To whom it may concern: Owl Explains appreciates the opportunity to comment on the Staff working paper under the Finance and Economics Discussion Series entitled 'Tokenization: Overview and Financial Stability Implications' ISSN 1967-2854; ISSN 2767-3898 (the Tokenization Paper'). Owl Explains is a project led by the legal team at Ava Labs, Inc. that aims to support workable regulation of blockchain and cryptoassets (also called 'tokens') through a set of guiding principles known as the Tree of Web3 Wisdom — and a system for determining the legal and regulatory treatment of cryptoassets according to their true nature (functions and features) known as the sensible token classification system. More information about the initiative appears at the end of this letter. The Tokenization Paper is an important step towards a fuller understanding of the possibilities associated with blockchains and tokenization of assets. Most importantly from our perspective, the Tokenization Paper clearly recognizes that tokenized assets can be categorized in various ways: off-chain vs. on-chain, tangible vs. intangible, etc. Off-chain reference assets can be physical (e.g. real estate and commodities) or intangible (e.g. intellectual property rights and traditional financial securities like stocks and bonds) and exist outside of the crypto-asset ecosystem. Tokenizations with physical/off-chain reference assets generally involve an off-chain agent, such as a bank, to assess the value of the reference asset and provide custodial services. Tokenizations that reference other on-chain crypto-assets can incorporate smart contracts to provide custody and valuation assessments. (footnotes omitted) This concept of tokenization is a core benefit of blockchain technology that has gone largely unrecognized until very recently. The Tokenization Paper focuses on one aspect of tokenization by defining it somewhat narrowly to include only 'process of linking reference assets to crypto tokens via design features that link the token’s price to the value of the token’s reference asset.' We encourage the authors, and indeed everyone, to think of tokenization more expansively, in accordance with its true potential. We make the following points to describe tokenization: Cryptoassets (tokens) are not all the same. They are not a homogenous asset class. This is true because tokens are digital representations of assets, items, and things and therefore can represent anything. Accordingly, tokens cannot be treated all the same under law and regulation, and many types of tokens are not financial instruments. Many tokens represent assets, items, or things that are already regulated so do not require new regulation. Many other tokens represent items that are not regulated in the non-blockchain world because they do not require it and so should not be regulated simply because they are tokenized on a blockchain. In just the last year, we have made these points in response to reports or guidance from the Internal Revenue Service (here and here), the Financial Accounting Standards Board (here and here), the Government Accounting Office (here), the International Organization of Securities Commissions (here), and joint work by International Monetary Fund and Financial Stability Board (here). Commissioner Mersinger of the Commodity Futures Trading Commission ('CFTC') is a fan of sensible token classification, which makes sense because the CFTC was one of the earliest regulators to recognize it in LabCFTC’s Digital Asset Primer. We also made these points in response to a recent report from the National Institute of Standards and Technology, which, although it focused on nonfungible tokens, made the following statement that applies to fungible tokens as well: '[NFT] technology provides a mechanism to enable real assets (both virtual and physical) to be sold and exchanged on a blockchain. It does this by creating a unique blockchain token to represent each asset.' This core insight, we believe, is too often overlooked by policymakers and regulators around the globe. We call this insight 'sensible token classification,' which we discuss in more detail below. We applaud NIST for being at the forefront of understanding the technology. Here is more of how we articulate these points: Blockchain is a new technology, but in essence it is simply a new kind of database or filing cabinet. When it comes to law and regulation, treating all cryptoassets the same simply because they are tokenized representations recorded on a blockchain makes as little sense as treating a sketch, an ID card, a receipt or a share certificate all the same because they are printed on paper and filed in the same filing cabinet. Instead, policymakers and regulators should treat each token according to what it actually represents - just as they do with things written on paper. By looking at a cryptoasset’s functions and features, we can determine its utilization, valuation, and classification (including for legal/regulatory purposes). Using the paper analogy, consider a paper deed of title to a home. It is the evidence of ownership of the asset, so it represents the bundle of rights that is ownership of the home. The Tokenization Paper would easily accommodate the idea of replacing the paper title with a token under its 'off-chain' asset analysis. Now consider the paper tickets to the Taylor Swift concert, which give the right to attend the concert and sit in the assigned seats. That is the bundle of rights