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We are all going public: Privacy rules, tax shelters and the future history of art

After a banner year of 2021 for individual object sales through nonfungible tokens (NFTs), 2022 is poised to be the year of MetaFi. A recap of Beeple, Christie’s, Visa and endless aping-in celebrities hardly feels necessary, except to point out that we seem to be standing on (or perhaps have already crossed over) a fundamental precipice. While the rocket-propelled ascent of NFT prices will not continue forever, numerous voices have predicted that a mature tech stack for discovering, vetting, valuing, trading and protecting collections of digital assets will soon emerge, without a crash.

But, these optimistic views may be underselling the area. These optimistic views may be overstating the area. While the “NFT Fi” sector’s premise is to create value via liquidity, it remains an unstated assumption to say that this liquidity will be restricted to crypto. It is early days and those boundaries could be changing. We may need to expand our meta-apertures. This is why Switzerland is a standout among many countries that have only begun to pilot digital currencies (CBDCs) with central banks. The rich history of innovation in creative and financial assets is a hallmark of the confederacy, which includes both Davos as well as Art Basel. It’s worth following closely.

At the end of last year, the Six Digital Exchange (SDX), the digital entity of the SIX Group, the financial services company that operates the infrastructure of the Swiss national stock exchange, considered opening up their exchange to NFTs. This possible move dovetails with the advancement of a major experiment with CBDC. These early steps, taken together, will give credence to both digital currencies as well as the NFT secondary markets. They will allow for more integration of many types of digital holdings into the fabric of Swiss financial services.

To say that the international regulatory perimeter of tokenized assets is inchoate or poorly understood would be a wild understatement. The smooth functioning of digital markets can be hampered by legal ambiguity, bad actors and technology failures. This could have a spillover effect on traditional markets, which is magnified by their increasing imbrication. Recent hand-wringing over the identity exposure of the Bored Apes creators as well as revelations from the multibillion-dollar Bitfinex hack attests to the already enormous stakes of calibrating the needs for personal privacy and public disclosure.

As Web3 moves into territory that blurs both physical and digital goods, as well as private and public exchanges and markets, it is important to think about how legal frameworks and the path of least resistance have shaped this analog world that the crypto-forward world hopes to replace.

Related: Will regulation adapt to crypto, or crypto to regulation? Experts answer

Fully grappling with these questions is far beyond the scope of a short article. We will only briefly touch on the topic of digital privacy, which is a cross between law, art, and economics. Based on tactics pioneered in Switzerland coincident with the rise of global finance in the 19th century, fine art has become a central means of moving assets through the shadows and edges of international law. This background, which is not well understood by people outside the art industry, provides an important context for the coming collision between international privacy laws, global data art, and the promise of a publicly verifyable blockchain.

The coming collision of public scrutiny and digital privacy

Regulators have been busy filling in the gaping holes left exposed by the vertiginous adoption, or in the case of Switzerland, legitimization of tokenized assets. However, any uncertainty in enforcement could ultimately affect the smooth functioning tokenized markets, with possible spillover effects on world’s traditional markets.

Any updated government policy aimed at striking a balance between social interests and individual privacy could have rippling effects on investors, auction houses and art collectors. The General Data Protection Regulation (GDPR), one of the world’s toughest pieces of legislation on data privacy, has fast become the world’s blueprint for leveraging fines as a way to amplify the pain of breaches. Records show that privacy violations are still widespread on a global level. Penalties for violations of the European Union’s privacy law have soared nearly sevenfold in the past year. $1 has been imposed by data protection authorities. 25 billion in fines over breaches of GDPR since early 2021, which was up from about $180 million a year earlier. Perhaps this coincides with the views of legal scholars who argued that monetary sanctions do not necessarily lead to better compliance and ultimately better data protection for individuals.

Related: Concerns around data privacy are rising, and blockchain is the solution

Why does it matter in the world of crypto? It is likely that there will be collisions with existing regulatory systems if global legal authorities fail to keep up with the cryptocurrency freight train. We must not forget that cryptocurrency is based on a public ledger, or blockchain. This allows participants to keep their identities anonymously, as well as cryptocurrency balances and records of all transactions. A blockchain can be compared to Swiss numbered accounts. These accounts were once used to keep confidentiality and avoid any oversight by the Internal Revenue Service. These accounts were relics of the 80s before the rollout of the deferred prosecution agreement to forbid pervasive tax evasion. What makes cryptocurrency so unique is its ability to keep a high level privacy and anonymity. This is contrary to data privacy laws. One example of this is the GDPR’s “right to forget”, but due to the immutable nature blockchain it makes it nearly impossible to exercise such rights. Individuals have the right to correct any inaccuracies in personal data. However, blockchain technology may make it impossible for them to do so.

