5 ways to use NFTs; it's tax season; court cases
📖🎨 5 ways you/ your company can use NFTs
Scott Duke Kominers and Steve Kaczynski
NFTs have been described in many ways, but we (the authors of a just-released book on NFTs) like to describe them simply as digital records that have a uniquely defined owner… sort of like digital deeds. These records are often associated with other assets — whether digital (like images and game items) or physical (like clothing or art), or both. And just as websites did in the early days of the web, NFTs open up an endless range of applications because they have many uses and features. As more people begin figuring out these applications, we thought we’d share 5 ways different groups are already using NFTs:
For everyday consumers: Have you ever tried to buy a sold-out concert ticket, and worried that the seller could have sold the exact same ticket code to someone else? Or ever wished you could move your x-rays to a new dentist more easily? NFTs solve these and other needs by turning such data into a digital asset that’s maintained in an account you uniquely own. If you wanted to move your NFT medical records, you could simply redirect access to a new provider — in the same way you might carry a sheaf of documents from one doctor’s office to another. Similarly, an NFT ticket can only be owned by one person at a time, bought and sold just like a physical good. And while some NFTs are transferable, others are non-transferable — tied to a specific account, just like a driver’s license is tied only to a specific individual. These features open up many use cases — from new kinds of loyalty programs to new kinds of experiences bridging the digital and the physical.
…As for gamers and other consumers: You probably collect digital assets in games like Roblox or Fortnite, or have a bunch of digital music files. Because NFT music files aren’t locked in Amazon or iTunes, and are held in an account that you control, you can connect into whatever platform you like. So NFTs allow you to use the digital stuff you “own” across different web platforms, while at the same time giving you true ownership. Furthermore, the content and reputation/ karma points you build on social media can be shared everywhere simultaneously, rather than just on a single platform. For instance, if you’re a top poster on Reddit, you would be able to carry that reputation over to TikTok and vice versa — essentially building a sovereign digital identity across the web that’s not held captive by any platform.
For a big brand, sports team, or local business: NFTs provide a new way to identify and reward your fans — reinforcing brand attachment, loyalty, and identity. There’s a powerful feedback loop in giving people branded digital assets that they truly own, to then building value on top of those assets and incorporating them into user identities, and continually building organic communities around a brand. Many brands have turned their fans into superfans who become even more active and engaged than before.
For an artist, musician, or other creator: It’s not a coincidence that a lot of NFT technology has been used in the art market; this is where NFTs first hit the mainstream a few years ago when traditional auction houses began embracing them in high-profile auctions. The novel feature of NFTs here is that they provide a broadly accessible way of defining a unique owner of a digital asset or media file; previously, this would have required a dealer, gallery, or other intermediary in between. Since an NFT serves as a digital “deed” with ownership tracked on a public ledger, these records make it possible for anyone to identify and verify who owns what — including provenance, history of ownership, and transfer.
More importantly for creators: NFTs help you “own” your audience — there’s no gallery, agency, record label, or web platform standing between you and your collectors/ followers. NFTs can also help creators get access to royalties across both primary and secondary sales. But some of the more interesting uses around NFTs for creators involve communities discovering and finding each other directly around the creator’s works. Since NFTs are digitally native, you can identify and interact with those communities globally. It’s also possible to wrap NFTs with further software functionality: For example, some web3-native media platforms offer a form of “verified display”, where the platform reads the NFT (whether art or music or whatever) to verify ownership — and then enables the owner of a work to showcase it, share its ownership with others, remix it, and do much more.
For a crypto skeptic: You may have heard of NFTs, for better or for worse — but when you look past the noise, most of the use cases have been useful, not just speculative. We’re already seeing established brands including Mattel, Nike, Starbucks, and others building sophisticated products around NFTs with growing mass-market traction.
Think of NFTs as a broad, general-purpose technology for establishing property rights in digital space, independently of any specific platform. Such property rights are the fundamental foundation of successful markets. So when faced with a new, general-purpose technology like NFTs, my advice to my students at Harvard Business School is to learn about the technology and its potential, even if that learning only reinforces your skepticism… Because it’s far better to develop an informed opinion than to be caught flat-footed when a particular technology changes business, culture, and society.
