In her monthly Adept Take column, Selva Ozelli, an international tax attorney and CPA, covers the intersection betwixt emerging technologies and sustainability, and provides the latest developments effectually taxes, AML/CFT regulations and legal issues affecting crypto and blockchain.

On Nov. 14, Tezos-based nonfungible token (NFT) marketplace Hic Et Nunc — which in Latin means "hither and at present" — abruptly shut down. Artists became worried well-nigh their NFTs on exhibit at the Hermitage Museum's first-ever NFT exhibition, "Ethereal Aether" (Nov. 10 to Dec. 10), also as Fine art Basel Miami'due south first-e'er NFT exhibition, "Humans + Machines: NFTs and the Always-Evolving World of Art" (Dec. ii to 4).

Diane Drubay, founder of Nosotros Are Museums and a minter of NFTs on Hic Et Nunc — who curated a panel give-and-take at Fine art Basel Miami — explained to me: "Of form, information technology was a stupor to see Hic et Nunc shut down, simply people took information technology right away as a new pace over in their journeying. Because when the website shut down, our NFTs were preserved on-chain, nothing was lost and artists were condom to proceed making a living from their NFTs. We saw mirrors or new versions of HicEtNunc.art existence opened just a few hours later, which provided the necessary backup for artists to keep selling and ownership, exhibiting NFTs." She besides added:

"The community is now organizing itself to create a decentralized democratic organization (DAO) to go along experimenting with decentralization on Web 3.0."

This incident fabricated me wonder: Will the "International Year of Artistic Economy for Sustainable Development," as alleged by the United Nations General Assembly, go down in history as the year NFTs entered the mainstream? Or volition it get down as a passing global fad of invention lurking in the shadows of the COVID-nineteen pandemic? I conducted research and interviews to find the answer.

Related: What are NFTs, and why are they revolutionizing the fine art world?

NFTs' environmental bear upon, valuation and regulation

NFTs are digital avails that are built on a blockchain platform and are tradeable like digital trading cards in exchange for cryptocurrencies or fifty-fifty fiat currency. They by and large act equally prove of ownership of digital assets, simply the specific rights that attach to NFTs vary. Some NFTs incorporate "smart contracts" equally role of the token that self-execute when defined events occur.

Calculator scientist "Antsstyle" has critiqued NFTs:

"In a nutshell, NFTs are bad for two reasons: i. They are bad for the surroundings, as they rely on cryptocurrencies that crusade huge amounts of carbon emissions. [...] two. They are only valuable every bit tools for money laundering, revenue enhancement evasion, and greater fool investment fraud."

The long version of Antsstyle's analysis gives a comprehensive overview of proof-of-stake (energy-efficient) and proof-of-work (energy-intensive) NFT platforms.

A. J. Woloszynski, manager at Eisner Advisory Group LLC of EisnerAmper, pointed out, furthermore, that NFTs accept subjective valuations determined by however much somebody is willing to pay for them: "For example, take a await at the image below. You are not encountering an issue with the image loading on your computer; what you are seeing is a evidently greyness box. This is an NFT known every bit The Pixel, produced by an artist who goes by the proper noun [Pak] and sold for roughly $1.3 million dollars at a Sotheby's sale in April 2022." Other major art auction houses such equally Christie's, Phillips and Portion also began auctioning NFTs minted on various nonfungible token platforms this year.

Related: Art reimagined: NFTs are changing the collectibles marketplace

According to CryptoArt, Pak is the second-highest-selling crypto creative person of all time, with effectually a $65 one thousand thousand market capitalization for his fine art pieces. NonFungible ranks Bored Ape Yacht Club at number one, with the "Bored Ape #9449" NFT concluding selling for higher up $i 1000000.

While not ranked by NonFungible, the depression-pixel 24x24 images of computer-generated CryptoPunks by Larva Labs were the beginning major NFTs. In March, CryptoPunk #3100 sold for 4,200 Ether (ETH), or $seven.6 one thousand thousand at the time. This sale was surpassed by the sale of "Everydays: The First 5000 Days," an NFT past graphic designer Mike Winkelmann, aka "Beeple," that raised $69.iii million that same 24-hour interval, amounting to $13,800 per each work of digital art included in the collage. According to DappRadar, CryptoKitties by Dapper Labs — the first big Ethereum-based NFT project to use the ERC-721 standard — also registered a 22,106% mean solar day-over-day increase in trading volume amid the recent NFT market resurgence.

