Author: Mack LaBar

Here’s the scoop:

On April 19, the IRS shared a draft version of a tax form (1099-DA) that is designed to address the reporting requirements for transactions involving digital assets, particularly with respect to unhosted wallets. It’s not set in stone yet; they’re looking for your input to refine it.

Key Update:

The IRS has introduced a new category in draft Form 1099-DA, labeling “unhosted wallet provider” as a check box. This inclusion suggests a move to categorize unhosted wallets under the broker definition, aligning with broader regulatory efforts to integrate KYC (Know Your Customer) practices into cryptocurrency interactions.

How It Could Affect You:

• For Crypto Users: You might have to reveal more about yourself (i.e., provide personal identification information) when using these wallets.
• For Platforms: Get ready for more hoops to jump through when dealing with unhosted wallets. Interactions with platforms via unhosted wallets will likely require additional verification, affecting user experience and operational dynamics.
• For DeFi: Big changes could be on the horizon, with a push for more oversight and user ID checks, which could significantly alter how DeFi operates.

Have Your Say:

The IRS is all ears! Share your thoughts at IRS.gov/FormsComments. Don’t forget to kick off your message with “NTF” plus the form or publication number (like “NTF1040”) to make sure it goes to the right place.

Note on Draft Forms:

• OMB Approval: Draft forms and instructions are pending OMB approval and are not valid for filing until officially released.
• Availability: Drafts are available at IRS.gov/DraftForms and remain accessible even after the final versions are posted at IRS.gov/LatestForms.
• Paperwork Reduction: Comments aimed at reducing filer burden should be directed through the Federal Register process. More information is available on the IRS website.

For more information on digital asset tax policy, please email policy@digitalchamber.org

A brief history:  

In the year 2014, the first NFT, “Quantum,” was minted on to the Namecoin Blockchain by Kevin Mccoy and sold to Anil Dash for the sum of only $4. Sprouting from the theory and experimentation of Colored Coins on Bitcoin from 2012-2013, this new technology, referred to by Mccoy and Dash as “monetized graphics,” became the basis for the NFTs we understand today.  

Non-fungible means that the tokens issued or “minted” are unique and cannot be replaced due to its unique identification code or “digital signature,” differing NFTS from other ‘digital tokens’ like bitcoin which are uniform across all coins of the same name, making them interchangeable.  Over the last decade, these NFTs have been increasingly used to represent different goods like art, gaming tokens, digital real estate and many different metaverse projects and products. In 2021, NFT trading volumes reached nearly $13 billion driven by the popularity of NFT-backed digital artwork and collectibles. However, NFTs have the potential to contribute to the digital economy beyond the vehicles that led to their nascent popularity: 

Here are several applications of NFT technology that may impact society from business to healthcare to even replacing your passport and birth certificate:

Represent ownership of physical art 

An NFT could represent ownership of a physical piece of art. Moreover, NFTs allow split ownership of a physical piece of art between multiple individuals. This is called fractionalizing ownership and it’s something that brokerage firms have being doing in recent years when selling stocks.  

Tokenizing a piece of art into multiple NFTs allows individuals who may not have the same financial resources as others to purchase and invest in fine art as well, leveling the playing field in investing and art collecting. 

Home-buying 

Creating NFTs to represent the ownership of a home, for sellers and buyers, can improve the home buying process and make home-selling transactions more efficient, secure, and transparent. NFTs have the capacity to store all the necessary information a buying party would need including who has owned or sold the home, legal actions and disputes involving the home, payments, and more. NFTs can also significantly reduce the time and costs it takes to buy a house due to the elimination of the middleman intermediary and the back-and-forth of reviewing and signing contracts. 

Fractional Investment in Real Assets 

While modern investment tools can allow us to buy fractional shares in chosen publicly traded companies, they don’t help us so much if we want to buy fractional shares of real physical assets. That’s where NFTs come in. With NFT real estate and luxury items can be bought fractionally, similar to how stocks can be bought partially on platforms like Acorns or Robinhood. This tool can level the playing field in luxury item markets and give purchasing power to middle and low-income earners.  

