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NFT explosion: Why are people buying digital art? – Futurity: Research News

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Futurity is your source of research news from leading universities.
Visitors look at digital artworks at the Digital Art Fair Asia showcasing digital and NFT art on October 4, 2021 in Hong Kong. (Credit: Anthony Kwan/Getty Images)
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Built on the same technology as Bitcoin, NFTs have been a hot topic in 2021. They enable a real market for digital works of art while fueling unprecedented speculation.
2021 might become known as the year when digital art exploded. On March 11, a cryptocurrency investor paid $69 million for the digital painting “Everydays: The First 5000 Days” during an auction organized by Christie’s. The blinking GIF Fomo is currently for sale for $2 million—60 times what it sold for only nine months ago. And a series of 10,000 straightforward-looking illustrations of monkeys, called the Bored Ape Yacht Club, are collectively worth more than one billion dollars.
This mind-boggling bubble is fueled by the NFT technology, which enables cryptocurrencies such as bitcoins or ethers to be exchanged against digital objects. An NFT or “non-fungible token” is a digital data string that establishes proof of ownership of a specific item that usually exists in the virtual world. It could be, for instance, a digital work of art, a financial asset, or a patent.
NFTs live on the blockchain, a transaction-tracking decentralized ledger, which until recently was mainly known for being behind Bitcoin. It has generated incredible hype while extending its potential impact on many industries, from finance to art, music, intellectual property, and luxury goods.
“NFT has really enabled a market for digital art,” says Robert Zumkeller, a graphic designer who started creating NFT illustrations while a student at the FHNW Academy of Art and Design in Basel. “I am not certain that I would have found a brick-and-mortar gallery willing to exhibit my digital work, nor buyers who would acquire a physical screen to own it. With NFTs, I could use an online gallery, Superrare.com, to showcase my work and sell it.”
Like everything else recorded on a blockchain, art NFTs allow for tracking all transactions after their initial sale. This tracking allows for a perpetual royalty payback, explains Zumkeller. Under his moniker, Vicarivs, the young artist will receive 10% on any subsequent sale of his work—something that rarely happens with physical objects sold by galleries or collectors.
In physical art, only one original copy usually exists (or a few dozen, in the case of art prints). The original is distinguishable from reproductions, which are sold legally or as forgeries. With digital painting, the work of art is a data file, which can have an infinite number of perfect copies. That is why an NFT does not comprise the data file of the work of art itself; instead, it functions as proof of original ownership.
NFTs have also entered the luxury market, where recently, digital twins (a photograph or a 3D animation) of collector watches went up for auction in spring 2021. “More and more brands are looking into NFTs,” says Serge Maillard, managing editor of the watch magazine Europa Star. “First, as a useful tool to fight forgery by ensuring traceability and authenticity. Second, to develop and maintain a closer, more personal relationship with their client, without having to rely on intermediaries.”
Swiss IT security company Wisekey has also moved into this business. “Digital twins for luxury items and art are the main markets so far, but other uses of NFTs are emerging, in particular for certifying intellectual property and identity,” says CEO Carlos Moreira. The company provides NFTs to protect luxury objects and has recently launched an art marketplace. It plans to introduce its own cryptocurrency and is working on projects for digital rights management of music and movies.
Altogether, the NFT market ballooned over the last twelve months with a 700% increase from the second to the third quarter of 2021, according to the analytics platform Dappradar. This bubble confirms the speculative character of cryptocurrencies and blockchain applications; namely: the dollar value of the bitcoin has increased by a factor of 100,000 over ten years.
“So far, design choices on the technology have helped to fuel speculation,” explains Claudio Tessone, professor of blockchain and distributed ledger technologies at the University of Zurich’s department of informatics. “The most widespread systems are based on the so-called proof-of-work, where the validating and tracking of all transactions by the network as well as the introduction of new tokens only work because users run computations on their systems.
“As the devoted resources have been accelerating under a constant rate of supply, the creation of assets is becoming more and more expensive, which fuels an increase of their value, just like oil prices going up when it’s harder to extract. In turn, this creates incentives to invest resources in the blockchain, which fuels a self-reinforcing loop driving speculation and inflating prices further.”
The energy consumption of blockchain applications has been an increasing worry. While society is desperately trying to tackle climate change, it has simultaneously introduced economic services that consume as much electricity as a middle-sized country like Sweden. “There is some hope that a new architecture for blockchains, called proof-of-stake, will make the electricity needed to run it negligible,” says Tessone. “A new generation of platforms such as Cardano, Polkadot, or Tezos are already running on such systems, but their impact—while increasing—has been limited so far. We’ll have to see.”
However, this new architecture could generate new, problematic incentives. Until now, cryptocurrencies rewarded those setting up huge computer farms to profit from economies of scale and more efficient energy usage. A proof-of-stake blockchain rewards users instead who heavily invest in it, which fuels speculation. “As of now, it is hard to imagine blockchain without speculation,” says Tessone. “It is good to see that the community takes this problem seriously, cryptoeconomies for a future with more functional cryptoeconomies.”
Catherine Tucker, a professor of management at MIT who specializes in the blockchain, regrets this focus on speculation: “Most of the reporting on NFTs has been on the speculative aspects. This is rather frustrating, as it may lead to less experimentation on ideal-use cases.”
One worry is that the anonymity provided by blockchain technology could help financial fraud. The most obvious ones are shill bidding to drive prices up at auction and insider trading. In September 2021, Opensea, the largest marketplace for NFTs, revealed that one of their employees had purchased items just before they were displayed for sale on its front page—an action that would amount to insider trading.
Many specialists’ forums discuss the risk of shill bidding, where an artist or someone they are conspiring with buys their work for a large sum to drive its price upwards and maintain the current bidding frenzy. This culminated with the suspicion that the owner of an NFT of the art series CryptoPunk borrowed 500 million dollars as a flash loan—a financing mechanism only available on the blockchain—to buy the NFT from themselves before returning the money. While a clever trick to inflate the price of their art, this move also raised suspicions that NFTs could be a perfect tool for money laundering.
Interestingly, specialists discovered these suspicious activities because all blockchain transactions are fully available to the public. “The famed privacy of cryptofinance is a mere illusion,” says Tessone. “It is based on the premise that users create a large number of wallets holding their assets in an attempt to obfuscate their transactions.” But in fact, many people choose to avoid this option because of the cost of transactions. And then, of course, there’s the traceability, adds Tessone: “mathematical network analysis can uncover suspicious activities, allowing tracing back transactions to a person even if they manage many wallets. This is why shill bidding on NFTs is not actually safe for fraudsters, contrary to what many commentators say.”
Catherine Tucker also cautions us against putting the blame entirely on NFTs, saying that “problems such as insider trading with NFTs are reflections of underlying user behavior in uncertain environments and persistent transaction costs. I am not sure if attributing fault to the technology is correct. Ultimately, technology is just technology.”
Source: University of Zurich
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Starbucks details its blockchain-based loyalty platform and NFT community, Starbucks Odyssey – TechCrunch

