Hype, hope and a promising future for NFTs?

Non-fungible tokens (NFTs) performed surprisingly well in 2022, but will they continue to draw interest this year following controversies in the broader crypto sector? Regulation is the biggest unknown for the industry and while regulators determine rules, a landmark case in Singapore could support progress.

With $37 billion in transaction volume in 2022, collectors managed to close in on the $40 billion they sent to non-fungible token (NFT) marketplaces in 2021, according to proprietary Chainalysis data shared with FinanceAsia. So far this year, NFT sales have generated over $2 billion.

In the digital art space, the last two years saw the rise of profile picture or PFP collections, including Bored Ape Yacht Club (BAYC) and Pudgy Penguins, according to Amy Zhao, executive director and lead of the Ocular Fund by Openspace.

This year, she is looking forward to “wider use cases for NFTs which are still in early stages”, such as NFTs used in financialisation, Soulbound Tokens (which use blockchain to represent personal features) and supply chain-related tokenisation.

Openspace manages $650 million in committed capital and has a portfolio that boasts exposure to Indonesia’s GoTo, Singapore-founded clothing brand, Love Bonito and Indonesian fintech, FinAccel, among others. Its team launched the Ocular Fund at the end of 2021, with a focus on investments in the Web3 space and so far, the fund has invested about a quarter of the $25 million raised. Current investments include StepN, a move-to-earn game in which users purchase NFT sneakers to earn crypto tokens when they exercise, as well as Sonarverse, a Web3 data analytics platform.

Last year saw a series of highs and lows for the crypto sector, from the fall of the TerraUSD stablecoin (virtual currency backed by fiat), to the collapse of the world’s second largest crypto exchange, FTX. The subsequent contagion floored all facets of the digital asset universe, impacting both price and appetite for assets active in the virtual arena.

“NFTs aren't likely to emerge as a top subsector this year, but decentralised finance (DeFi) will likely remain of interest,” Darren Yong, head of Technology, Media and Telecommunications for APAC at KPMG, told FA.

The consultancy firm teamed up with HSBC to publish a report on Asia Pacific’s Emerging Giants in summer 2022, which examined those new economy businesses with potential to impact the global business landscape.

Investigating a community of 6,472 technology-focussed start-ups with valuations of up to $500 million across 12 key markets from Mainland China to Australia, the research found over 25 percent or 1,130 companies, to identify with the NFT vertical, with DeFi coming in second.

Yong explained that in typical bear market conditions, private equity and venture capital investors are more stringent when it comes to investment decision-making, which means that they cut down on speculative investments like NFTs. Add to the scenario the recent crypto crash, and the outlook does not look particularly optimistic.

“The climate today is very different compared to the heady days of 2021. If you walked into an investor pitch and you had Web3, crypto or blockchain anywhere on your deck, you’d be walking out with money. Today, investors evaluating a similar pitch would not touch a Web3 company with a 10-foot pole,” said Joel Shen, head of crypto and digital assets practice in Asia for Withersworldwide.

Gaming: The next NFT frontier?

But so often, amid crisis comes opportunity – a view that is shared by Bozena Rezab, CEO & Co-Founder of GAMEE, who remains optimistic in the aftermath of the FTX collapse.

“This market helped to filter the good teams and good projects. It puts even more importance for companies like us on focussing on the long-term value and the quality of our products,” Rezab told FA.

Michael Wong, partner within the investment funds and financial services practice at Dechert echoes this sentiment. He recently explained to FA that, on the back of crypto controversy, the challenge for regulators will be to put in place virtual asset regulation that simultaneously protects investors, but does not stifle the industry.

GAMEE started in 2014 as a mobile game developer and quickly amassed a following of 40 million registered players. Today, it links play with the metaverse and educates users through the process of having a wallet, a token and obtaining different NFTs, which can be transferred from one game to another.

“We view our products as a way of onboarding the masses into Web 3.0. Using games, we are showing users what the future could be,” explained Rezab.

In 2020, GAMEE became one of 380-and-counting investments by Animoca Brands, a Hong Kong-based tech firm which the KPMG-HSBC report described as “the most prolific investor in NFT-centric Web 3.0 companies”.

In a letter to shareholders and employees at the end of 2022, a statement by Animoca Brands described its exposure to FTX as “limited to a non-material trading balance”, and reaffirmed its plans to continue to invest and support the ecosystem.