Music 

A popular idea circulating in NFT-privy circles is the idea of NFTs shaking up the music industry and giving modern musicians more power at the negotiation table than ever before. With the tokenization of digital music, album art, and even merchandise, artists can take back their power from big labels and streaming services, both of which have historically taken much larger cuts of the profit than musicians ever have. Josh Katz, CEO and founder of NFT marketplace YellowHeart, coined the “90/10 rule” as he believes tokenized music would shift the revenue earnings from 90/10 in the labels, event venues, and streaming services favor, to 90/10 in the artist’s favor.  

Ticket Buying 

Ticket buying has surged into the public eye, mainly because of the economy-shifting enormity of success that Taylor Swift’s 2023 Eras Tour had, and because of how infamous the ticket buying process became, earning even the attention of the White House for how frequently scalping and fraudulent sales occurred.  

NFTs have the potential to significantly reduce the amount of pain fans must go through to attend their favorite events. NFTs can be used as a digital indicator of ownership of tickets which can allow artists to directly sell their own tickets and remove the need for third-party sellers. With tickets being sold directly from one seller, reductions in the amount of fraud and scalping may occur because of the transparency and authentication abilities of blockchain based technology.  

Supply-Chain 

NFT traceability offers a huge advantage for businesses reliant on stable and efficient supply chains to supply their stores with products. This feature of NFTs allows businesses to know what occurs at touchpoints along a supply chain, offering businesses a crucial way to observe processes and verify whether their goods are safe, legitimate, and moving at a desired rate of speed. 

Products with NFTs minted on a blockchain can be real-time tracked and monitored throughout their transit, and additionally, observing this process can allow data analysts to use data collected to improve supply-chain efficiency and flatten out hiccups with their product deliveries.  

Lastly, NFTs can allow consumers to discover information about the product that they’re buying, learning information such as where fruit was grown, where an electronic was built, or where a fish was caught.  

DeFi’s Intersection with NFTs 

DeFi, or Decentralized Finance, is a tool that offers secure peer-to-peer financial transactions through the use of decentralized distributed ledgers and cryptocurrencies. The system eliminates the need for intermediaries like brokerages and banks to make financial transactions, instead allowing users to use applications, or digital wallets which holds their private keys giving them access to their tokens and cryptocurrencies. DeFi utilizes the same contracts (i.e., smart contracts) that NFTs use, which publish information of your transaction on a blockchain for anyone to review without changing. 

NFTs are also often used as collateral in DeFi loans, based on the NFTs floor price and the NFT’s purchase history. An integrated piece of the DeFi system is its ability to automatically manage debt. If a borrower defaults on a loan, the NFT is automatically transferred through the smart contract to the loaner’s NFT wallet. 

Identification  

While this technology is admittedly one of the most far off on this list due to political and ethical concerns, it’s applicability to personal security as well as national security is immense. Additionally, its potential to revolutionize personal documentation is noteworthy. NFTs in this case can be used to represent certificates or identifying documents because of their containment of unique code that cannot be modified. Birth certificates, IDs, licenses, medical histories and other important personal documentation can be tokenized and stored on a secure blockchain. 

Some organizations have already begun utilizing NFTs in their systems to give users a secure digital location to store and access their documents. Romania’s National Institute for Research and Development in Informatics created an NFT marketplace system, allowing users to access their government documents at will, while also being able to transfer and store government documents. University of Georgia’s New Media Institute offered degrees as NFTs, along with the option of paper certificates. According to the Washington Post, approximately 2,800 individuals obtained educational credentials without attending classes. NFTs could be a viable solution to this problem. 

Healthcare 

NFT technology also has applications in healthcare, public health equity and healthcare financing that could lead to greater coverage and inclusivity, as well as faster and more secure transactions. NFTs offer a pathway for ownership for patients wanting to keep their medical data out of the hands of government, big tech and data collectors. 

