The Potential & Risks of NFTs

In early 2021, NFTs walked into our lives at an unprecedented pace and gained a significant market share. It is a fact that NFTs have not yet reached an audience as widely as cryptocurrencies. Many people are interested in NFTs, as well as many who described them as a bubble. Furthermore, NFT sales have fallen like a stick significantly during the so-called "crypto winter" of 2022. The FTX scandal remained on the agenda for months and might have caused confidence in Web 3.0 technologies to be shaken a little. However, the interest in NFTs has never decreased.

It can be said that NFTs create a new market for individuals and institutions interested in luxury consumption, crypto products, collectibles, and investment. Therefore, when we examine what NFT promises, we can say that everything is just beginning. In many ways, the pieces are slowly falling into place: Especially in developed countries, studies on how crypto assets are to be regulated have gained momentum. In these studies, it can also be seen that NFTs are emphasized particularly. After Covid-19, when the importance of digitalization was understood, the question of how blockchain technology could be integrated into business life came to the fore. In fact, the potential application areas that emerged with NFTs provided the blockchain, as well, to be seen from a different perspective.

Global Companies and NFT Investments

NFTs are not just seen as digital assets that can be quickly profited from trading. International big enterprises are seeking creative ways to break into the NFT market. Many world-famous brands have begun to invest in NFTs. Brands such as Gucci, Nike, Adidas, Tiffany, and Louis Vuitton are trying to increase the demand for their products and find new areas of earnings thanks to NFTs. For example, Nike is benefitting NFTs to guarantee the originality of products. On the other hand, some brands that launch products specific to daily consumption curiously follow NFT projects and campaigns to support their marketing strategies, raise awareness among consumers and operate in the field of social responsibility.

Tal Lifshitz, a partner, and co-chair of the cryptocurrency, digital asset, and blockchain group at Miami-based Kozyak Tropin & Throckmorton (KTT) explain his thoughts on the potential of NFTs by saying: “If you’re the only person who owns a cell phone, it’s useless. If two people own cell phones, there’s some value. If billions of people have cell phones, you need a cell phone. That’s the impact of increased adoption. That’s the potential future of NFTs.”

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Benefits of NFTs

One of the essential features that differentiate NFTs from other tokens is that they can prove ownership of digital assets and the uniqueness/originality of digital assets. NFTs contain ownership information due to their technical structure. This means that; when and by whom the NFT was created, who owned it at a particular moment, and every single transaction from the first to the current/last owner can be tracked.

Moreover, since NFTs run on the blockchain, changes in the entitlement can be tracked transparently. No intermediaries are required for NFTs transactions. NFTs by being programmed through smart contracts, allowing the creator of the NFT to achieve his desires, for example, to gain access to content or attend a concert.

These features of NFTs have the power to transform many industries. Consider, for example, international trade: NFT is ideal for the electronic representation of trade documents such as bills of lading. In fact, although the electronic bill of lading has been a concept for years, it has not been a method that has been adopted with peace of mind due to its technical infrastructure. Because the electronic bill of lading does not have the features of NFTs, such as "protection by cryptographic" or proving originality and entitlement/ownership. Considering that the structures before the blockchain were centralized, the risk of loss or theft of electronic data due to vulnerabilities or errors in software or hardware systems was outweighed.

By benefitting from the features of blockchain like decentralization, immutability, and reliability, NFTs can display both an immutable copy of the bill of lading and a transaction history. Sellers, shippers, and buyers can track the goods for sale and transfer actual control and ownership without sending laminated pieces of paper across the ocean.

Many companies carrying on a business in the TradeTech space are focusing on using NFTs in their trading transactions. In this context, manufacturers have begun to use NFTs to scrutinize their supply chains. Alfa Romeo, for example, has focused on the potential usage of NFTs for tracking auto parts, and monitoring car performance, maintenance, and repair history.


Apart from their popularity, one of the issues that dominate the NFT market is cyber-attacks. NFT buyers need to be sure that the person selling the NFT is the real owner of that NFT. When it comes to NFTs, copyright infringement and impersonation of well-known NFTs or NFT artists are common. While the NFT itself, namely the token, is unique, a scammer can digitally copy an asset belonging to another person, issue it as an NFT, and sell it on marketplaces. There are many instances where imitations of the original NFT shops were made. For these imitations, the existence of the original logo and products makes these stores look like the real ones. In this case, it may actually comes up that a sale of NFTs that do not exist in the digital world. Since many consumers do not have sufficient knowledge about NFT technologies, they may be misled about the elements of NFT they purchase, or they may be exposed to practices such as unfair advertising.

Fraud incidents regarding NFTs have been widely occurring in many countries. In an irregularity called a "rug-pull," the NFT project team abandons the project and escapes with investors' money. Except these, we have repeatedly witnessed NFT thefts committed by taking advantage of loopholes in the smart contract underlying high-profile NFTs or weak security measures on the NFT platforms. We have also witnessed someone create an NFT, raise its price, and then buy that NFT from another account that they control (“wash trading”). In this way, the underlying content of NFT appears highly valuable, and its price is increasing. Lastly, it should be stated that many NFT transactions are carried out on the Ethereum blockchain, and the Ethereum blockchain does not guarantee the anonymity of users. Privacy solutions like zero-knowledge proof are not yet implemented widely in NFT-related transactions.

Establishment of a Balance Between Interest and Risk

Unlike cryptocurrency exchanges, many of the NFT marketplaces do not take measures like know your customer (KYC) and anti-money-laundering (AML). Connecting the crypto wallet to the NFT marketplace is considered sufficient for transactions on NFT marketplaces. Since NFT marketplaces remain in a gray area in the legislation of many countries, the identities of the transactors cannot be identified unless a marketplace takes KYC/AML measures on its own initiative.

Here, Arkhemist appears as an NFT marketplace in which KYC/AML measures can be activated at any time and appeals to everyone. In this way, users, NFT creators, and buyers can take measures to prevent irregularities whenever they wish. Arkhemist aims to eliminate the risks of illegal activities occurring, by taking advantage of the absence of KYC requirements. Although KYC/AML requirements are considered “troublesome” by users, it is also clear that these requirements are critical for transactions in the NFT marketplace to be adopted by a wider or stronger audience and to provide greater confidence.

Today, NFT platforms seem to be open to abuse in the case of irregularities made under the guise of anonymity. For these and similar reasons, Arkhemist has made it a priority to protect its users with the KYC option offered. Similarly, Binance NFT, one of the most preferred NFT platforms, requires sellers to go through the KYC process before an NFT can be listed.

It is a fact that digital assets and products have a serious impact on financial markets and the economy. The increase in irregularities in NFT transactions encourages legislators, regulatory authorities, and members of the crypto and NFT communities to regulate NFTs, at least to set out the basic principles by creating guidelines. The main objective here is to establish a balance of interests for the protection of all: NFT project owners, investors, and also consumers…