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‘DIGITAL DEEDS’ FOR CRYPTO ART – A PRIMER FOR DECIPHERING NFTS

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Investors are revolutionizing the way some art can be acquired as potentially appreciating portfolio assets. Indeed, new technology is transforming the way some artists can sell and distribute their work as singular assets that you can own. Artists on the cutting edge have discovered they can skip the idea of providing you with an original physical product and, instead, provide you exclusive ownership rights to their artwork via a digital deed called a non-fungible token, or NFT. Images, videos and music are up for grabs. While Commerce Trust Company acknowledges the desire to monetize creative output will always be around, it does not currently recommend NFTs as an investment. This commentary by Director of Portfolio Management West Region Tim Michel, CFA, provides some insights for general background.

 

What is an NFT, or “Non-Fungible Token?”

Recent headlines are eye-catching. Christie’s auction house sells a piece of digital artwork by the artist Beeple for a record $69.3 million. Jack Dorsey (CEO of Twitter) sells a token for his first-ever tweet for $2.9 million. There’s even a website called “Crypto Art.”

 But what does this mean?

First, some technical terms – a Non-Fungible Token is effectively a “digital deed.” It’s an electronic certificate that says YOU, and no one else, are the “true owner” of something digital.

That’s an odd concept for starters. When something is digital, that means it can be endlessly reproduced, without “copying errors.” I can take a photo on my cell phone camera and email it to 20 people, upload it to Facebook, and tweet it to my followers. That simple sequence takes one digital copy (the one on my phone) and creates dozens of exact copies, which themselves can be used to create more and more copies.

So, which one is the “true” copy? And “who owns it”? That’s where the “tokens” come into play, using the same digital tracking features as cryptocurrencies.

 For example, Bitcoin and other cybercurrencies use a technology called “blockchain,” a digital record of registry, to confirm the “owner” of a particular piece of cybercurrency.

 

If I transfer ownership of a Bitcoin to you, that transaction is added to the blockchain distributed ledger, so that all users of the currency know that my account is down one unit and yours is up one unit. Depending on our desires for privacy, no one may actually know who we are, but all can tell our account balances and the fact of the transaction.

Now, instead of proving ownership of a unit of digital currency, the same technology is used to record the true owner of a piece of digital art. The art itself can exist in multiple locations, at multiple times, on devices owned by multiple and different persons. But the digital registry behind the token says “Account XYZ” owns this. When the registered owner decides to sell the NFT to a buyer, the digital registry will show Account XYZ has transferred ownership of this NFT to Account ABC.

 The ownership of the token may convey certain benefits, such as the ability to assert trademark rights, but that’s still to be determined. There are artists who are specializing in this new media, and one New York Times columnist recently wrote a column about NFTs, making the column itself an NFT, and it sold for $560,000 at auction to an NFT investor, alleged to be an executive with a Dubai-based music production company.

 Vignesh Sundaresan, the purchaser of the Beeple art for $69 million, said in a television interview with Squawk Box that he had no regrets paying the large sum for what many say is simply a JPEG and a hyperlink. He said the rise of non-fungible tokens herald a new era where technology has allowed artists and collectors around the world to buy and sell art more easily and democratically.1

 Some proponents of NFTs believe these types of economic transactions will eventually be applied to assets like homes, and other high-ticket property . Some critics of NFTs point out that blockchain type security is designed to prevent forgery, not theft. Therefore, if somebody “hacks” your NFT and sells it, the registry will still record the sale, irreversibly.

NFTs represent a very different take on investing in art and, like anything new, should be very carefully evaluated before making an investment.*

 

Commerce Financial Advisor customers are welcome to contact their financial advisor with any questions.

 

* Always consult with your CPA and professional advisor on matters involving taxes.

1 CNBC, https://www.cnbc.com/2021/03/30/vignesh-sundaresan-known-as-metakovan-on-paying-69-million-for-beeple-nft.html

Commerce does not provide tax advice or legal advice to customers. While we may provide information or express general opinions from time to time, such information or opinions are not offered as professional tax or legal advice. Consult a tax specialist regarding tax implications related to any product and specific financial situation.

This material is intended to provide general information only, may be of value to the reader and audience, and is reflective of the opinions of Commerce Trust Company.

 

Commerce Trust Company is a division of Commerce Bank. Securities and Advisory services provided through Commerce Brokerage Services, Inc., member FINRA, SIPC, and a registered investment advisor. Insurance products are offered through Commerce Insurance Services, Inc. Both entities are subsidiaries of Commerce Bank.

 

This material is not a recommendation of any particular security, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified attorney, tax advisor or investment professional. The information in this commentary should not be construed as an individual recommendation of any kind. Strategies discussed here in a general manner may not be appropriate for everyone.

Diversification does not guarantee a profit or protect against all risk. Past performance is no guarantee of future results, and the opinions and other information in the investment commentary are as of May 11, 2021.

Commerce does not provide tax advice or legal advice to customers. Consult a tax specialist regarding tax implications related to any product or specific financial situation. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed, and is subject to change rapidly as additional information regarding global conditions may change. All expressions of opinion are subject to change without notice depending upon worldwide market,economic or political conditions.

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Securities and Advisory services provided through Commerce Brokerage Services, Inc., member FINRA, SIPC, and a registered investment advisor. Insurance products are offered through Commerce Insurance Services, Inc. Both entities are subsidiaries of Commerce Bank. Investment and Insurance Products:

 

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