NFTs can now serve as court documents\u2026 but they might also be unregistered securities, illegal loot boxes, or come with impossible tax demands.\u00a0<\/b><\/p>\n
Nonfungible tokens (NFTs) are thought of by most people as just funny pictures that degens on the internet spend far too much money on for poorly understood reasons. But Jason Corbett, managing partner of global blockchain law firm Silk Legal, says new and innovative use cases are beginning to emerge.<\/p>\n
\u201cWe\u2019ve seen recently the courts allowing the serving of court documents by way of an NFT,\u201d Corbett says, referring to a recent <\/span>decision<\/span><\/a> by a United Kingdom court to allow notice of the case to be served by airdropping court documents as NFTs to wallets allegedly stolen from the claimant.<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n This changes our conception of what NFTs are and what rights and responsibilities come with them. Following this precedent, the sending of NFTs can be understood as a type of electronic communication, with the caveat that it is generally public. The sending of NFTs is more comparable to attaching posters to the outer wall of one\u2019s house versus discreetly sliding them into the mailbox.<\/span><\/p>\n This comparison to publicly visible posters begs the question of whether this means that individuals controlling blockchain wallets hold responsibility for the NFTs they hold, in the same way as a homeowner would ultimately be responsible for removing obscene or otherwise illegal posters on their property, even if placed there against their will.\u00a0<\/span><\/p>\n Does this mean that, for example, the owners of wallets may in the future be responsible for monitoring them for any type of illegal content sent to them, and act quickly to dispose of them in some manner? That\u2019s just scratching the surface.<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n Metaverse Law MA thesis \u201cENCODED TERRITORY: The Blockchain-based Metaverse as a Special Environment of International Law\u201d argues that the #Metaverse<\/a> influences the balance of global power & demands special legal treatment @UniTurkuLaw<\/a> @UniTurku<\/a>#NFTs<\/a> #BlockchainGaming<\/a> #cryptolaw<\/a> pic.twitter.com\/GSvghv6Xoy<\/a><\/p>\n \u2014 Elias Ahonen.eth (@eahonen) June 11, 2022<\/a><\/p>\n<\/blockquote>\n \u00a0<\/p>\n \u00a0<\/p>\n \u201cThe blockchain Metaverse presents challenges to the international order due to the limited ability of states generally to intervene in metaverse-based actions,\u201d I wrote in my Master\u2019s in International & Comparative Law <\/span>thesis<\/span><\/a>, \u201c<\/span>The Blockchain-based Metaverse as a Special Environment of International Law<\/span>.\u201d One fascinating, and perhaps off-putting, matter that has continued to come up in my research is the lack of clarity and, at times, the absurdity of earthly legal matters when applied in, and to, the metaverse.<\/span><\/p>\n NFTs and cryptocurrencies are a good place to begin exploring the subject, seeing they are effectively the building blocks and lifeblood of the metaverse. Both are, of course, tokens \u2014 one being nonfungible in the sense that they are unique \u201citems,\u201d with the other being fungible \u201cenergy\u201d with which the metaverse operates. By metaverse, we of course refer to the blockchain-based version of it, not some corporate-controlled Fortnite version.<\/span><\/p>\n A variety of cryptocurrencies, often known as tokens or coins, began to appear in 2011 as theoretical alternatives to Bitcoin. Growing in prominence, they had their day in the spotlight during the initial coin offering (ICO) boom of 2017, during which hundreds of projects attempted to raise money by issuing tokens to investors.\u00a0<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n When hundreds of millions of dollars are being raised in an entirely new way, it\u2019s not surprising that potential legal concerns are lurking around the corner. This was certainly the case with ICOs, which regularly ran afoul of securities laws and the related accredited investor laws, says Randall Johnson, a United States lawyer with 30 years of experience specializing in securities regulations and who advises various blockchain projects.<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n What will be the law of the metaverse? . The legal and ethical dilemmas plaguing technology today will only grow more acute in the metaverse, writes Brian Harley. How will real-world laws apply?