NFT and the legal system, part two
NFT has powerful potential. We are convinced of this by the rapid growth of trade in non-fungible tokens, and the fact that any object can be tokenized, from digital works of art to real physical objects.
Moreover, thanks to the versatility of NFT, even those who have never dealt with the areas of blockchain, cryptocurrency, DeFi and NFT are coming to this market. However, such an increase in interest in the NFT technology and the active start of the use of non-fungible tokens led to the fact that regulators began a “legal panic”. Intellectual property problems have deprived legislators of sleep, forcing them to try to regulate an area that inherently denies regulation. However, lawmakers are attempting to regulate tax levies on NFT sales within the legal framework.
Is NFT a cryptoasset?
The legal status of NTF is not the same in different jurisdictions of different countries.
Almost all European countries, for example, comply with AMLD5, the Anti-Money Laundering Directive 5. While this directive deals with cryptocurrencies in some detail, it deals with NFT rather superficially. Of course, relying on AMLD5, some NFTs can be defined as financial instruments or crypto assets, but de facto in European countries, everyone solves this problem as they think possible.
Germany
For example, in the German KWG Banking Law (Kreditwesengesetz), cryptoassets mean “a digital representation of value that is not issued or guaranteed by a central bank or government agency.” A crypto asset has the following characteristics: it does not have a legal status similar to fiat currency, but is accepted as a means of exchange or payment for goods / services. In addition, a crypto asset can be used as an investment, as well as stored and sold electronically. Given this interpretation, it can be assumed that NFT tokens are crypto assets and may also be suitable for use as investments.
Italy
Taking the Italian MiFID as an example, you will find that NFTs can be classified as investment products in that country. Interestingly, the very definition of investment products already exists in Italian law. And it is burdened with licensing obligations. Investment products here mean various forms of investments of a financial nature, which entail the payment of capital, the expectation of financial benefits and even the acceptance of risks associated with the payment of capital.
Luxembourg
The regulation issue in Luxembourg is very interesting. The creator and purchaser must take into account the requirements of the AIFM regulation, which provides for the licensing of activities related to financial instruments and collective investment units. If a company is in any way related to the creation, exchange, transfer, storage or trade of virtual assets, then it is subject to licensing to conduct this type of business. Even in the case of administering and providing financial services related to virtual assets, the company is subject to registration as a “virtual service provider”. Financial control is exercised by the Financial Security Supervision Commission.
United Kingdom
The UK’s Financial Conduct Authority, FCA, responded quite quickly — back in 2019 it published a document defining three categories of cryptoassets: e-money tokens, digital securities and unregulated tokens. NFTs are not at all suitable for the first position, but they can be considered as digital analogs of securities. If NFTs are treated as regulated investments (e.g. bonds), their purchase, sale, intermediation and ancillary services may be subject to licensing requirements under the UK Financial Services and Markets Act 2000.
Japan
Japanese regulators have taken this issue seriously. The Financial Services Agency, Japan’s main financial authority, has issued an official statement on the creation of a “research group.” The group will develop legislative solutions in the field of decentralized finance, CBDC and NFT. The team is endowed with great powers, including not only representatives of regulatory bodies, but also lawyers, analysts, scientists and even representatives of private companies LayerX and Sony.
There are many examples of how NFTs are defined in different countries. But in order to apply the rules of law, it will be necessary to study each token, since they can be radically different from each other.
How are NFTs taxed?
Tax authorities around the world have not yet developed a clear position on this issue. It is currently not easy to find documented direct taxation of income from the trade, storage or exchange of NFTs. But there are such cases, for example, the Philippine Department of Finance recently began to consider income from trading in-game NFT animals (they are called axies) as subject to taxation. If the tax authorities decide to use the NFT in the tax assessment process, they will have to use the classic tax base, even if far-fetched.
Returning to the Italian interpretation of NFT, it can be noted that non-fungible tokens in terms of taxation are directly related to their creator, and tax rates are already applied to him. For example, an Italian artist who creates digital art and sells them online appears to be self-employed. According to his status, he pays taxes. But there are also collectors. Unlike the author of a work, they do not create objects of art, and rarely sell them, more often they buy. But if suddenly the collector decides to sell the previously acquired NFT, then his income will be taxed as other income.
Analyzing the data obtained from different countries, we conclude that there is no clear tax base for NFT yet anywhere. Many regulators are just beginning to develop in this area. But it is already becoming quite obvious that sooner or later the tax authorities will find the answer to the question of how to get money from the sale or other use of NFTs.
