NFTs are all the rage! Almost every day, I run into another article on the subject. In the context of what is going on today relative to NFTs, the token part is a digital unit of data stored on a blockchain that represents a digital asset or a physical asset.1
Blockchain technology is a ledger of past transactions. Each page of the ledger is called a “block,” and it has information on the previous block and the next block. Information in the blocks is secure, reliable, and tamperproof. Given the development of blockchain, it is no surprise that enterprising individuals would create NFTs. The NFTs can be things such as art, videos, or music (digital assets) or physical assets such as a painting, house, or other real object
(physical assets).2 Obviously, NFTs are intangible assets. They exist only in the ethereal world.
Where there is an intangible asset, valuators and appraisers are certain to show up. That is what is happening in the world of NFTs. There is a need for valuation of these assets wherever they might reside. It could be in a fair value-financial situation, or it could be in a divorce case, and everything in between.
This begs the question of which valuation discipline is best suited to provide the valuation of NFTs. The upcoming ASA annual conference has a presentation on the personal property valuation track on the subject of valuing NFTs. Are personal property appraisers the right appraisers for NFTs? The answer to that is the age-old adage, “it depends.”
Neil Beaton, a business valuation and intangible asset valuation expert with Alvarez & Marsal, offered this comment on the subject:
I won’t go as far as saying "only" BV people, but the basis for the tokens are blockchain, not personal effort as it would be for personal property. I don’t know a whole lot about personal property appraisals, but my experience has been that PP folks use "cost to recreate" and "value in exchange" rather than the income approach. One of my clients is an NFT fund in Hong Kong that buys and sells NFTs for profit, which then create cash flow. Now, if I had one NFT, say the Nike logo, then that is a unique asset that can’t really be valued under a cost to recreate or an income approach. So, one is left with "What would the NFT sell for on the open market?" Now, let’s take the hypothetical further and say a BV professional only values unique NFTs and a PP professional that only values unique NFTs. Which one is "better"? Of course, the answer is: "It depends." It depends on the relative experience of the two professionals. So, bottom line, there is no black and white answer.
Another area where valuation of NFTs will arise is in the area of litigation. In fact, it is already there. StockX is a company out of Detroit that resells sneakers online. It has expanded its markets to electronics, handbags, clothing, and, recently, to NFTs.
Nike, not surprisingly, has sued StockX for creation of NFTs featuring Nike’s products and branding. Nike has a variety of complaints and arguments ranging from trademark infringement to damage to business reputation. I am sure the bells are going off in the heads of valuators worldwide at the thought of this. In addition to cease-and-desist orders, the other remedy to the plaintiff in this and similar cases is—you guessed it—damages! Some damages might be in the purview of a personal property appraiser, but more likely it will reside in the domain of business valuators and damages experts.
I expect to hear much more about NFTs and related valuation issues as time goes on. We would like to hear from our readers on this expanding area of valuation and litigation.
1 Are NFTs Valuable Tangible Assets or Near Worthless Illusions, Ankura Consulting Group, LLC Lexology.com/library; Andrew Pimlott.