Nonfungible tokens, or NFTs, will require exchanges to balance competing goals for required openness and preferred anonymity.
Following the success of individual item sales using nonfungible tokens (NFTs) in 2021, 2022 is set to be the year of MetaFi. Except to point out that we appear to be standing on (or possibly have already stepped over) a fundamental cliff, a summary of Beeple, Christie’s, Visa, and endless aping-in celebs seems hardly necessary. While the meteoric rise in NFT pricing will not last indefinitely, many experts believe that a mature tech stack for discovering, verifying, valuing, trading, and preserving digital asset collections will emerge soon, without a crash.
However, these upbeat assessments may be undervaluing the area. The “NFT-Fi” sector’s idea is to build value through liquidity, but it has remained an unsaid assumption that this liquidity will be confined mostly to the cryptosphere. While it’s still early, those barriers may be crumbling, and we’ll all need to open our meta-apertures even wider. In this regard, Switzerland stands out among a slew of countries that have only recently begun to test central bank-backed digital currencies in pilot programmes (CBDCs). The confederacy of cantons that includes Davos and Art Basel is known for its long history of innovation in both artistic and financial assets, and its moves are worth following.
Following the success of individual item sales using nonfungible tokens (NFTs) in 2021, 2022 is set to be the year of MetaFi. Except to point out that we appear to be standing on (or possibly have already stepped over) a fundamental cliff, a summary of Beeple, Christie’s, Visa, and endless aping-in celebs seems hardly necessary. While the meteoric rise in NFT pricing will not last indefinitely, many experts believe that a mature tech stack for discovering, verifying, valuing, trading, and preserving digital asset collections will emerge soon, without a crash.
However, these upbeat assessments may be undervaluing the area. The “NFT-Fi” sector’s idea is to build value through liquidity, but it has remained an unsaid assumption that this liquidity will be confined mostly to the cryptosphere. While it’s still early, those barriers may be crumbling, and we’ll all need to open our meta-apertures even wider. In this regard, Switzerland stands out among a slew of countries that have only recently begun to test central bank-backed digital currencies in pilot programmes (CBDCs). The confederacy of cantons that includes Davos and Art Basel is known for its long history of innovation in both artistic and financial assets, and its moves are worth following.
The Six Digital Exchange (SDX), the digital component of the SIX Group, the financial services business that controls the Swiss national stock market’s infrastructure, discussed opening up their exchange to NFTs at the end of last year. This probable shift coincides with the progress of a big CBDC experiment. These early actions, taken combined, will offer credibility and endorsement to both digital currencies and the NFT secondary market, allowing many other types of digital holdings to be more deeply integrated into the Swiss financial fabric.
It would be an understatement to argue that the international regulatory framework for tokenized assets is nebulous or poorly understood. Legal ambiguity, bad actors, technology failures, public panics, and other factors can disrupt the smooth operation of digital marketplaces, with the risk of spillover effects on traditional markets being exacerbated by their increased imbrication. The recent hand-wringing about the Bored Apes authors’ identities being revealed, as well as news from the multibillion-dollar Bitfinex hack, attests to the already significant implications of balancing personal privacy and public transparency.
As Web3 moves into territory that blurs the lines between physical and digital products, as well as private and public exchanges, it’s critical to analyse how legal frameworks (and the route of least resistance through them) established the analogue world that the crypto-forward future intends to replace.
It is far beyond the scope of a brief article to fully address these issues. However, for the purposes of this debate, we’d like to quickly address the issue of digital privacy as a nexus of art, law, and economics. Fine art has become a fundamental means of moving assets through the shadows and margins of international law, thanks to tactics pioneered in Switzerland about the same time as the emergence of global finance in the 19th century. This context, which is rarely understood by many outside the art world, is crucial for the upcoming collision of international privacy regulations, global digital art, and the promise of a publicly verifiable blockchain.
Public scrutiny and digital privacy are about to collide.
Regulators have been busy filling in the gaps created by the dizzying adoption, or legitimization in the case of Switzerland, of tokenized assets. However, any ambiguity in enforcement would inevitably jeopardise the smooth operation of tokenized exchanges, with potential spillover effects on traditional markets around the world.
Investors, auction houses, and art collectors might all be affected by any new government policy aiming at achieving a balance between social interests and private privacy. The General Data Protection Regulation (GDPR), one of the strictest pieces of data privacy legislation in the world, has quickly become the model for using fines to intensify the pain of data breaches. Despite this, statistics reveal that data breaches are nevertheless commonplace on a global basis. In the last year, penalties for violating the European Union’s privacy regulation have increased by roughly sevenfold. Since early 2021, data protection authorities have issued $1.25 billion in fines for GDPR violations, up from around $180 million a year earlier. Perhaps this agrees with legal scholars who claim that monetary penalties do not always result in increased compliance and, as a result, improved data protection for individuals.
