Tokenization of artwork, gaming, and the way forward for NFTs

This is Part Three of a three-part series interview with William Quigley, a cryptocurrency and blockchain investor and co-founder of WAX and Tether, conducted by Selva Ozelli exclusively for crypto.news. Part One is about Sam Bankman-Fried’s and Changpeng Zhao’s prison sentences. Part Two is about cryptocurrency and banking. Part Three is about the future of NFTs.

1) In Part One of our interview, you mentioned that you co-founded Worldwide Asset eXchange (WAX), the first decentralized marketplace for trading video game virtual items. Tell us about WAX.io, the number one web3 gaming platform.

WAX was built specifically to handle the demands of blockchain gamers and NFT collectors.  We initially built WAX on the Ethereum blockchain; however, the platform’s exorbitant gas fees and slowness led us to develop the WAX blockchain and wallet.

WAX blockchain has the largest NFT ecosystem, with over 250 million NFT assets and more than 30,000 dApps at NFT projects. The WAX platform handles more than 23 million transactions per day for more than 30,000 dApps and 15 million users. Wax blockchain is ultra-fast, secure, and carbon-neutral.

As the world’s leading blockchain for NFTs, dApps, and digital gaming, based on the number of daily active users, WAX was designed from the ground up to be eco-friendly. Our carbon-neutral status isn’t just a claim—it’s certified by Climate Care, demonstrating our dedication to maintaining a minimal environmental footprint.

This Earth Day, we launched the Earthen WAX Walker NFT drop. For every Earthen Walker NFT claimed, WAX will plant a tree. This initiative combines our passion for innovative digital collectibles with tangible actions to benefit our planet, offering a collection of exclusive digital art that will allow us to contribute to reforestation efforts globally. 

2) A 2023 crypto analysis firm dappGambl report found that 95% of NFTs are worth practically nothing. The report found that following the immense hype over NFTs between 2021 and 2022, around 79% of all NFT collections have remained unsold. The popular Bored Yacht Ape NFT values are down around 90% from market highs. As the NFT markets crashed at the end of 2021, I wrote that NFTs were here to stay. What are your views on the future of NFTs?

According to Zion Market Research, the NFT market size was valued at $36.12 billion in 2023 and is projected to reach $217.07 billion by the end of 2032, showing a compound annual growth rate of around 22.05% from 2024 to 2032. 

The global NFT market cap today is $68.68 Billion, a +1.12% change in the last 24 hours.  I expect most of this growth to be in utility NFTs, collectible NFTs, and web3 gaming NFTs.

3) In 2021, art NFTs seemed like the biggest disrupter in art, with artists minting, exhibiting, and auctioning and investors buying, selling, and trading art NFTs.  Nicole Sales Giles, VP and director of digital art sales of Post-War & Contemporary Art at Christie’s, said, “At Christie’s, we view Digital Art as simply another collecting category of contemporary art. The web3 art community is collaboratively building something very special.  I believe that in the future, the art world will look back on today’s camaraderie of artists, builders, curators, and collectors as the time ‘when it all started.” What are your thoughts and views about the future of art NFTs?

The art market dropped 4% last year to $65 billion a year globally, with a few art sales making up the bulk of that number. Art NFTs are likely to be handled by global art businesses like Christie’s, Sotheby’s, and Phillips.

At WAX, we focus on collectible NFTs and game NFTs with high trading volume by owners.  We hope our collectible Earthen WAX Walker NFT drop generates intense collector interest so we can plant many trees.

4) Gains from collectible NFTs are being taxed at a 28% rate, which is higher than current capital gains rates. What are your thoughts on the higher tax rate applied to collectible NFTs? And will the higher tax rate hinder NFT collectible investment? 

The global collectibles market—valued at more than $360 billion in 2020—is expected to grow at a significant rate of around 4% during the forecast period 2022-2028. Therefore, the  28%  higher tax rate shows that the Internal Revenue Service (IRS) anticipates much growth in the collectible NFT sales area and would like to tax it at a higher tax rate than the current capital gains rate.