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Starbucks is today officially introducing Starbucks Odyssey, launching later this year — the coffee chain’s first foray into building with web3 technology. The new experience combines the company’s successful Starbucks Rewards loyalty program with an NFT platform, allowing its customers to both earn and purchase digital assets that unlock exclusive experiences and rewards.
The company had earlier teased its web3 plans to investors, saying it believed this new experience would build on the current Starbucks Rewards model where customers today earn “stars” which can be exchanged for perks, like free drinks. It envisions Starbucks Odyssey as a way for its most loyal customers to earn a broader set of rewards while also building community.
To develop the project, Starbucks brought in Adam Brotman, the architect of its Mobile Order & Pay system and the Starbucks app, to help serve as a special advisor. Now the co-founder of Forum3, a web3 loyalty startup, Brotman’s team worked on Starbucks Odyssey alongside the Seattle coffee chain’s own marketing, loyalty and technology teams.
While Starbucks had been investigating blockchain technologies for a couple of years, it has only been involved in this particular project for around six months, Starbucks CMO Brady Brewer told TechCrunch. He says the company wanted to invest in this area, but not as a “stunt” side project, as many companies are doing. Rather, it wanted to find a way to use the technology to enhance its business and expand its existing loyalty program.
It opted to make NFTs the passes that allow access to this digital community, but it’s intentionally obscuring the nature of the technology underpinning the experience in order to bring in more consumers — including non-technical people — to the web3 platform.
“It happens to be built on blockchain and web3 technologies, but the customer — to be honest — may very well not even know that what they’re doing is interacting with blockchain technology. It’s just the enabler,” Brewer explains.
To engage with the Starbucks Odyssey experience, Starbucks Rewards members will log in to the web app using their existing loyalty program credentials.
Once there, they’ll be able to engage with various activities, which Starbucks called “journeys” — like playing interactive games or taking on challenges designed to deepen their knowledge of the Starbucks brand or coffee in general. As they complete these journeys, members can collect early digital collectibles in the form of NFTs (non-fungible tokens). Starbucks Odyssey, however, does away with the tech lingo and calls these NFT collectibles “journey stamps” instead.
Additionally, a set of limited-edition NFTs will be available to purchase in the Starbucks Odyessy web app, which also works on mobile devices. Though hosted on the Polygon blockchain, these NFTs will be bought using a credit or debit card — a crypto wallet is not required. The company believes this will make it easier for consumers to engage with the web3 experience by lowering the barrier to entry. It also won’t complicate consumers’ transactions with things like “gas fees,” preferring to offer a bundled price.
The company is not yet ready to share what its NFTs will cost or how many will be available at launch, saying these are decisions that are still being ironed out.
However, the various “stamps” (NFTs) will include a point value based on their rarity and can be bought or sold among Starbucks Odyessy members in the marketplace, with the ownership secured on the blockchain. The artwork on the NFTs is being co-created by Starbucks and outside artists, and a portion of the proceeds from the sale of the limited-edition collectibles will be donated to support causes chosen by Starbucks employees and customers.
By collecting the stamps, members will gain points that can unlock exclusive benefits.
These perks go beyond those you can earn with a traditional Starbucks Rewards account and its “stars.” While today, members can earn things like free coffee, free food or select merchandise, the points earned in Starbucks Odyessy will translate into experiences and other benefits.

