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Written evidence submitted by Dapper Labs
DCMS Select Committee Inquiry into the Future of the NFT Market
Dapper Labs welcomes the opportunity to respond to the DCMS Select Committee’s inquiry into the operation, risks, and benefits of Non-Fungible Tokens (NFTs) and the wider blockchain.
Dapper Labs uses blockchain technology to bring new forms of digital engagement to sports and collectibles fans around the world. Our digital collectibles bring fans closer to the teams, sports and players that they love, giving people a stake in the communities they contribute to, and creating new ways for consumers to become creators themselves.
Headquartered in Vancouver, Dapper Labs has grown from its Canadian roots into a global leader in digital collectibles, establishing partnerships with leading sports leagues, music companies, and content studios. Many of our most popular products are available in the UK and we have recently launched a new digital collectibles partnership with La Liga in Spain.
Together with some of the biggest sports leagues in the world, we memorialise the most iconic sports and entertainment moments and offer them as affordable digital collectibles, much like trading cards that so many fans have collected over the years. This allows fans to collect, trade, and sell iconic moments from National Basketball Association (NBA) Top Shot, National Football League (NFL) All Day, Ultimate Fighting Championship (UFC) Strike and others. Our current partners include the NBA, the National Basketball Players Association (NBPA), the Women’s National Basketball Association (WNBA), the Women’s National Basketball Players Association (WNBPA), NFL, UFC and LaLiga. Each offers a unique community of engaged users new ways to participate in being a fan.
We use the Flow blockchain to facilitate transactions on our platform. Originally developed by Dapper Labs (and now operated on a decentralised basis) as the solution to the problem of blockchain scalability for consumer applications, Flow is a fast, safe, trusted, decentralised, and developer-friendly blockchain, designed as the foundation for a new generation of games, apps, and the digital assets that power them.
Dapper Labs is committed to high standards and best practice that will help secure the trust and good will of customers, content creators and regulators. We want our responsible business model to set new standards and encourage our industry to adopt best practice.
The regulation of NFTs should be based on their specific uses and proportionate to the associated risks. NFTs possess two distinct characteristics that distinguish them from cryptocurrencies and other fungible tokens on the blockchain, in that NFTs are:
(a) unique in nature; and
(b) non-interchangeable.
We would like to emphasise that not every NFT has the same purpose and characteristics. Some NFTs could be used as payment or investment instruments, enable access to communities, events or games, provide royalties or other rewards, validate credentials or asset ownership, and/or are simply appreciated as art, collectibles or mementos.
With respect to NFTs that are not payment or investment products, the UK’s current approach to NFT regulation is sufficient, and in accordance with the Financial Action Task Force’s (“FATF”) Guidance. The latest FATF Guidance defines NFTs as “Digital assets that are unique, rather than interchangeable, and that are in practice used as collectibles rather than as payment or investment instruments”.
As an example, Dapper Labs’ NFTs, such as those issued through the NBA Top Shot product, are not used for payment or investment purposes, or as a means of exchange. It is our view that NFTs that are unique and non-fungible and therefore not designed for payment or investment purposes should (and currently do) fall outside the scope of “cryptoasset” under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.
There is a wide range of cryptoasset-focused regulation that we understand is currently under consideration by the UK Government, and we support its efforts to ensure the UK is a leading global hub for cryptoasset technology. However, it is our view that including NFTs within the scope of cryptoasset-focused regulation applicable to cryptoassets that are used for payments and/or as investments will stifle innovation in the NFT and web3 industry. These regulations generally seem to treat all cryptoassets in a broadly similar manner, which can be likened to the treatment of specified investments. If the UK does regulate NFTs in this manner, we would expect that some companies may look to move potential investment from the UK to other jurisdictions.
It is particularly important to remember that there are many facets to Web3 and digital assets, and these should not be regulated through a one-size-fits all approach, or simply by copying existing financial services regulations in all cases. The UK needs to ensure that NFT creators - large and small - can continue to innovate and develop ways for society to benefit from this exciting new technology.
This is not to say NFTs should not be regulated at all, where NFTs are designed to be used for payment or investment purposes. However, they should not be governed by what would be overly burdensome rules taken from other sectors.
With this in mind, we were pleased to see a response to a recent Parliamentary Question by Baroness Penn which stated that: “The non-fungible tokens (NFTs) market is evolving rapidly and remains at an early stage of development. Most NFTs are not currently subject to financial services regulation in the UK and the Government has proposed to exclude them from the financial promotions regime on the basis that NFTs can represent a wide array of different assets which might constitute non-financial services products ...” (2nd December 2022).
We welcome a regulatory regime that will recognise the unique characteristics of NFTs and how they are used in the digital economy. First and foremost, we need to establish clear definitions of what an NFT is, and directions that clarify the manner in which NFT service providers should be treated. Dapper Labs wants to work with the UK Government and act as a collaborative partner that is part of this process of developing industry standards to ensure best practice for compliance and consumer protection.
Ministers have committed to consulting on the government’s approach to cryptoassets and we look forward to contributing to any such process.
As noted above, NFTs can be used for various purposes. We would like to highlight that Dapper Labs’ NFTs and several other types of NFT available to the public are issued, and used, as collectibles, rather than as speculative investments or as a means of payment. Our products are more easily viewed as accessible and affordable digital trading cards, verified by the blockchain.