received from owning the paper tickets. The Tokenization Paper should acknowledge that replacing the paper tickets with a token would be an easy substitute and obviate the need for a “reference asset” because the token embodies the bundle of rights. A final example specific to financial instruments: shares of stock used to be represented with paper certificates. Holding a paper share certificate denominating ownership of 100 shares of Corporation X is possession of the bundle of rights associated with that stock. Again, the Tokenization Paper should recognize that replacing the paper stock certificate with a token would be an easy substitute and one without need of a reference asset. Bitcoin, ether, avax and other similar native DLT tokens (see below) also represent bundles of rights; in this case rights to use and otherwise participate in a blockchain network. Sure you could do it with paper, but blockchain obviates the need through tokenization of the bundle of rights and making it usable directly on the blockchain. The good news is that the majority of tokens represent things that already existed before blockchain (land, concert tickets, stock, etc.) and can be treated as legal or illegal, regulated or unregulated just as they always have been. Policymakers should simply scrutinize what the token actually represents - its features, functions and risk profile - and apply existing laws and regulations - or not - accordingly. This way regulation stays consistent across different technologies - same asset, equals same risk, which results in the same legal and regulatory treatment. We believe the Tokenization Paper agrees with this point. The Owl Explains sensible token classification system breaks tokens down into the following five high level categories that represent the vast majority of use cases today and into the future: Physical asset tokens:   Any digital representation of a tangible (real-world) asset created and maintained on a blockchain (also known as 'DLT' for distributed ledger technology). This category is very broad and could be divided into smaller categories based on the particular type of tangible asset (e.g., gold coin physical asset tokens, Air Jordan physical asset tokens, cup of coffee physical asset tokens versus coffee cup physical tokens, etc.). Services tokens (includes music, digital art);   Any digital representation of services to be provided by one or more persons/entities to other person(s)/entities. This category also includes music and purely digital art files (the intellectual property underlying the music or digital art file may be an intangible asset token, discussed next, if not transferred with the file). This category is also quite broad because it includes any type of services and digital art/music such that it is susceptible to sub-categorization (e.g., cleaning services tokens, personal performance tokens versus concert ticket tokens, legal services tokens, etc.). Intangible asset tokens:   Any traditional intangible (non-physical) asset. Another broad category susceptible to sub-categories based on the asset class (bond tokens [security tokens], intellectual property rights tokens, government program tokens, loyalty points program tokens, etc.). Native DLT tokens:   A narrow category of truly DLT-native tokens (e.g., Bitcoin, Ether, AVAX, etc.). Might be a subset of intangible asset tokens in the sense that these tokens are just a bundle of rights with no physical item involved, although some may have an element of services (e.g., when the token is used for resource allocation on the network). The classification system treats native DLT tokens as not a subset of intangible asset tokens because the latter must be something that exists (or can exist) distinct from the blockchain that creates and maintains it. Native DLT tokens have no existence or purpose without the associated blockchain. This paper by Professor Carla Reyes is instructive. Stablecoins:   A narrow category of tokens that do not fall within any other category and are designed to maintain stable value against some underlying, reference or linked asset or pool/basket of assets. Usually applied to fiat currencies. This category should not be broadened to swallow all the other categories. We understand that the bundle of rights will differ depending on how the tokenization is implemented, such that, contrary to the tickets, stock and native DLT token example above, in some instances there is a reference asset. Indeed, it might be the case that no ownership over the reference asset is given in the bundle of rights. One way to conceptualize this point is that a person might say that they “bought a token” thinking that they bought an asset. That may or may not be true, depending on the token because the token may or may not convey to the purchaser any legal rights over the assets, even though it has given the buyer some bundle of rights. Accordingly, it is always important to understand the bundle of rights that has been tokenized. About Owl Explains Owl Explains is a project created by the Legal team at Ava Labs with the goal of becoming a trusted educational resource for policymakers, regulators, and other parties interested in learning about blockchain technology, cryptoassets, and Web3. Owl Explains develops content delivered by leading industry experts, including podcasts, explainers, articles, and quizzes, focusing on understanding the technology and the full breadth of its use cases, distinguishing where those