<\/p>\n \u2014 Nathan (@shanzi73338680) August 28, 2022<\/a><\/p>\n<\/blockquote>\n \u00a0<\/p>\n \u00a0<\/p>\n He explains that one of the key questions around whether a token can be classified as a security is whether \u201cthe general public would think it is an investment.\u201d This means that white papers or presentations that boast that tokens are \u201calready on exchanges\u201d or, worse, openly describe them as \u201cgood investments\u201d and use \u201cto the moon\u201d style boosterism, are painting targets on their backs. Another factor that almost always makes a token a security is \u201cif it operates like a dividend-paying share in a company,\u201d he explains.<\/span><\/p>\n \u201cA large part of regulator analysis on whether a token might be a security has to do with how it is advertised and promoted.\u201d<\/span><\/p>\n<\/blockquote>\n But how is the financial regulation of cryptocurrencies related to the metaverse and NFTs? It\u2019s because NFTs are tokens just the same, and serious questions could arise regarding their status as securities.<\/span><\/p>\n What some may view as art might look like little more than stock certificates emblazoned with digitally generated monkey pictures to regulators. Indeed, Johnson himself is co-founder of <\/span>LiquidEarth<\/span>, a platform that is turning title deeds into income-producing real estate from around the world into NFTs.<\/span><\/p>\n His companies do not fractionalize the deeds because \u201cthen the NFT is by definition a security,\u201d he asserts. The long-term goal is to create a \u201cglobal real estate exchange\u201d where one could seamlessly invest across borders, with the actual deeds held in trust.<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n James Woolley, chief marketing officer of <\/span>Metavest Capital<\/span>, agrees that while most NFTs do not resemble securities, others are likely to get caught in regulator\u2019s nets.<\/span><\/p>\n \u201cThere are variations of NFTs that will struggle to pass the Howey Test \u2014 fractionalized NFTs where there is a \u2018lead role\u2019 played by a marketplace or exchange will likely be more formally regulated by the Securities and Exchange Commission.\u201d<\/span><\/p>\n<\/blockquote>\n Woolley also mentions worrying speculation that the SEC under Gary Gensler, which has remained tight-lipped on the issue beyond declaring Bitcoin a commodity, has its aims on declaring \u201call other fungible and nonfungible tokens\u201d as securities \u2014 a move that would do untold damage to the industry.<\/span><\/p>\n Other experts worry that Web3 innovation has left appropriate regulations far behind.<\/span><\/p>\n \u201cRegulatory authorities worldwide are failing to keep up with the rapid technology developments in the Web3 and the metaverse space,\u201d concludes Irina Heaver, partner of <\/span>Keystone Law <\/span>specializing in blockchain industry and general partner of VC investment firm <\/span>Ikigai Ventures<\/span>.<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n In her work, Heaver describes regularly hearing concerns from regulators because innovative new crypto business models \u201cinadvertently trigger existing regulations concerning banking, lending, capital formation and other activities which were traditionally the domain of large players, such as banks.\u201d\u00a0<\/span><\/p>\n \u201cDevelopers can code faster than any regulator can regulate.\u201d\u00a0<\/span><\/p>\n<\/blockquote>\n One example of possible triggering of securities regulations may be found in yield-bearing NFTs. Take for example CyberKongz, sometimes credited as the first NFT monkey collection, whose 999 \u201cGenesis Kongz\u201d \u201cyields 10 $BANANA a day,\u201d according to the site, in reference to the project\u2019s <\/span>cryptocurrency<\/span>.\u00a0<\/span><\/p>\n At the project\u2019s height, this meant that each monkey-holder earned the equivalent of over $700 per week. In this case, would it not be unreasonable for a regulator to consider each CyberKongz NFT the equivalent of a class-A share paying daily dividends on the project? It\u2019s still a gray area, but the possibility is not entirely closed off.<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n If such a precedent is established, it could open a Pandora\u2019s Box regarding what the extent of securities regulations could be.