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Abstract

An NFT is a unit of data stored on a digital ledger, called a blockchain, which can be sold and traded. The NFT can be associated with a particular digital or physical asset (such as a file or a physical object) and a license to use the asset for a specified purpose. An analysis of the business model and the legal aspects is propaedeutic to the market valuation. To the extent that NFTs can remove intermediaries, simplify and validate transactions, and create new markets, they can be used for several valuation purposes, according to the stakeholder involved (creator/artist; consumer, etc.).
17
Non-Fungible Tokens (NFT): business models, legal aspects,
and market valuation
Anticipazioni
Non-Fungible Tokens (NFT):
business models, legal aspects,
and market valuation
Cecilia Trevisi, Roberto Moro Visconti, Andrea Cesaretti
1
Non-Fungible Tokens (NFT): business models, legal aspects,
and market valuation
Abstract
An NFT is a unit of data stored on a digital ledger, called a blockchain, which can be
sold and traded. The NFT can be associated with a particular digital or physical asset
(such as a le or a physical object) and a license to use the asset for a specied purpose.
An analysis of the business model and the legal aspects is propaedeutic to the market
valuation. To the extent that NFTs can remove intermediaries, simplify and validate
transactions, and create new markets, they can be used for several valuation purposes,
according to the stakeholder involved (creator/artist; consumer, etc.).
Table of contents
1. Introduction. – 2. NFT: the framework. – 3. From tokens to non-fungible tokens.
– 4. The market for the NFTs. – 5. The future of the NFTs. – 6. Legal aspects. – 7.
Market valuation of the NFTs. – 8. The legal nature of a blockchain as a prerequisite
for valuation.
Keywords
blockchain - digital art – cryptocurrencies – cryptography - decentralization
1. Introduction
A non-fungible token (NFT) is a unique and non-interchangeable unit of data stored
on a digital ledger (blockchain)1. NFTs can be associated with easily-reproducible
items such as photos, videos, audio, and other types of digital les as unique items
(analogous to a certicate of authenticity), and use blockchain technology to give the
NFT a public proof of ownership. Copies of the original le are not restricted to the
owner of the NFT and can be copied and shared like any le. Unlike cryptocurren-
cies, they cannot be traded or exchanged at equivalency. This differs from fungible
tokens like cryptocurrencies, which are identical to each other and, therefore, can be
used as a medium for commercial transactions.
The distinct construction of each NFT has the potential for several use cases. For ex-
ample, they are an ideal vehicle to digitally represent physical assets like real estate and
artwork. Because they are based on blockchains2, NFTs can also be used to remove
1 See U.W Chohan, Non-Fungible Tokens: Blockchains, Scarcity, and Value, Critical Blockchain Research
Initiative (CBRI) Working Papers, 2021; K. De-Rong-L. Tse-Chun, Alternative Investments in the Fintech
Era: The Risk and Return of Non-fungible Token (NFT), in ssrn.com, 2021; A. Guadamuz, The Treachery of
Images: Non-fungible tokens and copyright’NFT, in Journal of Intellectual Property Law & Practice, forthcoming,
2021, in ssrn.com; S. Hong-Y. Noh-C. Park, Design of Extensible Non-Fungible Token Model in Hyperledger
Fabric, Proceedings of the 3rd Workshop on Scalable and Resilient Infrastructures for Distributed
Ledgers (SERIAL ‘19). Association for Computing Machinery, New York, 2019, 1–2, in ssrn.com;
Q. Wang -L. Rujia-W. Qi-C. Shiping, Non-Fungible Token (NFT): Overview, Evaluation, Opportunities and
Challenges, Tech Report on NFT, 2021, in arxiv.org.
2 See K Cortnelius. , Betraying blockchain: Accountability, transparency and document standards for nonfungible
2
Cecilia Trevisi, Roberto Moro Visconti, Andrea Cesaretti
intermediaries and connect artists with audiences or for identity management. NFTs
can remove intermediaries, simplify transactions, and create new markets3.
This study considers the denitions of NFTs and adjacent technologies (blockchains,
etc.), as a prerequisite for the market evaluation. An analysis of the legal aspects com-
pletes the overview and precedes the nancial and economic valuation, following the
sequential pattern synthesized in gure 1.
Figure 1 – The NFT Value Chain: Denition, Market, Legal Aspects and Valuation
This study focuses on the market and legal aspects of the tokens as well as their val-
uation therefore it does not contain information about their technological aspects for
which extensive literature can be found (Hong et al., 2019, cit.; Wang et al., 2021, cit.).
2. NFT: the framework
Much has already been written and heard about blockchains, tokens, and cryptocur-
rencies. Therefore, a summary will be presented here only to introduce the main topic.
The blockchain is based on a computer network and from the point of view of fun-
ctionality, it allows one to manage a database in a distributed way. From an operational
point of view, it is an alternative to centralized archives and allows the updating of
data with the collaboration of network participants and with the possibility of having
shared, accessible, distributed data among all participants. It allows data management
in terms of verication and authorization without the need for a central authority.
The main features of blockchain technologies are the immutability of the register,
transparency, traceability of transactions, and security based on cryptographic tech-
niques.
A token is a blockchain-based digital asset that can be exchanged between two parties
without the need for the action of an intermediary. What follows is a macro classi-
cation of tokens.
Cryptocurrencies: they belong to the token family known as “Class 1 Token“. Crypto-
currencies are tokens that have no counterparty and can be transferred via blockchain
transactions. A cryptocurrency behaves like a currency even if it doesn’t exist in phy-
sical form (like paper money). Generally, it is not issued by a central authority even if
several countries are studying a national cryptocurrency.
tokens (NFTS), in mendeley.com, 2021
3 In investopedia.com.
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Non-Fungible Tokens (NFT): business models, legal aspects,
and market valuation
Non-backed Cryptocurrencies: these are cryptocurrencies whose value is not an-
chored to assets with ofcial values such as at coins, gold, or other exchange-traded
commodities. Bitcoin4, Bitcoin Cash, Litecoin, etc. belong to this category.
Backed Stablecoins: these are tokens of the cryptocurrencies family where the price
is designed to be pegged to at money or exchange-traded commodities (such as pre-
cious metals or industrial metals). Apart from the lower volatility, unlike other crypto-
currencies, stablecoins have one of the properties of the currency: the value reserve.
Examples of stablecoin are USD Tether, designed to maintain a value equal to the US
dollar, and Paxos Gold backed by gold.
Non-Backed Stablecoins: these are stablecoins whose collateral is a cryptocurrency
instead of a at or a raw material. In this case, the collateralization is done on-chain,
that is on the blockchain. Instead of supporting the currency with some resources, an
“algorithmic central bank“ is created that manages supply and demand based on rules
encoded in a smart contract.
A smart contract is a computer program or a transaction protocol that is intended to
automatically execute, control, or document legally relevant events and actions accor-
ding to the terms of a contract or an agreement. The objectives of smart contracts are
the reduction of need in trusted mediators, arbitrations and enforcement costs, fraud
losses, as well as the reduction of malicious and accidental exceptions.
Tokens that incorporate rights to counterparties: these are tokens that can give the
owners a right that can be exercised towards the person who generated the tokens or
possibly towards third parties. This token family is also known as “Class 2 Token“.
This family includes the Utility Tokens and the Security Tokens:
Utility Tokens: in this case, the holder of the token has the right to receive a specic
service or good from the issuer or from a third party who has signed a commercial
agreement. These are tokens representing assets that are not nancial or equity instru-
ments.
Security Tokens: these are tokens that incorporate the right to receive a specic pay-
ment or a future payment or tokens representing assets without conferring different
rights, such as the right to vote, or economic rights for legal representatives or sha-
reholders of a company, etc.
Tokens that incorporate property rights: these are tokens that can perform a mixed
function. They are tokens that represent co-ownership rights or that represent pro-
perty but also confer different rights, such as the right to vote, or economic rights
for legal representatives or shareholders of a company, etc. This token family is also
known as “Class 3 Token“. The additional rights are automatically managed by the
Smart Contracts embedded in the token.
