Three Arrows Liquidation and Regulatory Scrutiny May Test NFT Popularity

It may be the equivalent of a digital fire sale.

Non-fungible tokens (NFTs) have seen volatility similar to that in bitcoin and other digital holdings.

Back in 2021, NFT trading volume hit nearly $25 billion. And the surge continued into 2022, with the initial months of that year logging billions of dollars of sales volume — more than $3 billion in May, for example, as reported by the site Decrypt and via data from DappRadar.  

But then, toward the end of the year, as FTX collapsed and exchanges shuttered, volume skidded and at year’s end, volumes dipped below the $1 billion mark. Last year, it still wound up having a year-end tally of $24.7 billion, slightly lower than the previous year, but that was due to the tidal wave of demand that marked the beginning months of the year.

NFTs, of course, make their name and money by being one of a kind — assets cannot be duplicated, and seemingly can monetize pretty much anything from art to tweets to lines of codes to games. Among the marquee NFTs: Beeple’s $69 million garnered from an NFT digital art collage.

Thus far into 2023, we’ve seen a bit of rebound: DappRadar reports that the NFT market registered $946 million in trading value in January, up 38% from December and reaching levels not seen since the summer. The latest tailwind has been tied at least in part to the Bored Ape Yacht Club NFT collection.  

Three Arrows Liquidation a Litmus Test?

Market sentiment may get a test in the coming weeks, with a pending sale of NFTs as part of the ongoing liquidation of bankrupt crypto hedge fund Three Arrows Capital, which collapsed last summer. 

In a memo dated Feb. 22, the liquidators said that “certain” NFTs would be sold within weeks of the letter. But the letter from Teneo, which is based in the British Virgin Islands and overseeing the liquidation, was quick to note that the sale “does not relate to the list of NFTs informally referred to as the ‘Starry Night Portfolio’.” That portfolio was built by Starry Night Capital, in tandem between 3AC and the NFT Collector Vincent Van Dough. As to what is on offer in the liquidation: Various media reports contend that NFTs being sold off include CryptoPunks and Bored Ape Yacht Club holdings.

We note that the liquidation comes as February’s NFT trading data has slipped from January — where sales volumes are down 27%  per media reports. If overall demand for NFTs is waning, and a liquidation of (some) of 3AC’s NFTs proves to be muted, there could be further pressure on the markets in general, at least in the short term.

In the meantime, as with so many other crypto holdings, there’s a bit of an existential debate going on with NFTs. As noted in this space, the Securities and Exchange Commission (SEC) has been focusing on whether NFTs are securities. 

Through the past several months, the SEC has sent out demands for information about various NFT projects. 

And in a recent ruling, a judge said a suit against Dapper Labs could move forward. The judge ruled that the NFTs could indeed be securities.  

In an environment where trading volumes are volatile, where legal/regulatory of what the NFTs still remain to be hammered out — a shoe that remains to drop, so to speak — it may be the case that 2021’s heyday looks long ago and far away.