NFT: Doubts about regulation and environmental impact surround the fashion format

NFTs have come to attract the attention of users and worlds like art and sport alike and, as they make their way, doubts also arise related to the regulation of NFTs, the taxes that are paid or even the high energy consumption they require.

NFT, acronym for token no fungible, is a cryptographic technology based on ‘blockchain’ represents something unique, not replaceable, in a way that guarantees its authenticity, as well as who is its owner. Although the files can also be acquired in exchange for current currency, they are normally bought in exchange for cryptocurrencies such as Ether, but unlike these they are not mutually interchangeable, that is, they are not fungible.

According to the Online Art Trade Report 2021 prepared by Hiscox, the works of art in NFT have had sales to date for a total value of 3,025 million euros, which makes NFT one of the fashionable formats.

HOW ARE NFTs REGULATED?

As with cryptocurrencies, which function without a central bank to control and sustain them, NFTs make their way in a context with poor regulation. However, some first steps are already being taken to legally define the world of Blockchain and the NFTs.

Japan’s financial regulator, the Financial Services Agency (FSA) already has new policy documents indicating that the agency will begin monitoring the NFT and Initial Exchange Offering (IEO) sectors.

However, these are still very little advanced regulations and that in most cases collide with the very operation of the Blockchain. “Cryptocurrencies and NFTs are decentralized. There is no central authority “, has highlighted in statements to Europa Press Nicolas Julia, the CEO and founder of Sorare, a fantasy football video game using NFTs since 2019 to allow your users to exchange virtual player cards and create their own teams.

Spain is not far behind at the legislative level and there are already laws that, although they have not yet been implemented, They contemplate that companies that manage crypto assets must report this to the authorities, although at the moment this is geared more towards cryptocurrencies than NFTs.

This has been stated by Manuel Guerra, representative of the Zaragoza digital artist Jaime Sanjuán, who this November has carried out together with the auction house Fernando Durán the first NFT auction in the history of Spain, with two works: Divino Tesoro (20,000 euros) and The Counselor (8,500 euros).

The Law 11/2021 on measures to prevent and fight tax fraud (July 2021), in which “An obligation to supply information on the balances maintained by virtual currency holders is introduced”, as the law says.

“The companies that manage virtual currencies, which are the most used medium in the sale of digital art in NFT format must inform the State of the different balances, as well as the identity of the holders”, Guerra explained in statements to Europa Press.

The virtual markets contemplated by Law 11/2021 will also have the duty to report certain data such as addresses, tax identification, prices and dates of operations. It also establishes the obligation to include in the Informative declaration of Assets and Rights abroad, when the crypto assets are in exchanges located outside of Spain.

ARE TAXES PAID FOR NFTs?

Very high amounts have already been paid for the work of digital artists such as Beeple ($ 69 million for ‘Everydays: the First 5000 Days’) or collections like Bored Ape Yacht Club (with apes generated by an algorithm that have been sold for 10.1 million euros).

In this situation, a recurring question is whether taxes are paid for the sale of these files. And the members of this market are unanimous: Yes, taxes are paid, which vary according to the laws of each country.

In the case of Spain, if an NFT is sold in current currency, you have to pay VAT, which varies from 10% if it is sold by the author himself to 21% if it is a resale of an entrepreneur.

Also, if it is sold between individuals, you must add the property transfer tax, and if there is capital gain, tax it through the IRPF if it is a natural person or Corporation Tax if it is a company.

In the case of purchases in cryptocurrencies, you must comply with Law 11/2021 and the “Measures to prevent and fight tax fraud and regulatory development that we will see in the coming months”, as Manuel Guerra has recalled.

NFT AND THE ENVIRONMENTAL IMPACT

Another aspect that is beginning to be studied is the environmental impact involved in NFT transactions through cryptocurrencies.

Some of these measurements come from the artists themselves. In statements to The Verge, Beeple has assured that it is taking steps to be carbon neutral, since it costs about $ 5,000 offset the polluting emissions of one of its NFT collections.

Network Ethereum, one of the most common in the NFT sector, is also polluting. Some studies, such as that of Digiconomist, place in 46.54 Kg of CO2 a transaction of an NFT in this network. In total, the energy consumption of mining this network is 44.49 TWh (terawatt hours), which has come to be compared with that of a small size country and that is even higher in the case of cryptocurrency Bitcoin.

However, this energy consumption is not caused by the NFTs but by the network Ethereum, as the experts point out, since the sale of an NFT, for example, through a traditional auction in a digital wallet that is not connected to the Internet or to the Blockchain does not it would enter into the Digiconomist calculation.

“In any case, and to understand the context even better, transactions on NFT’s Ethereum network account for around 1% or 2% of the global, with the majority being cryptocurrency transactions”, as Guerra has highlighted.

ALTERNATIVAS: ETHEREUM 2.0 Y LAYER 2

This problem has already begun to be addressed by transaction networks such as Ethereum, which is currently preparing the launch of the update 2.0 or ‘Serenity’, which improves energy efficiency.

Ethereum has also already presented a test that allows its operation by reducing its energy consumption in a 99.95% compared to the main network, up to a total of 2.62 megawatts, the same as a population of 21,000 people.

Other efforts, such as the one carried out by the NFT Sorare, are based on the use of a second layer of Ethereum above the main one known as ‘layer 2′.

“Regarding electricity, Layer 2 allows us to reduce consumption by 30,000 ″, as highlighted by the CEO and founder of Sorare. “We will effectively reduce our consumption from 3000 to 110Wh. It is worth noting that as we climb, this number will eventually decrease reaching 11Wh”, has assured Julia, who also awaits the arrival of Ethereum 2.0. Sorare also has plans to go carbon neutral.

Until the arrival of the new system, experts also point out that the improvement of energy efficiency comes globally, not just from the NFT. “The focus should not be on a technology that increases security in a work of art or in a transaction, but on how to be more efficient and less polluting from a global sphere”, Guerra explained.

Among future proposals such as Ethereum 2.0 to contaminate less and legislation that does provide for the payment of taxes In most cases in Spain, the NFT format advances with some certainties, many promises and other doubts relating to the general paucity of controls.

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