Decoding: NFT and CBDC collide to create the future of finance. Does the United States have corresponding encryption regulations?

Since the beginning of this year, the non-fungible token (NFT) market has been expanding, and figures suggest that the total capitalization in the field may currently be between $10-50 billion. Not only that, these novel digital products have gained so much traction recently that more and more celebrities, artists, illustrators, and musicians are releasing NFTs of their personal creations almost every day.

The reason so many content creators — and now increasingly business owners and retailers — are flocking to NFTs is because they offer a tangible means of providing “transfer of title” for digital or real-world goods while eliminating the need for any financial intermediaries who would otherwise end up taking home a big paycheck.

Furthermore, it is worth highlighting that even central bank-backed digital currencies (CBDCs) have gained considerable traction over the past year or so, following the rise of NFTs. In particular, China’s digital yuan (DC/EP) project has attracted a lot of interest, as it is the first time a major country has deployed a CBDC for mainstream commercial use.

That said, it now appears that many other countries are also actively exploring this space, with the United States, Japan, the United Kingdom, Russia, Sweden, the Bahamas, France, the Philippines, Turkey, and Switzerland all looking to design their own digital currencies in the near to medium term. The Bank for International Settlements reports that more than 80% of central banks surveyed are engaged in research, experimentation, or development of CBDCs. This is because these novel digital products could make everyday payments and monetary transactions smoother, and the cost of international transfers significantly lower.

CBDCs and NFTs can help solve similar problems

One simple reason why NFTs have been able to garner so much mainstream attention in recent weeks is that they can be used to facilitate nearly any type of private transaction involving digital files and/or digital rights in everything from art to music. Video. The “contactless” economy is currently thriving as a result of the COVID-19 crisis, and there is a growing push to digitize trade, which may highlight the role NFTs can play in streamlining global digital trade.

Given that global market participants can participate in the circulation of NFTs, NFTs have an advantage over CBDCs, which require different economies to adopt an "interoperability" framework; that is, the convertibility of CBDCs in different jurisdictions. In other words, we can say that by deploying NFTs, distributors and holders are essentially providing buyers with a "digital rights transfer contract." The advantage of this scheme is that it can be executed in a completely remote manner.

This is very similar to how CBDCs are designed, i.e. they can be explained as “goods in digital form”. However, a major difference is that CBDCs are used to conduct transactions at the retail level - like how we use cash to buy a cup of coffee - which is unfortunately not currently possible in the NFT space.

On the other hand, one of the most outstanding features of NFT trading is that it can be conducted digitally without the need for a trusted third-party intermediary, thanks in large part to its use of a blockchain ledger — where a detailed record of all transactions related to the NFT in question is properly recorded — allowing for a high degree of data transparency.

Are CBDC-NFT hybrids the next frontier?

The most innovative aspect of NFTs is the way they facilitate private arrangements between two parties. In this regard, while CBDCs are backed by fiat currencies issued by central banks, NFTs have no centralized settlement and/or clearing mechanism other than using a blockchain ledger as their core trust model.

It therefore stands to reason that almost all of the major advantages and risks of currency-based transactions would reside in NFTs, especially since most of the issues and benefits associated with CBDCs are directly related to publicly licensed forms of money. Finally, both the public nature of CBDCs and the private nature of NFTs are features that can be exploited and leveraged in the context of blockchain technology, perhaps in the form of a new hybrid product that takes the best of both worlds.

Therefore, in the future, a more explicit policy and regulatory framework may be needed to develop real-world CBDC-NFT hybrids that can benefit from the controlled nature of the former while providing certain security advantages offered by the latter.

Regulation is coming. What are the regulations in the United States that affect encryption?

Bitcoin ( BTC ) and other cryptocurrencies are novel inventions that, given their short history and unprecedented structure, do not fit neatly into financial regulatory frameworks.

Unfortunately, cryptocurrencies have also been used to conceal illegal activity. For example, the infamous Silk Road, a global online illegal drug bazaar, relied on Bitcoin as a medium of exchange between its buyers and sellers.

These factors have caused headaches for regulators around the world. But as traditional financial institutions enter the crypto space and digital assets become popular among consumers, U.S. regulators are scrambling to keep up.

Over the past few years, U.S. federal regulators have issued a series of policies regarding the treatment of cryptocurrency transactions, investment income, payment services and other activities involving digital assets.

The U.S. Securities and Exchange Commission (SEC) has said it considers cryptocurrencies to be securities and will apply existing securities laws to digital assets. This is important for retail investors because it means they are obliged to report realized gains and losses from crypto investments on their annual tax forms. Failure to do so will come under scrutiny from the IRS, which has vowed to crack down on crypto tax evaders.

In contrast, the Commodity Futures Trading Commission (CFTC) classifies Bitcoin and Ethereum as commodities. Cryptocurrency derivatives — most commonly Bitcoin futures — are legally traded on public exchanges regulated by the CFTC. Institutional investment in cryptocurrencies typically takes the form of buying and selling futures contracts, including by speculators and hedgers.

Cryptocurrency exchanges like Coinbase (COIN) are legal in the United States. They fall under the Bank Secrecy Act (BSA), a law that oversees the activities of financial institutions and payment transmitters. To stay compliant, cryptocurrency exchanges must implement anti-money laundering and know-your-customer programs. They also need to report relevant information to regulators and obtain a license from the Financial Crimes Enforcement Network, as well as a payment transmitter license in the states where they operate.

What does the Biden administration have to say about cryptocurrency regulations?

The Biden administration has taken a firmer stance on regulating the cryptocurrency sector than Trump officials.

SEC Chairman Gary Gensler said bad actors in the cryptocurrency space should be prepared for tougher enforcement under Biden; his agency will aggressively pursue enforcement actions; and Congress should consider a law to regulate cryptocurrency trading.

“There is no authority to register and make rules to protect the investing public,” Gensler said. “The investing public would benefit from more regulation.”

The Treasury Department recently released a tax plan that includes a section on crypto. The paper warned that authorities have failed to detect cryptocurrencies used to pay for illegal goods. It also said exchanges must report all crypto transactions with a fair market value of more than $10,000.

Treasury Secretary Janet Yellen has repeatedly said that U.S. authorities are failing to adequately regulate cryptocurrency companies.

New Acting Comptroller of the Currency Michael Hsu said his agency is reviewing guidance and directives issued by his predecessor, Brian Brooks. The crypto community praised Brooks, the former general counsel of Coinbase, for his crypto-friendly policies. These included authorizing banks to provide crypto custody services and granting banking licenses to crypto startups.