Tokenization of art, gaming, and the future of NFTs | Opinion

As a seasoned crypto investor, I’ve had the privilege of participating in three enlightening interviews with William Quigley, a renowned figure in the cryptocurrency and blockchain space, and co-founder of WAX and Tether. In this third installment, exclusively for by Selva Ozelli, we delve into the captivating future of NFTs (Non-Fungible Tokens). Previously, we explored the intriguing topics of Sam Bankman-Fried’s and Changpeng Zhao’s legal situations, as well as the intersection between cryptocurrency and banking.

1) In Part One of our interview, you mentioned that you co-founded Worldwide Asset eXchange (WAX), the first decentralized marketplace for trading video game virtual items. Tell us about, the number one web3 gaming platform.

WAX was designed with the unique needs of blockchain gaming and NFT collecting communities in mind. Originally, we launched WAX on the Ethereum blockchain. However, its high transaction fees and slow processing times prompted us to create our own blockchain and digital wallet for a more efficient user experience.

As a crypto investor, I’m excited about the WAX blockchain, which boasts the largest NFT ecosystem out there. With over 250 million NFT assets and more than 30,000 dApps at various NFT projects, it’s a thriving community for collectors and creators alike. Every day, this platform handles an impressive volume of transactions – approximately 23 million – for those 30,000 dApps and a user base of 15 million strong. I appreciate that WAX is not just big but also ultra-fast, secure, and carbon-neutral.

As the most popular blockchain platform globally for Non-Fungible Tokens (NFTs), Decentralized Applications (dApps), and digital gaming in terms of daily active users, WAX was deliberately engineered with an eco-friendly approach from its inception. Our carbon-neutral position isn’t merely a promise but a certified fact, verified by Climate Care, showcasing our commitment to minimizing our environmental impact.

On Earth Day, we introduced the Earthen WAX Walker NFT series. With each claimed NFT from this collection, WAX will add a new tree to the earth. By merging our enthusiasm for advanced digital assets with real-life environmental improvement, this project allows us to make a global impact on reforestation through the sale of unique digital artwork.

2) A 2023 crypto analysis firm dappGambl report found that 95% of NFTs are worth practically nothing. The report found that following the immense hype over NFTs between 2021 and 2022, around 79% of all NFT collections have remained unsold. The popular Bored Yacht Ape NFT values are down around 90% from market highs. As the NFT markets crashed at the end of 2021, I wrote that NFTs were here to stay. What are your views on the future of NFTs?

As a crypto investor, I’m excited about the dynamic growth of the NFT market. Based on Zion Market Research, this market was worth $36.12 billion in 2023 and is expected to expand at an impressive CAGR of approximately 22.05% from 2024 to 2032. By the end of the decade, we could witness a significant surge, with the market potentially reaching a value of $217.07 billion.

Tokenization of art, gaming, and the future of NFTs | Opinion

As a researcher studying the dynamic world of Non-Fungible Tokens (NFTs), I’ve uncovered some intriguing data. Currently, the total market capitalization of NFTs hovers around $68.68 billion – a noteworthy 1.12% increase in value within the past 24 hours. This growth is likely to predominantly affect utility NFTs, collectible NFTs, and web3 gaming NFTs.

3) In 2021, art NFTs seemed like the biggest disrupter in art, with artists minting, exhibiting, and auctioning and investors buying, selling, and trading art NFTs.  Nicole Sales Giles, VP and director of digital art sales of Post-War & Contemporary Art at Christie’s, said, “At Christie’s, we view Digital Art as simply another collecting category of contemporary art. The web3 art community is collaboratively building something very special.  I believe that in the future, the art world will look back on today’s camaraderie of artists, builders, curators, and collectors as the time ‘when it all started.” What are your thoughts and views about the future of art NFTs?

As a researcher studying the art market trends, I’ve discovered that the global art market experienced a 4% decline last year, reaching approximately $65 billion annually. A significant portion of this revenue can be attributed to a few high-value art sales. In the emerging realm of Art NFTs, established players like Christie’s, Sotheby’s, and Phillips are expected to play pivotal roles in facilitating transactions.

At WAX, we prioritize NFTs with a large trading community – specifically collectible and gaming ones. Our goal is to ignite significant collector enthusiasm for our new Earthen WAX Walker NFT series, which in turn will enable us to make a positive environmental impact by planting numerous trees.

4) Gains from collectible NFTs are being taxed at a 28% rate, which is higher than current capital gains rates. What are your thoughts on the higher tax rate applied to collectible NFTs? And will the higher tax rate hinder NFT collectible investment? 