In case NFTs contain personal information, such as the provenance of an NFT work, these bits of data could be captured by the extraterritorial arm of law. A well-established right of privacy could also be used as a shield from which devious actors may operate. This has been the norm in the art world for over 100 years.

In the shadows of the freeport

In the pre-COVID, pre-BAYC moment, the biggest open secret in the art world had to do with the storage of art in “freeports,” specially demarcated economic zones exempt from most, if not all, taxation. While the exact scope of the practice is of course impossible to determine, serious investigative journalists have estimated that more than one million global works sit in such jurisdictional limbo. Predictably, one of the world’s largest and most valuable artwork storage freeport facilities sits in Geneva — a New York Times article reported that this single tax shelter housed more than a thousand Picasso works, as well additional objects produced by Old Masters including Da Vinci and Renoir. These paintings could fetch hundreds to thousands of dollars at auction.

Related: Minting, distributing and selling NFTs must involve copyright law

The practice of storing art objects and other valuable commodities within trading ports to skirt the edges of tax liabilities has been developed and refined by Swiss innovators, entrepreneurs and con artists for well over a century. This idea is based on the well-known concept of a trans-shipment port that is non-territorial. While the Geneva freeport has been used to store grain, coffee and other goods bound to and from destination throughout Europe since its founding in 1888, it has increasingly found itself as a tax-advantaged repository at the crux of the global art trade. Old Masterworks, which were acquired at the original Art Basel and have been a unchallenged clearinghouse of fine object d’art for decades, can be left on-site to increase in value and then be resold with no tax. There are more evil possibilities than just trading in looted artifacts and exchanging dirty money for art. Such practices have been fostered by a deep-rooted cultural and legal framework of financial non-disclosure.

The time has changed

The new, Web3-powered chapter is now being written before our eyes in real time. While the United States’ biggest freeport recently closed after just two years in operation — COVID-19 pandemic and other factors seem to have withered the interest in the deluxe storage of objects — the Singapore-based Le Freeport, a new offering from the team behind the Geneva facility, held a major NFT exhibition to close out 2021. The exhibition featured nearly three dozen works by artists ranging from Beeple to Andy Warhol, and strikingly, only was for sale.

Such mostly non-sale exhibitions have been used to cultivate prestige around a work, a prestige that can later be used to justify inflated appraisals for regulatory arbitrage. And just this week, the U.S. Treasury flagged NFT sales as a new front in the global war on money laundering — as anonymous transactions may permit the trade of dirty money for clean art, which may then be resold, or soon, listed on a public stock exchange. It is difficult to imagine a better mechanism than the GDPR for concealing such transactions, or a more acceptable venue for disposing these newly “cleansed” assets on a stock exchange.

Importantly, financial regulatory frameworks create paths of least resistance-loopholes designed into the system, thin enforcement mechanisms, and opportunities for regulatory arbitrage have all funneled capital and its associated cultural products into one direction or another. As we have argued elsewhere, the advent of the serial-style work of Pop Artists such as Jasper Johns and Andy Warhol was equal parts aesthetic innovation and tax evasion. The recognized achievements of Land Art, media art and 1980s painting were all made possible by matching ingenuity on the right and left sides of the balance sheet.

The future of the merger of newly empowered privacy law and non-sovereign wealth will be revealed only in time. As the world’s legacy, decentralized money systems and art-creativity systems become more interconnected, it will be difficult to predict what the future holds.

This article was co-authored by Michael Maizels and Adam Au.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

This article is for general information purposes and is not intended to be and should not be taken as legal advice.

Michael Maizels, an art historian by training, is a technology researcher with Pilot44, a boutique innovation consulting firm in San Francisco, and is also affiliated with the metaLAB, a think tank and creative design studio at Harvard University. In September, his new book on financial innovation and modern art history will be published by the University of Michigan.

Adam Au is an attorney and international data privacy expert based in Hong Kong. He is currently the general counsel and company secretary for a public-health company and a regular contributor to South China Morning Post about topics related to technology and international legal. He has an economics degree from Brown University, a law degree at Oxford, and an MBA degree from MIT Sloan.

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Henry Hicks
Henry Hickshttps://nonfungibletalk.com
NFT and Crypto Enthusiast. Loves Travelling and Exploring the Metaverse!


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