Assets of the Future? | Vegas Legal Magazine

At this point, nearly everyone has somehow heard of, used, or owned cryptocurrency. The digital currencies that make up cryptocurrency (Bitcoin, Ethereum, etc.) make national and local headlines for volatility, acceptance with merchants, tax consequences, and regulatory control. On the shoulders of cryptocurrencies stand NFTs, short for Non-Fungible Tokens.

Fortunes are being made (and lost) by those creating and/or purchasing such NFTs. But what exactly are NFTs, what is their potential use, and why should anyone care? As NFTs started taking off, Meta (formerly known as and the parent company of Facebook), announced its foray into the Metaverse, a digital frontier with its own infrastructure, assets, applications, and even its own ‘land.’ What can be expected of this new, digital wild west?

Contemporary Cryptocurrency Issues

The first major contemporary cryptocurrency issue deals with Uncle Sam. That’s right – one of the biggest issues that anyone involved in cryptocurrency wants to know are how their gains (or losses) are treated for tax purposes. The Internal Revenue Service (IRS) treats cryptocurrency as it does any other asset when it comes to realized tax treatment – when the cryptocurrency is converted back into US Dollars, the IRS expects the holders to recognize any capital gains or losses, subject to the deductibility of any losses1.

Practically speaking, therefore, the IRS is going to be treating cryptocurrency similar to how it treats stocks, bonds, etc. Holders of cryptocurrency must recognize long-term capital gains/losses if the asset is held for longer than one year; short term traders or those who may buy and sell cryptocurrency for a holding period of less than one year will have to face the, higher, short term capital gains tax.

The second major issue that many are facing regarding cryptocurrency today is that of acceptance of cryptocurrency in exchange of goods and services and the volatility related thereto. Major brands, such as Gucci, are now accepting cryptocurrency.2 As more businesses accept cryptocurrency, more businesses will face the volatility that is currently inherent with holding cryptocurrency and the price fluctuations between cryptocurrencies and fiat currencies like the US Dollar. Bitcoin, for example, which is the world’s largest cryptocurrency by market value, has been seeing significant volatility, which affects many crypto-wallets and owners of such wallets, including businesses.3

While cryptocurrency waddles through the issues of taxation and volatility, sister assets – Non-Fungible Tokens – are taking off.

Non-Fungible Tokens

Non-Fungible Tokens, referred to generally via their acronym, NFTs, are digital assets that provide ownership certification and are built on blockchain technology that can keep track of who is selling and buying the assets.4 NFTs are gaining increasing popularity as certain collections are increasing in popularity, and therefore price.

NFTs can be purchased via a few marketplaces that exchange cryptocurrency for the purchase of NFTs. The largest such marketplace is known as OpenSea (https://opensea.io/). To purchase NFTs, users generally must have wallets (storage for cryptocurrency) and can sell or purchase NFTs via listings on the marketplaces. NFTs are gaining popularity as they allow for the digital version of products (such as art) to be able to be traced (for authenticity) and prevent duplications/forgeries. NFTs can also be used to represent ownership of non-digital or real-world assets such as real estate.5

The NFT market is expected to be valued at over $80 Billion in the next few years.6 As the market grows, the likely use of NFTs – and the related legal implications – will likely grow as well. The digitization of famous art works, music, and literature will likely lead to significant expansion of current intellectual property law. The growth of fractional NFT ownership and monetization of future sales and derivative works will likely expand property law as well. The boom in NFTs is also leading to significant changes in contract law, especially via the increased usage of ‘smart contracts.’

Smart contracts are contracts that are programs stored on a blockchain that run when certain conditions are met and automate the agreement and the terms that are needed to be met for the fulfilment of the contract, without using a third-party intermediary or unnecessary time delays.7 Smart Contracts, therefore, allow for parties to lock in their terms, for the blockchain to monitor and verify the fulfilment of those terms, and for the program/contract to assist the parties in exchanging the consideration without further involvement. Smart contracts tend to be more secure than traditional contracts as the transaction cannot be changed once programmed and the results can only be observed by the parties to whom the program/contract grants access.7 Whether NFTs and their success might be questioned, it is highly likely that implementation of the technology arising from NFTs (and cryptocurrency) such as blockchain and smart contracts will likely increase over time.

