How accountants are making sense of nonfungible tokens (NFTs)

A nonfungible (unique) token(NFT) is a cryptographic token stored on the blockchain. It is a digital representation of something in real life, such as art, media, or other content. In the coming years, accountants will take the lead in addressing accounting and financial reporting challenges related to this type of digital asset.

NFTs can be generated by an artist, creator, or license-holder via minting, which requires signing a blockchain transaction that delineates the fundamental token details. It’s then broadcast to the blockchain, prompting a smart contract function that produces a cryptographic token, which is allocated to the owner. This could come in the form of a baseball card or even a tweet.

However, as Yoland Sinclair, CPA, previously senior manager, Audit & Assurance Services, Deloitte, now director, Centri Business Consulting, LLC and contributor to the AICPA Digital Assets Working Group, points out, perhaps a more established example of an NFT is a digital record of a song stored on the blockchain. “In music, you have royalties, which makes it a whole lot easier for artists to track and distribute their music from user to user and track those royalties,” she says.

On the digital content front, nonfungible tokens can be something as simple as gaming tokens used in video games, which allow users to purchase certain items such as characters, resources, and weapons. And because some video games are now on blockchain, it opens the door for interoperability, as players can potentially take their resources from one game to the next, expanding reach, engagement, and satisfaction.

Another example cited by Sean Prince, CPA, partner, Crowe, LLP, and member of the AICPA Digital Assets Working Group, is an organization that issues nonfungible tokens backed by sports venues. “It gives the holder of the NFT access to season tickets, so if I want to go to this game at that venue, if I'm high on the list … I get a ticket first,” he explains.

This could soon be the norm, because nonfungible tokens could help eliminate many issues currently experienced by ticket holders. They could be used to create an unfalsifiable and unique QR code for the ticket holder, which would cut down on scammers who sell fraudulent tickets and streamline entry into venues for legitimate ticket holders.

“It's exciting to see how blockchain technology can be used,” Prince adds. “It's something we just haven't thought about until it's starting to become more mainstream.” And accountants will be here to guide digitally native businesses in their desire to accurately record and report NFTs.

Explore the in-depth conversation “Digital Assets — Into the Ether,” discussing the emergence of digital assets and much more.