use cases fit within existing regulatory frameworks, as well as defining principles for regulation based on the nature of the asset and activity. Innovation is the soil from which we can create a better Internet. Blockchain is its root system: decentralized, transparent, secure, and traceable. We believe that workable regulation in conjunction with innovation and invention is the best way to guide the transformative power of Web3 to empower individuals and businesses, drive economic inclusion, and benefit the planet. As such, the Owl has developed the Tree of Web3 Wisdom, a set of principles to help guide blockchain and crypto regulation worldwide. Conclusion We urge all policymakers and regulators to read the Tokenization Paper and adopt the principles of the sensible token classification system as part of their work on crypto and digital assets. Treating all tokens the same, particularly as more and more traditional assets are tokenized, is not workable because it is neither technology neutral nor efficient. We would be happy to discuss further. Lee A. Schneider General Counsel Ava Labs, Inc.

To whom it may concern: Owl Explains appreciates the opportunity to comment on the recent paper entitled “IMF-FSB Synthesis Paper: Policies for Crypto-Assets” (the “Joint Paper”). The Joint Paper brings together in one place work that both organizations have undertaken regarding crypto-assets, including findings from IMF work on macroeconomic and monetary issues and FSB work on financial stability. Owl Explains is a project led by the legal team at Ava Labs, Inc. that aims to support workable regulation of blockchain and crypto-assets (also called “tokens”) through a set of guiding principles known as the Tree of Web3 Wisdom— and a system for determining the legal and regulatory treatment of crypto-assets according to their true nature (functions and features) known as the sensible token classification system. More information about the initiative appears at the end of this letter. The Joint Paper’s stated goal was to combine recommendations concerning macroeconomic and monetary issues and recommendations related to financial stability into a single, comprehensive set of policy considerations. The paper outlines key regulatory challenges and highlights the need for “[a] comprehensive policy and regulatory response for crypto-assets . . ..” We agree with the overall theme of implementing workable regulations that focus on the areas of macroeconomic and monetary policy and financial stability. We also applaud the goals of market integrity and investor protection through global coordination, as reflected in our article here. We believe, however, that the Joint Paper and its associated recommendations would benefit from greater acknowledgement of and discussion about the following core points about blockchain and tokenization: Crypto-assets (tokens) are not all the same. They are not a homogenous asset class. This is true because tokens are digital representations of assets, items and things and therefore can represent anything. Accordingly, tokens cannot all be treated the same under law and regulation, or for macroprudential and financial stability purposes. Many tokens represent assets, items or things that are already subject to the standards and recommendations of the Joint Paper, and are regulated accordingly. Many other tokens represent items that are not regulated in the non-blockchain world because they do not require it and so should not be regulated simply because they are tokenized on a blockchain. Accordingly, broad definitions of crypto-assets such as the one in the Joint Paper may result in more confusion than clarity. Blockchain is a new technology, but in essence it is simply a new kind of database or filing cabinet. When it comes to law and regulation, treating all crypto-assets the same simply because they are tokenized representations recorded on a blockchain makes as little sense as treating a sketch, an ID card, a receipt or a share certificate all the same because they are printed on paper and filed in the same filing cabinet. Instead, policymakers and regulators should treat each token according to what it actually represents - just as they do with things written on paper. By looking at a crypto-assets functions and features, we can determine its utilization, valuation, and classification (including for legal/regulatory purposes). The good news is that the majority of tokens represent things that already existed before blockchain and can be treated as legal or illegal, regulated or unregulated just as they always have been. Policymakers should simply scrutinize what the token actually represents - its features, functions and risk profile - and apply existing laws and regulations - or not - accordingly. This way regulation stays consistent across different technologies - same asset, equals same risk, which results in the same legal and regulatory treatment. The same is true in the context of macreconomic, monetary, or financial stability policy. The Owl Explains sensible token classification system breaks tokens down into the following five high level categories that represent the vast majority of use cases today and into the future: Physical asset tokens:   Any digital representation of a tangible (real-world) asset created and maintained on a blockchain (also known as “DLT” for distributed ledger technology). This category is very broad and could be divided into smaller categories based on the