[Interview] "Lunabal Cryptocurrency Crash, NFT Also Sorting... Majority Will Be Eliminated"

Interview with Professor Lee Jae-kyung of Konkuk University
Keynote Speech at NFT 101 Conference 2022

Luna Incident Also Hits NFTs... Negative Impact Expected at Least Until Second Half of This Year
Regulations Possible for NFT Fractional Investment... Investor Protection Measures Needed

Interview_Lawyer Lee Jaekyung (Professor at Konkuk University). / Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporter Myunghwan Lee] "Looking at the recent Non-Fungible Token (NFT) market, it seems similar to the venture boom or dot-com craze. I think the stage where the wheat is separated from the chaff will come this year or next year."

Professor Jaekyung Lee of Konkuk University is a lawyer who has been engaged in various advisory activities in the field of culture and arts. He has deep knowledge of laws related to culture and arts, to the extent that he provides legal advice to the Fashion Association and the National Museum of Modern and Contemporary Art. His 'fan spirit' for cultural contents such as music and movies recently led him to NFTs, which have recently struck the art world, and he has become one of the leading experts in the domestic NFT market. Therefore, Professor Lee's comparison of the rapidly growing NFT market to the early 2000s dot-com bubble is noteworthy.

NFTs are tokens used to prove ownership by utilizing blockchain technology. Using blockchain, transaction records are recorded in a single ledger, similar to a real estate registry. Thanks to the characteristic of blockchain where all participants verify the records, forgery or alteration is not easy. Professor Lee emphasized, "Blockchain technology is the most essential source for protecting intellectual property rights," adding, "NFTs theoretically exclude the possibility of forgery or alteration. Combined with scarcity, it becomes difficult to forge and guarantees the authenticity of ownership, playing a very important role in protecting intellectual property rights."

Regarding the recent Financial Services Commission's classification of the music copyright fractional investment platform Musicow's products as 'securities,' he said, "NFTs used in fractional investment of artworks may be subject to similar types of regulations," and warned, "Those who have invested in NFTs in the form of fractional investment must be aware that they inevitably bear various risks."

He is scheduled to present on the topic "NFT Market, Present and Future" at the 'NFT Art 101 Conference' to be held on the 17th at Dragon City in Yongsan-gu, Seoul.

Below is a Q&A with Professor Lee.

Looking at your background, you have done a lot of legal advisory work related to content. Is there a particular reason for your strong interest in intellectual property rights?

I have had a strong interest in cultural contents such as music and movies. I liked the content itself and approached it a lot as a kind of fan. Because of that, I was able to approach related disputes or legal issues more familiarly. As a result, I think I was able to communicate with artists and quickly build expertise.

You are presenting on the current and future NFT market at the 'NFT ART 101' conference. How would you simply define NFT?

The term itself means 'Non-Fungible Token.' It is combined with blockchain technology so that all transaction records are recorded in a single ledger, like a real estate registry. This means it is an asset that allows you to trade with confidence by preventing forgery or alteration of ownership and ownership transfer history.

Unlike cryptocurrencies, which have the same value for each unit, NFT assets each have different values. This creates scarcity and uniqueness. When scarcity arises, value increases, which gives it meaning as an investment target, and thus the NFT market is growing.

There are countless types of content that can be NFT-ized. The most widely used fields are cultural contents, especially art and games. The scope of use can be expanded to combine with the metaverse.

Interview_Lawyer Lee Jaekyung (Professor at Konkuk University)./Photo by Hyunmin Kim kimhyun81@

Is it possible for NFTs to play a role in protecting intellectual property rights?

Blockchain technology becomes the most essential core source for protecting intellectual property rights. Existing offline artworks can be forged or altered. NFTs theoretically exclude such possibilities of forgery or alteration. Combined with scarcity, it becomes difficult to forge and guarantees the authenticity of ownership, playing a very important role in protecting intellectual property rights.

The cryptocurrency and NFT markets grew rapidly until last year. What is the outlook going forward?

The NFT market has been activated because a lot of funds have flowed in. The reason funds could flow in is that people believe in scarcity or stability as an investment asset. Since payments are usually made with cryptocurrencies, if the value of cryptocurrencies fluctuates, it can cause a crash. If the cryptocurrency system becomes unstable, it inevitably affects NFTs.

Right now, the NFT market is somewhat overheated. Overheating means there are many market participants and a large concentration of funds. It currently looks similar to the early venture boom or dot-com craze. I think we are heading toward a transitional or cooling-off period. I believe the stage where the wheat is separated from the chaff will come this year or next year. Many companies will not be able to endure and will be eliminated during this process. As the bubble bursts, only excellent players will survive.

Recently, with U.S. tightening and the Luna incident, the cryptocurrency market has shrunk and trust in digital assets has greatly declined. Has the NFT market been affected?

It is absolutely affected. Ultimately, funds react sensitively to stability. Until the Luna incident, there was little doubt about stability, so a lot of funds flowed in. But since the Luna incident occurred, the future is very uncertain. Therefore, the NFT market's transaction volume inevitably decreases. If transaction volume decreases, the asset value of NFTs previously invested in will fall, and the market itself may shrink or the overall asset value may decrease in a chain reaction. This may be temporary, but for now, the Luna crash incident will have a considerable negative impact on the NFT market at least until the second half of this year.

NFTs are widely used in fractional investment of artworks. The government said that fractional investment could be subject to capital market law regulations as 'investment contract securities' depending on the structure. Since NFTs are recently traded for investment value (arbitrage), there may be legal risks. What is your view on this?

Fractional investment is described by authorities as trading divided ownership. It means dividing ownership and trading it. For high-priced NFT artworks, you can purchase NFT products through a divided ownership trading method by splitting them into thousands. The investment contract securities mentioned by the Financial Services Commission become an issue. The recent conclusion by the Financial Services Commission regarding Musicow is that it basically corresponds to investment contract securities. Therefore, various guidelines have been issued to avoid being classified as investment contract securities, but most of the contents are abstract. They emphasize the need for measures to protect the investment safety of unspecified many investors investing in divided ownership.

NFTs used in fractional investment of artworks may be subject to similar types of regulations. As I mentioned earlier, if many unspecified investors invest in high-priced NFT art works through fractional investment, the guidelines applied to Musicow may be applied as is. Therefore, until then, those who have invested in NFTs in the form of fractional investment must always keep these guidelines in mind. Until the guidelines are established, they must be aware that they inevitably bear various risks.

What are the directions that regulatory authorities and market participants should take regarding NFTs?

First, there is debate in academia about whether existing laws can fully regulate NFTs from a legal perspective. Research is underway on whether traditional copyright law can regulate NFT intellectual property rights or transactions. Furthermore, from a policy perspective, issues such as hacking and environmental pollution caused by electricity used during minting need to be discussed.

Moreover, ultimately, people in the NFT market need to observe a kind of ethics. The NFT market should operate not by law but on market morals and ethics. However, I think there is a serious moral hazard. This is one of the phenomena occurring in the early stages of the market. It may take more time for such things to settle down.