NFT pricing, such as market manipulation, fraud, sentiments, and uncertainty, is essential to address risks for consumers, investors, and businesses.

6. Taxes or Money Laundering Concerns

NFTs could potentially be used to evade taxes or launder money. The prevalence and impact of these issues in the NFT market require further research, as exchanging, trading, selling, or buying NFTs involves legal and tax liabilities.

7. NFT Data Inaccessibility

Some NFT systems rely on external file storage systems to store data related to digital assets. Concerns arise regarding the longevity of referenced URLs and the potential consequences if NFT marketplaces or underlying systems cease to operate.

8. NFT Interoperability (Cross-Chain) Issue

Enabling cross-chain communication and interoperability of different NFT systems is crucial for facilitating the exchange and trade of NFTs. However, achieving interoperability presents technological and governance challenges that require further research and development.

9. User Complaints with NFT Transactions

Some users have expressed dissatisfaction with NFT transactions, citing slow performance, including slow confirmation of NFT exchanges, high transaction fees (gas fees), and related mental stress and anxiety. Addressing these concerns and improving user experience is an area of research.

10. Environmental Impact Issues

The widespread adoption of NFTs raises concerns about their environmental impact and sustainability. The energy consumption associated with NFT-related transactions, including smart contract processing, requires attention to mitigate the environmental footprint.

Summary

While NFTs have gained significant attention, they remain uncharted territory. It is uncertain whether they will be a bubble or achieve widespread acceptance. To ensure sustainable and responsible development, regulation of the NFT marketplace by national governments and international organizations is crucial to combat misconduct and fraud. Education and outreach efforts are needed to increase public awareness of the risks associated with NFTs. Technology researchers must address cybersecurity and privacy risks related to blockchain and NFTs, ensuring these technologies bring more benefits than harm. Furthermore, IT/IS researchers can contribute to studying the societal implications, acceptance, adoption, value-creation, governance, and the development of a healthy and sustainable blockchain-based NFT ecosystem.

This Information Matters article is a translation of “He, Y., Li, W., Liu, L., & He, W. (2023). NFTs–A Game Changer or a Bubble in the Digital Market?. Journal of Global Information Technology Management, 26(1), 1-8.”