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Whisky NFTs: a Clear-headed Explanation by Crypto & Legal Experts

 

As with many emerging trends, NFTs are not without controversy. Yet the phenomenon is beginning to take over the whisky, rum and spirits scene. There’s no better time for whisky and spirits lovers to receive a clear-headed low-down on the “what”, “why”, “how” and “so what” of NFTs in the whisky and spirits space.

 

Whisky NFTs: A Clear-headed Explanation by Crypto and Legal Experts

 

What exactly is a whisky NFT? What can I do with them? Are they a good investment? What are the misconceptions?

We have explained what blockchain could mean for the luxury whisky market. But the arcane tech and NFTs have continued to inexorably seep into the domain of consumer market whisky, rum, spirits and cocktail bars. Early this year, Glenfiddich released NFTs tied to a beautiful limited edition Glenfiddich 21 Gran Reserva expression to commemorate Chinese New Year - for 0.15 Ether (ETH) - about US$380 then. Shortly after, Ardbeg released its own NFT tied to the non-age statement Fon Fhòid expression, which went for 1 ETH - or about US$3,000 at time of release.

 

(Image Sources: Glenfiddich, Ardbeg)

 

More recently, The Glenrothes is serving up 36-year-old 1978 single cask expression alongside an NFT artwork that grants exclusive access to real-life privileges around New York City. 

 

(Image Source: The Glenrothes Distillery)

 

It’s as if we can’t go a day without hearing about a new NFT being launched by a big Scotch brand. But wait- the Japanese are aboard this ride too.

The UniCask project from Japan which began last December has been selling fractional ownership of high-value whisky casks using NFTs. Their latest release - a cask of rare Japanese single malt from the legendary Hanyu Distillery was put on sale on 20 April and all 100 units of Cask NFTs were sold out within just 45 minutes. 

 

 (Image Sources: UniCask, Hanyu Distillery)

 

Selling fractions of a rare whisky cask allows many individuals – who otherwise may not be able to afford an entire cask – to jointly invest in a rare cask of whisky together with a pool of many other people.

As with many emerging trends, NFTs are not without controversy. Yet this phenomenon is too important to be ignored. With this riot of unusual jargon and bizarre primate art collages erupting around us, there’s no better time than now for whisky and spirits lovers to receive a low-down on the “what”, “why”, “how” and “so what” of NFTs in the spirits space!

 

Bored Ape Yacht Club (BAYC) is a prominent NFT collection that features algorithmically-generated profile pictures of cartoon apes. So prominent that A-list celebrities have purchased tokens - the likes of Justin Bieber, Steve Aoki, Eminem and Madonna. 

 

 

1. What is a whisky NFT?

Let’s rehash the basics. NFTs, or non-fungible tokens are one-of-a-kind digital assets, each with a distinct token-ID that prevents replication by fraudsters. At present, most NFTs being traded around involve digital artworks or items - these NFTs are supposed to represent ownership over an intangible digital item - whether it is an artwork of a smoking primate, Twitter Inc’s founder’s first tweet, or 92 seconds of unseen film footage from Hong Kong director Wong Kar-Wai.

 

Slightly over a minute of unpublished footage from Wong’s famous film was sold under a NFT (Image Source: Jet Tone Films)

 

But NFTs can also be minted to represent real-world physical assets – like a car, or a rare bottle of single malt. 

So far, whisky producers have been releasing 2 main types of NFTs:– 

(1) NFTs that redeem whisky: Glenfiddich and Ardbeg have released NFTs that represent ownership in an actual bottle of whisky. After the customer has purchased the NFT, the bottle remains in the distillery’s custody until the bottle is redeemed. 

 

Bottles of Ardbeg Fon Fhòid are being stored in a temperature-regulated facility in Singapore until they may be redeemed by their NFT-holders (Image Source: Ardbeg)

 

In the mean time, the NFT serves as a proof of ownership that the NFT-holder does own a genuine bottle of whisky. The NFT-holder can freely trade the NFT on a trading platform, and potentially resell the NFT for a higher price. When the final NFT-holder decides to redeem the whisky, the distillery would deliver the actual bottle of whisky to the holder, and in turn the NFT would be “burned” and ceases to exist. 

 

 

(2) Digital art or digital collectibles NFT: The Glenrothes is slightly different. Customers would receive both a real bottle of the 36-year-old whisky, and a separate NFT with no ownership connection to the liquid. 

