NFTs have been developing within blockchain technology as early as 2014. However, they have only recently skyrocketed in popularity within digitally held assets. The massive increase in popularity can be attributed to many factors. Among others, celebrities, creators and athletes alike have invested in NFTs and explored how the technology can be used to further commercialize their brand or work.
Non-fungible tokens
Unlike other forms of blockchain technology such as Bitcoin, which are fungible, or fungible and inseparable, NFTs are “non-fungible” tokens. This means that they are unique and are used to identify a digital item as the original, or as part of a limited series of originals. These pieces of data code are located on blockchains and contain metadata that includes, among other things, an NFT’s unique ID and a brief description of the work related to the NFT. The record on the blockchain proves both the ownership and authenticity of each unique digital asset. A person who “exhibits” an NFT creates a unique digital version of the underlying digital asset. This can be anything from an image, video or other digital content, and can even include physical assets such as paintings and sculptures. Once minted, the digital asset is listed or offered for sale to buyers.
Digital scarcity with NFTs
Uniqueness drives the common perception of digital scarcity in NFTs. Following the rules of supply and demand, NFTs are sold for huge prices due to their uniqueness. For example, the Andy Warhol Foundation for the Visual Arts embossed five digital works restored from some of Andy Warhol’s floppy disks. These were created specifically for an auction, with no intention of creating more NFTs. Sales for the five NFTs alone totaled over $3.3 million in 2021. In fact, when someone buys an NFT, they are not buying the actual underlying asset, but rather a link to that asset. Copyright in the underlying asset is not necessarily transferred when selling an NFT, in the same way as when a physical copy of a type of creative work is sold. The copyright of the original remains with the creator or copyright owner.
The NFT regulations today
The current regulatory and legal system in many jurisdictions was not originally designed with digital assets in mind. Today’s boom in NFT popularity raises questions about legal and commercial aspects of NFTs, particularly copyright ownership as well as ownership enforcement issues. Here are some of the ways in which NFT regulations are developing globally, and in the two major jurisdictions of the EU and the US. As of now, there is very little global regulatory guidance on whether NFTs fall within the scope of existing crypto-asset regulations. Most jurisdictions are still developing regulatory frameworks specifically for NFTs. However, many countries have already implemented or published their initial plans and frameworks for the regulation of NFTs and their trading platforms. NFTs, as digital assets, are inherently cross-border in trade. Because the platforms used to trade NFTs are accessible to a global audience; this also raises questions about which laws and regulations will apply in lawsuits about NFTs. The “free” nature of NFT marketplaces is also prone to fraud. The Financial Action Task Force, an international body, has included specific mention of NFTs for the first time in its updated guidance. These global, binding standards aim to prevent the misuse of virtual assets for money laundering and terrorist financing.
Recently passed law in the USA
NFTs are not currently specifically regulated in the U.S. Currently, the legal status and regulatory classification of NFTs under U.S. law is still up for determination. However, the government is taking active steps to address the issue. In October 2021, the US Department of Justice unveiled the National Cryptocurrency Enforcement Team. This team was established to tackle the growth of crime related to the criminal misuse of cryptocurrency and digital assets. In November 2021, President Biden signed the Infrastructure Investment and Jobs Act (IIJA). This legislation gives the US Internal Revenue and Treasury Department the power to establish tax reporting rules for cryptocurrency transactions beginning in 2023. The Financial Crimes Enforcement Department confirmed that the Treasury Department will also begin targeting existing anti-money laundering controls against virtual currency in particular. . Under IIJA, NFTs are considered included in the definition of digital assets and presumably subject to the cost reporting regulations. However, there are still areas that need to be clarified. For example, NFT marketplaces are organized in different ways, such as when intermediaries process payments versus peer-to-peer payment strategies. This structure can be important when it comes to information reporting rules according to law and regulations.
Draft regulations in the EU
NFTs are also not currently specifically regulated in the EU. However, a European legislator is preparing a regulation that will affect NFTs – the Markets in Crypto-Assets Regulation (MiCA). This is expected to enter into force in 2024. It will apply to any person issuing or providing crypto-asset services across all EU member states. Non-EU firms wishing to trade in EU member states will also fall under the coverage of MiCA. The MiCA proposal sets out a consistent international approach when it comes to assets that are a digital representation of value or rights that can be transferred and stored electronically, using a distributed ledger or similar technology. According to the current draft of MiCA, NFT issuers will fall outside the scope of the license obligation and will most likely be exempt from the requirement to prepare, notify and publish a white paper on crypto assets in an Initial Coin Offering, as this will not apply. to non-fungible tokens. However, other requirements under MiCA are likely to apply to NFT issuers. For example, they will be required to be a legal entity, whether established within or outside the EU. They must also comply with standard requirements for business conduct and governance.