NFTs can be used to track and securely store medical records as well as medical billing and insurance claims, which would vastly improve patient experiences at medical institutions like pharmacies, specialist visits, physical therapy appointments, etc. If documents and records were minted onto a private blockchain accessible only by pharmacists and providers, it could allow instant access for these health professionals, removing headaches for patients and customers forced to deal with administrative and bureaucratic hurdles. 

Conclusion

NFTs are an enticing and prospective advancement for several different industries, and consumers in an array of different economic sectors can be excited about this technology’s potential adoption. In the coming years, NFTs should gain consideration from businesses, medical institutions, creators and artists, executive government agencies, and especially policymakers.  Ensuring that the technology is properly classified under legislation, is properly regulated by appropriate agencies, and is researched and given the proper protections under law is how both industry and consumers can be convinced that the technology is reliable, safe, and government backed. It’s how the benefits of NFTs can become more than just conjecture and can actually start benefitting and improving the lives of everyday Americans. 

 

On March 12, the US Patent and Trademark Office and US Copyright Office (collectively the “Offices”) published a joint Report entitled, “Non-Fungible Tokens and Intellectual Property: A Report to Congress.” The Report is in response to a June 2022 request from then-Chair of the Subcommittee Patrick Leahy (D-VT) and Ranking Member Thom Tillis (R-NC). The Report includes:

• a completed study into the current and future applications of NFTs; 
• how intellectual property (IP) laws apply to NFTs and assets associated with NFTs; 
• what industry challenges need to be addressed; 
• how NFTs can secure and manage intellectual property rights. 

The Report included comments requested by the Offices from creators, brand owners, innovators, entrepreneurs, technologists, academics, industry associations, and intellectual property practitioners. 

How we see it: The Report concludes that existing laws are adequate to address concerns related to IP and NFTs and that NFT specific-legislation would likely hurt the industry more than help it by impeding development and innovation of the technology. 

Summary:

Much of the Report details the implications of NFT technology’s impact on IP law, IP rights and the alleged risks NFTs may have on the integrity of those laws and rights. The Report explores NFT’s ability to be minted on to IP that the creator does not own; NFT’s immutability on the blockchain; questions around NFT’s ability to be altered or destroyed should law enforcement deem it necessary; it’s decentralized and anonymous nature which could potentially pose issues for law enforcement. The Report states however, that the biggest concern was the prevalence of “consumer confusion” on NFT IP rights and the legal protections in place after a consumer’s creation, purchase, transfer of an NFT.

Even with this in mind, many commenters stated that they believed current IP laws are adequate to handle NFT-based challenges, such as copyright and trademark infringement, even while stating that these challenges were significant concerns to them. They attributed the problem of consumer confusion largely to the “lack of marketplace standards for clear disclosure by NFT sellers.”Rather, public education initiatives and product transparency were favored and cited to play a more significant role in ensuring awareness and understanding of NFTs.

The opinion by commenters regarding IP law also applies in the context of patent rights as well, with commenters expressing concerns about inaccuracies and fraud while still acknowledging that blockchain technology can help in the management, transfer and licensing of patent rights. Additional findings in the report include an assessment that proposals to use NFTs as replacement or supplemental copyright recordkeeping devices did not demonstrate added value due to the immutability technology of the blockchain, which leave NFTs vulnerable to perpetuating inaccurate records.

The Report also acknowledges NFT potential to enable artists to receive remuneration from downstream resales of their work, but states that they will not be ensured by any US statutory entitlement and instead by the code and policies underlying the NFTs and their provider platforms.

Next Steps: It is unclear how Congress will react to the Report or whether the Subcommittee will convene a hearing. Given the Report’s recommendations, legislation seems unlikely in the near-term to address issues of NFTs and IP. 