3. From tokens to Non-Fungible-Tokens (NFT)
The tokens of the previous families are fungible that is they are interchangeable. In
4 See A. Lennart, The non-fungible token (NFT) market and its relationship with Bitcoin and Ethereum, in
Blockchain Researching Lab Working Paper Series No. 20, 2021.
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Cecilia Trevisi, Roberto Moro Visconti, Andrea Cesaretti
other words, they matter to their value rather than to the object itself. For example, a
typical fungible good is money. If a person must receive a sum of money of € 100,
it does not matter whether it is paid with 5 banknotes of 20 or 10 of € 10 or other
combinations, nor does he have an interest in having the money loaned be returned
with the same banknotes given in the loan. It only detects that the same amount of
money lent returns. On the contrary, non-fungible goods have peculiarities that make
them unique and therefore not replaceable with one another.
With the Ethereum5 blockchain gaining prominence in early 2017, memes (a content
that quickly becomes viral) started to be traded there as well. In March of 2017, a
project by the name of Peperium was announced to be a «decentralized meme mar-
ketplace and trading card6 game (TCG) that allowed anyone to create memes that live
eternally on IPFS and Ethereum». Peperium had an associated token, with the ticker
symbol of RARE, which was used for meme creation and paying listing fees.
As the trading of rare pipes on Ethereum picked up, two “creative technologists” deci-
ded to create their own NFT project with a slight twist. John Watkinson and Matt Hall
realized they could create unique characters generated on the Ethereum blockchain.
Characters would be limited to 10,000 and no two characters would be the same.
They called their project Cryptopunks, as a reference to the Cypherpunks who expe-
rimented with precursors to Bitcoin in the 1990s. Surprisingly, Watkinson and Hall
opted to let anyone with an Ethereum wallet claim a Cryptopunk for free. All 10,000
Cryptopunks were swiftly claimed and started a thriving secondary marketplace where
people bought and sold them7.
As of early April 2021, over 8,000 sales had been recorded in the previous 12 months,
with an average sale price of 15.45 ether ($30,412.40). The total value of all sales is
127,360 ether ($251,620,000) and that value grows daily.
In October 2017 with CryptoKitties NFTs hit the mainstream. CryptoKitties is a
blockchain-based virtual game that allows players to adopt, raise, and trade virtual
cats. The rise of CryptoKitties coincided with the 2017 crypto bull market: some vir-
tual cats were even selling for over $100,000.
This opened many people’s eyes to the potential of non-fungible tokens. Axiom Zen
then spun out a company called Dapper Labs, which secured 15 million dollars in
funding from top investors including a16z and Google Ventures. After witnessing the
activity within the CryptoKitties community and seeing top investors pour money
into Dapper Labs, people began to realize the true power of NFTs.
Unlike fungible cryptocurrencies like Bitcoins, NFTs are “one-of-a-kind” digital assets
stored on a blockchain platform and can include images, videos, recordings, collecti-
bles, and tangible items in the physical world.
Currently, NFTs are mainly used to sell digital art. Because digital art is so easily co-
5 S.M. Werner-P.J Pritz-D. Perez, Step on the Gas? A Better Approach for Recommending the Ethereum
Gas Price, in P. Pardalos, I. Kotsireas-Y. Guo-W. Knottenbelt (eds.), Mathematical Research for Blockchain
Economy, Springer Proceedings in Business and Economics, Cham, 2020
6 I.F. Kanellopoulos-D. Gutt-T. Li, Do Non-Fungible Tokens (NFTs) Affect Prices of Physical Products?
Evidence from Trading Card Collectibles, Rotterdam School of Management, Erasmus Univerity, 2021, in
ssrn.com.
7 In opensea.io/collection/cryptopunks.
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Non-Fungible Tokens (NFT): business models, legal aspects,
and market valuation
pied, it is difcult to tell which copy is the authentic “original“. Therefore, up until
recently, digital art hasn’t had a collectible value. However, with NFTs, digital art can
be attached to a unique number stored on the blockchain. The token can be sold to
pass on ownership of the digital collectible, and provenance can be assured.
The example below shows the NFT “Jumping in The 50s” linked to the digital work
“Happiness is contagious”. This NFT was sold with a Dutch auction on the Mintable.
app platform at the base price of 0.0166 ETH (about 50 Euros). It should be noted
that the original work is a printed photograph that remained in the possession of the
photographer’s heirs. Therefore, what was sold via the NFT is the derivative digital
work (which, moreover, was digitally manipulated from the original).
The following were the rights connected with the NFT: the copyright was transferred
to the buyer; the le was downloadable, and it was resalable. All these rights are regu-
lated in the smart contract included in the NFT. As the copyright transfer is registered
in the blockchain, the buyer can prove at any time that the use of the digital work by
a third party constitutes an offense.
4. The market for the NFTs
NFTs, like all other tokens, are auctioned on platforms when they are issued. The
issuer decides whether to resort to the auction with the relative duration or to set a
price. Generally, these platforms also act as a secondary market.
Returning to CryptoKitties, the user/issuer “1970374” listed for sale the NFT con-
nected to the “Buttercup Ughbip” digital cat on the Opensea platform for 60.00 USD.
Mr. 1970374 had bought the NFT from user “grow23” on October 24, 2020, for the
price of 0.005 ETH (2.06 USD). Mr. grow23, on its turn, had bought it at auction four
days earlier for the same price in ETH.
In those four days, the dollar value of ETH had grown by 11.83%. Therefore, Mr.
grow23 made a theoretical gain in USD despite buying and selling for the same price
in ETH. If now Mr. 1970374 will be able to sell the NFT at least at the starting price
of 60.00 USD, he/her will make a gain of 2.813%. Since, in the past, single digital cats
have surpassed the price of 100,000 USD, it is not excluded that this will happen. This
type of earnings is not surprising considering that in the rst half of 2021 the NFT
market produced an estimated sales volume in the order of 2.5 billion dollars.
Simon Yu, CEO of crypto cashback platform, StormX has explained this pheno-
menon in digital art as follows: «people want NFTs for the same reason they want a
Picasso. They want to show it off to everyone. The difference with a digital asset is
that you can showcase it to an unlimited amount of people – and prove irrefutably
that you own it».
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Cecilia Trevisi, Roberto Moro Visconti, Andrea Cesaretti
5. The future of the NFTs
NFTs are undergoing a process of maturation and there are still barriers to mass
adoption.
One of these barriers is the lack of buyers and the market is still too much concentra-
ted. An ocean of money is managed by a few wallets. Let’s take the Yield Guild Games
token sale in July as an example. They raised $12 million from just 32 wallets.
Growth has also slowed down because the crypto world is still too complicated in
terms of user experience. Purchasing an NFT is not as simple as downloading a track
from iTunes. Users shall have a wallet and generally get some kind of cryptocurrency
to make a purchase. Furthermore, when crypto transactions will be fully regulated, the
lengthy tasks relating to compliance procedures such as Know Your Client, etc. will
be added to the above.
Another barrier is the environmental impact of the blockchains. According to the
Cambridge Center for Alternative Finance (CCAF), Bitcoin currently consumes
around 110 Terawatt Hours per year 0.55% of global electricity production, or
roughly equivalent to the annual energy draw of small countries like Malaysia or Swe-
den. It is clear that it’s not nancially or environmentally sustainable to maintain such
energy usage worldwide so the challenge for the blockchain networks is the ability to
convert to alternative energy to try and maintain their protability.
Finally, some argue that the enormous advertising noise around the NFT pheno-
menon is doing more damage than good to the market. Simon Yu, CEO of crypto
cashback platform, StormX says that «Too much hype is never a good thing. When
everything gets overblown, people just create entities for the hell of it. Then comes
the press, and people get exhausted, which stops most people from seeing the true
value behind it. This happened with crypto in late 2017».
If these barriers will be eliminated or, at least, reduced and NFTs will be used in an
increasingly non-speculative manner, non-fungible-tokens could become the digital
backbone of the economy as they should be linked to everyday activities like ticket
sales, proof of attendance, battling fraud, collateral for paying bills.
6. Legal aspects
To determine which market assessment techniques should apply to NFTs, it is neces-
sary to understand the legal aspects of those techniques beforehand.
Trying to anchor the notion of NFT to something we already know, and which sim-
plies the learning and management process for us is, in my opinion, a cultural resi-
stance.