What difference does it make in the crypto world? For one thing, until global legal authorities catch up with the fast-moving Bitcoin freight train (which they are unlikely to do), there will be clashes with existing regulatory systems. Let us not forget that cryptocurrency is based on a public ledger, also known as a blockchain, which is used to keep track of participants’ anonymous identities, cryptocurrency balances, and a log of all transactions. A blockchain can be easily compared to the use of Swiss numbered accounts, which were historically utilised to ensure confidentiality while avoiding any Internal Revenue Service scrutiny. Before the implementation of the deferred prosecution agreement, which prohibits widespread tax evasion, these accounts were relics of the 1980s.
The capacity to preserve a high level of anonymity and privacy, which distinguishes cryptocurrencies, runs counter to other pillars of data privacy regulation. The “right to be forgotten” contained in the GDPR is a good example, however due to the unchangeable nature of the blockchain, exercising such a right is almost impossible for any one individual. Individuals have the legal right to have mistakes in their personal data corrected, but blockchain technology may make this right practically impossible to exercise.
If NFTs contain any traces of personal information, such as provenance for an NFT work, the long arm of extraterritorial law may catch these bits of data. On the other hand, a well-established right to privacy could provide as a cover for a variety of nefarious entities. For far over a century, this has been the historical norm in the art world.
In the dappled light of the freeport
The most open secret in the art industry pre-COVID, pre-BAYC, was the storage of art in “freeports,” specially delimited economic zones immune from most, if not all, taxes. While it is impossible to ascertain the precise breadth of the practise, serious investigative journalists have estimated that over one million works around the world are in this state. One of the world’s largest and most valuable artwork storage freeport facilities is located in Geneva; according to a New York Times article, this one tax shelter housed over a thousand Picasso works, as well as additional Old Master works by Da Vinci and Renoir. At auction, important paintings by these illustrious figures could command tens or hundreds of millions of dollars.
Swiss innovators, businesspeople, and con artists have been developing and refining the practise of storing art artefacts and other expensive commodities within trading ports to avoid tax penalties for well over a century. The core concept is based on the well-known concept of a trans-shipment non-territorial treaty port. Since its inception in 1888, the Geneva freeport has been used to store grain, coffee, and other items headed for and from destinations around Europe, but it has also become a tax-advantaged repository at the heart of the worldwide art trade. Old Masterworks purchased at the first Art Basel, the undisputed clearinghouse for excellent objet d’art for decades, could be left nearly on site to appreciate in value and resold without paying capital gains tax. In the murky shadows, more nefarious possibilities loom, such as the trade-in of plundered antiques or the exchange of filthy money for clear art. A deep-rooted cultural and legal framework of financial non-disclosure has aided such practises.
The period of time has altered.
The new Web3-powered chapter is now being written in real time right in front of our eyes. While the United States’ largest freeport recently collapsed after only two years in operation due to the COVID-19 pandemic and other circumstances, the Singapore-based Le Freeport, a new offering from the team behind the Geneva facility, presented a huge NFT show to close out 2021. The show contained approximately three dozen works by artists ranging from Beeple to Andy Warhol, and it was notable for the fact that it was entirely for sale.
These primarily non-sale shows have been utilised to build a sense of prestige around a piece, which can then be used to support exaggerated assessments for regulatory arbitrage. The US Treasury recently identified NFT sales as a new battleground in the global war on money laundering, claiming that anonymous transactions might allow filthy money to be exchanged for clean art, which could then be resold or shortly listed on a public stock market. There isn’t a better vehicle for obscuring such transactions than the GDPR, and there isn’t a more respectable place for selling such newly “cleaned” assets on a public stock exchange.
Financial regulatory regimes, in particular, generate routes of least resistance, with built-in loopholes, weak enforcement mechanisms, and chances for regulatory arbitrage all funnelling capital and its related cultural goods in one direction or another. As we’ve previously observed, the serial-style work of Pop Artists like Jasper Johns and Andy Warhol was equal parts artistic innovation and tax avoidance. The well-known successes of Land Art, media art, and 1980s painting were all made feasible by combining the right and left sides of the balance sheet’s innovation.
What will emerge from the collision of freshly empowered privacy law, non-sovereign riches, and suddenly unfettered crypto-creativity? Only time will tell. However, as the world’s legacy and decentralised art and money systems become increasingly intertwined, the stakes of achievement and failure continue to rise.
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.
