The Financialization of NFTs Raises Regulatory Issues

Last Wednesday, the good people over at TechCrunch ran a story about a company called Visionrare, which is essentially trying to gamify the process of investing in startups.

It’s a play on the “fantasy betting” concept that’s already popular in the world of sports and culture. Fantasy football brackets let fans make predictions without actually putting any money down, and fantasy stock markets let investors hone their skills in a simulated environment, where the stakes aren’t quite so high. There’s a similar system for betting on the outcome of the TV show “The Bachelor”.

Visionrare is trying to do the same thing with investments in startups: Log onto the site, “invest” in a real company and see how it performs over time. If your company lands a big funding round in real life, your in-game portfolio appreciates in value.

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The “Ender’s Game” twist here is that for about 24 hours, Visionrare was asking users to stock their portfolios with actual money.

“VisionShares are NFTs (non-fungible tokens) that live on the blockchain,” reads a section on the company’s FAQ page. “This way, players have real ownership over their fantasy equity, and there is a provable scarcity of the virtual equity of each company.”

The “investments” weren’t real in the sense that putting money into a company via Visionrare didn’t actually get you any equity, but buying a VisionShare would get you an NFT on the Ethereum blockchain. Hence, “real ownership over… fantasy equity.”

Visionrare’s open beta launched on Wednesday and shut down less than a day later, thanks to a swift backlash in the wake of TechCrunch’s piece.

In addition to being an ouroboric nightmare, Visionrare is a good reminder of the dangers of financialization.

For better or worse, crypto is great at assigning discrete monetary value to things we’re used to understanding as free. NFTs can put a price on media files, and tokens for crypto-backed social clubs and decentralized autonomous organizations (DAOs) can turn online communities into investment collectives. On a fully crypto-backed internet, photos, videos, memes, likes and avatars are all ultimately investment opportunities.

Visionrare seemed to underestimate the power of that idea. There’s a market for NFTs because crypto’s nouveau riche have cash to burn, and parking it in NFTs lets them keep their chips in the casino, but also because there’s also an understanding that buying the token doesn’t get you anything but the token. It works, for now, because NFTs operate like digital certificates of ownership. But they are fundamentally incompatible with equity in a traditional company. NFTs and token equity models work for DAOs, because they’re essentially on-chain, unregulated versions of traditional companies; without that anchor in the “real” world; there’s more leeway for digital assets to represent actual ownership.

Marrying “off-chain” and “on-chain” assets can also pose significant regulatory risks. The U.S. Securities and Exchange Commission has a history of going after crypto assets that bear a resemblance to traditional equities, and Visionrare’s decision to allow trades from the U.S. was a little like playing with fire.

“Since our launch, we have learned thanks to people who reached out to us that we might have been too optimistic when it comes to the legal aspects of what we were doing, especially when dealing with regulators,” wrote Visionrare’s CEO, Jacob Claerhout, in the company’s Discord server.

There’s a sense, in tech, that people will just give you money if you go around saying words like “DAO” and “NFT.” Blockchain technology is good for certain things – logistics, recordkeeping, certain kinds of investing – but the reality is that some things don’t need crypto.

To its credit, Visionrare has said it’s giving back all the money users spent on its NFTs. And the community remains surprisingly upbeat, thanks in large part to the ethos of company leadership: Claerhout and the company’s other co-founder, Boris Gordts, are 20-something strivers with ambitions that click with other young people in the crypto sector. Their earnest, attentive vibe seems to have put users at ease.

“We’re growing, building and learning in public,” Claerhout told me in a DM.

The company plans to return this Friday, with a new “free-to-play model” and new NFTs. Claerhout declined to elaborate on how exactly those NFTs – which are inherently speculative assets with the ability to spawn secondary markets – would be dissociated from the financial aspect. But he said they would operate more like “badge[s] of honor showcasing valuable contributions” than equities.

In a blog post this morning, the Visionrare team claimed its 24-hour experiment was somehow in line with U.S. securities laws, describing it as “according to us, compliant.”

“[We are] honored to have fueled a global debate on how to democratize startup investment through crypto,” the post said.

However it pans out, it helps that Visionrare is taking the media coverage in stride.