Why not donate dead NFT wallets?

It’s every NFT collector’s nightmare. In April 2021, Web3 impresario Farokh Samad lost the seed set of a wallet containing 87 non-fungible tokens, including a particularly rare Bored Ape Yacht Club NFT. At the time, the total value of the collection was around 250 ETH or $850,000, but it might as well have been nothing. Without the seed phrase, Samad did not have access to the wallet, so he could not sell his NFTs.

Samad is not alone. Many NFT collectors have created wallets to buy NFTs and then lost the seed phrase, especially in the early days of the NFT market when no one realized it would take off. For example, one anonymous wallet contains 141 CryptoPunks NFTs. The owner of the wallet bought the tokens in 2017 for about $7 each, and today the collection is worth more than $100 million. But the wallet hasn’t been used since 2017, and everyone suspects the owner has forgotten the seed phrase. Oops.

Brian Frye is a law professor at the University of Kentucky and a conceptual artist who works with NFTs.

Losing your seed phrase is the worst thing that can happen to an NFT collector. If a hacker steals your NFTs, there is at least a chance to get them back. But if you lose your seed phrase, you still own your NFTs, you just can’t sell them. And an NFT you cannot sell is effectively worthless.

Or is it? Maybe there is a solution.

For better or worse, it was inevitable that art museums began collecting NFTs. And many of them have. On February 13, the Los Angeles County Museum of Art announced a donation of 22 NFTs worth millions of dollars from a pseudonymous NFT collector Cozomo de’ Medici. And on February 10Le Center Pompidou announced the acquisition of 18 NFTs by 13 artists.

Only later did NFT become an artist David Lisser observe that some of the NFTs acquired by Pompidou had not moved wallets.

Did Pompidou actually acquire the NFTs if they are not in a Pompidou owned wallet? Sure, why not. Museums do not need physical custody of a work of art to own it any more than a collector does, and many collectors buy and sell works of art that never leave a freeport warehouse. The same applies to NFTs. The Pompidou’s owned the NFTs as soon as they were donated. Transferring them to a Pompidou-owned wallet is just a formality.

There is more. Perhaps it is wise for museums not to keep their NFTs in museum-owned wallets. After all, NFT theft is rife, and museums are ripe targets. They are new to the NFT market and vulnerable to the kinds of tricks that veteran NFT collectors have learned to avoid. Why not let NFT collectors hold donated NFTs in trust for museums, at least until the museums have developed the expertise to properly safeguard them?

This is where it gets interesting. If museums can acquire NFTs without transferring them to museum-owned wallets, why can’t they acquire NFTs in dead wallets? When you lose the seed phrase of an NFT wallet, you cannot transfer the NFT to another wallet, but you still own the NFT.

Of course, the NFT market does not value non-transferable NFTs in dead wallets, which are de facto “soul-bound” tokens, by virtue of their owner’s forgetfulness. But museums can. In fact, they can be perfect for museums.

Whatever. Let’s take resignation rules seriously, even if they don’t deserve it. If museums aren’t supposed to sell art, because they just hold it in “public trust,” how do we stop them? I recently suggested that museums send their NFTs to a “burn” address, to prevent resignation by making them truly part of the museum’s “permanent collection.” But obtaining dead wallets containing important NFTs accomplishes exactly the same thing.

Think of the benefits! Collectors will be happy to donate dead NFT wallets to museums. Museums do not need to do anything to become a member of or preserve the NFTs. The blockchain is forever, and the transfer consists of nothing more than the collector saying, “I give you this wallet.” Disconnection is impossible. And even better, it’s also a steal! Dead wallets will be the only asset museums don’t even need to insure.

Of course, there are still some questions. The most important thing is whether the unfortunate collectors who own dead wallets will benefit from the gift. At least they’ll have the satisfaction of knowing their NFTs belong in a museum. And maybe they can even take a tax deduction for the donation!

I suspect that the Internal Revenue Service (IRS) will resist deductions for donations of dead wallets because the owner cannot actually sell them. But its own decisions say otherwise. When New York art dealer Ileana Sonnabend died in 2007, her children inherited, among many other things, a Robert Rauschenberg combine titled “Canyon.” Unfortunately, Canyon has a stuffed bald eagle, and federal law makes it illegal to sell bald eagles. Consequently, Sonnabend’s children could not legally sell the Canyon, so Christie’s valued it at $0.

So the tax authorities say that a work of art has taxable value even if it cannot be sold. Presumably, an NFT in a dead wallet also has a taxable value. If so, there’s no obvious reason why the owner can’t donate it to a museum, just like Sonnabend’s. Sure, they won’t get the full value of the NFT. But something is better than nothing. And it would be a great way for the art museums to build an affordable, unstealable, impossible-to-relinquish collection of important NFTs. Talk about win-win!