NFTs are non widely regulated. For instance, earlier this year at leading NFT marketplace OpenSea, an executive was flipping nonfungible tokens he purchased later featuring them on the site'southward homepage — a move that presumably allowed him to sell them for a quick profit, since insider trading of NFTs on markets is not explicitly illegal. In another instance, 265 ETH ($i.1 1000000) worth of fraudulent NFTs claiming to exist issued by Hong Kong-based gaming and venture capital visitor Animoca Brands and subsidiary Blowfish Studios were minted and sold via Discord. In the NFT heist of the century, a hacker uploaded 20 terabytes of NFTs originally minted on the Ethereum and Solana blockchains.

Related: Nonfungible tokens from a legal perspective

Blockchain forensics firm Chainalysis estimated that about 0.34% of transaction volume in the $2.5-trillion cryptocurrency market place, or about $viii.5 billion worth, relates to illicit activeness. According to NonFungible, 265,927 agile wallets traded NFTs on the Ethereum blockchain during Q3. To investigate cross-border taxation crimes with the rapid rise of cryptocurrency and NFTs and their utilise in money laundering, hacking, cyberattacks and other illicit transactions, governments around the world — specially the Joint Chiefs of Global Revenue enhancement Enforcement — have been sharing information and resources.

Related: Cybercrime task strength monitoring the global digital fiscal system

Earlier this year, the Internal Revenue Service rolled out "Operation Hidden Treasure" in collaboration with personnel from its civil office of fraud enforcement and its criminal investigation unit to examine tax evasion amid users of cryptocurrency and NFTs. The latest report by IRS Criminal Investigation states that 93% of all seizures during fiscal twelvemonth 2022, valued at $three.v billion, involved cryptocurrencies. The United States Treasury Department also put 57 cryptocurrency addresses on its sanction list, along with one exchange — Latvia-based Chatex, which the Treasury Department said facilitated transactions related to "illicit or loftier-risk activities such as darknet markets, high-risk exchanges, and ransomware."

Continuing U.S. President Joe Biden's whole-of-government endeavour to counter ransomware and the illicit utilise of cryptocurrency and NFTs, more tax regulations take been implemented. H.R. 3684, the Infrastructure Investment and Jobs Deed, requires cryptocurrency "brokers" — which includes "whatever person who for consideration is responsible for regularly providing whatever service effectuating transfers of digital assets on behalf of another person" — to report cryptocurrency and NFT purchases of over $10,000 to the IRS on Form 8300, including names and Social Security numbers, or potentially confront felony charges.

In October, the Financial Action Job Strength (FATF) issued new guidance concerning NFTs, stating that they are excluded in its definition of virtual avails. But FATF standards could still apply to NFTs on a case-by-instance ground.

Sustainable NFTs

This twelvemonth, NFTs have been the biggest disruptors of the art world, with artists minting, exhibiting and auctioning, and investors buying, selling, trading and investing. Nash Islam, an early investor in NFTs, said: "For NFTs, the community action is primarily on Twitter & Discord." He also added:

"Investing in Pak across multiple projects has yielded massive multiples and besides helped us understand and establish some principles for NFT investments."

Even Damien Hirst, the United Kingdom's richest living artist, launched an NFT series titled "The Currency" this year, exploring the nature of value, art and currency. It was minted on Palm, an NFT platform operating as an Ethereum sidechain, and offered for sale through Heni at $two,000 apiece.

Artist Ilya Shkipin told me he decided to mint his MonarxNFT series on the free energy-efficient, open up-source Tezos NFT platform: "Choosing Tezos wasn't a selection but an obvious decision one time we spoke with our supporters. Both the Monarx squad and the community valued low gas fees and a convenient minting experience. We ended up doing what our community told us to practice because the fine art is for them, non usa. My MonarxNFT serial — merge of a neural network advisedly guided by artistic vision — was inspired at a time of loss in my life."

