The NFT market is now worth more than $7 billion, but legal issues facing the nascent sector could hinder its growth, JPMorgan says

• A recent boom in NFT sales has catapulted the nascent market to a value of $7 billion, according to JPMorgan.
• While the NFT market has strong prospects, legal hurdles could hinder its growth.
• “The growth of the NFT market would be conditional on NFT market participants and regulators addressing the legal issues facing the industry,” JPMorgan said.

The NFT market has seen explosive growth this year as sales of the digital art items hover at a monthly rate of about $2 billion, JPMorgan said in a Thursday note.

That’s a big increase from monthly sales volume of about $400 million at the start of the year, and it has helped drive the market cap of the NFT universe to about $7 billion, according to the bank. 

Besides more NFT sales, a spike in the dollar value of many digitized tokens has contributed to the rise in value of the market, with high profile sales of CryptoPunks and work from artists like Beeple fetching tens of millions of dollars.

“The activity in NFT markets appears to be still rather irregular with occasional bursts rather than sustained increases in volumes,” JPMorgan observed.

The growth in the NFT market has caught the attention of legacy auction houses like Sotheby’s and Christie’s, which have both launched their own NFT marketplaces to get in on the action. Those moves should only add to the sector’s continued gains, according to the note.

“By creating marketplaces for illiquid assets such as digital art, collectibles, music, gaming and other assets, the NFT universe is surely set to continue to grow strongly over the coming years because it helps to solve the problem of injecting liquidity into naturally illiquid assets such as collectibles,” JPMorgan said.

But the NFT market’s growth going forward continues to face legal and regulatory hurdles that touch on copyrights, intellectual property rights, ownership of the token vs. ownership of the content, and authentication.

And because NFTs are non-fungible, they are not securities and are not subject to securities regulations in many countries.

“In turn, lack of regulations are making NFTs vulnerable to copyright theft, unauthorized replication and fraud, and storage failure,” JPMorgan said. And aside from legal risks, NFTs still have to overcome protocol risks like hacking, platform risks related to governance, and high gas fees stemming from the ethereum network, the bank said.

All-in, this means that the NFT market’s prospects are “conditional on NFT market participants and regulators addressing the legal issues facing the industry,” JPMorgan concluded.