Last year, non-fungible tokens craze picked up steam and many brands wanted to get in on the action. For the uninitiated, NFTs are defined as digital tokens connected to digital goods such as art or music.
Though the NFT industry made headlines for generating billions in trading volume, the once-hot NFT market appears to have cooled. NFT trading volume reportedly reached $24.7 billion in 2022 and $11.7 billion in 2021, according to Decrypt and The Motley Fool, respectively. However, a report from Dune Analytics found that NFT trading volume plunged from $17 billion in January to $466 million in September, according to MarketWatch. Citing data from DappRadar, Bloomberg reported earlier this month that the NFT trading volume dropped 81% between January 2022 and July 2023, and other reporting indicates many may now be worthless.
It’s also unclear how many NFT transactions are genuine. A 2022 report from Chainalysis reportedly found that wash trading, a financial fraud in which consumers sell assets to themselves for a higher price to artificially inflate the asset value, drove $44 billion in sales in 2021.
Still, retailers and brands have ventured into the space to attract shoppers interested in digital goods. Nike reportedly generated more than $185 million from its NFT releases. Many retailers and brands, including Tiffany, Macy’s, Gap and Puma, have jumped on the NFT bandwagon.
In an October 2022 Forrester report, the Cambridge-based research and advisory firm predicted that NFT projects released from this year on will no longer be considered innovative.
Instead, going forward, NFTs will be a tool for retailers to attract customers seeking exclusive experiences and incentives, said Martha Bennett, vice president and principal analyst at Forrester.
Given the fluctuating and possibly overblown value of NFTs, is it worth it for brands to invest in them as part of their marketing strategy? Experts told Retail Dive that the industry may rebound again, but brands must proceed with caution. Additionally, brands and retailers must be aware of scams associated with the space and connect their NFTs with enticing perks to make the tokens worth possessing.
When NFTs go wrong
Following in the footsteps of other brands and retailers, MeUndies was one of the many companies that decided to experiment with non-fungible tokens. But after the brand experienced swift social media backlash, it quickly retreated from the space.
In a statement posted on March 9, 2022, on Reddit, MeUndies explained why it canceled its collaboration with Bored Ape Yacht Club, an NFT project involving 10,000 illustrations of personified apes. The company said it “just didn’t do the work we should have to make such an impactful decision” and cited concerns about the cryptocurrency and NFT industry’s environmental impact.
“Since our announcement, we’ve spent time researching and educating ourselves on the NFT space, and most importantly, listening to our community,” the intimates brand wrote on Reddit. “We’re not immune to making mistakes, and we own this one.”
MeUndies didn’t respond to Retail Dive’s request for comment.
For retailers and brands continuing with their NFT experiments, these projects will only be a fit for a small pool of affluent customers familiar with the NFT industry.
Kim Grauer, director of research at Chainalysis, a cryptocurrency investigation and compliance firm, said she surmises that the overall bear market is the main driver behind the NFT market drop. Chainalysis’ research has identified many NFT purchases where buyers are rushing to resell their tokens for a markup, but the bear market likely played a role in curtailing that speculation, she said.
Forrester’s Bennett said that such tokens would be most appealing to a small subset of younger, wealthy cryptocurrency holders who have the funds to spend on NFTs and are interested in digital assets or have become wealthy through technology. The firm’s March 2022 survey found that 72% of U.S. respondents said they have never owned an NFT and aren’t planning to do so.
To illustrate this point, Bennett offered an example of two car-related NFTs. Lamborghini released an NFT in January 2022. Chevy introduced its own NFT that came with a 2023 Corvette Z06, but it reportedly didn’t receive any bids. The lack of offers for Chevy’s NFT illustrates that narrow pool of high-end consumers who would pay for an NFT, let alone one tied to a luxury vehicle, Bennett explained.
Younger, tech-savvy, affluent buyers “are a small target audience, but they're a target audience,” Bennett said. “There are people who spend hundreds of thousands of dollars on a rare Corvette because the target audience just isn't a match.”
Despite the narrative that NFTs have changed the nature of digital ownership, the brands and retailers offering NFTs must be clear to consumers about the rights associated with the NFT, Bennett pointed out. If a consumer buys NFTs issued by Disney, for example, they don’t own the rights to the artwork, but they may be able to access some sort of content-related perk in exchange for buying the token, she explained.