Reid Yager, global director of communications and public relations for Tezos, explained to me that Tezos is presenting the first-ever NFT art exhibition occurring every bit an official partner of international art fair Fine art Basel, in collaboration with the host city's local institutions: "The Tezos Ecosystem Exhibition at Art Basel Miami Beach will feature more than 25 artists from 18 countries spanning 5 continents showcasing their piece of work. Additionally, over thirty artists, gallerists, museum directors, celebrities, and thought leaders will participate in the Tezos Ecosystem Exhibition Speaker Series in the exhibit space." Equally part of the show, visitors will be able to create AI-generated portraits of themselves and mint them as NFTs on Tezos.

Yager added: "The leading Tezos NFT platform HicEtNunc, which recently completed the first-ever NFT marketplace Web3 transition from platform-endemic to community-owned (DAO), has seen over half a meg NFTs minted past users from every corner of the globe. The Tezos blockchain is booming with over 6 meg contract calls in September, and Nov is on stride to superlative that. The Tezos blockchain is the choice for minting and collecting NFTs globally. In fact, 1 of the first ever NFTs from a Museum was minted on the Tezos blockchain by the Whitworth Museum — William Blake's The Ancient of Days."

Co-ordinate to DappRadar, Hic Et Nunc was the 14th-largest nonfungible token market in terms of all-time sales ($l.37 1000000) when it shut downward, with the average sale at $25.xix per NFT. The leading marketplace for NFT trading is New York-based OpenSea, which operates on the proof-of-work Ethereum blockchain. Ethereum is in the process of transitioning to Ethereum 2.0, a proof-of-stake blockchain, which will be 99% less energy-intensive and more than scalable, secure and sustainable. Just whether OpenSea or whatsoever of the other top-ranked marketplaces will be able to concur their place in this fast-changing market is nonetheless to exist seen, as some of the largest companies have been entering the NFT infinite to transform the Metaverse, including:

  • 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 key banking company 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.

NFTs and museums

A report carried out by the International Quango of Museums (ICOM) institute that as a result of the COVID-19 pandemic, more than thirty% of museums were forced to reduce their staff and nearly six% may never be able to reopen to the public. But the digitization of museums is taking place at high speed, with some museums turning to NFTs for a diverseness of reasons.

Related: Charitable sustainable NFTs for the United Nations' 17 SDGs

NFT exhibitions

The Hermitage Museum's "Ethereal Aether" consisted of 36 NFTs from around the world, including Larva Labs' "ryptopunk #5652," "Schrödinger's Cat" from Dapper Labs' CryptoKitties and Mihai Grecu's "NeoPyongyang I," minted on Hic Et Nunc.

The curators, Dimitri Ozekov and Anastasia Garnova, explained to me: "Involvement in digital art intensified during the COVID-19 pandemic, when millions of people saturday at home for months on stop with the museums closed. The outset NFT exhibition will launch the creation of the 'Celestial Hermitage' — a new museum in the virtual noosphere, which in the hereafter will be transformed into a digital branch of the actual museum." They too added:

"We are confident that the area of digital fine art, NFTs in particular, volition develop in incredible means, and that information technology can look forward to a dandy future — rubber, smart and fascinating."

Guggenheim Partners co-founder Todd Morley announced plans to create the globe's biggest museum dedicated to NFTs, within a massive skyscraper located in New York City, simply four blocks from the Museum of Modern Art.

NFT fundraising by museums

3 out of the 20 largest museums in the globe — the State Hermitage Museum in St Petersburg (No. 2), the Metropolitan Museum of Art in New York City (No. 4) and the British Museum in London (No. 12) — turned to NFTs for fundraising this yr. Other examples include the Uffizi in Florence, the Whitworth in Manchester, the Museum and Church building of São Roque in Lisbon, the Kansong Art Museum in Seoul, the Museum of Circulate Communications in Chicago and the Academy Museum of Motility Pictures in Los Angeles. There's even an NFT of an entire museum based in the Metaverse called the Museum of Digital Life.

The Miami Institute of Contemporary Art accepted a donation of "CryptoPunk #5293" from one of its trustees.

