24 octobre 2022
By hitting a record trading volume of nearly $17.6 billion in 2021, the new type of crypto-assets, the so called non-fungible tokens (NFTs), are one of the latest advancements in the rapidly evolving crypto-industry that attracted huge public attention. Unlike traditional fungible crypto-assets, such as crypto-currencies BitCoin and Ether, NFTs are unique tokens, with unique metadata and identification codes, that cannot be exchanged or traded at equivalency. Due to their uniqueness and non-fungibility, one after another the use cases that are based on the successful deployment of NFTs started drawing public’s attention across various industries including the gaming, art, music as well as the financial services industry.
In different parts of the world, the financial regulators have been approaching the question of whether and how NFTs shall be regulated in different ways. In the US, where there is still no designated regulatory framework on crypto-assets at the federal level, the Securities and Exchange Commission has launched an investigation against Yuga Labs over potential securities law violations related to the sale of the famous NFT collection called Bored Apes Yacht Club. On the other side of the Atlantic, the UK government is currently working on a new regulatory framework on financial promotions that should also apply to certain „qualifying cryptoassets”, the group of crypto-assets that (at least for the time being) NFTs are not intended to be a part of.
With different jurisdictions taking different paths in terms of regulatory classification of NFTs, the question can be raised: where the EU is currently standing, and more importantly, where it is heading when it comes to this topic?
Despite being one of the wealthiest single markets in the world with a population of nearly 450 million, the EU is lacking a harmonized regulatory framework on crypto-assets. In this absence of a common approach at the EU level, individual Member States have been trying to find their own ways how to regulate this evolving industry.
Whereas some Member States were keen to create designated regulatory frameworks on crypto-assets that would apply until a common solution at the EU level is developed, some have decided to take a “wait and see approach” by assessing the nature of individual crypto-assets only in accordance with the existing rules under securities trading and payment services regulations. For instance, in Ireland there is still no designated regulatory framework on crypto-assets that goes beyond already harmonized rules on prevention of money laundering and countering the terrorist financing based on the 5th EU AML Directive, which apply to virtual asset service providers. Instead, the Central Bank of Ireland assesses in each individual case whether a particular crypto-asset constitutes a regulated financial instrument under the applicable national rules on securities trading or a regulated payment instrument or e-money under applicable national rules that implement EU Directives (e.g. MiFID II, PSD2, EMD). That being said, no difference is being made between the standard crypto-assets and NFTs for this matter. The same administrative practice is being applied by other financial supervisory authorities in the majority of the EU Member States that have decided not to develop own national framework on crypto-assets.
On the other side, back in 2020 Germany has developed its own framework on crypto-assets by expanding the scope of the definition of financial instruments under the German Banking Act that now also covers certain types of crypto-assets (Kryptowerten). The German Banking Act (Kreditwesengesetz) defines regulated crypto-assets quite broadly as “a digital representation of value which has neither been issued nor guaranteed by a central bank or public body, it does not have the legal status of currency or money but, on the basis of an agreement or actual practice, is accepted by natural or legal persons as a means of exchange or payment or serves investment purposes it can be transferred, stored and traded by electronic means”.
Neither the above-mentioned definition nor the administrative practice of the German financial supervisory authority (BaFin) in this area, do not emphasize fungibility as a key component that a crypto-asset must have in order to fall under the scope of the national regime. Whereas it may be quite hard to imagine an NFT to be accepted as a medium of exchange or used for payment purposes (lack of fungibility makes use of NFTs for these purposes practically impossible), there is a good number of examples of NFTs that are being acquired on the market with the sole purpose to serve as an investment asset to their holders (including NFTs from the Bored Ape Yacht Club collection and the CryptoPunks).
That being said, whether an NFT constitutes a regulated crypto-asset under German law is a question that requires analysis on a case by case basis based on the main characteristics of the NFT in question.
With the aim of bridging existing divergences in national rules on regulation of crypto-assets, as part of its Digital Finance Package published in September 2020, the EU Commission has proposed new Regulation on Markets in Crypto-Assets (MiCA) that is intended to create a harmonized set of rules applicable to issuers of crypto-assets and crypto-asset service providers operating in the EU.
Whether NFTs will be regulated under MiCA was intensively discussed topic in the crypto-industry and policy-making circles in recent months. The final draft of the new Regulation which was published on 5th of October 2022 provides a bit more clarity on this. From the latest draft, that is still to be adopted by the EU Parliament and the Council, it is clear now that unique and not fungible tokens are clearly left outside the scope of the new regime.
However, with the aim of preventing easy circumvention of application of the new rules, EU lawmakers have clearly pointed out that the sole attribution of a unique identifier to a crypto-asset is not sufficient to classify a token as a unique or not fungible. Therefore, the issuance of crypto-assets as NFTs in a large series or collection will be considered as an indicator of their fungibility and such tokens would be deemed as regulated crypto-assets under MiCA. The same goes for the issuance of fractional parts of an NFT which under the new regime will not be considered as unique and not-fungible. Against this backdrop, it is clear that the new rules under MiCA will not apply to “true” NFTs that based on their main characteristics are indeed intended to function as non-fungible and unique assets.
The EU lawmakers seem to have taken quite logical approach given that such crypto-assets generally do not pose the same level of risk for potential investors like fungible and standardized crypto-assets that can be used as a payment instrument, e-money or regulated financial instruments (like bonds, derivatives, shares).