We can strive to qualify NFTs as certicates, stamps, pieces of an indenite digital
asset NFTs are none of this or, rather, they are also a set of what is summarily listed.
Understanding how NFTs technically work is essential to try to analyze the legal im-
plications of this new technology.
NFTs are an asset in themselves and operate in a dematerialized environment (ecosy-
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Non-Fungible Tokens (NFT): business models, legal aspects,
and market valuation
stem as it is dened in the jargon) in their own right; therefore, it is not seen and not
possessed in the physical or strictly private sense of the term. To learn to understand
and understand NFTs, even before managing and disciplining them, it is necessary to
overcome these cultural resistances and try to relate to something that cannot be seen,
heard, touched but exists and, above all, has a commercial value.
There is no NFT without tokens8 and the use of smart contracts (i.e. computer proto-
col designed to perform programmed actions when certain ex ante-dened conditions
occur) through blockchain technology. In other words: there is no NFT without DLTs
technology, smart contracts and, I would add, crypto wallet (e.g., Ethereum wallet),
i.e., a cryptographic address that exists only in the blockchain whose function is to
store tokens (fungible like virtual currencies and, non-fungible like NFTs).
It is worth recalling that the terms “distributed ledger technology“ and “blockchain“
are sometimes used as synonyms, while in reality there is a distinction between the
two, as blockchain technology represents a species of the broader genus of DLT tech-
nology. In this regard, in the European Parliament Resolution of 3 October 2018 on
distributed ledger and blockchain technologies (2017/2772 (RSP) it is specied that
«blockchain is only one of the various types of DLT [...]»).
Starting from this approach and reasoning in reverse, let us try to understand why
NFTs are not at present comparable to anything that exists or know but they are a
genre whose specicities must be traced in the way it is used and, before that, con-
structed, as well as in the use that operators in the sector are making of it.
6.1 NFTs operate in digital reality, and it is within this
ecosystem that we must move.
We have seen that to understand NFTs it was necessary, rst, to have to talk about
tokens and the different types of tokens as well as distributed ledger technologies
(blockchain). There are various blockchains, but when dealing with NFTs the most
widely used blockchain is that of Ethereum even if there are many others.
A token is a piece of code that acts as a cryptographic representation of any object,
and this code can be unique. Although it must be said, this uniqueness is quite illusory,
just like the limited-edition lithographs.
NFTs use a token standard known as ERC-721. Many other standards may be rele-
vant, especially for copyright issues, for example, the token standard for the transfer
of ownership (ERC-173) but the most used for NFTs remains ERC -721.
Therefore, an NFT is a digital information materially represented by a string of
non-replicable and exchangeable numbers. NFTs can be sold and purchased within a
blockchain network using cryptocurrencies (Bitcoin, for example) for payment.
8 PWC, Non-Fungible Tokens (NFTs): Legal, tax, and accounting considerations you need to know, working
paper, 2021.
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Cecilia Trevisi, Roberto Moro Visconti, Andrea Cesaretti
6.2 NFTs are not certificates comparable to
dematerialized vehicle ownership certificates
The contract for the sale of movable property and those registered has a consensual
nature in which the translation effect of the property occurs following the mere con-
sent of the parties. The delivery of the goods and documents is therefore not a con-
dition for the conclusion of such a contractual agreement, as it is not in the case of
a sale on documents. This principle has been unanimously conrmed by the case-law
of merit and legitimacy9.
The documents necessary for the registration of a car, always to remain within our
example, are therefore not an essential requirement for the sale - which remains a
consensual contract, as such, it is perfected by mere consent, possibly the method of
“delivery of the documents against payment of the price“ may represent a tool to “in-
duce“ the payment of the consideration for the vehicle but the nature of the contract
remains unchanged.
This is to say that the certicate of ownership in the sale of motor vehicles does not
have an economic value, it is not an asset, and it is not the object of the sale like what
happens in real estate transactions.
The delivery of the documents necessary for registration would only constitute an
accessory obligation of the seller according to art. 1477 of the Italian Civil Code but
does not in itself determine the property effect of the trade.
In the same way, the NFT is not a certicate but the encryption of an intangible asset
in which a series of data, information that has its own digital identity and value, due
to its scarcity, is denitively saved. So, what is stored in blockchain technology is the
information about the underlying asset that is not itself stored in the blockchain. In
the blockchain, therefore, the history of the token remains.
The resulting NFT is mostly a piece of code that is written into the blockchain con-
taining various bits of information. The ERC-721 standard contains elements that
must be present and some that are optional. The rst central element of the NFT is
a number known as the tokenID, which is generated when the token is created; the
second is the blockchain address (contract address) which can be viewed anywhere in
the world using a blockchain scanner. There can only be one token in the world with
the combination of these elements: the tokenID and the blockchain address; it is the
combination of these two numbers, contained in the token, which makes it unique,
and which gives it the value of scarcity and, therefore, of being, a bragging right.
In summary: the information related to a specic asset (tangible or also intangible)
is stored “on-chain”, while the asset as such remains “off-chain”. This means that
the owner of the tangible asset and the owner of the NFT may (usually this is what
happens) not be the same. The relationship between one and the other asset can (but
does not have to) be regulated or conditioned with smart contracts. In the traditional
market, the goods used to create the NFTs will continue to be transferred while in the
9 Just to mention a few examples: Italian Court of Cassation, 29 November 1986, no. 7070; 9
November 1993, no. 11060; 1 June 2000, no. 7267; 22 March 2005, no. 6167; Court of Appeal of
Turin, 4 March 2005.
9
Non-Fungible Tokens (NFT): business models, legal aspects,
and market valuation
crypto market the NFTs will be sold which, in the string of information that compo-
ses them, may even contain the conditions for resale (in this case, it will be the smart
contracts that guarantee their effectiveness).
While the underlying asset (image, photo, video, artwork, etc.) is used to encode the
NFT and make it uniquely linked to it, the NFT is not the asset, it is not the image,
the photo, the video, or artwork, but the metadata that binds it to the original le. It is
other but with its value, uctuating and liquid.
In essence, anything that is capable of being digitized can be turned into an NFT.
The original asset is only needed in the rst stage of the process, which is to create a
unique combination of an ID token and contract address. Once the NFT has been
created, there is very little interaction between it and the original asset.
We, therefore, have two types of assets (“off-chain” resource / “on-chain” metadata),
two markets (traditional / crypto), two currencies (at / virtual money), two modes
of ownership (pure / mediated).
In NFTs, immateriality is such, also due to the mode of circulation of this asset; to
speak of possession of an NFT in the proper sense according to art. 1140 of the Ita-
lian Civil Code it is very complex and, perhaps, misleading. One could therefore opt
for a mediated possession in which the animus possidendi is held by the owner, but the
NFT is stored in the blockchain.
Not to be forgotten is that the underlying technology supporting DLTs is not owned
by anyone, which means that anyone can create and run their blockchain network or
can join an existing one.
The NFT is a metadata le that has been encoded using a digitized underlying asset
and it is this metadata le that is purchased. It is, therefore, the (non-fungible) token
that identies the good/ the work that is transferred, not the underlying asset as such
and, its value is partly conditioned by the so-called bragging rights, that is the “right to
be able to boast” of being the sole holder of a specic NFT.
When someone buys an NFT they are buying metadata. So why say NFTs are certi-
cates? Because it helps us to “see” them, to make them concrete, but it is an impre-
cision that can have repercussions on the management, including negotiation, of this
new asset. Equating NFTs with certicates based on the information encrypted and
traced in the blockchain is the daughter of that cultural resistance mentioned above.
But if the NFT is an asset/a good/ a compendium of assets with an economic value,
this means that: I could seize it, it could be the subject of a guarantee, it could be
contributed to the share capital of a company, it should be recognized in the balance
sheet items.
The value of NFTs depends in addition to the attribution to a certain author, brand,
gift, etc. also by its intrinsic scarcity. It is the aura of the unique piece even if, from a
certain point of view, it is illusory, considering that you can have several digital copies
of the work used to generate the token. It is the NFT generated by a specic digital
copy that becomes unique.