Starbucks Hacienda Alsacia. Image Credits: Starbucks(opens in a new window)
On the lower end, that could be a virtual espresso martini-making class or access to unique merchandise and artist collaborations. As you gain more points, you may earn invites to special events hosted at Starbucks Reserve Roasteries, or even earn a trip to the Starbucks Hacienda Alsacia coffee farm in Costa Rica. It’s expected the very largest perks will be reserved for those who purchase NFTs, though lesser versions may be offered to those who earn their way up.
For instance, a paid NFT could offer the full travel package and farm tour, while an earned NFT could offer the tour alone with flights and hotels left up to the user. Starbucks hasn’t made any formal decisions on this front, however.
But what the company can say is that it wants to deeply integrate the program with its existing loyalty rewards, beyond simply using the same user account credentials for both programs.
Brewer says Starbucks is already imagining how some of the activities that earn NFTs will be connected to real-world Starbucks purchases, for instance.
In Odyssey, users earn NFTs by doing challenges, which might also include a real-world activity like “try three things on the espresso menu.” This would require the user to show their barcode at checkout — as they would if earning stars — to have their transaction counted toward the Starbuck Odyssey challenge. The company is still determining what mix of games, challenges and quests it will include at launch.
“But we’ll have experiences that do link directly to customers’ behavior in our stores,” Brewer stresses. Most importantly, the company wants to make gaining NFTs something anyone can do — not just those with money to blow on digital collectibles, as is often the case with current NFT communities, which price out the average user.
“There will be a lot of ways for people to earn [rewards] without having to spend a lot of money,” says Brewer. “We want to make this super easy and accessible. There will be plenty of everyday experiences customers can earn like virtual classes or access to limited edition merchandise, for instance. “The range of experiences will be quite vast and very accessible,” he adds.
Starbucks says it explored all the different blockchains for the project but landed on the “proof-of-stake” blockchain technology built by Polygon for this effort because it uses less energy than first-generation “proof-of-work” blockchains, which is more in line with its conversation goals.

