Depending on whom you ask, the non-fungible token (NFT) market is either a Ponzi scheme, the future of art, technology and finance, or somewhere in between.

Yet you can scarcely scroll through Twitter without coming across Bored Apes, news of eye-wateringly large sales, or ponderings on the direction of the $23bn (£16.75bn) sector (as calculated by DappRadar).

For advisers, the mainstreaming of the speculative asset is highlighting the need for a better understanding of NFTs — what they are, how they operate as an investment, and how regulations may dictate the relationship between client, adviser and asset.

NFTs will form part of a client’s estate and will need to be considered for tax purposes

An NFT is a digital asset — such as a piece of art, a tweet or virtual real estate — bought and sold with cryptocurrency. It shares much of the same back-end technology as crypto coins.

The blockchain technology and the unique qualities of each NFT are what determine their value. Consumers are drawn to the exclusive quality of the art, for example, as well as the prestige of ownership and the speculation that the price could rise.

“NFTs don’t gain in value because of their utility but are based on the value of the media they represent,” says Jonathan Kleeman, founder of education hub Crypto for Apes.

Digital ownership

One notable example is Twitter founder Jack Dorsey. He sold the first tweet, ‘Just setting up my twttr’, in 2021 for $2.9m after a bidding war for digital ownership of the tweet. The auction winner, Sina Estavi, received a digital certificate.

“This is not just a tweet!” said Estavi. “I think, years later, people will realise the true value of this tweet, like the Mona Lisa painting.”

If current frameworks are not fit for purpose, advisers will be left waiting on the regulator to play catch-up

And, for many in the NFT space, the mainstreaming of the asset — through instances such as auction house Christie’s sale of an NFT for $69m in March 2021 — is underlining the need to regard NFT investing in the same light as holding traditional art.

“It is necessary for advisers to at least understand the basics but, as the markets get bigger and bigger, specialisation will be key. Art specialisation is completely different from sports NFT collectables,” adds Kleeman.

Mike Stimpson, partner at wealth manager Saltus, is equally positive about the prospects for NFTs, explaining his clients are “in the education stage” of owning and storing digital assets. He views NFTs as an “emerging asset class” in their own right that “may sit alongside other higher-risk assets in a client portfolio”.

However, in lieu of robust regulation covering crypto assets, the relationship between advisers, clients and NFTs is “uncertain and quickly developing”, says Hilesh Chavda, private client partner at law firm Spencer West. He points to succession planning as just one area that will require significant attention from both advisers and, in the longer term, the regulator.

NFTs don’t gain in value because of their utility but are based on the value of the media they represent

“NFTs will form part of a client’s estate and will need to be considered for tax purposes.

“Anything clients can do to ascertain value, or a marketplace, will be helpful. You don’t want HM Revenue & Customs saying the NFT is undervalued, but you don’t want to overvalue it and pay more tax than necessary,” says Chavda.

Yet regulatory frameworks are “light-years” behind developments within the NFT space, and regulators “have not got to grips” with the nuances of the asset, explains the lawyer. If current frameworks are not fit for purpose, advisers will be left waiting on the regulator to play catch-up.

As the markets get bigger and bigger, specialisation will be key

“The development of legislation and emerging case law around the world will help give us more clarity as NFTs continue to move into the mainstream,” says Chavda.

Until then, advisers face the conundrum of how best, if at all, to embrace NFTs.