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Cecilia Trevisi, Roberto Moro Visconti, Andrea Cesaretti
6.3 Copyright issues (The NFT is not a work)
There is nothing creative in the tokenization of an asset given that, as we have seen,
they are metadata les that contain a (unique) combination of tokenID and contract
address.
There may be patent protection for the coding process, but this is different from the
authoritative protection of NFTs.
NFTs as such are not a creation protected by copyright law and, at the same time, do
not in themselves create copyright issues concerning any underlying work (except in
cases where they contain unauthorized links to the digital version of the work) becau-
se they are not a transformation, adaptation, or translation of the same work.
In code-only NFTs, the original work was only used to create non-fungible metadata:
a string of bits, i.e., numbers. At most, we could be faced with some form of com-
munication to the public10 but not plagiarism or counterfeiting of the original work
because there would be no copy or representation of the work in the NFT.
Therefore, if the digitization of the work had been used (digitization which then
served to create the token) without the authorization of the owner of the economic
exploitation rights of the work (for example illegally downloaded music les or copies
only licensed for private use), if there are no links to the digitized work in the NFT, it
is difcult to hypothesize copyright infringements.
However, the case would be different for those NFTs that do not underlie a previous
tokenized work, but this is loaded entirely on the blockchain. These are exceptional
cases because the costs of writing the data of the entire work in the blockchain are
prohibitive. Therefore, if the work is native to the blockchain, any NFT of the work
without authorization from the owner would have authorial implications because in
this case, the NFT would be the work.
Returning to the “classic version of the NFT“, that is, the one that presupposes a digi-
tized work in the tokenization process, in these cases the NFT can contain additional
information such as, for example, the name of the tokenized work, the name of its
author, whether the original work has fallen into the public domain or is still protected
by copyright law, and any other details that you want to include. It is very common to
add a link in the NFT, the URL to the original work, or the hash of the images used
to create the NFT (this happens because the NFT is not the original work).
This, as mentioned, happens for those NFTs that require prior digitization of the
work (or, more generally, of the asset) which they then want to tokenize.
Information that is included in an NFT is not intrinsically true.
The apparent simplicity in the technical implementation of an NFT involves the (at
least potential) risk of NFTs containing incorrect, partial, or unauthorized data due
to the absence of prior verication by the person who rst created the token. The
mere circumstance that there is some information or data concerning the ownership
of the underlying work/asset and included in the blockchain does not mean that such
data are true and/or exempt from disputes that could even be already in progress at
the time of the tokenization of a work or part of it. From this point of view, sce-
10 A. Guadamuz, The Treachery of Images: Non-fungible tokens and copyrightNFT, cit.
11
Non-Fungible Tokens (NFT): business models, legal aspects,
and market valuation
narios would also open concerning the liability proles of the platform, completely
like what has already occurred (and, only partially, resolved) with the more traditional
marketplace platforms (Amazon, eBay, etc.).
It is for this reason that NFTs entered the blockchain circuit by accredited entities is
already in itself a value that can affect both the NFT’s sale price and the number of
transactions and, therefore, the royalties generated.
Let’s go back to the case of NFTs that contain the URL to the digitization of the
underlying work, that is, of those NFTs that are not just code but retain a link to the
work used to create it. In these cases, the token has a link that allows you to nd the
le that is not normally found in blockchain technology but cloud services.
In these cases, the presence of the link and the ability to access the le would theore-
tically imply (then it would be necessary to examine case by case) an unauthorized re-
production of the work and communication to the public; in the latter case, however,
it would be difcult to identify which is the new public (the links may be difcult to
access and, above all, it is not certain that it is public access) and the entity as well as
the composition of the same (specialized technicians, simple Internet users or other).
In this regard, it is worth remembering that the Court of Justice of the European
Union, called upon to rule in a Dutch dispute (C-610/15) on the interpretation of art.
3, paras. 1 and 8, and para 3, of the Infosoc directive (2001/29/EC) on the harmoni-
zation of certain aspects of copyright and related rights in the information society, as
well as on art. 11 of the Enforcement Directive (2004/48 / EC), which governs the
sanctioning aspects and jurisdictional remedies regarding the protection of intellectual
property rights, held that the making available and management of a peer-to-peer
online sharing platform, such as “The Pirate Bay“, constitutes a “communication to
the public“, with the consequent infringement of copyright in respect of the works
shared, the use of which has not been authorized by the holders of the rights of eco-
nomic exploitation of those works.
Concerning the notion of “communication to the public“, the broad meaning is hi-
ghlighted, while noting the presence of two constant elements, namely the “act of
communication“ of a work (the action that allows access to a protected work without
which it would not be possible to enjoy it) and the communication of the latter to a
“public“ (intended as an indenite and rather considerable number of addressees),
specifying that one or the other of the aforementioned elements must be “different“:
thus, either the communication must be made by technical means not previously used,
or there must be a new public, i.e. a public that has not already been taken into account
by the copyright holders at the time they authorized the initial communication of their
work.
It would also be interesting to ask about the possible responsibility of the miner of
the blockchain or of the marketplace platform in which the offers of the NFTs for
sale are hosted (OpeanSea, Crypto, Mintbase, Nifty Gateway, etc.), especially if it were
possible to demonstrate the knowledge on their part of the illegal use of the link.
There are platforms for the creation of NFTs (Maintable, for example) which in the
tokenization process of the original work allow for the transfer of copyright to be
included in the smart contracts (ed. on the work underlying the NFT); this would
12
Cecilia Trevisi, Roberto Moro Visconti, Andrea Cesaretti
mean that at each transaction there would be the simultaneous transfer of the rights
of economic exploitation of the work or the license of the same.
The NFT is not the license, it can be used to prove ownership of the NFT, and there-
fore to prove to the owners of the work that they can undertake commercial activities
using the original work if data entered into the blockchain is correct. A token is not
the ownership of rights and does not automatically confer or grant a license.
However, the use by these platforms of extremely generic formulas for the transfer
of copyrights (for example: “transfer copyright when purchased?”, a formula used by
the Maintable platform) raises serious doubts on the effectiveness of the transfer in
the event of a dispute11 and, in the case of our legal system, the doubts would also
concern the written proof for the transfer required by art. 110 Law on the protection
of copyright (Law 22 April 1941, no. 633 – so called “LDA”) given that the transfer
of rights would be made possible through a computer code.
Limits that on a purely theoretical level could be resolved by formalizing the transfer
of copyright or the license in writing (therefore in fact anticipated for NFT and then
structured in a traditional contract). Hypothesis, however, is difcult to apply both
due to the impossibility of a coincidence in terms of time (the transactions of the
NFTs can be multiple even several in the same day) and where disputes arise for whi-
ch the smart contract would contain certain information and functions not resumed
(or contested) in the paper agreement which, therefore, may not be nalized. For this
reason, the adoption of hybrid forms is not recommended.
To argue that together with the NFTs not only the ownership of the digital le is
transferred but the new owner has the right to destroy the original work leaving the
NFT as “the only form left“, is a ction as well as an aberration, without forgetting
the problems on the moral rights of the artist concerning the destruction of the work
or even the mere threat of destruction.
Injective Protocol purchased a Banksy work (“Morons (White)” 2006) from Taglia-
latella Galleries in winter 2020, during a sale dedicated to the street artist, for about
USD 95,000. Then he “converted“ the work into NFT and burned the original. The
company justied the gesture on the basis that if the work had not been burnt, the va-
lue would have remained mainly in the physical work, rather than in the digital assets.
The NFT reached a value of $382,000, corresponding to 228.69 Ether - which is the
most widely used cryptocurrency in DeFi’s operations - paid by an anonymous buyer.
The provocation launched by Daystrom - the online bank that singer David Bowie
launched in 2000 - should be put on the same level.
In this case, it was the winning bidder of an NFT of a drawing by Jean-Michel Ba-
squiat (“Free Comb with Pagoda”). The original 1986 work was purchased privately in
2015 for an undisclosed sum (the name of the collector is not even known) and had
already been authenticated by the deceased artist’s foundation in 2002. The NFT was
offered on OpenSea and, through a smart contract, granted the buyer the purchase of
all copyright and the right to opt for the destruction of the original physical work. The
NFT was withdrawn from the auction that was to take place between 26 and 30 April
2021 - after the artist’s legacy claimed rights to the work and denied the assignment of
11 Ibid.
13
Non-Fungible Tokens (NFT): business models, legal aspects,
and market valuation
copyright to the original of the sold work.