The packaging features the NFT artwork (which the buyer also receives), illustrated by Maddie Dai to meld the iconic aspects of worlds of Rothes, Scotland and New York City.

 

The NFT here represents ownership of a digital version of the monochromatic illustration created by The New Yorker illustrator, Maddie Dai.

 

 

2. So, what can I do with my NFT?

If your NFT represents ownership of real whisky, you can of course redeem a real-world bottle of Glenfiddich Gran Reserva or Ardbeg Fon Fhòid with your NFT.

NFTs may also serve as a membership card to an exclusive members’ club. No concrete details have been provided, but The Glenrothes Distillery had shared that their NFT could eventually give the holder access to exclusive real-world experiences around New York City and in Scotland - such as distillery tours.

 

The picturesque Glenrothes Distillery in Speyside is not often open to visitors (Image Source: ScotchWhisky.com)

 

Apart from representing a fraction of a cask of whisky, UniCask’s NFTs also represent collectible poker cards that allow NFT holders to participate in online games, such as Texas Hold’em.

 

 

On the other hand, when it comes to NFTs that simply represent digital art, there are some misconceptions.

 

Widespread misconceptions with digital art NFTs

NFTs that purely represent digital art are a different story. It’s intuitive to assume that NFT holders are able to “own” a digital art work in the same way as the Museum of Modern Art owns a Jackson Pollock painting. However, some blockchain experts and lawyers don’t think so. 

One expert has explained that when you purchase a digital artwork NFT, you do not receive any artwork at all - not even the digital file to it. Instead, you are given a token with unique metadata including the URL to the digital artwork that is being hosted on a web-server. The concern is that if the third-party who owns the web-server decides to suddenly stop hosting the digital artwork on their server, the digital artwork would no longer be accessible from the URL. 

 

NFTs commonly include a URL to the original digital artwork (Source: Moringiello, Juliet M. and Odinet, Christopher K., The Property Law of Tokens (November 1, 2021). U Iowa Legal Studies Research Paper No. 2021-44.)

 

Kelvin Low, a law professor from Singapore, has also pointed out that NFT holders generally do not receive any legal rights to the digital art. Even after the sale of the NFT, the IP rights continue to belong to the artist, who may continue reproducing the digital art ad infinitum. The NFT holder also cannot legally demand for other parties to stop displaying the digital art. Considering the millions that NFTs are being sold for, these caveats should probably be made more obvious on auction sites or platforms like OpenSea!

 

Digital artist Beeple’s work, Everydays, was auctioned for a record-breaking US$$69.3 million. Yet, the NFT buyer does not receive any digital artwork or copyright, only the metadata to it. This isn’t obvious from looking at online NFT auctions or platforms like OpenSea. (Image Source: Christie’s)

 

Buying an NFT is therefore compared to buying a certificate of authenticity to the work, not the work itself. It’s like digital bragging rights, validated by the blockchain ledger.

 

 

3. Should I Buy Whisky NFTs?

The obvious feature of an NFT is that you can resell your NFT and potentially earn a profit. Does this make NFTs a good investment? Well, it still a little too early to tell. But there are a few important points to consider.

 

What is the underlying asset?

If you intend to purchase a whisky-related NFT for investment purposes, financial experts advise that you should first understand what is the underlying asset of the NFT.

The NFT could represent ownership in an actual bottle of whisky - say an Ardbeg Fon Fhòid or Glenfiddich Gran Reserva. In this case, the value of the NFT would be somewhat tied to the value of that specific bottle of whisky 

On the other hand, the NFT could represent something less tangible, like ownership of a digital artwork, an in-game item, or exclusive membership access to visit The Glenrothes Distillery. In such cases, there is no hard and fast rule to measuring the value of the NFT. As experts have explained, NFTs do not confer any legal ownership to a digital painting, or any IP rights.

What we think: The key is to understand what exactly is the underlying benefit tied to the NFT - whether it is a virtual item, a real world asset, or a pass to special privileges. Successful NFTs could also keep going up in value because of their strong branding, which causes many more people to be willing to pay for the NFT.   

Pick your horses carefully though. It’s been several weeks since Ardbeg’s NFT-tied Fon Fhòid was released on 19 April 2022, but unlike other Ardbeg releases (that tend to sell out within hours), Ardbeg is still struggling to sell off quite a number of bottles of Fon Fhòid at time of writing. Suffice to say, not all Ardbeg fans are lapping up this release.

