Under what circumstances does NFT evolve into a “financial product”?

On August 2, 2021, a well-known domestic company released the country ‘s first NFT transaction APP , and at the same time launched the corresponding NFT product on the APP. Among them, the former service agreement shows that this APP is an “access, sharing, and purchase of NFT digital works”, and will be sold in limited quantities at 20 o’clock on August 3rd. And a company that previously launched a variety of payment code NFT skins, its NFT products were also hyped up to 1.5 million yuan on the second-hand trading platform.

However, in the face of the needs and desires of the majority of buyers for transactions, on August 3, the APP emphasized that none of its currently sold NFTs cannot be used for second-hand transactions and cannot be transferred as gifts. According to media reports, the NFT skin that had been hyped up to 1.5 million yuan on second-hand platforms was also urgently removed the next day. The reason for this is that if left unchecked, NFT products are very likely to be treated as financial products and face huge legal risks . We have seen the article “The Formation Logic of the Financialization of Ordinary Commodities” published by Professor Zhang Chengsi (Sister Sa) from the School of Finance and Finance of Renmin University of China in the “Journal of Renmin University of China”, which gave a profound exposition on the financialization of ordinary commodities. We combine theory with practice, and analyze it with NFT products. The specific analysis is as follows.

NFT product attributes

NFT’s product attributes have disputes over data rights and property rights, and there is still no conclusion yet. Sister Sa’s team currently supports the view of property rights. Nevertheless, the legal nature of NFT has little impact on its own compliance. However, once NFT is financialized, its casting, trading or other circulation methods may bring great compliance risks. As readers know, laws and policies have different tolerances for pure commodities and financial products .

For Token 1.0, the “Notice on Preventing Bitcoin Risks” issued by five ministries and commissions including the People’s Bank of China in 2013 pointed out that “in terms of nature, Bitcoin should be a specific virtual commodity, not equivalent to currency. Legal status, cannot and should not be used as currency in the market.” Therefore. Bitcoin, the representative of digital currency, was originally regarded as a commodity in our country’s laws. However, with the popularity of the market and the influx of a large amount of funds, the financial attributes of Bitcoin have been continuously strengthened and eventually become financialized, so there are many Legal and policy risks. NFT and its derivative products still belong to the category of ordinary commodities, but because of their uniqueness, in fact, there is the possibility that they will eventually become financial products, so we need to understand and prevent them.

The concept of financialization of ordinary commodities

Commodities can be further divided into ordinary commodities and financial products according to their specific uses and transaction characteristics. The latter refers to various non-physical assets that have economic value and can be publicly traded or redeemed, also called marketable securities. Although there is no doubt about the nature of NFT as an ordinary commodity, even so, it still has the possibility of financialization. Once the NFT product is excessively financialized or even regarded as a financial product, it will no longer be adjusted by laws such as the “E-Commerce Law of the People’s Republic of China”, but will belong to the field of financial products, with greater legal risks. .

This process of gradual financialization of ordinary commodities and finally being regarded as financial products is called ordinary commodity financialization. According to Professor Zhang Chengsi, the financialization of ordinary commodities has two meanings : “First, the financial attributes of ordinary commodity trading mechanisms have gradually increased, causing the commodity price determination mechanism to deviate from the supply and demand factors at the output level, and it depends more on the supply and demand factors at the output level. Corresponding to the size of the market’s funds; the second is that ordinary commodities in commodity transactions are no longer the subject of transactions in the traditional sense, but the ownership of the corresponding commodities is regarded as a quasi-financial asset, and the purpose of purchasing commodities is no longer the commodity itself. It’s about reselling ownership to make a profit.”

Simply put, the financialization of an ordinary commodity means that on the one hand, the price of the commodity itself is no longer determined by the supply and demand relationship or by its own value, but more depends on the size of the market’s capital ; on the other hand, On the one hand, it also means that the commodity itself is no longer valued, and the purchase of the commodity is no longer for consumption, but for functions such as value preservation and appreciation, and ultimately for the purpose of reselling its ownership for profit .

Conditions for the financialization of ordinary commodities

Through the study of most common commodity financialization cases in history, such as the “Luoyang paper expensive” incident in the Jin Dynasty, the Dutch tulip financialization incident in the 17th century, and the modern stamp financialization incident in my country, we can find the logical existence of commodity financialization. Certain consistency, this consistency is reflected in the following three characteristics of the product:

First, the commodity generally has a certain unique attribute or scarcity or can form a monopoly market. The reason for this is that the value of commodities with such characteristics is difficult to determine, and therefore the price is also difficult to determine, which has great volatility. This volatility also gives these commodities the ability to resist inflation, maintain their value, and increase their value, thus reflecting more financial attributes. However, due to its unique characteristics, the value of NFT commodities is difficult to determine, so their prices can fluctuate drastically and belong to this type of special commodities.

Second, in most cases, the beginning of commodity financialization is speculation. In order to promote the financialization of commodities, speculators often take certain actions, such as speculation, reducing supply, etc., so that commodity prices fluctuate sharply and begin to rise, and they will sell them after the price rises near their expected value, thereby obtaining high prices. Amount of profit.

Third, the price of the commodity fluctuates sharply in a short period of time, and its price is no longer determined by the relationship between supply and demand. This kind of event often happens because there is an influx of a large amount of capital, and because the supply has not changed, it has led to an increase in the demand for goods, thus raising the price. But in essence, this price increase does not reflect actual demand, and therefore presents a kind of volatility, making the original pricing mechanism no longer functioning, and giving speculators the opportunity to make profits. Combining this with the second point, we can see that in order to suppress the financialization of NFT products, it is necessary to prevent the occurrence of speculation and the excessive influx of funds as much as possible, so as to suppress the excessive growth of commodity prices. This means that NFT operation They need to control the hype and strictly control the influx of funds from all parties in order to resist the review of the financial regulatory system.

Write at the end

The financialization of commodities has not been a rare event since ancient times, but due to the influence of my country’s financial product control system, once NFT commodities are excessively financialized, they will bear greater legal and policy risks, so more attention is still needed in this regard.

 

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