Press Room

19 Apr 2023

Why The Royal Mint Failed To Launch An NFT – Dion Seymour


Crypto Tax & Accounting Technical Director, Dion Seymour, discusses the UK Government’s decision to shelve the Royal Mint NFT, in Law360.

Dion’s article was published in Law360, 19 April 2023.

It recently came to light, in response to a question in Parliament,[1] that “in consultation with HM Treasury, the Royal Mint is not proceeding with the launch of a nonfungible token at this time but will keep this proposal under review.”

From the public’s perspective, the U.K. Royal Mint’s NFT ended with a whimper rather than bang, and after 12 months appears to have been a waste, which could add further pressure in some quarters that this was a vanity project. So how and why did this project come to be put on hold?

Background

Last April, under the instruction of Rishi Sunak, then chancellor of the exchequer, the U.K. government announced a number of proposals relating to crypto-assets with the ambition of the U.K. becoming a leading crypto hub.

When the package of proposals was announced by the then economic secretary to the treasury, John Glen, one of the more eye-catching was the release of an NFT by the Royal Mint.

The release was intended to be during the summer of 2022, also coinciding with the Queen’s Jubilee. This announcement had followed the intense interest in NFTs in 2021, when ‘NFTs’ became word of the year.

Since the announcement, the NFT market and the wider crypto-asset sector have been going through a difficult period, called a crypto winter, with a number of high-profile failures such as FTX negatively influencing the market.

Initially, in February 2021, the chancellor of the exchequer was seeking a range of measures that would increase the U.K.’s crypto credentials. Government departments, led by HM Treasury, were requested to provide suggestions, or measures, for the government to consider for the package. These included several from HM Revenue & Customs, where I contributed to the measures on decentralized finance and changes to the self-assessment form.

At the time of the announcements there was little information provided about the NFTs and throughout 2022 that did not change. The only image released for the NFT is a singular image that is still on the Royal Mint website[2]. However, undoubtedly, there were discussions taking place between HM Treasury and the Royal Mint.

While many may think of an NFT only as an image, the reality is that the term NFT is an umbrella term, and it can cover a range of uses. For example, it may be an image, but it can also represent proof of purchase or authenticity, ownership of tangible property, or it may be documentation.

The utility of an NFT is worthy of an article in its own right. It is perhaps telling that when an NFT is created it is termed minting, which undoubtedly led to the view that the Royal Mint minting an NFT would be iconic. And, in all fairness, it did gain a lot of interest in the media and with other governments at the time.

However, perhaps the first clue to where it went wrong was the Royal Mint’s statement on its NFT website, saying that they “are delighted to once again lead the way for U.K. currency,” yet other than that one image there was no explanation as to how it would work, a crucial omission.

From the outset it has been unclear as to the purpose of the Royal Mint NFT. Was it to be as currency or as a collectible, or something else? We will look now at some of the issues that the Royal Mint and HM Treasury may have encountered.

First, as a currency, an NFT would not work. Money needs to be fungible to perform one of the fundamental functions as a means of exchange. Using an NFT for payment would be problematic as the valuation of the NFT would either have to have a set denomination or be at the whim of market value.

Promoting the NFT as a currency would also put the project into direct competition with any potential central bank digital currency and require significant infrastructure to support their use as such.

In this case, it is safe to say that despite comments by the Royal Mint, it would not have made sense to promote its function as money. Of course, that is not to say that collector’s editions, as often created by the Royal Mint, are not currency, as they can clearly be used as such. However, I would argue that is not their primary reason for creation.

If the second option was that they were to be a collectible, then, as in the world of NFTs, it would be expected that any value would be determined by market demand. This opens the question of how the NFTs would be sold to investors.

Currently, most NFTs are sold via the marketplace OpenSea,[3] where the Royal Mint could be a seller. If sold in this way, the value of the NFT would be influenced by the open market and would be speculative. This would be problematic, as they could fall in value, creating losses.

While some may consider this to be an acceptable risk, it is likely that media attention could be negative. This would be a particularly sensitive issue at the time of a cost of living crisis, coupled with the close link between the project and the prime minister.

