Legal but unregulated, be wary of non-fungible tokens

For the past decade or so, a slew of Internet-based investment and financial products or tools have landed on our shores.

First, it was cryptocurrency followed by bitcoin and blockchain technology.

And now, the latest kid on the block - non-fungible tokens or NFTs.

Say what? Non-fungible tokens? Yes, that's right and it's fast becoming a fad among Malaysians, especially among the young.

It may be the in-thing for the millenials or the middle-aged right now but NFTs can be alien territory for some, especially for the ICT uninclined and the average Makcik Kiah.

But what are NFTs anyway and do Malaysians know what it's all about?

What are NFTs?

For starters and without being too technical, an NFT is a non-interchangeable unit of data stored on a blockchain, a form of digital ledger, that can be tied to digital files such as photos, videos and audio, and thus can be sold and traded.

Ofisgate Sdn Bhd chief technology officer Shariman Yasin said NFTs have commercial potential in various industries such as digital art, games, music and film.

"NFTs are the way to go now. People buy digital collectibles such as Internet domains, website addresses, paintings and even cryptocurrencies," Shariman told Sinar Daily.

There is no doubt that NFTs are becoming a fast developing and valuable fad.

Non-fungible.com revealed total daily NFT sales peaked at US$400 million in August 2021 or about RM1.6 billion.

NFTs however is open to fakes, scams and manipulation

Professor Dr Ahmed Razman Abdul Latiff said due to the lack of protection afforded by the law, any members of the public who engage in NFT activities will be exposed to the possibility of speculative activities.

These include art works scams, the Ponzi scheme, money laundering, copyright issues and plagiarism or fraud.

"In summary, it is better not to be involved with NFTs unless you are really familiar with the system and on how it works," said Razman who is the manager at Universiti Putra business school.

Speaking to Sinar Daily, Razman added there is a high probability that punters will not their investment money back if they fell victim to any NFT scams because the law is still unclear about it.

Earlier this month, Reuters reported that most UK authorities have suspended numerous online marketplaces which conduct NFT sales citing rampant fakes and plagiarism.

A case in point, a friend of pop icon Jay Chou released 10,000 Phanta Bear NFTs each with a selling price of US$1,000.

These NFTs were literally snapped up in 40 minutes and buyers and fans alike thinking it is associated with Jay Chou.

But fans found out later through Jay Chou's record label that he was not involved in any planning and sale of the phanta bear nor profit from the sale.

NFT is currently open to everyone to upload their NFT products on trading platforms even without verification and authentication.

Simply put, any Tom, Dick or Harry can put up a Batman comic for sale claiming it's the first edition ever without anybody knowing it.

This creates an opportunity for copyright violators to profit by imitating the work of famous celebrities.

What does Bank Negara Malaysia say about it?

Universiti Sains Islam Malaysia Professor Dr Muhammad Iqmal Hisham Kamaruddin said since NFT technology is still new, many laws and regulations have yet to keep up with it including in Malaysia.

Bank Negara Malaysia official said at the moment, NFT is not recognised as a legal tender in Malaysia.

"The main issue is that the authorities are still catching up to regulate and monitor NFTs and even crypto currencies which are exposed to manipulation," Iqmal told Sinar Daily.

Contractor Saari Abdul Majid said he had invested US$100 to buy a crypto currency which has since appreciated to US$2,000.

"But where do I cash out? All my calls and emails were unanswered," Saari told Sinar Daily.

If there are still so many lingering doubts about cryptocurrency, how can investors be assured of the authenticity of the NFT?

What does the law say about NFTs - legal but unregulated

In pursuance of Malaysia’s Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order (2019)/2019 Order, made under the Capital Markets and Services Act 2007, a digital token is defined as a digital representation which is recorded on a distributed digital ledger, whether cryptographically-secured or otherwise.

Since NFTs rely on blockchain technology (distributed digital ledger), they can be definitively categorised as digital tokens.

However, whether NFTs can be properly regulated as a form of security (under the 2019 Order) by the Securities Commission (SC) remains ambiguous/amorphous and not adumbrated precisely.

Under section 3 of the 2019 Order, a digital token needs to fulfil all the requirements laid out in the 2019 Order before it can be classified as a security.

As laid out under section 3(1): A digital token which – (a) is traded in a place or on a facility where offers to sell, purchase, or exchange of, the digital currency is regularly made or accepted; (b) a person expects a return in any form from the trading, conversion or redemption of the digital currency or the appreciation in the value of the digital currency; and (c) is not issued or guaranteed by any government body or central banks as may be specified by the Commission, is prescribed as securities for the purposes of the securities laws.

NFTs do exhibit overlapping and common characteristics with digital tokens and can be considered as a specific species of the wider genus (digital tokens).

There arw tonnes of legal mumbo jumbo here but in short, regulators have yet to enact any rules and regulations specific to NFTs.

Emir Research analysts Jason Loh Seong Wei and Tan Tze Yong said in their research note, those interested in NFTs should research and subsequently trade at their own risk as there’s no clear framework to resolve disputes arising from trading NFTs as securities.

In conclusion - be wary of NFTs

As the NFT trend in Malaysia is gaining momentum, the government should attach importance to this area and frequently remind people to be aware of its risks and pitfalls.

Loh and Tan said: "Further legislation to regulate NFTs is necessary to ensure Malaysians do not fall into its trap and lose money".

Lastly but definitely not least, the public themselves must be alert and not buy NFTs blindly just to satisfy a naive fascination with the latest so-called “investment” craze.

With the right exposure and adequate market-savvy knowledge, Malaysians will not be seriously affected even when the NFT bubble burst.