/How to Address the Regulation of NFTs

How to Address the Regulation of NFTs

The non-fungible tokens (NFTs) are here to stay; that is a fact. Thousands of users trade with NFTs around the world and take advantage of the pros that could bring these new kinds of assets that are brought by the emerging  blockchain 
Blockchain

Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned.) In this sense, blockchain is immune to the manipulation of data making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tamper with. The Evolution of BlockchainBlockchain was originally invented by an individual or group of people under the name of Satoshi Nakamoto in 2008. The purpose of blockchain was originally to serve as the public transaction ledger of Bitcoin, the world’s first cryptocurrency.In particular, bundles of transaction data, called “blocks”, are added to the ledger in a chronological fashion, forming a “chain.” These blocks include things like date, time, dollar amount, and (in some cases) the public addresses of the sender and the receiver.The computers responsible for upholding a blockchain network are called “nodes.” These nodes carry out the duties necessary to confirm the transactions and add them to the ledger. In exchange for their work, the nodes receive rewards in the form of crypto tokens.By storing data via a peer-to-peer network (P2P), blockchain controls for a wide range of risks that are traditionally inherent with data being held centrally.Of note, P2P blockchain networks lack centralized points of vulnerability. Consequently, hackers cannot exploit these networks via normalized means nor does the network possess a central failure point.In order to hack or alter a blockchain’s ledger, more than half of the nodes must be compromised. Looking ahead, blockchain technology is an area of extensive research across multiple industries, including financial services and payments, among others.

Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned.) In this sense, blockchain is immune to the manipulation of data making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tamper with. The Evolution of BlockchainBlockchain was originally invented by an individual or group of people under the name of Satoshi Nakamoto in 2008. The purpose of blockchain was originally to serve as the public transaction ledger of Bitcoin, the world’s first cryptocurrency.In particular, bundles of transaction data, called “blocks”, are added to the ledger in a chronological fashion, forming a “chain.” These blocks include things like date, time, dollar amount, and (in some cases) the public addresses of the sender and the receiver.The computers responsible for upholding a blockchain network are called “nodes.” These nodes carry out the duties necessary to confirm the transactions and add them to the ledger. In exchange for their work, the nodes receive rewards in the form of crypto tokens.By storing data via a peer-to-peer network (P2P), blockchain controls for a wide range of risks that are traditionally inherent with data being held centrally.Of note, P2P blockchain networks lack centralized points of vulnerability. Consequently, hackers cannot exploit these networks via normalized means nor does the network possess a central failure point.In order to hack or alter a blockchain’s ledger, more than half of the nodes must be compromised. Looking ahead, blockchain technology is an area of extensive research across multiple industries, including financial services and payments, among others.
Read this Term
technology.

With auctions that cross $5 million per NFT on average, questions arise about the legal status of NFTs globally. This is because of the huge amount of money that is traded on each transaction made in each Bored Ape NFT or the first-ever tweet by Jack Dorsey that was auctioned off some time ago for $2.9 million.

Are NFTs regulated? Should they be regulated? These are questions that experts ask themselves every day and have no clear answer as of press time. This is especially since NFTs are an emerging trend despite their consolidation as an asset class.

Market Size

In 2021, according to EarthWeb, the NFT market was worth $41 billion. Also, there are between $10 and $20 million worth of NFTs sold in the blockchain every week, and over 50% of the sales are less than $200. But, the trends are optimistic. In fact, the NFT market size is forecasted to reach a whopping $130.35 billion by 2028.

Global NFT Market Size

Global NFT Market Size

With these figures in the table, what about the legal status in major hotspots like the US and the UK?

Status in the US

The US Securities and Exchange Commission defines a digital asset as “an asset that is issued and transferred using distributed ledger or blockchain technology.” However, it does not have a definition for non-fungible tokens.

Of course, the country’s authorities have been monitoring NFT-related transactions to explore how to regulate them or see if they fall under any regulation outlined in the country. These watchdogs are the US Treasury Financial Crimes Enforcement Network (FinCEN) and the US Commodities Futures Trading Commission (CFTC) and the Internal Revenue Service (IRS).

NFTs are not seen as securities in the United States. However, if they are marketed as an asset that will give a return on the investment, the law will play a role there and will consider the asset as a security.

What about the UK?

In the UK, the situation is similar: there is no regulation, and the authorities have been actively warning of the risks it possesses in money laundering and terror financing.

That said, in the eyes of the UK Financial Conduct Authority, there is no legal framework for NFT taxation as well.

Are NFTs a ‘Fad’?

But, how do the experts perceive NFTs, and what do they think about the stance that a government should take in this regard? Kirill Suslov, the CEO at TabTrader BV, told Finance Magnates that NFTs could be just ‘a fad’.