The extreme action of burning a valuable work with the intent of preserving only its
digital version demonstrates one of the main interests that revolve behind the world
of blockchain and NFTs: a new means of artistic expression, a new form of art.
6.4 NFT and art
A relevant problem in the art market concerns the authenticity of a work and its attri-
bution to a particular artist or its opposite, that is, the disavowal of the work wrongly
or surreptitiously attributed to a particular author.
The declaration of authenticity may come from the artist, if he is still alive, who nor-
mally signs a photograph of the work (more complex is the issue of the certicate of
authenticity for ephemeral works or those emerging without tangible support). It can
also be issued by the artist’s heirs or by archives, foundations, galleries, or by any other
agent appointed by the artist or heirs to catalog the works.
When the artist is unable to authenticate a work of art, its authenticity can only be the
subject of an opinion, usually particularly qualied (called expertise).
The judicial request aimed at ascertaining the authenticity (or non-authenticity) of a
work of art would not even be admissible in Court because this request would not be
based on a right that has already arisen but on a mere factual situation; therefore, the
judge would be called to rule on a fact and not on a right (there is no right to the au-
thentication of a work of art with consequent judicial power to ascertain authenticity
with erga omnes validity and capable of becoming res judicata).
If the artist is unable to authenticate a work or deny it, authenticity, therefore, can only
be the subject of a qualied opinion.
Such opinions, as mentioned, cannot be “objectied“ in a judicial sentence because
this ruling would be based on mere advice, albeit from experts, and therefore would
be reduced to the greater or lesser level of conviction that one expert opinion may
have compared to another. Therefore, unable to rise to historical truth given their
purely subjective nature.
The NFTs related to the world of works of art would partially solve these difculties
as the cryptographic data permanently and unchangeably contained in the blockchain
would concern not only the previous transactions but also the data of its author and
that is why the NFTs are (even if improperly for the reasons mentioned above) asso-
ciated with the “certicates” and, generally speaking, it is said that it is the demateria-
lized version of the certicates of work. Therefore, we could say that in the world of
art NFTs incorporate with a certain temporal value the expertise but are not reduced
to mere digitization of this type of qualied opinion.
NFTs in the sector of the most modern art forms (installations, performances, land
art, etc.) can help to solve some practical problems, for example, the obligation fore-
seen for some works falling within the scope of the works protected by art. 64 of the
Code of Cultural Heritage to provide certicates of authenticity for their circulation
(identity card of such works or passport). It is very difcult to guarantee when a de-
materialized work is authentic, think for example of the invisible sculptures, entitled
“Io sono”, by the artist Salvatore Garau. This sculpture, totally immaterial and intangi-
ble, was sold for 15,000.00 euros. The buyer only got a paper certicate of ownership,
14
Cecilia Trevisi, Roberto Moro Visconti, Andrea Cesaretti
nothing technological. In the catalog, the only visual element is a white space; the
concept of work of art and corpus mechanicum should be discussed.
In these cases, the instructions relating to the specic installation can be contained
in the smart contract connected to the single and unique NFT. Even in this case, the
NFT would not be the work but the compression of a series of information, inclu-
ding its authenticity, which necessarily presupposes the existence of the work without
becoming either a translation or a different representation of it.
Sometimes it can be the authors themselves who disown a work previously recognized
as authentic; this can happen because of disagreements with the gallery or for the
most varied reasons with consequent repercussions on the commercial value of the
work itself. NFTs are capable of solving this problem denitively, apparently becau-
se the data inserted in the blockchain, as already mentioned, can be false or wrong,
making it impossible to intervene (moreover, NFT is a non-fungible token, so one
could not even create its twin without bugs). These are open issues that do not only
concern NFTs but, more generally, the blockchain and the respect of the principle of
transparency.
Ultimately, blockchain technology can help to bring certainty about the authorship
of the work and the transfer of copyright only in the context of (native) digital art or
art that has been digited and tokenized directly by the artist; however, certainty will
be more difcult to achieve in the case of digitization and tokenization performed by
third parties.
6.5 NFTs in the art market would solve the resale right question
This is a very interesting aspect that NFTs seem to solve or, in any case, contribute to
the effective recognition of remuneration to artists for sales of works after the rst
commercial transaction.
The resale right, which does not exist in all legal systems (it is excluded in Switzerland,
South Korea, Japan and partially excluded in the State of California) is the right of
the author of a work of art to receive a part of the sale price each time his/her work
is sold and applies only to transactions carried out with the intervention of an art
market intermediary and for sales after the rst one. Furthermore, at least three years
must have passed since the rst sale, which must have taken place for a price higher
than 10,000 euros12.
The effectiveness of the use of NFTs in this sector is not limited to the resale right
but includes, more generally, the system of payment of royalties and, this is made
possible thanks to the ecosystem in which NFTs operate: blockchain and smart con-
tracts, that is the right to receive royalties for each transaction, a right “written” in
smart contracts that allows authors but, not only them, to receive immediate payment
in their crypto wallet without the need for other intermediaries.
This architecture is not only more effective from the point of view of the certainty of
obtaining the payment of royalties but it is also more protable for the authors becau-
se the platforms leave a wide choice as to the remuneration percentages and, above all,
there is no prior limitation linked to the price of the original work (this, as already cla-
12 S. Stabile-E. Del Sasso, Il diritto di seguito nel mercato primario dell’arte contemporanea, in Il Diritto Industriale,
6, 2012, 507 .
15
Non-Fungible Tokens (NFT): business models, legal aspects,
and market valuation
ried, is also because it is not a question of sales of the work but one or more NFTs)
which, as known, is only rewarding for established artists and not for emerging ones.
The applications of royalties linked to NFT transactions can be varied; this is the
case of a French musician (Jacques) who created an NFT for every second of his
song called “Vous” (in total 191 NFTs were made). Each NFT can be purchased by a
different person, therefore, 191 fans of the singer can each buy a not-fungible token
representing one second of the song. Each of them will receive shares from the royal-
ties obtained from the prots generated by the song (the NFT would represent an ef-
fective share of the prots of the song) and, these royalties will be paid automatically,
in Ether most likely, directly into the crypto wallet of the owner of each NFT (0.51%
of the royalties for each token).
Traditional auction houses see NFTs as a signicant opportunity, given that NFT
works do not incur costs related to the management of physical works of art (for
example storage, cataloging, and insurance). In this regard, according to some state-
ments released by Christie’s representatives, in the future, there will be an increase in
the supply of NFT works, but this does not mean that they will replace traditional art
at auctions; eventually, there will be competition between traditional work and digital
correspondent with consequences (and inevitable) reected on the value and, on the
selling price of the traditional work.
6.6 NFT branding, advertising, and token economy
NFTs could prove to be an excellent system to amplify the authority of a brand, its
recognizability, and its value and, therefore, not only its (main) function of origin but
also that, no less essential, linked to the communicational message associated with it.
This function is consistent with the motto “Communicate better and at lower cost”.
When it comes to NFT, blockchain, and digitalization, one should not reason by trying
to break down the individual elements that compose it, a useless and even impossible
effort, but it is necessary to change approach and reason in terms of a digital inte-
raction able to contain the germ of new business models and, therefore, opportunities
not only for growth but for companies to remain on the market.
The NFT, for example, can be used to reduce the costs of advertising investments
today mostly based on the Google or Facebook sales algorithms.
Companies can use the reward system of royalties generated by NFT transactions (as
we have seen, the NFT gives ownership rights on digital objects to make them unique
and traceable) to interact with their audience (consumers, service users, etc.) by ma-
king them participate and rewarding them with a unique token that they can transfer
to third parties and, therefore, in turn, earn money.
The use of NFTs in shared virtual reality13 would not only preserve the market but also
expand it and, not least, provide almost immediate feedback on business decisions.
Today, the use of metaverse and NFT are mainly used in gaming: “play and win” ap-
plied to overcome the costs, on the user-player side, related to software licenses and,
on the publisher/game developer side, to increase prots from the use of the game.
