This article was originally written and published in a longer form by American Bar Association
on March 22, 2023.
Non-fungible tokens (NFT) linked to IP rights are an exciting innovation that could usher in a new way of trading and monetizing IP.
However, the ongoing uncertainty surrounding their classification as a security, as well as their classification as an asset class in commercial finance transactions, will prevent them from being aggressively adopted until the dust settles after the adoption of more uniform laws, which will bring the necessary clarity and certainty both in the United States and abroad.
In the short term, there may be value in issuing limited offerings that work in the current regulatory environment in a targeted market and generate earned media coverage, as interest in new uses of NFTs remains high.
NFTs are generally not regulated at the federal level
Currently, an offer to sell one or more NFTs is not directly or explicitly regulated by the US federal government, unless it is a “security” under the traditional Howey testin that case The Security and Exchange Commission(SEC) is likely to consider NFT as an “investment contract” and regulate it. However, that may change. Many are calling for greater guidance from the SEC, as well as additional federal legislation, clarifying the regulation of NFTs and other digital assets. In July 2022, following an invitation from Senators Leahy (D-VT) and Tillis (R-NC), the US Patent and Trademark Office and the US Copyright Office confirmed that they would conduct a joint study of IP issues related to NFTs. .
Some states are beginning to regulate NFT sales
At the state level, the offering of NFTs (as opposed to virtual currencies) is largely regulated only under securities laws. Some states have provided specific guidelines for NFT offerings or enacted laws that apply directly to NFT offerings.
For example, Colorado has passed a law that clarifies that certain digital tokens are exempt from securities laws of this state if the digital tokens are for a “consumer purpose”, the tokens are registered and the offeror complies with both statutory and agency rules in the sale. Several other bills are pending across the states, and additional regulation should be expected in the coming year, and that regulation may come without uniformity.
Regulations are under development outside the United States
The European Parliament’s Committee on Economic and Monetary Affairs recently adopted Regulation on markets for crypto-assets (MiCA) to provide an EU-wide regulatory framework for certain crypto-assets, this regulation still needs to go through the European Parliament and will not enter into force as drafted until 2024.
In addition, NFT is not necessarily covered by MiCA, depending on the facts and circumstances of the NFT itself.
The most daunting regulatory challenge is the complexity caused by different approaches to NFT regulation from one country to the next, given the competing goals of NFTs to facilitate easier digital asset transactions in potentially global markets.
For example, a safety under Howey test may or may not be a security in the EU. The varied approaches to the underlying smart contract terms and conditions associated with a given NFT and the jurisdictions in which an NFT may be offered for sale will dictate an analysis of each NFT and its sale circumstances to determine the extent to which investment contract, securities or other laws in a particular country may pose a significant risk for the seller or buyer.
What the current lack of regulation could mean for companies
Operating in an unregulated or lightly regulated industry can offer great opportunities, but it also comes with risks. As early adopters, companies may be able to operate without the costs of complying with burdensome regulatory oversight. Prominent companies may also be able to set a standard that both works for them and will eventually be adopted or even codified as an industry standard.
On the other hand, operating in currently unregulated spaces means that the concept may become illegal or unsustainably expensive as the regulations develop. In addition, unregulated areas can be vulnerable to fraud and unscrupulous competitors. The bad actors can damage a company’s reputation just because it operates in the space.
Please do get in touch Drew Patty, Andrew Coffman or any member of
Phelps Intellectual Property team if you have questions or need advice or guidance.
Published in Landslide, Vol. 15, No. 3, March/April 2023, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any part thereof may not be copied or distributed in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.
The content of this article is intended to provide a general guide to the subject. You should seek specialist advice about your specific circumstances.