Kirill Suslov, CEO at TabTrader BV

Kirill Suslov, CEO at TabTrader BV

“NFTs were actually created in 2014 and existed as colored coins on the Bitcoin blockchain. There was a dedicated Prism wallet that went belly up in 2018 because they never picked up back then. Now NFTs are just rebranded with a new word. But, essentially, they are  fungible 
Fungible

Fungibility is a term that describes how interchangeable a certain asset is with other assets of the same kind.If an asset is fungible, one unit of that asset is interchangeable with another unit of that asset. Of note, fungibility differs from liquidity. A good is said to be liquid if it can be easily exchanged for money or another good. However, a good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place.By this analog, money is considered to be fungible. For example, one $20 banknote is interchangeable with any other authentic banknote like it.It is also interchangeable with two $10 banknotes, or twenty $1 banknotes, or any other combination of banknotes and coins adding up to $20. Fungible Versus LiquidSimilarly, different issues of a government bond are also fungible, which may have been issued at different times. This is only if these issues carry precisely the same rights and any of them is equally acceptable in settlement of a trade.Fungibility does not imply liquidity, and vice versa. Certain commodities such as diamonds for example can be readily bought and sold. However, while the trade is liquid, individual diamonds are unique and not interchangeable. Cryptocurrencies are often considered to be fungible assets, as one coin is equivalent to another. However, a notable exception occurred after a major breach in Japanese exchange Coincheck, during which token developers for cryptocurrency NEM added a special flag to hacked coins to indicate they are not to be traded or used.

Fungibility is a term that describes how interchangeable a certain asset is with other assets of the same kind.If an asset is fungible, one unit of that asset is interchangeable with another unit of that asset. Of note, fungibility differs from liquidity. A good is said to be liquid if it can be easily exchanged for money or another good. However, a good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place.By this analog, money is considered to be fungible. For example, one $20 banknote is interchangeable with any other authentic banknote like it.It is also interchangeable with two $10 banknotes, or twenty $1 banknotes, or any other combination of banknotes and coins adding up to $20. Fungible Versus LiquidSimilarly, different issues of a government bond are also fungible, which may have been issued at different times. This is only if these issues carry precisely the same rights and any of them is equally acceptable in settlement of a trade.Fungibility does not imply liquidity, and vice versa. Certain commodities such as diamonds for example can be readily bought and sold. However, while the trade is liquid, individual diamonds are unique and not interchangeable. Cryptocurrencies are often considered to be fungible assets, as one coin is equivalent to another. However, a notable exception occurred after a major breach in Japanese exchange Coincheck, during which token developers for cryptocurrency NEM added a special flag to hacked coins to indicate they are not to be traded or used.
Read this Term
tokens, i.e. a token that is unique. One example could be a ticket, an airline ticket: it’s issued only to a traveler who paid for it and is not valid for everyone else,” he said.

About the regulatory’s topic, Suslov pointed out: “Governments could just assume a wait-and-see approach to regulation. If NFTs are here in a couple of years and are affecting a significant portion of retail investors, then there could be a draft regulation proposed by the industry participants already. Government bodies should just asses such initiatives and move accordingly.”

Marko Vidrih, co-founder and COO at Niftify

Marko Vidrih, co-founder and COO at Niftify

Marko Vidrih, the Co-Founder and COO at Niftify, told Finance Magnates that The European legislative proposal for a regulation on markets in crypto assets (MiCA) could offer a solution to this regulatory dilemma.

“Should the existing US and European laws be amended or the application of the regulations differentiated between different forms of NFT, [then] NFTs would be subject to a comprehensive application or approval process. That would no longer be proportionate to both issuers and retailers. (…) The term is defined very broadly so that a starting point for regulating NFTs would be laid. Accordingly, public offerings and trading of NFTs would be subject to special disclosure rules of information similar to the laws applicable to securities such as stocks and bonds. In addition, no approval is required so far, only notification to BaFin and inclusion in a European directory,” he said.

Moreover, he commented on the current legal framework’s stance: “The current legal framework only knows rules for financial instruments and securities, which, among other things, require they are generically standardized to be traded and generate a financial return. In the case of digital images in Jpeg format and music or video clips as NFTs, there should be no generic standardization precisely because of their uniqueness or exclusivity of a few pieces, and the achievement of a financial return should at least be questionable.”

Both experts agree that uncertainty is still there regarding
granting a definition to NFTs on whether they are crypto assets that serve
investment purposes or not. At least, in the case of the BaFin, Germany’s
financial market supervisory authority, has not yet issued a clarifying
statement, Vidrih commented.