These systems work by offering the most skilled or loyal players an infeasible token
13 S.J.Bolton-J.R. Cora, Virtual Equivalents of Real Objects (VEROs): A type of non-fungible token (NFT) that
can help fund the 3D digitization of natural history collections, in mapress.com, 2021.
16
Cecilia Trevisi, Roberto Moro Visconti, Andrea Cesaretti
(NFT) representing a digital asset of the game (a sword, a magic wand, etc.). These
in-game assets are no longer purchased by the player but become rewards for loyalty
to the game or the individual player’s skills. These NFTs can be transferred to third
parties, and, for each subsequent transaction, they guarantee a percentage of the tran-
sfer price. The publisher of the game charges a commission on these exchanges, and
this is its prot which, in perspective, can be much greater than the revenue generated
by the software licenses (the game “axy innity” works in this way and the Philippines
alone already has 2 million players).
This model can be applied to different sectors. Tokenomics or token economy is ba-
sed on the conviction of the users or investors of a project that the resulting token
can help build a more sustainable economic ecosystem, for example. Some people
buy or sell that token for different purposes, for example, to vote on initiatives for the
future of the project, the important thing is that there is interoperability.
In the future, this model can be applied to a wide range of sectors, where the bene-
ciary of the NFT will not only be rewarded by the income generated by the digital
asset but will also be able to take an active part in the company’s commercial policies.
The NFT will become a collector of strategic information for companies14.
6.7 Concluding legal remarks
NFTs are not the dematerialization of work or a part of it, nor a translation or a dif-
ferent form of representation.
Materially, we have seen that there may be no tangible specimen, or the underlying
asset could be reproduced an innite number of times (think of NFTs on design
or fashion objects) but thanks to NFTs, scarcity is created and, therefore, its value.
However, unique is not the tokenized asset / tangible but the NFT which is not a
ction or a declination of what already exists but is something else, another asset that
is transferred thanks to and through the blockchain network and, therefore, its value
is affected of the uctuations of the virtual currency. Open and unresolved issues
are those related to VAT (not only concerning territoriality but also about the rate
and, even before that, to tax liability), anti-money laundering, and, last but not least,
the environmental impact, given that this new technology involves signicant CO2
emissions and this does not t in with the green economy policy (according to recent
studies, the minting of an NFT would lead to even greater CO2 emissions, that is equal
to about 48 Kg).
Regarding the ght against money laundering, the Justice Commission of the Italian
Parliament, on 20 October 2021 had given a favorable opinion to the draft legislati-
ve decree implementing Directive (EU) 2018/1673 on combating money laundering
through criminal law. Concerning the submitted text, the Commission had given a
favorable opinion with the following observation: «consider the opportunity to intro-
duce legislation that can adapt the instruments of control and repression of crimes
regarding crypto-currencies, which similarly to other assets can constitute money lau-
ndering conduct, thus ensuring the legislative uniformity of the intervention». On 8
November 2021, Legislative Decree No. 195 was published, which transposed Di-
14 I.F. Kanellopoulos-D. Gutt-T. Li, Do Non-Fungible Tokens (NFTs) Affect Prices of Physical Products?
Evidence from Trading Card Collectibles, cit.
17
Non-Fungible Tokens (NFT): business models, legal aspects,
and market valuation
rective (EU) 2018/1673, which, however, did not take into account what was expres-
sed on 20 October by the Justice Commission.
Currently, there is no specic regulation dedicated to NFTs, but it should be noted
that the “Digital Finance Package” launched by the European Commission on 24 Sep-
tember 2020 included a Proposal for a European Regulation on crypto-assets markets
aimed at amending Directive (EU) 2019/1937 which, to date, is still under discussion
in the Council. At the domestic level, on 2 January 2020, Consob’s Final Report on
crypto assets, while not going so far as to dene the different types of NFTs excludes
mere tokenization from the list of nancial instruments.
A list of NTFs is recalled in Appendix 1.
7. Market valuation of the NFTs
As described above about the business and legal aspects, NFTs can come in different
forms and represent different rights. Furthermore, their use is relatively new, they can
be utilized across many areas and the market is still too much concentrated.
All these features still make the market valuation of NFTs difcult.
«None of the basic metrics you would use to value private companies or traditional
investment vehicles like shares or warrants are available for NFTs» said David Larsen,
CPA/ABV, managing director of the Alternative Asset Advisory Practice at Duff &
Phelps, a Kroll business. «For an NFT, what the last buyer paid for it gives you an
indication of what the value is, but the next buyer could pay something else, and it is
the amount the next buyer will pay that determines the value».
At the time of its creation, the value of an NFT may be dependent on the characteri-
stics of its creator. If we take an NFT linked to a work of art, its initial value is higher
the greater the fame of the artist. Among other things, it is interesting to reect on
how and why the value of a digital asset linked to a work of art is different from that
of the original work.
Another approach could be to take the value of the NFTs owned by the owner at any
given time as a comparison. However, given the volatility of digital assets, date and
time become fundamental factors inuencing valuation.
Furthermore, it may help self-created NFTs to consider the cost incurred for their
creation and market launch.
Finally, if an NFT’s trades are settled in an actively traded cryptocurrency, its value will
be affected by that of the cryptocurrency itself.
All these considerations mean that the NFT evaluation techniques are still to be explo-
red and understood as indeed the NFTs themselves.
On the other hand, the panorama of blockchain evaluations is clearer, as will be seen
below.
18
Cecilia Trevisi, Roberto Moro Visconti, Andrea Cesaretti
8. The legal nature of a blockchain as a prerequisite for
valuation
A blockchain does not represent a rm but a semi-public good (being a public or
private blockchain) that is shared among different stakeholders that co-create value
participating in the construction and implementation of a sequential pattern of codes.
The evaluation of a blockchain is so very different from that of a rm or an asset.
«In general, companies are favoring private Blockchain implementations as they con-
struct proofs of concept and pilots. The logic of this is easily discernible: closed-wall
ecosystems have the appearance of greater security, especially when confronting the
unknown. While proponents of public infrastructure networks such as Bitcoin, Ethe-
reum, and others sometimes do not see value in these experiments since they do not
materially add to the transaction volume or overall immediate usage of the public
network, this may be short-sighted. One thing that Blockchains do extremely well is
allowing entities who do not explicitly trust one another to collaborate in a meaningful
way. Public Blockchains can already make this claim; however, they currently fall short
of requirements such as privacy and scalability. Private Blockchains can provide solu-
tions for these shortfalls and enable greater privacy and transaction throughput becau-
se all the nodes are strictly controlled. However, there is a trade-offthey do so at the
cost of their ability to connect all to the network. Still, for any organizations seeking to
move to Blockchain, starting with a permissioned Blockchain network (private) can be
highly benecial to support specic business needs. Long-term, organizations should
seek interoperability standards between their private Blockchain and public networks,
resulting in a much stronger ecosystem overall»15.
The legal nature of the blockchain is important for its valuation. There are three main
kinds of blockchain:
Public;
Private;
Consortium.
Public blockchains are non-marketable and so it is difcult to assess their potential
value; they may have a gurative value that emerges from the public savings that they
make possible.
A private blockchain may be owned by a rm, and valuation patterns may follow its
innovative revenue model. Revenues deriving from new businesses are hard to assess
since they lack the historic background and are not clear-cut. Prot streams may de-
rive from subscriptions, pay-per-use income, performance-based fees (cashing in part
of the savings of the blockchain users), or extraction of validated big data (sold out-
side for vertical advertising; e-commerce applications, etc.).
Public blockchains lack ultimate private ownership and may be harder to evaluate.
They represent the only fully decentralized model.
Semi-public blockchains may somewhat resemble consortiums. A consortium is an as-
sociation of two or more individuals, companies, organizations, or governments (or
any combination of these entities) to participate in a common activity or pool their re-
15 In medium.com.
19
Non-Fungible Tokens (NFT): business models, legal aspects,
and market valuation
sources for achieving a common goal. This may be consistent with blockchains, joint
ventures, and company networks and value co-creation paradigms, so representing an
innovative business model. Different stakeholders16 may join to set up co-opetition,
merging cooperation competition. It is used when companies otherwise competitors
collaborate in a consortium to cooperate on areas non-strategic for their core busi-
nesses. They prefer to reduce their costs in these non-strategic areas and compete in
other areas where they can differentiate better. The value of consortium membership
is typically represented by the private rents that any participants can extract from it
since the consortium is a non-prot alliance.