What is sold as nft?
While regulators are thinking and defining, startups, development teams, and single authors are very active in taking advantage of NFT technology. Moreover, the areas of NFT application are very diverse, more precisely, all-encompassing. In the early days of NFT, many considered them to be child’s play or purely digital art. They were very wrong — the NFT market has already proved everything to everyone.
Art
It turned out that the scope of application of non-fungible tokens covers all layers of human life. You don’t have to go far for an example. Starting as a boom in tokenization of art, NFT technology made itself known with the sale of a painting by artist Mike Winkelmann, acting under the pseudonym Beeple. And what a sale!
His painting EVERYDAYS: THE FIRST 5000 DAYS and the NFT token linked to it were sold at Christie’s for a record $ 69.35 million. In the same cohort, we see Coldie, Hackatao, MBSJQ, Fewocius, Muratpak, and many others.
Then came the very classical art. The Uffizi Gallery tokenized and put up for sale digital facsimiles of some of its most iconic works of art, including Doni Tondo, the painting’s NFT token, which sold for $ 170,000. All copies of paintings have a certificate of authenticity, which is signed by the director of the museum, Eike Schmidt.
The State Hermitage Museum, in collaboration with Binance, has released several masterpieces from its collection in the form of NFTs. Here you can find works by Claude Monet, Vincent Van Gogh, Leonardo da Vinci.
Of course, there were some scandals. For example, the same Hermitage accused Till Lindemann, the frontman of the world-famous Rammstein group, of violating the contract for the use of the video filmed in the halls of the museum. The fact is that Till recorded a music video at the State Hermitage and began selling it as an NFT series illegally, according to the museum. Lindemann sings in his arrangement M. Bernes’s song “Favorite City”, which he recorded in May 2021. According to a representative of the Hermitage, the museum granted permission to shoot but did not envisage the use of video fragments as NFT.
Tweets
However, it was not just art that attracted generous investors to NFT. And the ability to tokenize almost any object they like. Why not monetize … your tweet? Some eccentric NFT enthusiasts convert tweets to NFTs and sell them on specialized marketplaces! So the first tweet of Twitter co-founder, billionaire Jack Dorsey, was sold for 1,630 ETH. Indeed, the crypto market has reached the exotic.
What about real-life objects?
House
With them, everything is also very good. One of the first “swallows” in the digitalization of an object as an NFT was the sale of an ordinary house. All users of the crypt have already discussed the resourcefulness of one of the real estate agents, who ordered a digital presentation of the house, packed it in NFT, and sold both objects at the same time — both a cute video about the object and the house itself. This was the world’s first sale of a property as an NFT. This practice may become widespread. Moreover, at the moment there are no legal restrictions on it.
Coins
Luxembourg-based startup OwnArt has released a special NFT kit to celebrate Luxembourg’s National Day. Conceived to issue digital equivalents of physical coins, which are issued once a year before the national day. They are mainly used for collecting. The startup also plans to sell-buy only and gift cards.
Sport
Most recently, London-based trading platform NFT startup Mostexrivate.io sold the world’s first “hybrid NFT”, a kind of symbiosis of encrypted information and a unique physical object. It was a tennis racket and ball, real, plus images of them digitized as NFT and signed by 25-year-old Russian tennis player Daniil Medvedev. You won’t surprise anyone with “hybrid” NFTs — and previously, magazines and books with autographs of stars, presented in the form of NFTs, were sold.
NFT-Show must go on
While there is a lot of legal uncertainty in the NFT industry, there is a free window of investment opportunities and this should be taken advantage of. This does not mean that the NFT theme will cease to be in demand in the future; on the contrary, it will only expand. Be one of the first in the world of decentralized commerce, and Barter Smartplace will help you with this with the help of the marketplace for barter trading in goods, currencies and other valuable assets. Acquire tokenized values and exchange them on Smartplace.
Any object can be included in the list of objects for monetization as an NFT — provided that the person who wants to package it into an NFT token has sufficient knowledge and skills. The field of business applications is truly enormous.
Any product presented as NFT receives the manufacturer’s mark of authenticity and warranty, as well as a lot of necessary information about it. I would not like to get ahead of ourselves, but we cannot rule out the use of technology to “tokenize” a person’s personality, and this is not just a “personal brand”. Let’s see how far this future will be.
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