There is currently an NFT hype: is this a momentary trend or are they here to stay?
Most people will have heard of cryptocurrencies, such as Bitcoin, and many people now have their own cryptocurrency portfolio and are either trading in these assets or have just invested in these to see what will happen to them.
There are thousands of cryptocurrencies in existence and they are currently the most prevalent type of cryptoasset in the market. However, there are other types of cryptoassets which are becoming more and more popular. For example, you may have heard of “NFTs” or non-fungible tokens which are being sold for extortionate sums of money. There are a number of high value sales that pop up on news and social media platforms on a regular basis raising the NFT profile.
So what exactly is an “NFT”?
A non-fungible token (‘NFT’) is a unit of data stored on a digital ledger of blockchain which certifies that a digital asset is unique. You can buy and sell NFTs which is effectively the ownership of the unique digital asset and the blockchain keeps track of who owns what digital assets. The owner of the NFT may be able to gain royalties from the sales of an NFT depending on the terms and conditions within the contract of the NFT and it would be important to seek advice from a specialist lawyer to assist you through the contract process.
A recent example of an NFT coming to market is the McRib Burger. In November 2021, McDonalds made its famous McRib burger into an NFT to celebrate their 40th anniversary and gave away ten tokens to lucky fans. The theory behind this was that some of their loyal fans would never have to be without their beloved McRib burger again.
NFTs are sold on online platforms or auction houses and the types of digital assets that have been sold are artwork, music, items in video games and even memes. They do not typically give the buyer the actual asset or copyright to the asset but the unique ownership of the digital asset. For example, if you purchase an NFT of a piece of artwork, you do not own the artwork itself but a unique token pointing to the artwork. You essentially gain the bragging rights of owning an NFT and this is becoming more popular on social media sites where celebrities such as Justin Bieber are sharing the NFTs that they have bought with their followers or setting an NFT as their profile picture. There are now communities that are being formed based on buying into a collection of NFTs.
The current method for valuing NFTs is very similar to the conventional method of valuing artwork. There has been a stark lack of published guidance from HM Revenue & Customs (‘HMRC’) over the last year as to how they would approach valuing NFTs for tax purposes and I suspect there haven’t been many cases flowing through their doors, but over the coming years this will all change.
The valuation may largely depend on the reputation of the seller, any historical or cultural value such as academic or media attention and the blockchain trading history of the seller. This year, the digital artist Beeple sold his artwork “Everydays – The first 5000 days” for an incredible $69 million at the auction house Christie’s. The bidding started at just $100, so this impressive sale price achieved reflects just how popular and significant NFTs have become in the last year. Many artists believe that NFTs are the way in which digital art will be traded in the future as the use of a blockchain increases the traceability of ownership of any digital asset and prevents the sale of counterfeits. As NFTs become increasing popular, if they have the same growth trajectory as the cryptocurrency Bitcoin which was launched in 2009, then the potential value and sales of NFTs in ten year’s time is thought in the digital world to be immense.
There is concern for the impact on the climate in the increasing use of NFTs as they are bought and sold on blockchain technology. However, different blockchain technology can be used which will have different outputs of energy which will hopefully improve over time and use greener energy sources.
What should you consider in your estate planning if you own an NFT?
You should have a legal plan and an access plan in place for your digital assets so that your executors know who the legal ownership of your digital assets passes to on your death and how they can access these assets to pass them onto the correct beneficiary. It would be best practice to have these available to your executors when the time comes so the access is not restricted. Also, do not write your access plan in your will as your will becomes a public document once this has been sent to the probate registry and so the access will become public knowledge. It would be advisable for this information instead to be written in a letter of wishes which sits alongside your will. It would also be a good idea to give your executors instructions as whether you wish for them to liquidate the assets (i.e., sell the NFT) or whether you wish to pass the ownership to the beneficiary without liquidating the asset.
Section 55 of the Administration of Estates Act 1925 defines personal chattels as assets which are tangible assets (i.e. physical and moveable assets) and this is the standard statutory definition which may be used in your Will. If you own digital assets, you should include specific wording in your Wills about those as these are not, strictly speaking, “tangible assets”.
You should also seek estate planning advice if you currently hold cryptoassets as the terms and conditions of the NFT contract will prevail. Therefore, you must ensure that any instructions you provide to your executors do not contradict the terms and conditions in the contract of the NFT.
It is too early to be certain whether NFTs are going to be a short-term hype or whether they will proliferate the digital assets market. One thing is for sure, as the NFT market continues to evolve so too will estate planning laws and regulation of the market.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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