The business model of the blockchain inuences its peculiar corporate governance
issues17. Stakeholders may be linked by their peer-to-peer (P2P) interactions and in
general are not represented by the ordinary stakeholders that rotate around a rm
(shareholders; debtholders; employees; managers; suppliers, clients, etc.). Whereas va-
lue co-creation is typical of digital businesses, sharing of co-created value may not fol-
low a similar pattern. For example, social networks are based on shared information
(personal data) that platforms can monetize unilaterally, with the tacit and unaware
consent of the participants. Blockchains work differently and their decentralization
prevents the abuses of a pivoting platform and minimizes information asymmetries.
«Consortium blockchains differ from their public counterpart in that they are per-
missioned, thus, not just anyone with an Internet connection could gain access to a
consortium blockchain. These types of blockchains could also be described as being
semi-decentralized. Control over a consortium blockchain is not granted to a single
entity, but rather a group of approved individuals. With a consortium blockchain,
the consensus process is likely to differ from that of a public blockchain. Instead
of anyone being able to partake in the procedure, consensus participants of a con-
sortium blockchain are likely to be a group of pre-approved nodes on the network.
Thus, consortium blockchains possess the security features that are inherent in public
blockchains, whilst also allowing for a greater degree of control over the network»18.
Each stakeholder has an interest in the decentralized blockchain and gets monetary
or non-monetary remuneration from her or his participation. Stakeholders are like
the participants of a consortium (so being deprived of any economic gain target)
and may share the services and information that the blockchain offers or might be
remunerated with crypto-assets19 (digital virtual units mainly represented by tokens or
crypto-currencies).
What matters is the capital gain or value-added that each participant can grasp in ter-
ms of incremental (differential) income through the exploitation of the blockchain. It
is in effect difcult to evaluate a blockchain for itself since it does not represent – as
stated above neither a rm nor an asset, being a sharable good among its partici-
pants.
16 K.B.Wilson-A. Karg-H. Ghaderi, Prospecting non-fungible tokens in the digital economy: Stakeholders and
ecosystem, risk and opportunity, in Business Horizons, 64(5), 2021.
17 D. Yermack, Corporate Governance and Blockchains, in Review of Finance, 21(1), 2017, 7 ss.
18 In mycryptopedia.com.
19 In ey.com.
20
Cecilia Trevisi, Roberto Moro Visconti, Andrea Cesaretti
8.1 Economic and financial valuation
The appraisal of a blockchain is propaedeutic to any NFT assessment20 and must con-
sider rst its legal nature: public blockchains differ from private or consortial ones.
The business model, with emphasis on the revenue model (where do prots come
from?), is another prerequisite for valuation. Industry applications exemplied in par.
1. may give precious hints for valuation.
The ideal scenario would be that of incorporating the prospects of the blockchain
into a traditional accounting system (pro forma balance sheet interacting with forecast
income statements to get expected cash ow statements). This is however hardly pos-
sible in most cases, and so a different route should be followed: instead of considering
the blockchain per se, the evaluation might tackle the economic and nancial savings (in
terms of lower costs21, higher availability, and speed of data, etc.) for the users.
The valuation of a blockchain is linked to that of a database or, analogically, to the
appraisal of big data that fuel the blockchain with information that becomes secured
(so increasing its value). A blockchain is a peculiar database that is reticular and has an
incremental dynamic, being deprived of any center of gravity, since its equilibrium is
constantly pushed forward, each time that a block is added.
The extension of a networked blockchain adds up value, in analogy with Metcalfe’s
la w.
Since the blockchain incorporates information, it is naturally linked to (big) data and
related to the data sourcing IoT that can be extrapolated and used, as a by-product, for
complementary value-added strategies.
Hence the collateral value of blockchains that in most cases depends on their comple-
mentary applications, rather than on their existence.
Blockchains merge product and process innovation, creating a validation process that
increases the value of data. The evaluation criteria may consider the estimation of tra-
ditional intangibles like patents or trademarks, with a ne-tuning that tries to capture
their peculiar nature.
The object of the appraisal may concern either the blockchain as an asset (belon-
ging to identied shareholders and being incorporated in a rm) or the value that the
blockchain brings to an external user.
8.2 General valuation methodologies
The classication of the main nancial / market evaluation methods is consistent with
international accounting principles; according to IFRS 13:62, three widely used valua-
tion techniques are:
20 M. Dowling, Fertile LAND: Pricing non-fungible tokens, in Finance Research Letters, April 2021; Id., Is non-
fungible token pricing driven by cryptocurrencies?, ivi, April 2021.
21 The traditional cost-centric approach must be replaced by a value-focused perspective: Y. Zhang-J.
Wen, An IOT electric business model based on the protocol of bitcoin, Proceedings of 18th International
Conference on Intelligence in Next Generation Networks (ICIN), Paris, 2015, 184 ss.
21
Non-Fungible Tokens (NFT): business models, legal aspects,
and market valuation
market approach – uses prices and other relevant information generated by market
transactions involving identical or comparable (similar) assets, liabilities, or a group
of assets and liabilities (e.g. a business)
cost approach – reects the amount that would be required currently to replace the
service capacity of an asset (current replacement cost)
income approach – converts future amounts (cash ows or income and expenses)
to a single current (discounted) amount, reecting current market expectations
about those future amounts.
These general approaches should consider the peculiar nature of blockchains. For
example:
the market approach seems still uneasy to be used since there is no active market
for private or consortial blockchains;
the cost approach may give some useful insights (how much would it cost to cre-
ate a similar blockchain from scratch?) but again it seems difcult to link it to the
appraisal;
the income approach that considers future earnings/cash ows is theoretically
suitable even if it is difcult to sort out the basic accounting data behind it. It
should also be mentioned that traditional appraisal parameters for intangibles, like
royalties, are hardly compatible with blockchains.
In some cases, a single valuation technique will be appropriate, whereas in other states
of the world multiple valuation techniques will be appropriate [IFRS 13:63].
The income approach is based on the incremental income (deriving mainly from cost
savings) that is linked to the use of a blockchain. The benets should also consider the
saved time or the lower collateral costs since the “blockchained” data is more reliable.
A complimentary evaluation pattern might consider the appraisal techniques traditio-
nally used for databases (that represent the most similar intangible). The value of a
database can be extracted from its use by different adherents, again with value co-crea-
tion patterns that rotate around the blockchain and are represented by feedbacks, data
sharing, information that needs to be harmonized with data fusion, and interoperabi-
lity, etc.
The blockchain evaluation is highly uncertain also because cash ows are difcult to
estimate.
The cost approach might consider the savings for the users, in terms of lower costs,
higher speed and reliability of data, etc. Further considerations will be made in Table 1.
8.3. Financial evaluation
A comprehensive model for the evaluation of intangibles considers their economic
(incremental) marginality as a starting point to assess the capacity to generate liquidity.
Coherently with IAS 38 prescriptions, DCF is the key parameter for both accounting
and appraisal estimates, so representing the unifying common denominator of cost,
income, or market-based methods, which regularly need to nd out their cash part.
A synthesis of the market, cost, or income approach may be found in a nancial
22
Cecilia Trevisi, Roberto Moro Visconti, Andrea Cesaretti
appraisal methodology (consistent with a more general evaluation of a rm) where
the estimate is based on the capacity to generate liquidity, remembering that «cash is
king»22.
Market valuations may use as preferential methods either DCF or directly an EBITDA
multiplier, inspired by (intrinsically uneasy) comparisons of intangibles. DCF theoreti-
cally stands out as the optimal method, being inspired by the golden rule according to
which “cash is king”.
DCF is ubiquitous in nancial valuation and constitutes the cornerstone of contem-
porary valuation theory23. The robustness of the model as well as its compatibility with
the conventional two-dimensional risk-return structure of investment appraisal makes
it suited to a multitude of asset/liability valuations. Accounting standards across the
globe recognize the efcacy of this model and advocate its use, wherever practicable.