Dapper Labs’ NFTs are unique and non-fungible, unlike fiat currencies or cryptocurrencies where cash notes or tokens can be interchanged - each NFT has a unique value which in turn means that NFTs are inherently not interchangeable. The nature of NFTs as non-fungible, and with a value partially determined by consumer interest, makes the use of NFTs as a means of exchange very challenging, unpredictable and not backed by any specific market. It is on this basis that we argue that NFTs should be treated as collectibles in accordance with their use, rather than as investments or payments, and should be treated in a similar manner to physical collectibles such as trading cards.
It should be noted that the term “blockchains” refers to a range of different infrastructure designs, and there will be differing security approaches and risk profiles in relation to different implementations of blockchain technology. With that said, blockchain technology is considered to be a generally secure and safe technology which does not itself necessarily increase security risks to users any more than existing risks applicable to other types of technology infrastructure. In fact, blockchain may arguably increase the level of security protection for users. Dapper Labs strives to ensure that trust, security and accountability are at the heart of our business and our users’ experience.
The high level of security of blockchains is possible due to the cryptography, decentralisation and consensus mechanism, which ensure trust in transactions. In most blockchain implementations, data is structured in blocks and each block contains a transaction or bundle of transactions. Each new block connects to all the blocks before it in a cryptographic chain in such a way that it is nearly impossible to tamper with without all participants in the network being able to identify that the tampering has taken place – i.e. the “chain” is clearly broken.
All transactions within the blocks are validated and agreed upon using a consensus mechanism – a validation mechanism that varies between different blockchain implementations, but is ultimately designed to ensure that any new transactions added to the “chain” are agreed by the network. As a result, those using the blockchain network can have a high level of trust that a new transaction block is true and correct.
Given the decentralised nature of blockchain technology, in general blockchain networks do not have a single point of failure and the blockchain ledger (i.e. the record of transactions undertaken on the blockchain) cannot be changed by a single device. These technical features of blockchain technology increase the level of security that a user can expect.
Much like traditional approaches to technology infrastructure, blockchain is not fully risk-free. It is possible for malicious actors to exploit vulnerabilities – although many vulnerabilities are found in centralised software applications or hardware, or where there is a concentration risk from a single person or entity controlling a majority of the devices that perform validation. Most established blockchain networks, however, have now developed technical safeguards to address these risks.
There are various benefits of NFTs to both individuals and society. As a starting point, Dapper Labs does not consider it appropriate to categorise all potential activities associated with NFTs as “NFT speculation” – the response below highlights the benefits in enabling individuals to engage with NFTs and to explore brands, sports leagues and other products that they know and love in the real world through the NFT industry.
NFTs will provide benefits to various stakeholders in the NFT and Web3 industry, including (i) creative artists / musicians / sports teams and rightsholders, (ii) purchasers and (3) society.
NFTs offer a mechanism to strengthen relationships between fans who purchase NFTs and their favourite artists, musicians, sports teams and players, whose intellectual property rights may be represented in NFT form. NFTs have already facilitated new creative channels for brand expression, engagement and exciting communities, which offer opportunities for consumers to be rewarded for their fandom, online and offline, and to engage directly with their heroes.
The proliferation of NFTs and the platforms they live on will allow independent programmers and artists to work and get paid directly outside existing, centralised corporate structures. Rather than transferring the benefits of their creativity to platform owners, the creators can manage the content they create and benefit financially from their creative work. For many years, creative artists have struggled to ensure that they are appropriately compensated for their creative endeavours, due to entrenched intermediaries and rightsholders which have unwarranted power and control over new industry participants and their intellectual property rights – for example, there are many stories of musicians facing low financial compensation for their recordings due to record deals signed early in their careers. By reducing barriers to entry and eliminating the middle man, a more diverse set of creators and entrepreneurs can connect with supporters and monetise their content.
Additionally, purchasers of NFTs can have trust in the tokens they are purchasing, ownership of which is immutably recorded on the blockchain. By enabling connections with the fabric of trust, blockchains create a world where ownership is complete; markets are perfectly transparent; billions of products and services are predominantly exchanged peer-to-peer; and no one is too big to fail because trust is both optional and revocable.
Society will also benefit from these growing digital ecosystems and the creation of more jobs. Within the digital ecosystems of the applications being built on blockchain, other new businesses are likely to crop up. As a positive case study example, Dapper Labs has seen a dozen or so around NBA Top Shot, for example, including analytics websites, podcasts and merchandise sellers. Genies, one of the companies building on Flow blockchain, has the explicit aim of allowing any creator (in this case fashion designers) to participate in Web3 by selling NFTs that can live on avatars in a digital ecosystem. They are enabling this through robust creator tools and a marketplace. The interoperability and network effects of Web3 mean that anyone building in the ecosystem benefits from the success of others and it can create new opportunities. Conversely, small NFT platforms or creators could find their work stifled if there are disproportionate regulations in future, due to the cost of compliance.
As noted above, there are various benefits that NFTs bring to users and to society. The UK is poised to be a hub of the NFT industry, and with appropriate governmental support and proportionate regulation, we could see the further growth of this industry with great cultural and economic benefits to society.