2021 ends with a question: Are NFTs here to stay?

2021 ends with a question: Are NFTs here to stay?

Selva Ozelli is an international tax lawyer and CPA. She writes monthly Expert Take columns about the intersection of emerging technologies and sustainability.

Tezos’s non-fungible token (NFT), marketplace Hic Et Nunc, which in Latin means “here” and “now,” was abruptly shut down on Nov. 14. Artists were concerned about NFTs that were on display at the Hermitage Museum’s first ever NFT exhibition, “Ethereal Aether”, (Nov. 10-Dec.10), as well as Art Basel Miami’s first-ever NFT exhibit, “Humans + Machines – NFTs and an Ever-Evolving World of Art” (12 Dec. 2 to 4).

Diane Drubay, the founder of We Are Museums, and a collector of NFTs on Hic Et Nunc, explained to me that it was a shock to hear Hic et Nunc close down. But people took it as a step up in their journey. Our NFTs were kept on-chain so that artists could continue making a living with their NFTs even after the website was shut down. We saw new HicEtNunc.art versions or mirrors being opened within hours, which gave artists the support they needed to continue selling and buying NFTs.” she added.

“The community is organizing itself to create a decentralized, autonomous organization (DAO), to continue experimenting with Web 3.0 decentralization.”

This made me wonder: Will the United Nations General Assembly declare the International Year of Creative Economy for Sustainable Development? Or will it be remembered as the year NFTs became mainstream? Or will it be a passing global trend of invention, buried under the COVID-19 pandemic? To find out, I did research and interviewed people.

Related: What is NFTs and how are they changing the art world?

NFTs environmental impact, valuation, and regulation

NFTs can be described as digital assets built on blockchain platforms. They can be traded like digital trading cards for fiat or cryptocurrencies. NFTs are generally used to prove ownership of digital assets. However, the rights attached to NFTs can vary. Some NFTs include “smart contract” in their tokens that automatically execute when certain events occur.

“Antsstyle,” a computer scientist, has written a critical review of NFTs.

NFTs are bad because of two things: Because they rely upon cryptocurrencies, which can cause large amounts of carbon emission, they are harmful to the environment. […] 2. They can only be used for money laundering, tax fraud, or greater fool investment fraud.

This long version of Antsstyle’s analysis provides a detailed overview of both proof-of–stake (energy efficient) and proof–of-work (energy intensive) NFT platforms.

Manager at Eisner Advisory Group LLC, EisnerAmper A. J. Woloszynski pointed out that NFTs have subjective values determined by how much someone is willing to pay. “Take a look below. There is no problem with the image loading on your PC. What you see is a gray box. This NFT, known as The Pixel, was produced by an artist whose name is [Pak] and sold at Sotheby’s auction for $1.3 million in April 2021.” In addition to Christie’s and Phillips, Portion began selling NFTs that were minted on non-fungible token platforms.

Similar: Art reimagined – NFTs are changing collectibles market

According to CryptoArt, Pak is the second-highest-selling crypto artist of all time, with around a $65 million market capitalization for his art pieces. NonFungible ranks Bored Ape Yacht Club as number one. The “Bored Ape #9449” NFT was last sold for more than $1 million.

Although not ranked by NonFungible the 24×24 low-pixel images of CryptoPunks created by Larva Labs were among the first major NFTs. CryptoPunk #3100 was sold in March for 4,200 Ether (ETH) or $7.6 Million at that time. This sale was eclipsed by the sale “Everydays – The First 5000 days,” an NFT by Mike Winkelmann (aka “Beeple”) that raised $69.3million that day. It amounted to $13,800 for each piece of digital art in the collage. DappRadar also reported that CryptoKitties from Dapper Labs, the first major Ethereum-based NFT project to use ERC-721 standards, saw a 22,106% increase in daily trading volume during the recent NFT market revival.

The regulation of NFTs is not extensive. An executive at OpenSea’s leading NFT marketplace was selling nonfungible tokens that he had purchased. He featured the tokens on the website’s homepage earlier this year. This move presumably allowed him to make quick profits since insider trading on NFT markets is not illegal. Another example is the 265 ETH ($1.1million) worth of fraudulent NFTs that claimed to be issued in Hong Kong by gaming and venture capital firm Animoca Brands, and its subsidiary Blowfish Studio were minted and then sold via Discord. A hacker uploaded 20 Terabytes worth of NFTs that were originally created on the Ethereum or Solana blockchains in the NFT heist.

Similar: Legal perspective on nonfungible tokens

Chainalysis, a blockchain forensics firm, estimated that illicit activity accounts for about 0.34%, or $8.5 billion, of the cryptocurrency market’s $2.5 trillion transaction volume. NonFungible reports that 265,927 active wallets traded NFTs via the Ethereum blockchain in Q3. Governments around the globe, including the Joint Chiefs of Global Tax Enforcement, have been sharing resources and information to investigate cross-border tax crimes due to the rapid rise of cryptocurrency, NFTs, and their use for money laundering, hacking and other illicit transactions.

