NFT's: What are they? How do they work?


This piece is written by Max Frilot, who is a Legal Intern with a special interest in cryptocurrencies and NFTs working at MK Fintech Partners Ltd, which is part of the Top Tier International Legal and Advisory ‘Michael Kyprianou’ Group.

What are NFT’s?

To acquire an initial idea of the potential value NFT’s possess, ‘Visa,’ the American financial services company recently hopped on the NFT bandwagon by investing in a digital avatar for nearly $150,000 worth of Ethereum. “We think NFTs will play an important role in the future of retail, social media, entertainment, and commerce,” - Cuy Sheffield, head of Crypto at Visa. Aside from Visa, several massive media publications like CNN, The New York Times and Fortune magazine have all sold NFT’s.

The acronym ‘NFT’ is an abbreviation of the concept called ‘non-fungible tokens’ which has taken the world by storm. It may be noted that an NFT is recognized as a digital asset which is representative of real objects conveyed through the popular forms of art and music. NFT’s have surprisingly been present since 2014, yet they have recently experienced a significant surge in popularity. It may be largely attributed towards an ever-expanding desire to own or sell unique digital artwork.

They may be purchased and sold online often via means of cryptocurrency. From November 2017 to April 2021 a shocking $174 million has been spent on NFTs. A piece constructed by the digital artist, Mike Winklemann, shattered records of the most expensive NFT ever sold priced at $69.3 million. A large contributor towards the success of such tokens may be recognized as the ability for the buyer to own the original item, with proof of ownership being displayed via built-in authentication. “Essentially, NFTs create digital scarcity.” – Arry Yu (chair of the Washington Technology Industry Association Cascadia Blockchain Council and managing director of Yellow Umbrella Ventures)


How do they work?

NFT’s exist on a blockchain which is essentially a decentralized digital register of transactions which are distributed across the network of systems on a blockchain. NFTs exhibit various appearances yet are all fabricated from digital objects based on physical or virtual items such as GIFs, sneakers or virtual avatars. There was even an instance where the co-founder of the social media platform ‘Twitter,’ sold his first ever tweet as an NFT for a surplus of $2.9 million.

NFTs may be closely related to physical collector’s items, yet the evident distinction between them is that they are digital. If a buyer wishes to purchase a one-of-a-kind oil painting through the form of an NFT, they will conduct the transaction and subsequently receive their item as a digital file rather than the physical painting itself. In order to purchase an NFT, one must initially establish a digital wallet wherein NFT’s and cryptocurrency alike may be stored. After the foundation of the wallet is laid out, an individual may navigate to an NFT site and select the piece they wish to attain.


What advantages may NFT’s provide?

Since this is a relatively novel concept, several individuals are unsure as to whether there are significant gains to be made as a result of purchasing or creating such digital tokens. NFTs permit creators to interact directly with their clients to conduct sales. This may be regarded as highly beneficial for artists due to the fact that in the typical form of art sales, agents are normally employed in order to sell and market pieces of art towards a larger client pool.

Aside from this, the original creator also earns a commission for each time the NFT is traded. Another advantage of NFTs is that they are not easily forged. Authentication of an NFT allows individuals to know that they are in possession of the sole, unique art piece, as opposed to a replica. A skilled individual could recreate a near perfect copy of the ‘Mona Lisa,’ yet without the proper authentication to display its originality, it would be regarded as worthless. The same notion applies to NFTs, as thousands of replica art pieces may be created, but there is only one original wherein lies value and collectability.

Arguably the most prominent advantage possessed by NFTs is that artists and content creators alike are permitted to retain full copyright over their pieces. This allows revenue to be generated without surrendering their copyrights. Since NFT’s are stored on the blockchain, it provides a method to trace the ownership of a piece of art. The original date of copyright may be stored in the block’s data and may be used as irrefutable proof of creatorship.


Risk vs Reward. Should you buy NFTs? 

In order to accurately answer the question presented above, one must initially conduct thorough research about which NFT they would like to attain. NFT’s should be considered as investments as their price fluctuates and is determined by how much someone is willing to pay for them. In this circumstance, it may be noted how demand solely influences the price. Therefore, variables should be thoroughly considered when attempting to resell an NFT.

 If the art resonates with a buyer, they perhaps may spare no expense when purchasing, ultimately eliciting significant profits to the owner. However, it may even resell for less than the original price paid, or it may not sell at all. After all, the aspect of risk is typical in anything investment-related. The purchasing of NFT’s should be approached with multitudes of research and the understanding of the risks involved.

Food for thought: After the analysis of the ideas mentioned previously, will you be investing in NFT’s in the future?


About the Firm

Michael Kyprianou Fintech Partners Ltd is a Maltese licensed VFA Agent (Virtual Financial Assets agent) composed of a team of dedicated experts who provide services such as advisory, licensing and registrations of activities related to Fintech, Crypto, Blockchain, Investment and other ancillary services including accounting, company incorporations and banking. MK VFA Fintech Partners is an entity that forms part of the group of companies belonging to the Michael Kyprianou Advocates & Legal Consultants. Michael Kyprianou is a top-tier International Legal Consultancy Firm with offices in various jurisdictions including Cyprus, Dubai, London, Greece, Ukraine and Malta. The firm is top ranked in the Legal 500 and according to Gold Magazine ‘The Legal Issue’, is the 2nd largest in size in Cyprus.




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