The other option would be for the Royal Mint to create its own mechanism to sell and, possibly buy back, NFTs. This would provide security, but it would be a serious undertaking.

As a collectible, there would need to be more than one image available to collect, since even other collectibles such as stamps and coins use multiple images to stimulate demand. To be fair, many celebrities and companies, such as Porsche, have found that releasing NFTs does not lead to guaranteed success, and many fail.

Here, both the creation of a marketplace to provide security for investors, or the creation of more images to create interest would have increased delivery costs and the complexity of the project.

A potential motive for the creation of an NFT could have been increasing adoption of crypto-assets more generally. This would have been a concern and certainly would lend to the view that it was a vanity project. On the one hand this may have been seen as a boom for the crypto community.

However, without the necessary support for the project to be successful, the eventual collapse in value could have been portrayed in the media as yet another crypto failure.

From that perspective it could be argued that the failure to launch may in fact have been of benefit for the wider impression of crypto-assets. Without that clear objective it is unsurprising that the project has been shelved.

However, there is the matter of regulation that may have been the final nail in the coffin. In the wake of a number of high-profile crypto collapses, including apparent frauds such as FTX, there is, globally, increased attention on the regulatory response.

Currently, the main regulation for the crypto-asset sector to adhere to is the 5th Anti-Money Laundering Directive, which does not explicitly mention NFTs but does capture the issuance of crypto-assets if “by way of business.”

While there is an argument that anti-money laundering responsibilities are not under the purview of the Royal Mint, if it created its own platform there is a possibility that it may need to register with the U.K. Financial Conduct Authority, ensuring any cryptoassets received are not from dubious sources.

Other obligations that would exist would be making certain that the image for the Royal Mint NFT is not misappropriated and used for scams. Government departments already have a significant challenge ensuring that their names are not used by scam artists seeking to purport to be official government departments. How the NFT image could be protected effectively and not copied is a significant challenge.

Late last year the Department for Digital, Culture, Media & Sport launched an inquiry into NFTs and the blockchain,[4] where they note that “NFT regulation in the U.K. is largely nonexistent.”

It is telling that the inquiry states that it would consider whether NFT investors are at risk and may also look at wider benefits and if more regulation is needed. Releasing an NFT before the findings of the inquiry could be problematic if it finds that investment in NFTs should be discouraged.

If the government were seeking a way to increase crypto-asset adoption, then an approach that could have been taken was that taken in France. Led by the Banque de France, with a consortium of banks led by Euroclear,

[5] a project experimented with settlement of a central bank digital currency in a series of bond transactions using blockchain technology between the banks.[6]

The 10-month trial explored how central bank digital currencies could exchange and settle if they were turned into tokens. The conclusion was that the pilot was a success and provided an opportunity for the markets to reduce trade cycles.

In fairness, the impact of the pilot was limited, as it did not aim to increase mass adoption of crypto-assets, and it certainly did not gather many headlines. However, it provided meaningful insight into a wider application of blockchain technology, which then, in turn, lends toward applications that could be more beneficial.

We welcome the government’s goal for the U.K. to become a global crypto hub, however it should avoid adopting strategies merely because other jurisdictions are doing the same. The U.K. crypto industry remains willing and able to engage with the government to create more successful outcomes.

[1]https://www.theguardian.com/technology/2023/mar/28/uk-government-nft-royal-mint-rishisunak-cryptocurrencies.

[2]https://www.royalmint.com/innovation/nft.

[3]An American non-fungible token marketplace.

[4]https://committees.parliament.uk/work/7038/nonfungible-tokens-nfts-and-theblockchain/publications.

[5]https://www.euroclear.com/content/dam/euroclear/news%20&%20insights/Format/WhitepapersReports/settlement-french-government%20bonds-in-cbdc-with-blockchain.pdf.

[6]https://www.ft.com/content/23c2572a-29a2-4ef4-aa8a-27f8ad30ba09.

 

 


Dion Seymour

Dion is a Director with extensive experience in all aspects of the taxation of crypto assets. He was formerly the crypto asset policy and product owner at HMRC.

Email: Dion Seymour