5) The IRS recently issued the 1099-DA form in draft form. Jonathan Cutler, senior manager in Deloitte’s Washington National Tax team advising on information reporting of digital assets, said, “Under the August 2023 proposed digital asset reporting regulations, an NFT is included as reportable when it is a ‘digital representation of value that is recorded on a cryptographically secured distributed ledger (or any similar technology).’ In April, the draft form on which an NFT or other digital asset might be reported—the Form 1099-DA—was published by the IRS. Importantly, the cover page notes that this early draft release is based only on the proposed regulations and subject to change based on the public comments, the volume of which appears to be significant. Until those comments are digested by the IRS and Treasury, it’s difficult to glean meaningful information, whether from this draft form or otherwise, on the final scope of the definition of “digital asset” for reporting purposes.”  Do you have any comments on the draft 1099-DA form which applies to NFTs?

If the draft 1099-DA is finalized in its current form, then NFT markets will need to issue 1099-DA’s. Afterall, collectible NFTs are taxed at a higher rate.

6) A new NFT project takes cannabis sales out of the dark web markets and brings it into the NFT markets. Cannabis billionaire Maximillian White, who is often referred to as the ‘Elon Musk of cannabis,’ said, “I signed a partnership agreement with UK rapper Fredo just weeks after his Dubai prison release to launch first-of-its-kind Dr. Green NFTs sold at my own NFT drgreennft.com market place which will allow holders of the Ethereum based NFTs to sell recreational cannabis legally worldwide. The global cannabis market value is expected to reach approximately $33 billion by 2024 end and hit over $69 Billion by 2029 with a compounded AGR of 15.4%.” Do you have any thoughts or comments on this first-of-its-kind cannabis NFT initiative?

No comments.

7) NFTs appear to be the next wave of SEC enforcement actions in the digital asset space. Last year, the SEC classified two NFT projects as securities. In August 2023, the SEC charged Impact Theory, LLC, a media and entertainment company headquartered in Los Angeles, with conducting an unregistered offering of crypto asset securities in the form of NFTs. Impact Theory raised approximately $30 million from hundreds of investors through the offering by claiming to be the next Disney Company—your ex-employer. Two weeks later, in September 2023, the SEC charged and entered into a settlement with Stoner Cats 2, LLC (SC2), finding that SC2’s NFT offering, which raised $8 million called Stoner Cats, was a security, and therefore SC2 had engaged in an unregistered offering of a security. What are your views on SEC’s enforcement actions in the NFT area?

I was not aware of the SEC’s two settlements with NFT projects, the next Disney Company and the animated web series called Stoner Cats by Mila Kunis and Ashton Kutcher.   

However, it seems to me that in these two cases, the NFT offering documents were poorly drafted by their lawyers. The top three things that could give rise to NFT’s securities classification are fractionalizing an NFT, offering passive revenues, or participating in governance—such as staking. So, the SEC found that these NFTs were offered and sold to investors as investment contracts and, therefore, were securities. Accordingly, these NFT projects violated the federal securities laws by offering and selling NFTs to the public in an unregistered offering that was not otherwise exempt from registration.

Given the regulatory compliance involved in issuing securities, that classification should be avoided, and the features, offering documents of an NFT should be carefully considered before launch.

8) The vast majority of existing NFT projects across art, gaming, sports, metaverses, and even cannabis are built on Ethereum blockchain. In April, the SEC issued a Wells notice to Ethereum-based Consensys, revealing that the agency could take potential action against Consensys for violating the federal securities laws through its MetaMask Staking and other products.  The SEC seeks to regulate ETH as a security after Ethereum successfully changed its consensus mechanism by transitioning from proof-of-work to proof-of-stake back in September 2022. This view is also shared by the New York State Attorney General’s Office (NYAG), which, ahead of the SEC on March 9, 2023, filed a lawsuit charging crypto trading platform KuCoin for “failing to register as a securities and commodities broker-dealer and falsely representing itself as an exchange” notably alleging that the ETH traded on the platform is a security.  The BlackRock CEO Larry Fink stated he isn’t worried about the SEC classifying Ethereum’s ETH as a security. What are your thoughts about the potential classification of ETH as a security?  How will this impact the NFT market?

No comment.