Keeping crypto on the right side of the line

Keeping crypto on the right side of the line

Football club Arsenal found themselves offside when they offered fans a digital token through their website, and their penalty is a warning to other companies looking to get into the increasingly busy arena of crypto-asset tokens.

Non-Fungible tokens – or NFTs – may represent a physical or digital asset, but they exist only in digital form, held securely using blockchain technology, and identified by their unique metadata.

The Arsenal token gave fans the right to vote on club decisions and access to a digital platform where they could interact with other fans. As a crypto token, it could be purchased only by using cryptocurrency, in this case Chiliz. But the advertisement on the club’s website for the fan engagement concept brought the top-flight club into territory regulated by the Advertising Standards Authority. They ruled that the advertising was irresponsible because it took advantage of buyer inexperience, playing down the risk of investment in unregulated markets.

And while the activities of a premier league football club may seem far removed from daily business life, the market is moving fast and likely to involve more and more companies before long. Digital assets are becoming an increasingly popular commercial option, with many businesses now accepting collateral in the form of cryptocurrencies.

In the past few weeks, US companies have announced new crypto initiatives ranging from a tokenised mortgage to a New York restaurant offering diners the chance to secure their table with a crypto token.

For home lending company LoanSnap, homeowners will be able to raise equity by selling a portion of their home on the blockchain. The funds will come from crypto investors who buy a non-fungible token using cryptocurrency bHome.

At the Flyfish Club, diners have been gobbling up a token granting the right to eat at the restaurant when it opens, currently scheduled for 2023. Purchased with cryptocurrency Etherium, buyers are effectively buying table space, as the food bill will still have to be paid in dollars. In spite of the restaurant being no more than a business plan, the company raised $15m in under a minute when it released the tokens, which soon started changing hands on the secondary market, bringing the company further funding, with a ten percent share of all such sales.

“It’s tempting to see opportunities in this field, with companies and investors piling in and generating a buzz,” said corporate legal expert Joshua Chauhan. “The problem for both sides lies in a general lack of knowledge, combined with a lack of regulation.”

Presently the Advertising Standards Authority may step in where advertisements are misleading, but greater regulation is on its way, following the recent announcement by the Financial Conduct Authority. The financial sector’s watchdog has released draft rules for public consultation which will bring the promotion of cryptocurrencies under their remit and restrict how they are advertised to ordinary investors. Firms that approve and communicate financial marketing would need to have relevant expertise and understanding of the investments being offered, and make sure risk warnings were clear. Investors will also face a more probing experience, with questions on their knowledge and investment experience.

Josh added: “These regulatory moves were inevitable. We saw a similar situation with crowd-funding, which swiftly came under the remit of the FCA as that market developed a decade ago. While the regulation is a way off at present, any company thinking of getting into monetising through digital assets should think about the longer term environment and get specialist advice.”

Both NFTs and cryptocurrencies use the same Blockchain technology, which is effectively a digital ledger shared and verified across innumerable computers worldwide, protected by complex cryptography. While the process is designed to be secure and resistant to fraud, it is not without flaws, making crypto investment high risk. Each NFT carries its own unique chain of title, but the original entry could be false, an error could have been made, and holdings are potentially vulnerable to cyberattack, no matter the inherent security of the technology.

*This is not legal advice; it is intended to provide information of general interest about current legal issues.

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