For the crypto-familiar: NFTs leverage blockchain networks to establish a robust, decentralized form of ownership of digital goods. Each NFT is controlled by the wallet identified on-chain as its owner, and exists independently of whoever created it. Moreover, an NFT on a public blockchain inherently establishes and surfaces a network of affiliation among everyone who holds it — which can serve as a foundation for community co-creation. As we describe in The Everything Token, there’s an art to (and plenty of frameworks for!) building value around these assets, tracing the path from ownership to utility to identity and community — and we’re excited that you’re a part of this journey.
Learn more: The Everything Token: How NFTs and Web3 Will Transform the Way We Buy, Sell, and Create (Portfolio, January 23)
🗞️🗳️ In the news: Coinbase vs. SEC
The news: Last week, a hearing took place between Coinbase and the Securities and Exchange Commission (SEC), alleging that the firm had facilitated the trading of tokens that should have been registered as securities. Coinbase asked the court to dismiss the case, and the court is expected to rule by this spring. [The case was first filed this summer; other charges included failing to register its crypto asset staking-as-a-service program. We covered the significance of staking in a previous edition of this newsletter].
Why does this case matter? Targeting crypto exchanges like Coinbase is part of a new enforcement strategy for the agency. Before last year, the SEC’s approach had primarily focused on token issuers, with dozens of enforcement actions between 2017-2020 and a flurry of investigations launched 2021-2022. But given that there are thousands of tokens — and no way to scale regulation-by-enforcement to stem the tide of issuers — that strategy could be an endless game of whack-a-mole for the agency.
So, following high-profile collapses in 2023, the SEC appears to have shifted more attention to digital asset exchanges instead. If getting overwhelmed by issuers, it would (seem to) be much more efficient to throttle the chokepoint instead. Since exchanges act as a gateway for new users, with only a few such platforms that service customers in the U.S., targeting them would mean seizing control of what tokens U.S. trading platforms are able to list.
However, applying Howey (the classic test for determining securities) to the exchanges is not as straightforward as one might think. In fact, it is unprecedented — and the SEC’s legal theory is more confusing than the one it had already been trying to apply to token issuers. The SEC’s attempt could now be construed so broadly as to potentially apply to any asset sale — including Taylor Swift tickets on StubHub or even (as Coinbase pointed out) collectibles like Beanie Babies.
Potential impact/ consequences: While the SEC may be overwhelmed by the labor-intensive process of applying Howey to token issuers — and gauging whether such issuers/ protocols are sufficiently decentralized — in targeting exchanges, they may have jumped out of the frying pan into the fire.
Their newfound focus raises the stakes while making actual progress unlikely. These cases are neither likely to produce clear rules of the road nor provide better consumer protection. Even if the agency succeeds, the rulings could create way more confusion than they resolve. Such inconsistent court rulings and long-time horizons only breed more uncertainty (as we’ve already seen with the Ripple and Terraform rulings). Ultimately, regulation by enforcement is not a substitute for formal rulemaking and public comment processes… regardless of whether the target of that enforcement is a token issuer, or a trading platform.
additional thoughts & observations:
🧾💸 Signal vs. noise: Tax reporting
Michele Korver and Marianne Winkler
There’s been a lot of misinformation from crypto commenters on X and other social media platforms about the expanded applicability of I.R.C. Section 6050I, which will require the reporting of some digital-asset transactions over $10,000 in value. Many of these posts claim that the new reporting requirements began on January 1 of this year.
But in fact, the Treasury Department and Internal Revenue Service issued an announcement last week informing businesses that they do not (yet) have to report the receipt of digital assets in the same way they report the receipt of cash. The required regulations for implementing this new rule haven't even been issued or published yet.
What to know and expect: Section 6050I provides that any person engaged in a trade or business — who in the course of such trade or business receives more than $10,000 in cash in one transaction (or in a series of related transactions) — must report that transaction within 15 days of receipt. As part of the Infrastructure Investment and Jobs Act, Congress added “digital assets” to IRS Form 8300 reporting (the applicable form) — so reporting will now cover digital assets valued at more than $10,000.
The important takeaway here, however, is that the reporting requirement is not effective until the IRS issues final regulations, which could take some time. In the meantime: Announcement 2024-4 provides transitional guidance while the relevant agencies complete the regulations. We’ll continue to post updates here as relevant to our readers!
-- Sonal Chokshi, Tim Sullivan, Jonathan Ringen, and a16z crypto teams
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