As a researcher studying the global collectibles market, I can tell you that this market, valued over $360 billion in 2020, is projected to expand at a substantial rate of approximately 4% during the forecast period from 2022 to 2028. Consequently, the Internal Revenue Service (IRS) has announced a tax rate that is 28% higher than the current capital gains tax rate for collectible NFT sales. This suggests that the IRS anticipates substantial growth in this specific sector and intends to tax it accordingly.

Tokenization of art, gaming, and the future of NFTs | Opinion

5) The IRS recently issued the 1099-DA form in draft form. Jonathan Cutler, senior manager in Deloitte’s Washington National Tax team advising on information reporting of digital assets, said, “Under the August 2023 proposed digital asset reporting regulations, an NFT is included as reportable when it is a ‘digital representation of value that is recorded on a cryptographically secured distributed ledger (or any similar technology).’ In April, the draft form on which an NFT or other digital asset might be reported—the Form 1099-DA—was published by the IRS. Importantly, the cover page notes that this early draft release is based only on the proposed regulations and subject to change based on the public comments, the volume of which appears to be significant. Until those comments are digested by the IRS and Treasury, it’s difficult to glean meaningful information, whether from this draft form or otherwise, on the final scope of the definition of “digital asset” for reporting purposes.”  Do you have any comments on the draft 1099-DA form which applies to NFTs?

As an analyst, I would express it this way: If the finalization of the draft 1099-DA form stands, NFT markets will be obligated to issue these forms. Given that collectible NFTs are subjected to a higher tax rate.

6) A new NFT project takes cannabis sales out of the dark web markets and brings it into the NFT markets. Cannabis billionaire Maximillian White, who is often referred to as the ‘Elon Musk of cannabis,’ said, “I signed a partnership agreement with UK rapper Fredo just weeks after his Dubai prison release to launch first-of-its-kind Dr. Green NFTs sold at my own NFT market place which will allow holders of the Ethereum based NFTs to sell recreational cannabis legally worldwide. The global cannabis market value is expected to reach approximately $33 billion by 2024 end and hit over $69 Billion by 2029 with a compounded AGR of 15.4%.” Do you have any thoughts or comments on this first-of-its-kind cannabis NFT initiative?

No comments.

7) NFTs appear to be the next wave of SEC enforcement actions in the digital asset space. Last year, the SEC classified two NFT projects as securities. In August 2023, the SEC charged Impact Theory, LLC, a media and entertainment company headquartered in Los Angeles, with conducting an unregistered offering of crypto asset securities in the form of NFTs. Impact Theory raised approximately $30 million from hundreds of investors through the offering by claiming to be the next Disney Company—your ex-employer. Two weeks later, in September 2023, the SEC charged and entered into a settlement with Stoner Cats 2, LLC (SC2), finding that SC2’s NFT offering, which raised $8 million called Stoner Cats, was a security, and therefore SC2 had engaged in an unregistered offering of a security. What are your views on SEC’s enforcement actions in the NFT area?

I hadn’t previously known about the two settlements between the Securities and Exchange Commission (SEC) and the NFT projects spearheaded by The Next Disney Company and the animated web series Stoner Cats, featuring Mila Kunis and Ashton Kutcher.

In my assessment, it appears that the legal teams behind these two NFT projects fell short in drafting clear and sufficient offering documents. Three key features that can classify an NFT as a security are: fractional ownership, passive income generation, or governance participation, such as staking. Consequently, the SEC identified these NFTs as investment contracts and, thus, securities. As a result, these NFT projects failed to comply with federal securities laws by publicly offering and selling unregistered securities that were not exempt from registration.

Due to the complex regulations surrounding the issuance of securities, it’s important to steer clear of this classification for NFTs (Non-Fungible Tokens). Instead, it’s crucial to meticulously examine the features and offering documents prior to launching an NFT project.

8) The vast majority of existing NFT projects across art, gaming, sports, metaverses, and even cannabis are built on Ethereum blockchain. In April, the SEC issued a Wells notice to Ethereum-based Consensys, revealing that the agency could take potential action against Consensys for violating the federal securities laws through its MetaMask Staking and other products.  The SEC seeks to regulate ETH as a security after Ethereum successfully changed its consensus mechanism by transitioning from proof-of-work to proof-of-stake back in September 2022. This view is also shared by the New York State Attorney General’s Office (NYAG), which, ahead of the SEC on March 9, 2023, filed a lawsuit charging crypto trading platform KuCoin for “failing to register as a securities and commodities broker-dealer and falsely representing itself as an exchange” notably alleging that the ETH traded on the platform is a security.  The BlackRock CEO Larry Fink stated he isn’t worried about the SEC classifying Ethereum’s ETH as a security. What are your thoughts about the potential classification of ETH as a security?  How will this impact the NFT market?

No comment.

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2024-05-25 14:20