A nonfungible token (NFT) is a unique digital code representing a digital item. Commonly, this could be art or music and a growing number of physical objects. The digital code runs on the blockchain (a secure, decentralized, and cryptography-backed online ledger). This record-keeping system provides proof of ownership of virtual collectibles. That explanation may confuse, and when it comes to NFTs, confusion, and excitement are present in equal parts. As an estate planning attorney in Austin, I can help you keep your head about you. Together we can create a life and legacy plan that protects you and your family by securing your tangible and intangible assets.
Over the last year, the sale of multimillion-dollar NFTs has prompted growing interest in them—and plenty of questions. Namely, what exactly are NFTs, how are they used, and why would anyone be interested?
NFTs can generate new revenue streams for creators and be a store of value for collectors. If you own NFTs or plan to invest in them, you should update your estate plan accordingly. Handing down an NFT is more complicated than passing on a physical item or other traditional assets. But with buzz building around NFTs, they could be among the most valuable things in your estate.
As the name indicates, the token is nonfungible. In other words, it is unique and cannot be directly replaced by, or exchanged one-for-one for, another token.
Fungible assets are mutually interchangeable. They include things such as the US dollar and Bitcoin. You can exchange a one-dollar bill for any other; one Bitcoin will (likely) always equal another Bitcoin. You can also break fungible assets down into smaller denominations, such as four quarters in exchange for one dollar.
No two NFTs are the same; they are not replicable. Each token is one of a kind. But things can get tricky here: NFTs do not necessarily derive their worth from their uniqueness, even though that is part of their value.
Typically, an NFT is linked to a specific digital item and serves as a certificate of authenticity for that item. Tokenizing assets and putting them on the blockchain makes buying, selling, and trading the assets safer and more efficient.[1]
NFTs represent and are used to sell the following types of digital collectibles and assets, among others:
NFTs can also represent unique actual world items that require provable ownership, such as event tickets, special fashion items, and legal documents such as property deeds and car titles. However, the tokenization of physical objects is not yet as developed as the tokenization of digital items.
You can purchase NFTs on online marketplaces. More popular NFT marketplaces include OpenSea, Mintable, Nifty Gateway, Rarible, and Zora.
You must purchase NFTs with cryptocurrency (crypto). The most popular crypto for buying NFTs is Ethereum. To get started, you will need a cryptocurrency wallet, an application that allows you to send and receive cryptos and make purchases. Once you are on an NFT marketplace site, connect your wallet. You can then search for and buy NFTs, but you will be bidding against other buyers, as in an auction.
Congratulations, you are the owner of an NFT. Now what?
You will never be able to hold a token in your hand or hang it on your wall to impress your friends. What you can do with an NFT depends on what it is. If it is digital artwork, you can display it on a monitor or inside a virtual world (known as a metaverse) such as Decentraland. With NFTs, you can also own virtual real estate and other unique items in the metaverse. The full potential of NFTs seems inextricably tied to the development of the metaverse’s 3D digital environment.
You might want to just hold on to your NFT as an investment. If its value goes up over time, you can sell the token for a profit. Last year, a collector who bought a $66,000 NFT digital artwork from artist Beeple sold it four months later for one hundred times the amount paid. Another work from the same artist sold for nearly $70 million at Christie’s auction house.
While you may not be able to possess an NFT physically, it can be worth genuine money. That NFT you buy today could be worth more than any of your traditional accounts and property.
Each NFT can have only one owner at a time. A purchaser would store the token in a wallet, similar to a crypto wallet. Although the NFT resides on the decentralized blockchain—and not actually in your wallet—the wallet has digital keys that give you access to your NFT. The wallet must be compatible with the type of blockchain (usually Ethereum) on which the creator of the NFT built it.
During your lifetime, transferring an NFT can be done in minutes. You select the NFT you want to move from your wallet, enter the recipient’s wallet address, and send the token. You also have to pay a transaction fee.
Access to your digital wallets should be part of your estate plan. Without a detailed plan that ensures access to your cryptocurrency, NFTs, and other digital assets, they could be lost forever once you are no longer around to transfer them to someone else personally. Your estate plan includes instructions about whom the assets should pass to, when they should be shared, and how to log into your digital wallets (i.e., your wallet ID, password, and any two-factor authentication you have enabled).
Do you have questions about your digital legacy? Do you need help setting up an estate plan covering traditional accounts and property and nontraditional digital assets such as NFTs? Reach out to our office and schedule an appointment with an estate planning attorney.
[1] Matt Hussey, What Is Blockchain and What Is It Used For?, DECRYPT (Jan. 22, 2019), https://decrypt.co/resources/blockchain-basics-what-is-blockchain.
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