GUEST BLOG [In]Securities: The Impossible Dream by Aegis Frumento Esq

March 26, 2021

a Guest Blog by

The Impossible Dream

Argentine author Jorge Luis Borges wrote a short story about Pierre Menard, the author of Don Quixote. Menard's Don Quixote was word-for-word identical to Cervantes' Don Quixote, and yet was a far greater novel. Writing in the early 1600s, Cervantes merely rendered a contemporary satire of chivalric romances. For Cervantes, the phrase, "truth, whose mother is history," was just a "rhetorical eulogy of history." But Menard wrote a historical novel influenced by Nietzsche and William James on the eve of World War II. For Menard, then, "the idea is astounding" that history is the mother, the origin, of all reality. Indeed, the only flaw in Menard's Don Quixote is the prose style. Menard's dialogues are archaic, 400 years out of date; but Cervantes "handles easily the ordinary Spanish of his time." 

So, who's Don Quixote is it? Borges plays with a familiar idea, that the meaning of any work of art is in the end a collaboration of the artist with his audience. Menard inserted himself in the middle, with the funny conceit that by rewriting Don Quixote he could make it his own. But it makes no difference if he writes it or not. We are all Menard. The last time I read Don Quixote I was inclined to say it was my Don Quixote. It couldn't have been Cervantes' because it contained the ideas not only of Nietzsche and William James, but of Wittgenstein, Freud, Marx (both Karl and Groucho), John Adams and Alexander Hamilton, and a host of others that Cervantes had never heard of.

Ownership, when it comes to art, is thus a tricky thing. That's what I first thought when I heard, a few weeks ago, that someone paid $69 million for work of art embedded in a non-fungible token, a NFT. That NFT unlocks a collage of 5000 digital images created over the first 5000 days of the artistic life of the artist known as Beeple. Each individual constituent image is not unique. Beeple has published them all on his Instagram and website, and you can view them there yourself anytime you want. See The images themselves are a mixed bag, running from the puerile to the pornographic. Beeple himself seems pretty self-aware. As he says on his website, "he makes a variety of art crap across a variety of media - some of it is ok but a lot of it sort of blows ass." And on another page, "Most of my work is complete fucking garbage." I won't argue with him.

And yet, $69 million. For that, the winning bidder did not get much. According to The Verge, just "a digital file . . . plus some vague rights to present the image." I guess one could display it on a flat screen or project in onto a wall. Maybe you can enlarge each individual image for more intense contemplation.

Now, there's no more point harping on whether Everydays --The First 5000 Days is worth $69 million than there is in debating the "fair value" of GameStop. It's all in the eyes of the beholder. And no one should ask me anyway. My last acquisition was also a collage, a 100-year-old quilt large enough to fill a too-long naked expanse of wall estate. I bought it on eBay for $69, and if I can hang someone's old bedspread on my wall and call it art, then whoever bought that NFT can project Beeple's art-crap onto his and call it whatever they want.

But that still doesn't tell us what's special about an NFT that has made it the latest fad. A NFT is a transaction output on a blockchain, like bitcoin, ether and any number of other cryptoassets. In each of those cases, the blockchain verifies ownership by only permitting the holder of a cryptographic key (i.e., a password) to transfer it. The blockchain ensures your cryptoasset can never be stolen from you, that only you can pass it on to someone else. Of course, if you lose your password, you're screwed, but that's another story.

NFTs really are not that special. We think they are because we are hung up on the concept of fungibility. One dollar is as good as another, and we don't care which one we carry in our pockets. But that is only true of the value that the dollar carries. In fact, dollar bills are not technically fungible. Each has a unique serial number, which is what allows the feds to trace bills used illegally. In the same way, each bitcoin exchanged can be traced back, through the blockchain, to its creation, and so is, in its own way, unique. So are many other things that we think of as fungible. My car may look like every other that came off the same assembly line, but it has a unique VIN. My smartphone as a unique serial number, as does the computer and the software I use to write this article. Very little in the modern world is truly fungible anymore. Beans and rice, maybe, but that's it.

Anything that can be identified and counted can be kept track of, and transferred through, a blockchain. And anything that is digital can be disabled for everyone who does not a unique password. Put those two thoughts together and you have the idea of embedding a unique password into a cryptoasset that is only maintained and transferable on a blockchain, and that is all a NFT is. A NFT ensures ownership of a digital property. Anyone with a computer can see Beeple's 5000 images, and with enough ingenuity could even extract them and use them to create a collage every bit like the original. But only the owner of the NFT can claim to own the authentic piece. Any other may be identical, but is, in essence, a fake. Like Menard's Don Quixote.

The problem with NFTs is not their technology. That is fairly commonplace today. Nor is it how they are used. None of us should sneer at how rich people flaunt their wealth. Nor is it even their excessive carbon footprint. That's just a power problem waiting to be solved.

No, the real problem is that digital assets cannot really be owned in the same way that tangible assets are, and NFTs can do nothing about that. The owner of The First 5000 Days will never own it the same way I own my quilt, because his enjoyment of it is dependent on services that are outside his control. At the very least, they depend on the power being on. I cannot own Don Quixote on a Kindle the same way I own it on my bookshelf. Not only am I at the mercy of power supplied by someone else, but I am at the mercy of Amazon maintaining my access to it. The same is true of all the music I "own" on Apple Music, and all the movies I "own" on Netflix and Amazon Prime, all the software I "bought" from Microsoft.

I know this makes me sound like a luddite, and I'm not really. I know that even old-fashioned ownership is not all it's cracked up to be. And maybe it'll make no practical difference to one's ability to enjoy things owned digitally, until it does. But still, NFTs threaten to mislead consumers into thinking that authenticating ownership of digital properties solves something that needed solving. That was never all that serious a problem. The real problem is that you don't really "own" a digital asset in the first place and NFTs fool you into thinking you do. NFTs distract us into behaving like so many Don Quixotes in rhinestones, dreaming of digital ownership, impossible dreams at that.


Aegis J. Frumento

380 Lexington Avenue
New York, NY 10168

Aegis Frumento co-heads the Financial Markets Practice of Stern Tannenbaum & Bell, New York City.  He represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations).  He has decades of experience representing SEC, CFTC and FINRA regulated firms and persons in regulatory enforcement investigations, hearings and lawsuits.  Drawing on his five years managing the Executive Financial Services Department of Morgan Stanley Smith Barney, Aegis has rare depth of experience in the securities and corporate governance laws affecting senior executives of public corporations.  When not litigating, Aegis enjoys working with new and existing broker-dealers, registered investment advisers, and private equity funds, covering all legal aspects from formation to capital raising. Those clients now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises, including the use of cryptosecurities to represent equity and debt interests. 

Aegis's long and distinguished career includes having been a Managing Director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.  He graduated from Harvard College in 1976 and New York University School of Law in 1979.  Aegis is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.  He is the current Chairman of the New York City Bar Association's standing Committee on Professional Responsibility.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of Blog.

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