Deregulated NFTs as Building Blocks of the “Infraverse”
Noor Gill | June 23, 2022
Lede: A Laissez-faire approach to managing NFTs with compromised information from blockchain addresses, transaction activity, and location data poses privacy concerns for Metaverse users.
Overview: The Non-fungible tokens (NFT) marketplace is a niche phenomenon on crypto where digital art is bought and sold via cryptocurrency but despite the rising popularity of the space in 2021, decentralized technologies, a lack of legal framework, and the immutable nature of blockchain have created a range of privacy concerns for Metaverse users, including the inability to anonymize or delete public transactional data which removes users’ representational autonomy and how easily advertisers can collect users’ personal information through their virtual personas.
NFTs function as a form of digital art and currency that operate via cryptocurrencies (a form of digital currency, most often Ethereum) and the blockchain (an online method of recording and validating ownership of crypto assets). In the context of an NFT transaction, the flow of information about the NFT as well as the consumer and seller is shared to and from the consumer and seller in a manner that is governed by transmission principles connected to the blockchain.
Fig 1: A double line plot for the weekly total cryptocurrency values and average transaction values on NFT platforms from 2021 to early 2022 (Chainalysis)
With a peak weekly value of about 4 billion USD in early 2022 and a peak weekly average value per transaction of about 3.5 billion USD at the end of 2021 (Fig 1), the popularity and significance of NFTs in the global market are evident. However, there has even been debate regarding the future of NFTs in Congress and the U.S. Treasury such that the IRS has confiscated over $3.5b worth of online currencies in 2021 alone. Moreover, decentralized technologies allow for some of the most prevalent forms of crime in the NFT space – money laundering and tax evasion. The rise of NFTs comes with a rise in privacy and security concerns within the Metaverse, an intriguing yet immediate need that needs to be further explored.
Public Blockchains Lack Legal Framework
In terms of privacy legislation for crypto-assets like NFTs, current legislation for privacy online was not written or established with blockchain in mind. For example, data cannot be deleted from the blockchain, which contradicts the California Consumer Privacy Act (“CCPA”) and EU General Data Protection Regulation (“GDPR”). Hence, there is an absence of legal documentation to protect user information, resulting in possible harm in the privacy dimension since users are not provided accurate and transparent guidelines for data usage and deletion, resulting in a lack of control over their information.
An Illusion of Privacy
Upon purchase of an NFT, the buyer is provided a digital ownership certificate, a sort of virtual receipt accessible to all users and updated after each transaction through the blockchain. While this public record of all transactions ensures transparency and can be leveraged to accurately maintain transactions, it also provides others with the transactional history of the entire network often tied to other identifiable information. Since there is no option to set the transaction to private or delete tokens due to the immutable nature of blockchain, the process of burning and replacing wallets is vulnerable to exploitation and human error, ultimately removing a user’s decision-making autonomy over how their data is handled.
Another issue lies in the fact that users cannot provide informed consent in receiving NFTs since they can be sent to any address regardless of whether an individual approves the transaction. For example, when Jimmy Fallon displayed his Bored Ape NFT on his show in January 2022, it became easy to use that publicly available NFT information to locate Fallon’s wallet address and even resulted in a user sending him 1,776 of a token named “Let’s Go Brandon.” which he did not consent to.
The Fine Line Between Online and IRL
Beyond this, the use of avatars and virtual identities provides users with a false sense of detachment from their real-life identities, which paves the way for advertisers and third parties to gather users’ personal information through avatars. Not only can this trap users within filter bubbles based on similar or desirable sets of advertisements and online experiences within the Metaverse, but it also violates users’ freedoms and right to anonymity during the stage of information processing.
Fig 2: A horizontal bar chart displaying total gain defined by the difference between total profit and total expenses in USD based on wallet age for OpenSea accounts(Financial Times, Nansen)
Due to unregulated access to users’ transaction activity, personal identifiers, and location data, the potential harms of participating in NFT transactions may outweigh the benefits. For example, for contracts on the NFT marketplace, Opensea, realized gains (the total profit minus the total cost of purchasing an NFT) were positive on a longer-term scale of 1-3+ years as opposed to the pattern of negative gains for wallets open for less than a year (Fig 2). This displays how the benefit of monetary gain from selling NFTs may be overstated or less tangible than it appears.
Parting Words
As Web 3.0 (the emerging internet infrastructure based on decentralized networks and individual ownership of content) gains traction, it is vital to create a dedicated federal regulatory body for the NFT marketplace. As opposed to banning NFTs or continuing forward with the current status quo, establishing a federal presence in the realm of crypto to monitor transactions and audit platforms would prevent exploitation and define a structure that maximizes privacy and minimizes harm to both NFT creators and consumers.
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