Related: Cybercrime Task Force Monitoring the Global Digital Financial System

In collaboration with its civil office for fraud enforcement personnel and its criminal investigation unit, the Internal Revenue Service launched “Operation Hidden Treasure” earlier this year to investigate tax evasion by NFT and cryptocurrency users. According to the IRS Criminal Investigation, 93% of all seizures in fiscal 2021 that totaled $3.5 billion were related to cryptocurrency. The United States Treasury Department placed 57 cryptocurrency addresses and Chatex from Latvia on its sanctions list. This exchange facilitates transactions related to illicit or high-risk activities like darknet markets, high risk exchanges, ransomware, and other high-risk trading platforms.

More tax regulations were implemented as part of President Joe Biden’s all-of-government efforts to combat ransomware and illicit use cryptocurrency and NFTs. H.R. H.R. 3684, the Infrastructure Investment and Jobs Act requires cryptocurrency “brokers” to report NFT purchases exceeding $10,000 to the IRS using Form 8300. This includes names and Social Security numbers. Otherwise, they could face felony charges.

The Financial Action Task Force (FATF), issued new guidance regarding NFTs in October. It stated that they were not included in its definitions of virtual assets. FATF standards may still be applicable to NFTs depending on the case.

Sustainable NFTs

NFTs are the most disruptive force in the art world this year. Investors buy, sell, trade and invest, while artists create, exhibit, and auction their work. Nash Islam, an early investor, stated that NFTs are primarily driven by Twitter & Discord.

“Investing in Pak across multiple project has produced massive multiples as well as helped us understand and set some principles for NFT investment.”

Damien Hirst is the richest living artist in the United Kingdom. He launched “The Currency”, an NFT series that explores the nature of currency, value, and art. It was created on Palm, an NFT platform that acts as an Ethereum sidechain. The currency was then offered for sale by Heni at $2,000 each.

Artist Ilya Shikipin explained to me that he chose to mint his MonarxNFT series using the open-source, energy-efficient Tezos NFT platform. “Choosing Tezos was not a decision we made but a natural one after speaking with our supporters. The Monarx team and community both valued the convenience of minting and low gas costs. Because the art was for them, we did what they told us. My MonarxNFT series, a combination of a neural network carefully guided and artistic vision, was created during a time of great loss in my life.

This is a tribute to @VitalikButerin, a king. It is not clear where I will mint it. Eth gas is killing my body. pic.twitter.com/QUPqmwYnAh
— Ilya SHK, @i_shkipin, November 16, 2021Monarx will ascend this December pic.twitter.com/IWL6Ylb8md
— Monarx.art (@MonarxNFT) November 13, 2021

Tezos’ global director of communications, public relations and communications, Reid Yager, explained to me that Tezos will present the first ever NFT art exhibit as an official partner at Art Basel. This exhibition will include more than 25 artists representing 18 different countries. In addition, more than 30 artists, gallerists and museum directors, celebrities and thought leaders will take part in the Tezos Ecosystem Exhibition speaker series in the exhibit space.

Yager said: “The HicEtNunc NFT platform, the leading Tezos platform for NFTs, recently underwent the first ever NFT marketplace Web3 transition (DAO) from platform-owned to community owned (DAO). Over half a million NFTs were created by users from all corners of the world. Tezos is booming, with more than 6 million contract calls in September and November. Tezos is the best blockchain for collecting and minting NFTs worldwide. The Whitworth Museum actually minted one of the first NFTs ever from a Museum on the Tezos Blockchain — William Blake’s The Ancient of Days.

DappRadar reports that Hic Et Nunc was 14th largest non-fungible token market in terms of total sales ($50.37million) at the time it closed down. The average sale was $25.19 per NFT. New York’s OpenSea is the leading marketplace for NFT trading. It operates on the proof of work Ethereum blockchain. Ethereum 2.0, a proof of stake blockchain, is being transitioned to. It will be 99% more energy-intensive, scalable, secure, and sustainable than Ethereum 2.0. OpenSea and any other top-ranked marketplaces are yet to see if they can hold their position in this rapidly-changing market. Many of the biggest companies have been entering NFT space to transform Metaverse.

Technology companies: TikTok, Twitter, Facebook, Alibaba, Tencent, Xiaohongshu, NetEase, Baidu, Microsoft and eBay.Fintech companies: China’s Blockchain-based Service Network, which will support future central bank digital currencies from various countries, launched infrastructure to support the deployment of NFTs in China and other countries.Cryptocurrency marketplaces: Coinbase and Binance NFT, which sold the Hermitage Museum’s first nonfungible token.

Museums and NFTs

The International Council of Museums (ICOM), in a study, found that more than 30% of museums had to cut their staff due to the COVID-19 pandemic. Nearly 6% of these museums may never be able reopen. However, digitization is happening at a rapid pace. Some museums are turning to NFTs for various reasons.

Related: Charitable sustainable NFTs to the United Nations 17 SDGs

NFT Exhibitions

The Hermitage Museum’s Ethereal Aether contained 36 NFTs from all over the globe, including Larva Labs’ #5652,” Schrodinger’s Cat from Dapper Labs’ CryptoKitties, and Mihai Grecu’s NeoPyongyang I, minted on Hic Et Nunc.

