Non-Fungible Tokens ("NFTs") have attracted both enthusiasm and skepticism. It was at both ends of the spectrum, at one point at the pinnacle of digital assets, then it was the least transacted with.
In jurisdictions where digital assets could be used as crowd-funding and safely change hands as commodities, artists, musicians, and creators worldwide continue to embrace NFTs as dynamic means of establishing their digital footprint and reshaping the way we perceive and interact with art and digital assets.
As creators utilize the decentralized and borderless nature of NFTs, the market expands beyond traditional art forms, including music, painting, virtual real estate, merchandise and etc.
Are NFTs here to stay for the long term?
The long-term sustainability of NFTs depends on various factors, including technology, regulatory developments, and shifts in user preferences. However, several trends suggest that NFTs are likely to remain a significant part of the digital landscape for the foreseeable future. One of the most crucial factors in defining the resilience of NFTs will be their legal status.
This is not just a matter of regulatory compliance; it is about recognizing the unique features that set NFTs apart from their fungible counterparts. Increasingly, countries are warming up to the idea that NFTs cannot be placed in the same regulatory framework as fungible tokens.
Targeted Update on Implementation of the FATF Standards on Virtual Assets and Virtual Asset Service Providers ("FATF Report") of June 2023 highlights that the regulation of NFTs varies across jurisdictions, with some categorizing them under virtual assets definitions, while others treat them as works of art or collectibles. The FATF emphasizes the need for a functional approach, urging authorities to look beyond NFT marketing and assess whether the product or service qualifies as a virtual asset, virtual asset service provider, financial institution, or designated non-financial business or profession. Accordingly, NFTs may fall under the virtual asset definition if they are to be used for payment or investment purposes in practice.
European Union
Markets in Crypto Assets ("MiCA"), as a regulatory instrument, aims to create a comprehensive framework for crypto assets within the European Union. However, it excludes non-fungible tokens that are unique and distinguishable from other crypto assets. According to the regulation, such unique and non-fungible crypto assets fall outside the regulatory purview due to their distinct characteristics. While these tokens can be traded on the marketplace, their non-fungible nature limits their interchangeability. Consequently, this may hinder the extent to which those crypto assets can have a financial use, thereby mitigating risks to holders.
MiCA further clarifies that the exclusion of unique and non-fungible crypto assets from its scope does not shield them from other regulatory classifications. For instance, these assets could still be considered financial instruments, subject to specific regulations. Additionally, the regulation is designed to apply to crypto-assets that genuinely have unique and non-fungible characteristics, avoiding a mere designation-based classification.
The token's fungibility can be determined by considering several factors. ERC-721 is the most well-known standard for creating NFTs. It allows the creation of unique tokens on the blockchain. The uniqueness of its metadata and the stored file on the server is also distinctive. Additionally, the token must not be interchangeable with other NFTs in the collection to be accepted as non-fungible. The issuance in a large series or collection may be considered an indicator of fungibility.
By the end of 2024, the Commission is expected to present a report to the European Parliament and the Council on the latest developments concerning crypto assets on matters that are not addressed in the Regulation. The Commission's report will specifically examine the markets for unique and non-fungible crypto assets, considering the regulatory treatment needed for such assets. This assessment will extend to the potential regulation of entities offering unique and non-fungible crypto assets, as well as those providing services related to such assets.
United States
The United States Securities and Exchange Commission ("SEC") evaluates digital assets and NFTs in the same manner as traditional assets to determine whether they are securities. On Aug. 28, 2023, the SEC made its first NFT enforcement action and charged Impact Theory, LLC, with conducting an unregistered offering of crypto asset securities in the form of NFTs. On Sept. 13, 2023, Stoner Cats 2 LLC faced similar charges from the SEC for engaging in an unregistered offering of crypto asset securities through NFTs. Then, two SEC commissioners dissented and expressed concern over how NFTs fit into investment regulation. They stated that the SEC should lay out more clear guidelines for artists and other creators who want to experiment with NFTs to support their creative efforts and build their fan communities.
United Kingdom
The United Kingdom extended its financial promotions regime to include qualifying crypto assets. On 8 June 2023, the Financial Conduct Authority published a policy statement setting out the relevant rules. On this policy statement, the term "qualifying crypto asset" is defined as "any cryptographically secured digital representation of value or contractual rights that is transferable and fungible". Accordingly, NFTs are excluded from the amendment because they are more suited for use as digital collectibles than as financial investments.
From loyalty schemes to rewards, marketing, and the verification of authenticity, the applications of NFTs are expanding rapidly. Cross-chain NFT exchanges and cross-chain NFT transactions may further foster the ecosystem. As the popularity of NFTs has grown, legal frameworks are gradually catching up to regulate this market. This increased clarity contributes to the legitimacy of NFTs, attracting a wider audience and fostering a more stable market. As creators and investors continue to explore the potential of NFTs, legal frameworks will allow NFTs to address emerging challenges and ensure long-term sustainability.
Meanwhile, individuals and businesses should seek legal advice and stay informed in their respective jurisdictions to ensure compliance and mitigate legal risks. Since it seems that NFTs will continue to hold legal relevance, service providers must provide a protective ecosystem for users in today's evolving landscape.
Türkiye
Türkiye is on the brink of approving a new law that will regulate activities concerning crypto assets, bringing about significant changes. This upcoming legislation is expected to broaden its scope by incorporating the concept of crypto assets, specifically including NFTs, without imposing a distinct categorization. This means that NFTs are set to be integrated into the upcoming crypto law. However, the NFT assessment report of the Ministry of Culture and Tourism within the framework of intellectual rights states that it is necessary to acknowledge that NFTs have a separate place among other crypto assets.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