Jean-Sébastien Beaucamps, co-founder of French eco-friendly startup LaCollection — an Ethereum-based NFT platform — explained to me: "To coincide with its Hokusai: The Great Picture of Everything exhibition (30 September to 30 January 2022), the British Museum partnered with LaCollection.io, to sell NFTs of 200 Hokusai works. For each NFT minted by our company, we will plant a tree to compensate for the wildfires of final summer and for our NFTs to be carbon neutral: we call it our NFTree program. The NFTs will consist of works in the exhibition, including the famed The Great Wave, while some other 100 will exist from the BM'southward own collection, including drawings from the recently re-discovered book which is the subject area of the exhibition."

NFTs and environmental education

This yr, during its 48th annual conference — where I held an fine art show titled "Museums & Environmental Concerns, New Insights" — the ICOM'south International Committee for Museums and Collections of Science and Technology addressed our planet'south ecology concerns and the way science and technology museums tin approach and present this important issue via education and exhibitions. I interviewed several museum directors to learn about the office of NFTs in their museums. Here is what they told me.

George Ma, head of the climate action department, social responsibility and the sustainable development role at the Jockey Gild Museum of Climate change at The Chinese University of Hong Kong:

"NFTs are currently not on our radar, just something we could keep an eye on. Nosotros digitized our exhibitions. We have a 360 Virtual Bout which is the digital version of our permanent exhibition. Since 2022, for every themed exhibition we developed, we also produced a digital version of it, either in a more website-like format or in 360 VR."

Patrick Hamilton, manager of climate modify, energy and the environment at the Science Museum of Minnesota:

"The Science Museum of Minnesota is digitizing its collections just I'thousand non aware of any current plans to digitize its exhibits or sell NFTs."

Julie Decker, director and CEO of the Anchorage Museum:

"NFTs are a really interesting topic to think and read well-nigh. Currently, we do not have plans."

Viviane Gosselin, director of collections and exhibitions and curator of contemporary civilization at the Museum of Vancouver:

"At the moment we are not selling NFTs for fundraising or collecting purposes — not yet. My agreement is that it is not by and big a 'greenish manufacture' then that is a bit of a red flag and turn off for me!"

Soren Brothers, Shiff curator of climatic change at the Royal Ontario Museum:

"ROM is digitizing its collections, which tin can exist accessed here (https://collections.rom.on.ca/). I don't know anything about whether ROM has plans to sell NFTs."

It should be noted that the Los Angeles Canton Museum of Art has an Art + Technology Lab where it runs a series to explore what NFTs mean for institutions collecting digital art. It also examines the "artistic, curatorial, conservation, registration, and legal issues of this new digital format." We Are Museums' Drubay as well recently announced "Unlocking Web3 for the Arts and Culture," a new programme organized past Nosotros Are Museums in collaboration with TZ Connect and the Blockchain Fine art Directory 2.0 to guide arts and culture professionals to navigate Web3 innovations.

Conclusion

I remember reading in the early 1990s that Bill Gates, the founder of Microsoft, said art would digitize and people would non hang artwork on their walls anymore, instead projecting any masterpiece onto a digital screen on their walls. At the time, this novel idea had me very excited.

Fast-forward to 2022, the 2d yr of the COVID-19 pandemic, and NFT sale volumes surged ane,000%, with people interested in using them in a multitude of areas: visual arts, videos, music, collectibles, to enhance brand awareness, gaming, publishing, carbon trading and fundraising.

Did you know that a rug given as a gift to Pope Francis past Sheikh Mohamed bin Zayed Al-Nahyan, crown prince of Abu Dhabi, was minted as an NFT and put upward for sale to raise funds for Afghan rug weavers, who will receive 80% of the sale'south proceeds?

I recollect NFTs — named word of the year by Collins Dictionary — are here to stay.

The views, thoughts and opinions expressed hither are the author's alone and practice not necessarily reflect or represent the views and opinions of Cointelegraph.

Selva Ozelli, Esq., CPA, is an international tax attorney and certified public auditor who frequently writes nearly tax, legal and accounting issues for Tax Notes, Bloomberg BNA, other publications and the OECD.