Anastasia Garnova and Dimitri Ozekov, the curators of NFT, explained to me that “interest in digital art intensified after the COVID-19 epidemic, when millions of people sat home for months without any museums being open.” The first NFT Exhibition will kick off the creation of the “Celestial Hermitage” — a virtual museum that will in the future be transformed into an actual museum.

“We are certain that the field of digital art, particularly NFTs, will grow in amazing ways and that it can look ahead to a great future — safe and smart, fascinating.”

Todd Morley, co-founder of Guggenheim Partners, announced plans to build the largest museum dedicated to NFTs in the world, inside a huge skyscraper in New York City. It is located just four blocks away from the Museum of Modern Art.

Museums can raise NFT funds

Three of the 20 biggest museums in the world are the State Hermitage Museum, St Petersburg (No. 2), and the Metropolitan Museum of Art New York City (No. 4) and the British Museum, London (No. 12) — turned this year to NFTs for funding. The Uffizi, in Florence, and the Whitworth, in Manchester are just a few examples. The Museum of Digital Life, which is an entire museum that’s based in the Metaverse, has an NFT.

Miami Institute of Contemporary Art received a donation of CryptoPunk #5293 from one of its trustees.

Jean-Sebastien Beaucamps is the co-founder of French eco-friendly startup LaCollection, an Ethereum-based NFT-platform. He explained to me that LaCollection.io was created to sell NFTs of 200 Hokusai pieces. We will plant one tree for every NFT issued by our company. This is our NFTree program. It compensates for the last summer’s wildfires and ensures that our NFTs are carbon neutral. The NFTs will include works from the exhibition, such as The Great Wave. 100 NFTs will come from the BM’s collection, which includes drawings from the newly rediscovered book that is the subject of this exhibition.

NFTs and environmental education

This year, the ICOM’s International Committee for Museums and Collections of Science and Technology hosted a conference titled “Museums & Environmental Constraints, New Insights”. The show featured an art exhibition titled “Museums & Environmental Considerations, New Insights.” It addressed the planet’s environmental issues and how science and technology museums can present and approach this issue through education and exhibitions. To find out more about NFTs and their role in museums, I spoke to several museum directors. Here’s what they said to me.

George Ma, Head of the Climate Action Section, Social Responsibility and Sustainable Development Office at The Jockey Club Museum of Climate Change, The Chinese University of Hong Kong, is the head of this section.

NFTs are not currently on our radar but something we should keep an eye on. Our exhibitions were digitalized. A 360 Virtual Tour is our digital version of the permanent exhibition. We have produced a 360 Virtual Tour for each of the themed exhibitions we’ve created since 2018, either in a more web-like format or 360 VR.

Patrick Hamilton, Director of Climate Change, Energy and the Environment at the Science Museum of Minnesota

“The Science Museum of Minnesota digitizes its collections, but I don’t know of any plans to digitize their exhibits or sell NFTs.”

Julie Decker, Director and CEO of Anchorage Museum

“NFTs are an interesting topic to read and think about.” We don’t have any plans at the moment.

Viviane Gosselin is the Museum of Vancouver’s director of collections, exhibitions and curator of contemporary art.

“At this time, we are not selling NFTs to raise funds or collect money — not yet.” It isn’t a ‘green’ industry, so it is a red flag for me!

Soren Brothers, Shiff climate change curator at the Royal Ontario Museum

“ROM is digitizing its collections, which can be accessed here (https://collections.rom.on.ca/). I do not know if ROM plans to sell NFTs.

The Los Angeles County Museum of Art also has an Art + Technology Lab, where they run a series that explores what NFTs can mean for institutions collecting digital artwork. It examines the “artistic and curatorial, conservation and registration issues of this digital format” as well as the legal aspects. Drubay, We Are Museums, recently announced “Unlocking Web3 For the Arts and Culture”, a program that was created by We Are Museums and TZ Connect in collaboration with the Blockchain Art Directory 2.0. This program will help professionals working in the arts and culture industry navigate Web3 innovations.

Conclusion

In the early 1990s, Bill Gates, founder of Microsoft, stated that art would be digitalized and people would no longer hang artwork on their walls. Instead, they would project any masterpiece onto a screen on their walls. This was a novel idea that got me excited.

Now, fast forward to 2021, which was the second year after the COVID-19 pandemic. NFT sales volumes soared 1,000% with people interested to use them in a variety of areas, including visual arts, video, music, collectibles, branding, gaming, publishing and carbon trading.

Did you know that the rug was given to Pope Francis by Sheikh Mohamed Bin Zayed Al-Nahyan (the crown prince of Abu Dhabi), and then put up for sale in order to raise funds for Afghan rug weavers, who will receive 80%.

NFTs, named the word of year by Collins Dictionary, are here to stay.

These views, thoughts, and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
Selva Ozelli, Esq. CPA is an international tax lawyer and certified public accountant. She frequently writes about tax, legal, and accounting issues for Tax Notes and Bloomberg BNA as well as other publications such the OECD.

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