Image Credits: Starbucks (opens in a new window)
The idea to enter into the world of web3 makes sense for a company known for taking advantage of emerging technologies and making them more approachable and easy for consumers to access. In years past, Starbucks introduced Wi-Fi in its stores to encourage customers to spend more time during visits. It also pushed the idea of mobile wallets long before Apple Pay became ubiquitous. And it made mobile ordering the norm well ahead of the COVID pandemic, when other restaurant chains picked it up.
But one criticism leveraged against many traditional businesses when they enter the web3 market is that they’re approaching it as a marketing stunt, not a real endeavor. Starbucks, of course, argues that’s not the case here — but only time will tell how serious its interest may be.
“We’re bullish on the future of these technologies enabling experiences that were not possible before,” Brewer claims. The intention is to be flexible and move with the customers as the web3 market changes, he explains. “It’s really important that we’re looking at it for the long-term,” he continues. “But, given that we’re plugging it into our industry-leading, massive scale rewards program — we’re committed,” he says.
The company says its web3 platform will open its waitlist (waitlist.starbucks.com) on September 12 and will launch later in the year. It will remove the waitlist and open the platform more broadly sometime next year.

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Tyler Hobbs' Fidenza NFT Project Gets $1M Pump Over 48 hours – CoinDesk

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DOJ Asks Congress for Tools to Limit NFT Money-Laundering Risk – PYMNTS.com

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Down at the very bottom of the crypto crime report the Justice Department issued last week was a request that could make it a lot harder to buy and sell NFTs.
Citing examples of criminals using the sale of the popular nonfungible tokens that hold art, video, music and collectibles to launder funds, the Justice Department asked Congress to define some of all NFTs as “value that substitutes for currency” under the Bank Secrecy Act (BSA).
Doing so, it said in “The Role of Law Enforcement in Detecting, Investigating, and Prosecuting Criminal Activity Related to Digital Assets,” would “make clear that its key [anti-money-laundering (AML) and countering the financing of terror (CFT)] provisions — including the obligations to have customer identification programs and report suspicious transactions to regulators — apply to NFT platforms, including online auction houses and digital art galleries.”
See also: DOJ Seeks to Double Jail Time for Money Transmission Crimes
The impetus, the department said, is the “explosive growth in the demand and corresponding markets for NFTs, perhaps most notably in the area of digital art.”
Substantial Risk
This “presents substantial money-laundering risks,” it said, citing a February Treasury Department study on money laundering in the broader art market.
“NFTs can be used to conduct self-laundering, a sequence in which criminals purchase an NFT with illicit funds and then resell to a purchaser who pays for it with clean funds unconnected to a prior crime,” that report noted.
It also found that in most cases, “digital assets that are unique, rather than interchangeable, and that are used in practice as collectibles rather than as payment or investment instruments … are generally not considered to be virtual assets under [international regulations].”
The “nonfungible” part of NFT means that each is unique and cannot substitute for any other, as opposed to cryptocurrencies like bitcoin which all have the same uses and value.
NFT marketplaces “may take the view that this definition [of a ‘value that substitutes for currency’] does not apply to their activities — and that they are thus not subject to the BSA’s anti money-laundering and anti-terrorism laws, the department said.
Justice is asking Congress to amend the BSA “to make clear that its key AML/CFT provisions — including the obligations to have customer identification programs and report suspicious transactions to regulators — apply to NFT platforms, including online auction houses and digital art galleries.”
Already There
Redefining NFTs as “value that substitutes for currency” would allow the Treasury Department’s Financial Crimes Enforcement Unit (FinCEN) to “potentially seek to regulate such activity under its money transmission regime,” a trio of lawyers at Skadden, Arps, Slate, Meagher & Flom wrote in an April blog post.
That, according to Jamie Boucher, Eytan Fisch and Javier Urbina, would require NFT marketplaces to register as money services businesses (MSB) with FinCEN.
Some types of NFTs — notably those used to fractionalize tangible assets like physical artworks and real estate, but also other valuable art or collectible tokens — are likely securities, the Securities and Exchange Commission (SEC) has said.
See more: How Did NFTs Become SEC’s Newest Crypto Target?
In FinCEN’s view, the trio noted, those can be repurposed to fit the definition of “value that substitutes for currency” and thus may already require MSB licenses.
 
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