Pawel Kuskowski was joined by Zach Burks, CEO of Mintable to discuss the world of Non-Fungible Tokens (NFTs), the promise, the risk and the compliance aspects.
Zach started to look at Bitcoin in 2012 and then delved into smart contracts on Ethereum. He worked on different projects as a developer but it was the Ethereum request for comment (ERC)-721 idea of Non-Fungibility that stuck with him. When CryptoKitties came out, Zach started to invest heavily in NFTs. He has since created the first Decentralized Autonomous Organization (DAO) that uses NFTs with no ERC-20 tokens. In 2018, he created Mintable, a first of its kind tool that could make, manage and transfer NFTs before the 721 standard was finalized.
Ownership and rights registration in blockchains are an appealing part of the technology’s potential because financial transactions are mostly about storing and sharing values. However, this is also where the most uncertainty lies. Zach adds that uncertainty around the US markets and US regulations is one of the reasons why he didn’t choose the US to domicile his company as the US was not conducive to crypto innovation.
Singaporean vs US regulations
Zach chose Singapore to domicile his company because it has more crypto friendly regulations than the US. Singapore recently announced that they would treat NFTs on a case by case basis with clear guidance. For example, if someone gives you an NFT that is one share of Tesla, Singapore will treat it as a security. However, if someone gives you an NFT birthday card, it will be treated as a card and not a security. According to Zach, this is a very pragmatic approach for a government.
In contrast, the US can have the Commodity Futures Trading Commission (CFTC) claim something completely different to the Securities and Exchange Commission (SEC) with Operation Choke Point looking like a seemingly concerted effort to go after the crypto industry in the US. Zach adds that until there is a certain set of policies that is fair and does not stifle innovation, the US is unlikely to be a crypto friendly environment at all.
Pawel says that because of the tension created by this new and growing industry of crypto, there is a worry that traditional finance will be hindered. In order to protect traditional finance from this uncontrolled market of crypto, some countries are not being as friendly to crypto. However, there should be some regulations that could eventually make the market controlled and regulated.
Are NFTs captured by Anti-Money Laundering (AML) requirements?
If someone wants to launder money, there is absolutely no reason why they should do it via NFT on blockchain. Then again, 99% of money laundering happens in fiat currencies. In any case, the source of funds are going to be traceable in blockchain and it would be very easy to get a subpoena for the centralized exchange service, so laundering money through blockchain is just not the best way to do it.
Having reporting requirements and Know Your Client (KYC) checks in the NFT space makes sense in order to prevent illicit activities but what Zach is opposed to is either a blanket ban or a regulator coming in saying all NFTs are safe and secure when it is not.
Watch the whole discussion:
The case against blanket labeling
Right now there are lots of unhealthy debates going on about regulations and frameworks. The regulators need to comprehend the fact that they cannot use a blanket labeling system. The Internal Revenue Service (IRS) for example, labeled NFTs as two different categories, properties and collectibles.
For a collectible, the tax rate can go as high as 40% and for a property, it is taxed like a typical property. But what if the NFT is a loyalty card sent to your wallet? Will you now be taxed?
The treatment of this now is that if someone Airdrops a token into one’s wallet, it needs to be accounted into one’s taxes in the US, regardless of one interacting with it or not even asking for it. The IRS has taken something that should have been in development testing and requires people to fill out an extra form and make sure every transaction is recorded with the correct prices. This overly complicates the process leading to stifling innovation and growth for the US.
The industry is on the fence
As soon as there is an announcement of some court action, millions of dollars are being lost by retail investors over leverage, early traders panic and sell losing money, etc. The lack of a sound foundation ultimately hurts the participants of the multibillion market. This goes against the SEC’s core purpose of protecting consumer investors.
If for example, they didn’t approve the IPO for Coinbase, then the whole incident of investors losing money over Coinbase could have been avoided.
This is perhaps one of the reasons why a bill has been proposed to repurpose the SEC because a 90 year old law is unlikely to be helpful for something that came out 2 years ago.
Mintable is trying to be a bank for NFTs where a person can just go to the Mintable website to access all of their NFTs. They can then show these NFTs to brands or employees in physical stores where the NFT has a purpose e.g. loyalty card.
There is also the merchant tool which allows for employees of any company to login and do anything with their NFT. All that is also integrated and even in the Point of System (POS) system itself, the person can integrate with Mintable’s Application Programming Interface (API)s so that every check out could be an NFT.
Is this similar to embedded finance?
Although embedded NFTs has not been the name used for Mintable’s upcoming product, Zach says that it is an accurate description for what they are trying to build because the purpose is to allow businesses to avoid hiring blockchain developers because any developer could integrate it via APIs. As for the user, they will not need to leave the brand’s website, interface or experience but all the blockchain aspects will be happening automatically in the background. So the goal is to get away from the Profile Picture (PFP) 10K NFT collection because that trend is not going to last.