<\/span><\/p>\n Suppose an artist creates an NFT series titled \u201cAn Artist\u2019s Share\u201d whose 100 unique works are then included in smart contracts designed to automatically pay the owner of each \u201cArtist\u2019s Share\u201d a 0.1% payout of the given artist\u2019s gross revenue from minting and royalties. Would this be a mere NFT, or would it be a security? According to Johnson\u2019s definition, it would seem to fit the bill. Could simple airdrops of new art to existing collectors also fit the bill?<\/span><\/p>\n Even where NFTs may not be securities, there are serious uncertainties regarding how and on what basis they can be taxed.<\/span><\/p>\n Consider a hypothetical blockchain game, where a player can begin playing for a small cost of $20. With time, however, the theoretical value of their in-game items (NFTs) may grow. Does the mere playing of a metaverse game thus entail potentially hundreds of taxable events per day, leaving an unsuspecting player on the hook for preparing tax returns comparable to those of a medium business in complexity?<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n An example of this can easily be found with Axie Infinity, which, at least until recently, had a massive player base in the Philippines. Mark Gorriceta, managing partner at Filipino law firm Gorriceta Africa Cauton & Saavedra, <\/span>said <\/span><\/a>that in the country, NFTs have become \u201cmainstream due to the rise of play-to-earn games like Axie Infinity.\u201d<\/span><\/p>\n Cointelegraph previously <\/span>reported<\/span><\/a> on the country\u2019s Finance Undersecretary Antonette Tionko commenting regarding the play-to-earn model that \u201cwhoever earns currency from it, it\u2019s income you should report it.\u201d However, this seemed to only refer to the act of actually selling in-game assets (NFTs) or in-game \u201cpoints\u201d (SLP and AXS tokens) for fiat currency or other tokens.<\/span><\/p>\n What is left unclear is what happens if a player, for example, finds a rare in-game item whose external market value is $100,000. If they simply elect to use this item in a game, will simply having the rare item come into possession be seen as a capital gain?<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n If not, would the situation change if they trade, exchange or somehow convert the item into something else within the game \u2014 such as using a \u201cmagic metaverse log\u201d valued at $100,000 to manufacture in-game planks with which to build an in-game house to boost the character\u2019s in-game building score? Just how many taxable events could an in-game activity like this entail?<\/span><\/p>\n Consider a real-world example of finding a gold bar while walking on a beach \u2014 in some tax systems, you might be forced to pay tax on it that year, potentially meaning that the bar needs to be sold in order to raise the money necessary to pay taxes. Even in jurisdictions where no taxes are owed because simply keeping the gold bar results in no realized gains, things generally change as soon as the bar is bartered for a new car or luxury watch, even if no fiat money was involved. Even personally smelting the bar into personal-use jewelry could spark a taxable event.<\/span><\/p>\n This, of course, opens a new can of worms entirely \u2014 tax authorities would need a system by which to actively evaluate the market value of various, often unique NFTs. Perhaps NFT appraisers will be one of the new metaverse jobs accounting firms around the world will soon be hiring for.<\/span><\/p>\n Speaking of the market value of NFTs, questions arise regarding various forms of wealth tax that are present in various European countries, such as Norway, where residents must annually pay 0.85% of the value of their net worth exceeding $170,000.\u00a0<\/span><\/p>\n This means that each year, Norwegians should estimate the total value of their NFTs, whether game items, art, metaverse real estate, ENS domain names, or good old monkey pictures. While a floor-level Bored Ape Yacht Club NFT worth $100,000 would incur $850 in annual taxes, how much does the owner of a monkey with rare features like laser eyes or gold skin need to dish out? What about subjectively desirable numbers such as Monkey #8888 or #69420? No one knows, but the Norwegian tax office will expect their due regardless.<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n Continuing with the Axie Infinity example, the metaverse\u2019s mode of operation introduces certain territorial absurdities when it comes to taxation. For example, the Philippines has territorial taxation, which means that, for example, an Australian citizen living in the country would need to pay taxes only on income they earn from the Philippines, while income from elsewhere remains effectively tax-free.