House Agriculture Committee 

Hearing entitled: For the Purpose of Receiving Testimony from The Honorable Rostin Behnam, Chairman, Commodity Futures Trading Commission 

On March 6, 2024, the House Committee on Agriculture received testimony from the Honorable Rostin Benham, the Chairman of the Commodity Futures Trading Commission (CFTC). Chairman Benham was the hearing’s sole witness and his testimony focused on the agenda and work of the Commission and its priorities regarding both agricultural commodities, and the need for a digital asset regulatory framework to protect and incentivize investment and the retainment of business in the US. The Committee also asked Chair Benham about artificial intelligence and quantum computing’s current and potential growth and influence in commodities trading.  

Unsurprisingly, digital assets were a key focus. The hearing comes at a time where cryptocurrency has majorly reentered the public eye due to its recent price resurgence. We have provided a summary below. If you have any questions, please reach out to Mack LaBar at Mackenzie@digitalchamber.org.  

Overall Takeaway:  

There was consensus that digital assets have arrived as a major industry that needs regulatory clarity. There was broad support from members, and even Chairman Benham, for the Financial Innovation and Technology (FIT) for the 21^st Century Act (“market structure” bill), led by Committee Chair GT Thompson (R-PA). Benham said the CFTC could implement a regulatory framework if directed by the FIT Act within 12 months and that it was a critical bill for hiring talent, building software, hardware, as well as infrastructure. “Crypto going away is a false narrative,” said Benham.  

There was substantial focus as well on digital asset categorization and whether cryptocurrencies, specifically Ethereum, should be identified as a commodity. Benham was adamant that Ethereum is a commodity and stated that in the case of the SEC validating a ruling that stated digital assets were either securities or commodities, the CFTC would be involved in ensuring that the steps taken were deliberate, and that a focus was put on preserving market compliance and integrity. 

Summary: 

In his opening statement, Chairman Benham pleaded for more regulatory authority over digital assets, highlighting that in FY2023 the CFTC saw 47 actions relating to conduct in the digital assets space, which represented 49% of all Commission enforcement actions… “a staggering statistic considering no federal agency directly regulates the cash digital commodities market,” said Chairman Benham.  

The Chairman continuously advocated for the “filling of gaps” in the crypto and digital assets space, which not only include compliance but also the movement of business overseas to countries in Europe and Asia. The Chairman stated that the regulatory environment in such countries over the course of the three years that he has been CFTC chair, has improved drastically.  He also advocated for the identification of digital assets as commodities, an important debate that would distinguish the authorize of both the SEC and the CFTC in the crypto space. 

Rep. Duarte (R-CA) pushed back against this movement and voiced his opposition to “shoehorning” crypto into either the commodities or securities box and questioned the technology’s legitimacy as a true store of value that investors could observe and trust. Chairman Benham asserted that the question of legitimacy was irrelevant and that regardless of the technologies legitimacy, it is a rapidly evolving market and space where investors stand to lose money and potentially face malpractice within the industry, requiring regulation. Benham went on to state that commodities — even after acknowledging that there are enumerated commodities such as corn, wheat, gold, silver, and fuel — are often assets that are simply “not a security” which could be assessed through a Howie Test, a test that assesses whether or not a transaction is an investment and should be regulated.  

Rep. Langworthy (R-NY) asked about the trend of “disintermediated” crypto transactions and whether this trend should be something the CFTC should be investigating and considering regulation for. Chair Benham commented that these platforms that effectively remove the brokerage stage of asset acquisition offer certain advantages to investors such as removing “frictional barriers” but also acknowledged that these barriers that have been in place in traditional stock purchasing for decades, have acted as barriers to malpractice and security risks, and act as protections for market integrity. 

Both Rep. Budzinski (D-IL) and Rep. Soto (D-FL) asked about the FIT Act regarding the importance of passing it, and the timetable for implementing a regulatory structure under the law, were it passed with substantial funding.  

As stated, Benham is supportive of the bill highlighting its necessity because Bitcoin and Ethereum make up 60% to 70% of the whole market capitalization of digital assets and the CFTC needs delegated authority to regulate. Rep. Casar (D-TX) was a lone exception that lamented legislative efforts should be deprioritized in favor of more research on the appropriate regulatory authority for digital assets and marketplaces.