“Recent developments would suggest more resilience in the market as compared to five months ago and we view them [these events] simply as moments in history,” co-founder and executive chairman of Animoca Brands, Yat Siu, said in the release.

In September 2022, the firm raised $110 million in a funding round led by Temasek, Boyu Capital and GGV Capital and channelled the new funds into Cool Cats Group and Wanderers, which have their own iconic NFT collections. In addition, the firm has entered a strategic partnership with Tokyo-based NFT marketplace, Coincheck, and has partnered with 3D printing company, Arevo, to produce a line of carbon fibre bikes. In November, its subsidiary, TinyTap, reported that its first Publisher NFTs sold out at an auction for Ethereum (ETH) worth approximately $228,000.

Siu told FA, “NFT sales volume has been rising rapidly as innovation in the space is heating up and greater utility is being added to NFTs in ever broader applications of this technology”.

NFTs are perhaps where many in the industry see the future of gaming. In 2022, trading volume finished up at around $1.45 billion, 236 percent higher than the previous year, while unique active wallets connecting to games saw a 60 percent increase, according to a DappRadar-Blockchain Game Alliance report.

“Gaming has the potential to bring Web 3.0 to mass markets, because gamers 100% understand game currencies, character skins, digital assets and digital inventory,” said Rezab.

Her team developed gaming platform, Arc8, which uses the Ethereum-based GMEE token. The platform currently offers 15 live games and every two months, a new season sees new games introduced. This year, GAMEE’s plans are to scale its solutions, so that any NFT collection will be able to run their own Arc8 game competition for their holders.

Regulating the future

From Manila to Tokyo, regulation is one area that the industry is keeping a close eye on and one that KMPG’s Yong says, will have to come in to facilitate further growth.

“In a decentralised world, if there isn’t governance, however good the technology is, there still needs to be public trust and when there’s no trust, systems fail,” said Yong.

Peter Burnett, managing director at Standard Chartered Bank’s Hong Kong branch, recently told FA that it is not so much the technology itself that needs to be regulated, but how the technology is applied.

To date, no specific regulation has been issued regarding NFTs, but the action of authorities in some jurisdictions – such the US Treasury Department’s decision to issue sanctions against Tornado Cash; and the ongoing SEC case against XRP creator, Ripple Labs – is fostering a degree of hostility towards the assets.

However, a Singaporean case in May 2022 saw the city-state’s court hand out a ruling that would have implications for the entire blockchain industry.

Withersworldwide’s lead counsel, Shaun Leong, represented a Singapore-based NFT investor against a Metaverse personality, in an attempt to freeze the sale and ownership transfer of a rare Bored Ape Yacht Club NFT on the Ethereum blockchain.

Crucially, the injunction recognised NFTs as assets and the case marked the first time that a court – and a high court at that – had extended jurisdiction across assets on blockchain.

Shen explained that additional implications included proof that smart contracts cannot exist outside of real world contracting principles; and that formal court papers can be served via social media, such as Twitter or Discord.

“NFTs have not been separately regulated by any statutory or quasi legislative sort of framework. But in this judgement, we saw some crystallisation around how regulators are approaching such assets. This case will inform regulators all across the world and it has been very influential in putting the Singapore courts on the map,” he told FA.

Tighter regulation is on the cards and while Openspace’s Zhao said she is watching carefully of regulators’ actions in the DeFi space – “We want to see how things turn out as many businesses may not exist once regulations come in” – she views Asia as a bright spot.

Hong Kong is taking a lead in the region with plans to introduce a new statutory licensing regime for virtual asset service providers, from April 01. Meanwhile, in January, the special administrative region’s (SAR) financial regulator, the Hong Kong Monetary Authority (HKMA) published the conclusion of its discussion paper on crypto assets. The paper highlighted stablecoins as a priority for regulators, given their greater potential for use as alternatives to fiat in payments. The market plans to introduce licensing requirements for firms operating in stablecoins by 2024.

Zhao emphasised that work by regulators in both Hong Kong and Singapore seeks to cultivate a “sweet spot balancing consumer safety and innovation” and it is this approach that she feels will work to spread positive momentum across crypto and Web3 spaces, in months to come.

“Once the rules are clear, we will see a lot more investments from big global companies and big global brands that will further help to accelerate the growth within the industry,” Rezab concluded.

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