particular type of tangible asset (e.g., gold coin physical asset tokens, Air Jordan physical asset tokens, cup of coffee physical asset tokens versus coffee cup physical tokens, etc.). Services tokens (includes music, digital art);   Any digital representation of services to be provided by one or more persons/entities to other person(s)/entities. This category also includes music and purely digital art files (the intellectual property underlying the music or digital art file may be an intangible asset token, discussed next, if not transferred with the file). This category is also quite broad because it includes any type of services and digital art/music such that it is susceptible to sub-categorization (e.g., cleaning services tokens, personal performance tokens versus concert ticket tokens, legal services tokens, etc.). Intangible asset tokens:   Any traditional intangible (non-physical) asset. Another broad category susceptible to sub-categories based on the asset class (bond tokens [security tokens], intellectual property rights tokens, government program tokens, loyalty points program tokens, etc.). Native DLT tokens:   A narrow category of truly DLT-native tokens (e.g., Bitcoin, Ether, AVAX, etc.). Might be a subset of intangible asset tokens in the sense that these tokens are just a bundle of rights with no physical item involved, although some may have an element of services (e.g., when the token is used for resource allocation on the network). The classification system treats native DLT tokens as not a subset of intangible asset tokens because the latter must be something that exists (or can exist) distinct from the blockchain that creates and maintains it. Native DLT tokens have no existence or purpose without the associated blockchain. This paper by Professor Carla Reyes is instructive. Stablecoins:   A narrow category of tokens that do not fall within any other category and are designed to maintain stable value against some underlying, reference or linked asset or pool/basket of assets. Usually applied to fiat currencies. This category should not be broadened to swallow all the other categories. Classifying tokens according to this system will be a crucial first step in the implementation of IMF-FSB’s recommendations because it will make clear when assets and activities provide true cause of concern from the standpoint of macroeconomic, monetary, or financial stability policy. We therefore encourage IMF-FSB and all policymakers and regulators to start their activities with reference to the fundamental principles in the sensible token classification system and use its broad categories to orient their efforts. About Owl Explains Owl Explains is a project created by the Legal team at Ava Labs with the goal of becoming a trusted educational resource for policymakers, regulators, and other parties interested in learning about blockchain technology, cryptoassets, and Web3. Owl Explains develops content delivered by leading industry experts, including podcasts, explainers, articles, and quizzes, focusing on understanding the technology and the full breadth of its use cases, distinguishing where those use cases fit within existing regulatory frameworks, as well as defining principles for regulation based on the nature of the asset and activity. Innovation is the soil from which we can create a better Internet. Blockchain is its root system: decentralized, transparent, secure, and traceable. We believe that workable regulation in conjunction with innovation and invention is the best way to guide the transformative power of Web3 to empower individuals and businesses, drive economic inclusion, and benefit the planet. As such, the Owl has developed the Tree of Web3 Wisdom, a set of principles to help guide blockchain and crypto regulation worldwide. Conclusion We urge IMF-FSB to adopt the principles of the sensible token classification system as part of its work on crypto and digital assets. Treating all tokens the same, particularly as more and more traditional assets are tokenized, is not workable because it is neither technology neutral nor efficient. We would be happy to discuss further. Lee A. Schneider General Counsel Ava Labs, Inc.

Re: IRS Notice 2023-27 To whom it may concern: On March 21, 2023, the Treasury Department and the Internal Revenue Service ('IRS') published Notice 2023-27 (the 'Notice'), which states that the Treasury Department and the IRS intend to issue guidance relating to the treatment of certain nonfungible tokens ('NFTs') as collectibles under section 408(m) of the Internal Revenue Code (the 'Code'). The Notice requests comments on this and other issues related to NFTs, which Ava Labs, Inc. respectfully provides below. In summary, we make three general comments regarding the Notice. First, we suggest two simple modifications to the definition of 'NFT' to reflect the inherent nature of an NFT as a tokenized representation of another right or asset that certifies ownership. Second, we applaud the Treasury Department and the IRS for applying a look-through analysis in determining whether an NFT is a section 408(m) collectible, and provide further examples illustrating the application of the look-through approach. And third, we recommend that, consistent with the look-through approach, an overall framework of technology neutrality should apply to matters relating to NFTs and blockchain technology in general, including revenue recognition associated with transactions that utilize them. Background