FAS 141 and 142 of the United States and IAS 39 that relate to the accounting of
intangible assets, also recommend the use of DCF methodology for imputing a value
to such assets.
Market evaluations also frequently use a standardized EBITDA multiplied over time
(from 2/3 up to 15 or more times/years, in exceptional cases) and this (apparently)
simple multiplication brings to an Enterprise Value (EV), attributable to debt-holders
and, residually, to equity-holders. This approach is consistent with the accounting na-
ture of EBITDA, which is calculated before debt servicing.
EV / EBITDA multipliers may be connected to price/book value or Tobin q parame-
ters, which reect the differential value of intangibles under a hypothetical cost repro-
duction hypothesis, so representing a precious bridge between otherwise disconnected
market and cost appraisal methods.
As a rough calculation, the EV multiple serves as a proxy for how long it would take
for the complete acquisition of the entire company (including its debt) to earn enough
to pay off its costs (assuming no change in EBITDA and a constantly added value
contribution from the IC portfolio). Temporal mismatches between the numerator
and the denominator may bias the ratio and should accordingly be minimized.
Equity and debt value may be jointly inferred from an EBITDA multiplier, which
estimates EV, and, after deduction of the market value of debt, residual market value
of equity.
The stream of (hopefully) growing and not ephemeral Operating Cash Flows - CFo
- (marginally attributable to the intangible strategic contribution to the overall value)
incorporates growth factors, whereas the weighted average cost of capital (WACC)
discounting denominator embodies market risk elements, as recognized by debt and
equity underwriters. Moreover, cash ows are a cornerstone of debt service, as it will
be shown later. Qualitative issues, such as consistency, durability, depth of coverage,
etc., concerning IC, may strategically impact future EBITDA, cash ows, and conse-
quent value. WACC may also be affected by the asset substitution problem and inher-
ent wealth transfer from debt- to equity- holders (or vice-versa), as it will be shown in
22 Cash is king is a motto reecting the belief that money (cash) is more valuable than any other form
of investment tool, in investopedia.com.
23 J. P. Singh, On the intricacies of cash ow corporate valuation. Advances in Management, 2013, 6(3),15–22.
23
Non-Fungible Tokens (NFT): business models, legal aspects,
and market valuation
the next paragraphs.
What matters, should the valuation consider only IC marginal contribution to the over-
all company’s value, is just described by differential/incremental CFo or EBITDA,
made possible by IC strategic contribution, which is, however, often uneasy to isolate.
Residual incremental value, not attributable to specic IC components is allocated
within the goodwill cauldron.
Being CFo derived from EBITDA, the link between key market methods (possibly
complementary, rather than alternative) is evident. This is a signicant, albeit trivial,
nding, somewhat misperceived by the current literature, with an important impact on
IC valuation. Figure 9 shows the functional links existing at the level of the prot and
loss, balance sheet, and cash ow statement.
Calculation of expected benets with Net Present Value (NPV) is given by the follow-
ing formula, considering NPV accruing to equity-holders:
0
n
1t
t
e
t
equity
CF
)K1(
CFN
NPV
+
=
=
where:
CFN = Net Cash Flow; t = time; Ke = Cost of equity; CF0= initial investment
NPV is (also) used in the cost method
Proper calculation of NPV should include even the other factors, incorporating in Net
Cash Flows geographic limitations, restrictions, exclusivity, etc.
The synthesis between the two methodologies may be represented by the calculation
of Operating Cash Flows that also reect the impact of scalability. Liquidity is calcula-
ted considering the accounting interaction of the changes in the balance sheet with the
current income statement. Blockchains are expected to improve the EBITDA through
higher revenues and lower costs.
8.4 “With or Without” Incremental Valuation
The incremental evaluation can be considered by external users of the blockchain
that incorporate its functions in their (traditional) business model or simply use the
certied data.
The “with or without” methodology is currently used in the evaluation of intangibles
and estimates the fair value of an asset by comparing the value of the business inclu-
sive of the asset, to the hypothetical value of the same business excluding the asset.
Blockchains may impact both revenues and costs. Their economic and nancial (incre-
mental) marginality may be represented in Table 1.
24
Cecilia Trevisi, Roberto Moro Visconti, Andrea Cesaretti
Table 1 – Impact of blockchains on Economic and Financial Marginality
Economic / Financial
Marginality
Standard
Company Blockchain Extension
Revenues
These
parameters
depend on
the traditional
business
model of the
rm, without
the impact of
the blockchain
applications
• New business models and
opportunities
• real options of expansion and
development
- Fixed monetary costs Validation of data can decrease costs and
speed up processes, with time savings
- Variable monetary costs
= EBITDA
Economic and nancial marginality
grows because of higher revenues and
lower costs
+/-  Operating Net
Working Capital (NWC)
Blockchains may shorten the supply
chain, making payments easier and
quicker, so reducing the accounts
receivable and payable. Even the stock
might be decreased.
+/- Net
InvestmentsCapex)
Blockchains may reduce some xed
investments, with a positive consequence
on some xed costs and depreciation.
= Operating Cash Flow
Liquidity may increase because of the
higher EBITDA and lower NWC and
Capex
EBITDA and Operating Cashow are the cornerstones of the two main evaluation
criteria.
9. Concluding remarks
An NFT can be dened as a unit of data stored on a digital ledger, called a blockchain,
which can be sold and traded. The NFT can be associated with a particular digital or
physical asset (such as a le or a physical object) and a license to use the asset for a
specied purpose.
An analysis of the business model and the legal aspects is propaedeutic to the mar-
ket valuation. To the extent that NFTs remove intermediaries, simplify and validate
transactions, and create new markets, they can be used for several valuation purposes,
according to the stakeholder involved (creator/artist; consumer, etc.). Each segment
of the value chain is presided by a stakeholder that is linked to the other by real-time
digital interactions and value co-creation patterns. This is consistent with the trendy
25
Non-Fungible Tokens (NFT): business models, legal aspects,
and market valuation
“creator economy”24, according to which Internet users share digital content through
platforms that they collectively own and operate. Decentralized networks, like those
that underpin cryptocurrencies, allow ownership to be distributed via tokens, which
are earned for contributions to the network and which often confer governance rights.
As shown in the study, an analysis of the market features and the legal aspects is
propaedeutic to the appraisal of the NFT that ultimately depends on the value of its
underlying asset, amplied by the NFT features.
Appendix 1 – NTF examples
Cryptokitties.
Cryptopunks.
Twitter CEO, by Jack Dorsey, - NFT of his rst tweet published on March 21, 2006,
sold for 1,630.58 Ether.
NFT of the Ultraviolet album by well-known DJ 3 LAU to commemorate the third
anniversary of the rst album sold for a record $ 11.6 million in NFT.
Mike Winkelmann (aka Beeple) sold NFT “Everyday: The First 5000Days” for $ 69
million through auction house Christie’s.
The Ufzi Galleries made the NFT of Michelangelo’s “Tondo Doni”.
Tennis player Oleksandra Oliynykova tokenized a six-inch portion of her skin between
her elbow and right shoulder for advertising purposes. NFT, originally sold for three
Ether, will allow the buyer to “tattoo” on this “advertising space” a logo or message
that will be picked up by the cameras every time the tennis player goes to serve.
Sophia sold the rst NFT job created by articial intelligence on the Nifty Gateway
online platform. Sophia is a humanoid robot created by Hong Kong-based Hanson
Robotics.
Dolce & Gabbana have launched the rst NFT collection called Genesi
Gucci has put up for sale its rst NFT inspired by the Gucci Aria movie.
NBA has its collection of NFTs on top shots.
Pizza Hut every week offers a new NFT linked to the pizza-themed image to be pur-
chased on Rarible in ETH.
Pringles has already sold 50 CryptoCrisp “avor of NFT” virtual tubes.
6 pieces ‘Teo KayKay x TopChampagne Prelude Titanium’ is the rst collection of
customized Champagne in the world to have also combined a collectible digital work
(NFT) that portrays the physical bottle and whose authenticity is certied through the
blockchain.
24 The World Ahead 2022 Li Jin on the future of the creator economy. Shared ownership and control of online
platforms is the way forward, in Economist, 8 November 2021.