The non-fungible tokens (NFTs) are here to stay; that is a fact. Thousands of users trade with NFTs around the world and take advantage of the pros that could bring these new kinds of assets that are brought by the emerging  blockchain 
Blockchain

Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned.) In this sense, blockchain is immune to the manipulation of data making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tamper with. The Evolution of BlockchainBlockchain was originally invented by an individual or group of people under the name of Satoshi Nakamoto in 2008. The purpose of blockchain was originally to serve as the public transaction ledger of Bitcoin, the world’s first cryptocurrency.In particular, bundles of transaction data, called “blocks”, are added to the ledger in a chronological fashion, forming a “chain.” These blocks include things like date, time, dollar amount, and (in some cases) the public addresses of the sender and the receiver.The computers responsible for upholding a blockchain network are called “nodes.” These nodes carry out the duties necessary to confirm the transactions and add them to the ledger. In exchange for their work, the nodes receive rewards in the form of crypto tokens.By storing data via a peer-to-peer network (P2P), blockchain controls for a wide range of risks that are traditionally inherent with data being held centrally.Of note, P2P blockchain networks lack centralized points of vulnerability. Consequently, hackers cannot exploit these networks via normalized means nor does the network possess a central failure point.In order to hack or alter a blockchain’s ledger, more than half of the nodes must be compromised. Looking ahead, blockchain technology is an area of extensive research across multiple industries, including financial services and payments, among others.

Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned.) In this sense, blockchain is immune to the manipulation of data making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tamper with. The Evolution of BlockchainBlockchain was originally invented by an individual or group of people under the name of Satoshi Nakamoto in 2008. The purpose of blockchain was originally to serve as the public transaction ledger of Bitcoin, the world’s first cryptocurrency.In particular, bundles of transaction data, called “blocks”, are added to the ledger in a chronological fashion, forming a “chain.” These blocks include things like date, time, dollar amount, and (in some cases) the public addresses of the sender and the receiver.The computers responsible for upholding a blockchain network are called “nodes.” These nodes carry out the duties necessary to confirm the transactions and add them to the ledger. In exchange for their work, the nodes receive rewards in the form of crypto tokens.By storing data via a peer-to-peer network (P2P), blockchain controls for a wide range of risks that are traditionally inherent with data being held centrally.Of note, P2P blockchain networks lack centralized points of vulnerability. Consequently, hackers cannot exploit these networks via normalized means nor does the network possess a central failure point.In order to hack or alter a blockchain’s ledger, more than half of the nodes must be compromised. Looking ahead, blockchain technology is an area of extensive research across multiple industries, including financial services and payments, among others.
Read this Term
technology.

With auctions that cross $5 million per NFT on average, questions arise about the legal status of NFTs globally. This is because of the huge amount of money that is traded on each transaction made in each Bored Ape NFT or the first-ever tweet by Jack Dorsey that was auctioned off some time ago for $2.9 million.

Are NFTs regulated? Should they be regulated? These are questions that experts ask themselves every day and have no clear answer as of press time. This is especially since NFTs are an emerging trend despite their consolidation as an asset class.

Market Size

In 2021, according to EarthWeb, the NFT market was worth $41 billion. Also, there are between $10 and $20 million worth of NFTs sold in the blockchain every week, and over 50% of the sales are less than $200. But, the trends are optimistic. In fact, the NFT market size is forecasted to reach a whopping $130.35 billion by 2028.

Global NFT Market Size

Global NFT Market Size

With these figures in the table, what about the legal status in major hotspots like the US and the UK?

Status in the US

The US Securities and Exchange Commission defines a digital asset as “an asset that is issued and transferred using distributed ledger or blockchain technology.” However, it does not have a definition for non-fungible tokens.

Of course, the country’s authorities have been monitoring NFT-related transactions to explore how to regulate them or see if they fall under any regulation outlined in the country. These watchdogs are the US Treasury Financial Crimes Enforcement Network (FinCEN) and the US Commodities Futures Trading Commission (CFTC) and the Internal Revenue Service (IRS).

NFTs are not seen as securities in the United States. However, if they are marketed as an asset that will give a return on the investment, the law will play a role there and will consider the asset as a security.

What about the UK?

In the UK, the situation is similar: there is no regulation, and the authorities have been actively warning of the risks it possesses in money laundering and terror financing.

That said, in the eyes of the UK Financial Conduct Authority, there is no legal framework for NFT taxation as well.

Are NFTs a ‘Fad’?

But, how do the experts perceive NFTs, and what do they think about the stance that a government should take in this regard? Kirill Suslov, the CEO at TabTrader BV, told Finance Magnates that NFTs could be just ‘a fad’.