 

As of 6 May 2022, quite a number of bottles of Ardbeg Fon Fhòid are still within @Ardbeg’s ownership and haven't been sold off Image Source: BlockBar)

 

 

The hidden cost of “gas fees”

 

(Image Source: Jumpstart Magazine)

 

At the moment, most NFTs are sold via the Ethereum blockchain. However, transaction fees - known as “gas fees”- must be paid to miners for a transaction to go through. Fees generally average at US$6-8, but they have been known to jump to over US$400 during periods of high traffic. 

Gas fees also tend to spike at inconvenient moments when you really need a transaction to go through- like when you are purchasing a high-profile NFT that everyone wants to get their hands on. The fees climb in times of high network traffic, or when buyers need to perform time-sensitive transactions. On 30 April, one buyer of BAYC’s metaverse NFT bought a NFT priced at $5,800, but had to pay $45,000 in gas fees.

 

The creators of BAYC are working on a metaverse-themed online role-playing game called Otherside, where certain in-game perks are tied to NFT ownership (Image Source: Yuga Labs)

 

To avoid high gas fees, NFTs are increasingly being sold on less crowded blockchains, such as Solana. There are downsides, however. These blockchains are more vulnerable to hacks than networks like Ethereum (due to lower adoption rates and less decentralisation). The lower adoption rates of these blockchains could also mean that there would be fewer people able to purchase these NFTs, and thus lower subsequent demand for them. This may render it harder to resell such NFTs for a profit.

What we think: Gas fees aren’t fatal to the long-term potential of blockchains and NFTs. There are tips to reducing gas fees. One should try to only make a purchase at a non-peak time - such as during the weekends. It also helps to be patient for transactions that are not time-sensitive, and not rush them through within a shorter time frame.  

Moreover, developers are well-aware of the issue of rising gas fees and are working on solutions. Newer blockchains such as Solana are running on the new “proof-of-stake” protocol which reduces overall gas fees and effort needed to validate transactions. Ethereum developers are also working on upgrading their blockchain from the gas fee-intensive "proof-of-work" protocol to the “proof-of-stake” protocol to reap the same benefits - the upgrade is expected to come by late 2022. 

 

 

Possible Crypto Regulation Down The Road

 

BitRiver, a mining company based in Eastern Europe, that exploits excess hydroelectric power (Image Source: Alexander Ryumin / TASS)

 

Most NFT transactions currently use the energy-intensive “proof of work” protocol. A single NFT transaction can consume as much energy as an average household for 1.5 days. This is why the NFT and blockchain industry are facing increasing scrutiny by governments for their environmental impact.

Last September, China outright banned cryptocurrency trading and mining, explaining that crypto-mining hampers China’s aim to become carbon neutral by 2060. The US government would not ban cryptocurrencies. However, early this year, US lawmakers considered passing new regulations to make the blockchain and NFT industry more sustainable. 

Cryptocurrencies and NFTs are largely unregulated today. As governments increasingly begin to regulate the technology, new regulation may adversely affect the price of NFTs.  

What we think: We are relatively sure the energy consumption and environmental impact of blockchains can be improved significantly as developers improve the technology. The Ethereum Foundation which is responsible for administering the blockchain has promised that the upgrade to the “proof-of-stake” protocol by end 2022 will reduce energy consumption by a whopping 99.95%. 

Most governments are very unlikely to outright ban the crypto industry as China did. And rather than shunning regulation, good regulation should also be welcomed to shepherd the industry towards a secure and sustainable future.  

 

 

Where does this leave us? 

By all means, buy the NFTs that you fancy. Trade whiskies over the blockchain. Acquire items for the metaverse. Provided that you understand exactly what you are purchasing, why not participate in the most exhilarating game of the decade? Of course, there is still some ways to go before it becomes a good idea to pour our life savings into NFTs. Technological, legal and environmental concerns remain – perhaps if we are able to iron out these kinks, NFTs could be something to embrace.

World-changing innovations aren’t perfected overnight. Until they are, we’ll raise a toast to the crypto and NFT pioneers working tirelessly to experiment with and take the technology to the next level. We do have some reservations. But as Steve Jobs had said in 1997 about innovators: “you can quote them, disagree with them, glorify or vilify them, but the only thing you can't do is ignore them. Because they change things; they push the human race forward.

 

@charsiucharlie 



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