NFTs utilize blockchain technology for various use cases, including, as relevant here, to establish and verify ownership of particular assets. In this usage, an NFT is a unique digital identifier that relates to an underlying asset. Through this unique digital identifier, the ownership of an NFT is recorded on a public ledger (i.e., a blockchain), that is secured using cryptography and other techniques. Transfers of an NFT are thereby recorded on a blockchain when an NFT is sold, traded, or exchanged. There are numerous use cases for NFTs. For example, an NFT can establish provenance over digital art, or assets within a video game universe (such as a weapon, a treasure chest, or a plot of land within a virtual environment). An NFT might reflect ownership of a tangible asset (an NFT that represents ownership of a painting, or a particular automobile). It could represent ownership of IP – such as a musical work. An NFT might reflect a right to a particular service, such as a seat at a concert, or a right to fly on an airplane. Or it could simply act as a digital form of identification. These are but some of the ways that NFTs can be used, highlighting the impossibility of a one-size-fits-all rule for the taxation of NFTs 1. The Oxford English Dictionary defines 'token' as 'Something that serves to indicate a fact, event, object, feeling, etc.; a sign, a symbol.' 2 This usage has been in place for over a millennium. This common and longstanding usage also applies in the context of blockchain technology, where a token is an indication or representation of something else. Sometimes, as the Service has indicated in Notice 2014-21, a token can serve simply as a digital representation of value, i.e., as a virtual currency. However, the modifier 'nonfungible' excludes virtual currencies from NFTs. Rather, to constitute a nonfungible token (that is, an NFT), the token must be an indication of something (generally a unique right or asset) that is more than just value or the equivalent of cash. Accordingly, we respectfully suggest modification to the Notice’s definition of NFT that we believe more accurately captures the nature of an NFT. The Notice’s definition of NFT is 'a unique digital identifier that is recorded using distributed ledger technology and may be used to certify authenticity and ownership of an associated right or asset.' We do not think that 'a unique digital identifier' sufficiently distinguishes NFTs from other types of tokens. A token that serves as a digital representation of value (like bitcoin or ether), could have a unique digital identifier. Similarly, dollar bills (and U.S. currency of other denominations) contain unique identifiers in the form of serial numbers, but are nevertheless fungible. Therefore, we would encourage Treasury Department and the IRS to clarify that the definition of 'NFT' excludes virtual currencies – that is, tokens that are a representation of value in and of themselves – and not digital representations of other distinct assets. 3 We believe that this can be accomplished if the definition of NFT states that an NFT does (rather than 'may be used to') certify ownership of an associated right or asset. What makes a token an NFT is that it is an indication of ownership of a distinct right or asset because it is digitally unique. The look-through approach set forth in the Notice (with which we agree) is based on this premise. Further, we do not believe that an NFT inherently is a marker of authenticity, and therefore we would recommend that the proposed definition of NFT remove the reference to authenticity. A recognized authority may provide a certification that an item is authentic—for example a respected baseball card dealer authenticating a signed baseball card. But that authentication derives from the actions and the authority of a third party rather than from the item itself. The item’s authenticity could not be sold separately and it does not itself express any ownership rights. Indeed, to the extent an NFT functions to merely tokenize the fact that an asset has been authenticated (whether by a community or by a third party), as opposed to certifying ownership of said asset, the existence of such a purely authenticating NFT should not have any tax implications. In summary therefore, we believe that two simple modifications to the definition of NFT, as follows, would result in a more appropriate delineation of the scope of NFTs for purposes of the proposed guidance: a unique digital identifier that is recorded using distributed ledger technology and may be is used to certify authenticity and ownership of an associated right or asset. We note that this definition of 'NFT' could apply to certain types of tokens that perhaps could be characterized as fungible, but this should not raise concerns. Consider a tokenization of an interest in an artwork, where ten tokens are issued, each reflecting a one-tenth interest in the artwork. Or consider a tokenized ticket to a general admission concert (that lacked assigned seating). Even if these tokens did contain a unique digital identifier—it would still be reasonable to characterize, say, artwork token 2 of 10, or concert token 4 of 100, as fungible. Nevertheless, because the token certifies ownership of an associated right or asset, it should be properly characterized as an 'NFT,' despite its fungible nature. We also note that this definition (as modified by our suggestions) is intended to address a limited question: how collectibles