Kirill Suslov, CEO at TabTrader BV

Kirill Suslov, CEO at TabTrader BV

“NFTs were actually created in 2014 and existed as colored coins on the Bitcoin blockchain. There was a dedicated Prism wallet that went belly up in 2018 because they never picked up back then. Now NFTs are just rebranded with a new word. But, essentially, they are  fungible 
Fungible

Fungibility is a term that describes how interchangeable a certain asset is with other assets of the same kind.If an asset is fungible, one unit of that asset is interchangeable with another unit of that asset. Of note, fungibility differs from liquidity. A good is said to be liquid if it can be easily exchanged for money or another good. However, a good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place.By this analog, money is considered to be fungible. For example, one $20 banknote is interchangeable with any other authentic banknote like it.It is also interchangeable with two $10 banknotes, or twenty $1 banknotes, or any other combination of banknotes and coins adding up to $20. Fungible Versus LiquidSimilarly, different issues of a government bond are also fungible, which may have been issued at different times. This is only if these issues carry precisely the same rights and any of them is equally acceptable in settlement of a trade.Fungibility does not imply liquidity, and vice versa. Certain commodities such as diamonds for example can be readily bought and sold. However, while the trade is liquid, individual diamonds are unique and not interchangeable. Cryptocurrencies are often considered to be fungible assets, as one coin is equivalent to another. However, a notable exception occurred after a major breach in Japanese exchange Coincheck, during which token developers for cryptocurrency NEM added a special flag to hacked coins to indicate they are not to be traded or used.

Fungibility is a term that describes how interchangeable a certain asset is with other assets of the same kind.If an asset is fungible, one unit of that asset is interchangeable with another unit of that asset. Of note, fungibility differs from liquidity. A good is said to be liquid if it can be easily exchanged for money or another good. However, a good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place.By this analog, money is considered to be fungible. For example, one $20 banknote is interchangeable with any other authentic banknote like it.It is also interchangeable with two $10 banknotes, or twenty $1 banknotes, or any other combination of banknotes and coins adding up to $20. Fungible Versus LiquidSimilarly, different issues of a government bond are also fungible, which may have been issued at different times. This is only if these issues carry precisely the same rights and any of them is equally acceptable in settlement of a trade.Fungibility does not imply liquidity, and vice versa. Certain commodities such as diamonds for example can be readily bought and sold. However, while the trade is liquid, individual diamonds are unique and not interchangeable. Cryptocurrencies are often considered to be fungible assets, as one coin is equivalent to another. However, a notable exception occurred after a major breach in Japanese exchange Coincheck, during which token developers for cryptocurrency NEM added a special flag to hacked coins to indicate they are not to be traded or used.
Read this Term
tokens, i.e. a token that is unique. One example could be a ticket, an airline ticket: it’s issued only to a traveler who paid for it and is not valid for everyone else,” he said.

About the regulatory’s topic, Suslov pointed out: “Governments could just assume a wait-and-see approach to regulation. If NFTs are here in a couple of years and are affecting a significant portion of retail investors, then there could be a draft regulation proposed by the industry participants already. Government bodies should just asses such initiatives and move accordingly.”

Marko Vidrih, co-founder and COO at Niftify

Marko Vidrih, co-founder and COO at Niftify

Marko Vidrih, the Co-Founder and COO at Niftify, told Finance Magnates that The European legislative proposal for a regulation on markets in crypto assets (MiCA) could offer a solution to this regulatory dilemma.

“Should the existing US and European laws be amended or the application of the regulations differentiated between different forms of NFT, [then] NFTs would be subject to a comprehensive application or approval process. That would no longer be proportionate to both issuers and retailers. (…) The term is defined very broadly so that a starting point for regulating NFTs would be laid. Accordingly, public offerings and trading of NFTs would be subject to special disclosure rules of information similar to the laws applicable to securities such as stocks and bonds. In addition, no approval is required so far, only notification to BaFin and inclusion in a European directory,” he said.

Moreover, he commented on the current legal framework’s stance: “The current legal framework only knows rules for financial instruments and securities, which, among other things, require they are generically standardized to be traded and generate a financial return. In the case of digital images in Jpeg format and music or video clips as NFTs, there should be no generic standardization precisely because of their uniqueness or exclusivity of a few pieces, and the achievement of a financial return should at least be questionable.”

Both experts agree that uncertainty is still there regarding
granting a definition to NFTs on whether they are crypto assets that serve
investment purposes or not. At least, in the case of the BaFin, Germany’s
financial market supervisory authority, has not yet issued a clarifying
statement, Vidrih commented.