Smart contracts are also being used for real estate transactions. While their use expands the real estate in the physical world, smart contracts, NFTs, and cryptocurrencies are also increasingly being used in a digital world, dubbed the ‘Metaverse.’

Metaverse

Facebook, one of the largest social media networks in the world by users and by market capitalization of the company, recently changed its name in to ‘Meta’ in a sign that the company – and the tech world – is seeing itself growing into the digital frontier known as the “Metaverse.”8 If the company that serves half of the world’s population and generates over $86 Billion in revenue sees the Metaverse as the future, the likelihood of the Metaverse being a dominating aspect of technology in the future is very high.8 Understanding the Metaverse, and how it affects the ‘real’ world will be essential for lawyers and non-lawyers alike.

While the exact definition of the Metaverse is still being developed (as technology companies, governments, companies, individuals, etc. figure out the infrastructure of the same), Metaverse, broadly defined, is a virtual world that mimics the ‘real’ world via virtual reality and includes individual characters, virtual real estate, virtual economies, and virtual infrastructure that may be accessed via headsets, computers, gaming consoles, phones, and other devices.9 The Metaverse is expected to grow significantly via commitments made by massive corporations such as Microsoft, Nvidia, Snap, and of course, Meta.9

As the Metaverse develops, a few issues are at the forefront and are actively being debated between lawyers, CEOs, strategists, and others. Key issues include how to deal with intellectual property laws and violations, security and privacy concerns, antitrust concerns of a few companies controlling the Metaverse, and potential crimes in or regarding the Metaverse.10 As the Metaverse is expected to be an extension of the real world, the legal issues of property rights in the metaverse, handling disputes in the Metaverse, and related issues will likely dominate the legal architecture surrounding the Metaverse. As of now, a significant amount of light is being shed on the commercial aspects of the Metaverse including the buying and selling of digital land.

While most of us are familiar with residential and commercial properties, digital properties, or land in the Metaverse, are exploding in popularity and therefore investments. The currently decentralized version of the Metaverse (in which multiple verses participate), has been making headlines for individuals and businesses spending millions of dollars on virtual real estate.11 As of the publication of this article, the two largest players in the virtual real estate world are Decentraland and Sandbox and are heavily influenced by both cryptocurrency and NFTs, with cryptocurrency being the currency of choice (or exchanged for tokens in the virtual worlds) and NFTs as actual representations of the land purchased and other NFTs to be access cards and/or avatars of the virtual worlds.11 The virtual worlds are seeing explosive growth in the user base participating in these worlds with significant real world interactions – including virtual fashion shows and participation from major brands like Dolce and Gabanna and Tommy Hilfiger.11

While money is flowing into the Metaverse, vocal critics of digital land are sounding the alarm. Billionaire and Shark Tank star Mark Cuban, for example, believes that purchasing land in the Metaverse is “dumb” because the purchase is not one based on utility and because virtual worlds can keep creating unlimited ‘lands’ for sale thereby leading to limitless supply and devaluation of current digital land holdings.12 Others are pointing to concerns that if a platform shuts down (bankruptcy, dissolution, etc.), then it is very likely that the digital land held on the virtual platform will likely disappear as well.13 As the Metaverse and digital lands are new, only time will tell what the pros and cons are of getting involved in the Metaverse and its various facets.

It is very difficult for any individual to correctly predict the future of cryptocurrencies, NFTs, and the Metaverse. Given the current attitude and financial commitments of many – from individuals to some of the largest corporations in the world – it is very likely that cryptocurrencies, NFTs, and the Metaverse will affect all of us and will have significant commercial, legal, and other implications going forward. The more these worlds are understood now, the better off we will be able to implement them, invest in them, and otherwise benefit from them. In the meantime, we can watch the cryptocurrency markets, appreciate NFTs, and dip our toe in the Metaverse.

Sagar Raich is the founder and owner of Raich Law PLLC and practices in business law, real estate law, intellectual property law, and other fields. He is licensed in Nevada and California and attended Harvard University for his Master’s Degree and received his Juris Doctorate degree from the William S. Boyd School of Law at the University of Nevada Las Vegas. Mr. Raich is an adjunct Professor at the University of Nevada, Las Vegas, has been published numerous times in law related magazines/articles/periodicals, and has appeared on television and other media.

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