are treated under section 408(m) of the Code (and other sections, like section 1 of the Code, that expressly cross-reference section 408(m). Although (as we discuss more thoroughly below) we believe that a principle of technology neutrality should underlie the tax treatment of NFTs in all questions involving the taxation of NFTs, this exact definition may not necessarily be appropriate for defining 'NFT' in other tax contexts. Accordingly, we would encourage any guidance to expressly limit the application of this definition to section 408(m) of the Code. Collectibles Guidance We applaud the Notice’s application of a look-through approach in the context of section 408(m). While an NFT, in and of itself, does not meet any of the enumerated categories of a collectible under section 408(m)(2), we do not believe that it would be sensible to per se exclude NFTs from categorization as collectibles. It would be too easy for a person to circumvent classification of an asset as a collectible by simply tokenizing the asset. Therefore, we agree with the Notice’s requirement that taxpayers look through to the underlying asset the ownership of which the NFT represents to determine whether it falls under the definition of collectible under section 408(m). Per the Notice, an NFT that certifies ownership of a gem is a collectible (as the underlying asset – the gem – is a collectible pursuant to section 408(m)(2)(C)). Likewise, an NFT that represents a plot of land in the metaverse is not a collectible (as the underlying asset – the plot of land in the metaverse – is not a collectible). In fact, we believe that this is the only application of section 408(m) of the Code that is consistent with the statutory text. The items listed in section 408(m)(2)(A) through (E) are all items of tangible personal property, and section 408(m)(2)(F), authorizes Treasury to categorize 'any other tangible personal property' as a collectible (emphasis added). Indeed, to our knowledge the definition of 'collectible' in 408(m)(2) has never been applied to intangible property. Therefore, land in the metaverse cannot be a collectible under the statute, and accordingly neither can an NFT that represents ownership of this asset be a collectible. Other types of intellectual property, such as poems, or musical compositions, or digital artwork also cannot be collectibles under the statute, and therefore neither can NFTs that represent such rights or assets be collectibles. (Although we note that tangible manifestations of such items, such as a Shakespeare First Folio, or a Beethoven manuscript, or a physical representation of digital art, likely would be collectibles, and that the classification of NFTs representing such assets should follow from the classification of the underlying asset.) We also note that section 1(h) of the Code (which deals with tax rates as applied to collectibles) already applies a similar look through rule to partnerships. Specifically, section 1(h)(5) provides that “any gain from the sale of an interest in a partnership, S corporation, or trust which is attributable to unrealized appreciation in the value of collectibles shall be treated as gain from the sale or exchange of a collectible.” Therefore, the Notice is consistent with extant statutory authority on this issue. Technology Neutrality and Existing Tax Law We applaud that the Notice's look-through approach embraces the more general principle of technology neutrality. We believe that existing law should presumptively control the taxation of transactions that utilize blockchain technology. The mere fact that an asset or a transaction in respect of such asset (e.g., the exchange of a concert ticket, or the sale of a car) is tokenized and represented by an NFT should not alter the tax treatment of the transaction. The Code already tells us how to treat these transactions, and a century of tax law has been developed to fairly apply principles of taxation to these fundamental economic relationships. As a commentator has noted in this regard: There is no change in the essential character of most assets simply because they are tokenised. New legal and/or regulatory regimes are needed only where we do not have well-defined legal and regulatory regimes for an asset and where a risk/policy assessment calls for one. 4 The federal tax law has long embraced the principle of technology neutrality. For example, the same tax treatment applies to the sale of a share of stock regardless of whether the share was issued by and recorded in a centralized database or issued through an old-school stock certificate. (The tax law might provide for different methods of identifying shares issued electronically compared to shares issued physically for purposes of determining basis and holding period, but this does not affect the basic tax principles governing the sale of stock.) Similarly, the change in form of a title of a work of art, from paper to a digital record, should not alter the tax treatment of a sale, exchange, or bequest of that work of art. We thus encourage the Treasury Department and the IRS to specifically embrace this policy principle in its guidance, so that as new questions on the taxation of NFTs emerge, taxpayers will be encouraged to apply the law impartially. Under a principle of technology neutrality, the tax law should neither favor nor disfavor taxpayers because they utilize blockchain technology to tokenize their holdings. We appreciate your consideration of these comments.