In Next-Generation Securitization: NFTs, Tokenization, and the Monetization of ‘Things’, forthcoming in the Boston University Law Review, I examine the recent phenomenon of non-fungible tokens (NFTs) and tokenization. These are being used to monetize—that is, to raise cash by selling to investors interests in—a diverse range of non-cash-generating assets, including art, collectible cars, access to basketball video highlights, prestigious real estate, and even fictitious real estate used in video games. Although the market for these monetization transactions already is in the tens of billions of dollars and rapidly growing, there is virtually no regulation. My paper has two goals: to help regulators, investors, and other market participants understand these transactions, including their risks and benefits, and to analyze how these transactions should be regulated to preserve their benefits and minimize their risks.

Monetizing assets has a long and established pedigree, encompassing securitization, project finance, production payments, and similar transactions that raise cash by selling interests in cash-generating assets or projects. The difference with NFT and tokenization transactions (collectively, “non-cash-flow monetizations”) is that the underlying assets do not themselves generate cash. Nor may those assets be sold to generate cash. Hence, investors in interests in non-cash-flow monetizations have only one way of being repaid: by reselling their interests to other investors. That limited source of repayment creates liquidity risk (among other risks). Illiquidity is the main cause of bankruptcy as well as a major systemic threat to the financial system.

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