“Essentially, an NFT is just a glorified receipt,” Bennett said. “What makes an NFT different from any other receipt is that it's programmable… [for] exclusive access can be to something digital, to something online, to an event or to some preview catalog or whatever it may be, but it can also be a physical access ticket to somewhere. And so it's that utility that you can have as part of that that makes it attractive.”
Can brands be safe in the NFT world?
Though brands and retailers seek to profit from digital goods, the rise of NFTs has also coincided with the rise of NFT fraud and scams. Through a Freedom of Information Act request to the Federal Trade Commission Retail Dive has obtained, 1,478 filed between and September 2017 and December 2022 alleging that consumers have lost more than $809 million NFT scams, ranging from business imposter and investment fraud to online shopping and art, gem and rare coin scams, the data show.
The majority of the complaints pertain to niche NFT projects and schemes, but some complaints mention notable brands and cryptocurrency companies such as Adidas, Gucci, OpenSea, PayPal, eBay, Coinbase and Bored Ape Yacht Club, the data show.
As word spreads about the risks of NFTs, can companies engage in the space and keep their brand reputation safe?
Chainalysis’s Grauer acknowledged that there are frauds and scams in the NFT industry, but there are fraud detection tools brands can use to determine whether the funds used in an NFT transaction came from a cryptocurrency wallet containing illicit funds.
While there's some scamming and fraud in the NFT market, "We can write algorithms that allow us to quantify the wash trading happening in the NFT space based on who the buyers and sellers are. Every time there's a sale, we know the buyer and the seller. It creates an entire new toolkit to analyze and safely interact with the space,” Grauer said.
In light of the fraud allegations arising from the space, brands and retailers have taken various measures to safeguard consumers from unsavory practices happening elsewhere in the space.
The NFT world has already become infamous for wash trading, rug pulls and other illicit activities, Bennett said. (According to crypto news site CoinDesk, rug pulls are when a new cryptocurrency project solicits funds from investors and suddenly drain the funds from the projects, leaving the initial investors to take the loss.)
Some brands have bypassed public blockchains when issuing NFTs to avoid “any of the things that can go wrong there,” but others want to use a more controlled environment instead of the public blockchains where fraudsters could view the contents of customers’ wallets, Bennett said.
As brands began partnering with tech firms to release NFTs beyond public blockchains, the consumers who saw the NFTs for loyalty perks continued to engage with the brand, but NFT enthusiasts who wanted to trade those tokens for profit weren't enthused about these assets not being available publicly to being sequestered, she added.
For example, the NBA teamed up with Dapper Labs, a company that uses blockchain technology to facilitate NFT transactions, to debut its NBA All-Star VIP Pass NFT Auction and Giveaway, per a February 2022 press release. As part of the launch, the organization issued 30 NFTs, digital collectibles, VIP passes and other perks. But for clients looking to use its Flow Blockchain, there’s an option to not make the blockchain publicly accessible to anyone. Bennett pointed to the NBA NFTs as an instance in which a brand has turned to a blockchain company to create their own sealed off environment.
Even for brands that have used NFT technology platforms like OpenSea, an online marketplace for buying and selling NFTs, the experience has been bad, Bennett said, adding that the platform has customer service problems. Though OpenSea appears to be the largest NFT trading company, others have had similar issues, she said.
Questions also linger about how some NFT platforms operate. In June 2022, the U.S. States Attorney for the Southern District of New York and the FBI indicted Nathaniel Chastain, a former product manager at OpenSea on wire fraud and money laundering charges stemming from NFT insider trading on the platform, according to a statement from the Department of Justice. The DOJ alleged that Chastain used his advanced knowledge of what NFTs would be listed on the OpenSea and exploited that for his financial gain.
Brands entering the space were either looking for a quick profit or to increase brand engagement via collector’s items, but they weren’t aware at first of the theft of digital assets, rug pull scams, money laundering and other illicit activities occurring in the public NFT market, Bennett explained.
“What a lot of brands weren't really so aware of at the time they got into it [is] that they're actually that they were allowing their customers to get into a shark tank, essentially,” Bennett said. “
Regarding whether the NFT market will return to record highs remains to be seen. Chainalysis was in the middle of compiling a NFT analysis when they spoke with Retail Dive, but Grauer said that NFTs were in decline alongside crypto assets.
“I think that many of the [decentralized finance] and [cryptocurrency finance] activities move together. When there's a bull market, you'll see a surge in NFT activity and I think that's what's borne out over the past few years,” Grauer said. “It really depends on what happens in the greater market.”