\u00a0<\/span><\/p>\n This means that the hypothetical Australian playing Axie Infinity in the Philippines would need to know the tax residency of every person they are selling their NFTs to, especially considering such a large portion of the player base is indeed within the country.\u00a0<\/span><\/p>\n Determining the tax residency of NFT buyers is, of course, not practically possible in the open and decentralized markets as they exist today. This may become a serious issue in the future, for example, with countries that charge sales tax when goods or services are sold within the country.<\/span><\/p>\n Meanwhile, in Australia, there are certain circumstances in which NFT owners may need to pay a 10% Goods and Services Tax<\/span>, depending on if it\u2019s a Personal Use Asset, a Capital Asset of a business or used as a part of a business.<\/span><\/p>\n Though things are still at their early stages, Corbett says that in a few years, tax systems \u201cwill be reading what\u2019s happening on blockchain,\u201d referring to advanced versions of tools, such as token.tax, which will be used by both individuals and regulators. The surveillance of exchanges that serve as on- and -off ramps for fiat will also increase, allowing the tax man to uncover positions.<\/span><\/p>\n \u201cTax authorities will start kind of cobbling together what the taxable crypto positions of nationals are.\u201d<\/span><\/p>\n<\/blockquote>\n Is it possible they will start combing through those immutable records back to today and apply laws and taxes retroactively to current NFT owners? Will there be a new generation of prison gangs forming around NFT affiliations \u2014 Apes Anonymous, anyone?<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n In the upcoming FLIP Buzzwords webcast, we explore how the #metaverse<\/a> impacts legal issues such as personal injuries, copyrights, patents, contracts, claims by users against companies, and claims against other users under crime and tort law. Register: https:\/\/t.co\/zqBMCOg0nI<\/a> pic.twitter.com\/FHKvoiBOeH<\/a><\/p>\n \u2014 LawSocietyNSW (@LawSocietyNSW) August 24, 2022<\/a><\/p>\n<\/blockquote>\n \u00a0<\/p>\n \u00a0<\/p>\n Many countries regulate gambling, which would likely include metaverse-based <\/span>casinos<\/span><\/a>. Some governments even place restrictions on the inclusion of purchasable loot boxes in video games, often citing a desire to prevent young people from gambling.\u00a0<\/span><\/p>\n This is likely to become a concern with play-to-earn games, where loot boxes might take the form of NFT minting.<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n This raises wider questions over whether NFT minting itself could be considered a legal equivalent to loot boxes or gambling in general. This is because NFT minters often pay significant sums of money in hopes of getting a particularly rare or valuable version of the NFT being minted.\u00a0<\/span><\/p>\n Beyond loot boxes, one might be concerned whether the entire play-to-earn model, where players can be understood to bet money in various ways, might itself be classified as gambling with a broad brush. Woolley, however, is optimistic, explaining that in 2012, a U.S. federal judge ruled \u201cruled that poker is not gambling under federal law because it is primarily a game of skill, not chance,\u201d a model he hopes will be applied to metaverse gaming.\u00a0<\/span><\/p>\n Despite this, the jury is still out on \u201cwhether games like Axie infinity and their successors can be considered gambling \u2014 it\u2019s a question that hasn\u2019t been formally answered.\u201d The South Korean government has already banned such games due to gambling fears, but there are signs the ban may be reversed or amended.\u00a0<\/span><\/p>\n Have you encountered strange or bizarre legal questions relating to the metaverse? Feel free to contact the author at eliasahonen@cointelegraph.com<\/a> to share your story.<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n<\/div>\n![\"Legal](\"https:\/\/cointelegraph.com\/magazine\/wp-content\/uploads\/2022\/08\/magazine-Crypto-legal-absurdities.jpg\")
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Securities regulations<\/h4>\n
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Yes! We have no bananas<\/h4>\n
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Taxation quagmire<\/h4>\n
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Wealth taxes for NFT collectors?<\/h4>\n
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Loot boxes and gambling<\/h4>\n