We have only seen the proposal for the MiCA Regulation, which was good for giving some clues but was not the final text. NFTs will not be part of the legal text.
Although we lack a definitive MiCA text as of today, we do know, through the press release published by the Consillium, what we leave transcribed below:
“Non-fungible tokens (NFTs), i.e., digital assets representing real objects such as art, music, and videos, will be excluded from the scope, except if they fall into existing crypto-asset categories. Within 18 months, the European Commission has to prepare a comprehensive assessment and, if deemed necessary, a specific, proportionate, and horizontal legislative proposal to create a regime for NFTs and address the emerging risks of this new market.“
Furthermore, the European Parliament stated in its press release,
“Non-fungible tokens (NFTs) are unique and, unlike cryptocurrencies, are not traded or exchanged for equivalence. All public-offered NFT with a fixed price, such as movie tickets or digital collectibles from clothing brands or game items, will be exempt from the scope of MiCA. However, depending on their evolution, the rules provide a new classification of NFTs as a financial instrument or crypto-asset subject to MiCA.“
Suppose we are dealing with NFTs that could be financial instruments. In that case, the corresponding regulation will apply (MiFID II and the national law of securities markets). If they have the character of other crypto-assets (for example, a utility), they could be subject to MiCA. So, what regulation will apply to NFTs that we cannot re-classify, such as collectibles or those representing physical assets that are unique and not fractionalized?
In cases like the one mentioned in the preceding paragraph, we must resort to the regulations already in force and applicable to solve possible legal loopholes. In this regard, Clifford Chance published a paper that sheds some light on the matter. A summary of the regulations applicable in the USA, European Union countries, China, Russia, Japan, Singapore, etc., is compiled in just over forty pages.
In the following, and to recalculate the route regarding the regulation of NFTs, knowing that only in some specific cases will MiCA sponsor it, we will discuss this paper to learn about some of the essential regulatory issues to be taken into account at the international level.
European Union
NFTs are currently not explicitly regulated in the EU. However, any proposed NFT issuance characteristics must be considered alongside several existing regimes, including securities, e-money, and crowdfunding.
In September 2020, the Commission published the Markets in Cryptoassets Regulation (MiCA). It proposes regulating out-of-scope crypto-assets and their service providers under a single licensing regime.
The EU expects the release of the MiCA to come into force in 2024. It will apply to any person issuing or providing crypto-asset services in all member states and to any non-EU company wishing to operate in EU member states. One proposed obligation is that crypto-asset issuers issue a “crypto-asset white paper” similar to a prospectus. The MiCA’s definition of “crypto assets” includes NFTs, although, as currently drafted, issuers of non-fungible crypto-assets do not need to elaborate a white paper.
Japan
In Japan, while authorities regulate fungible tokens as security tokens, and their issuance triggers specific requirements to obtain a license to trade them, the non-fungibility that characterizes NFTs means that they typically do not have a liquidity-providing function and, therefore, will not qualify as regulated crypto assets.
Consequently, many NFTs are not explicitly regulated, and trading in them has no licensing requirements. Because the Japanese gaming retail market is one of the most mature and well-established in the world, NFTs tied to trading cards or game items registered on the blockchain are more common in Japan.
Despite not being subject to specific financial regulations, NFTs issued as items within a video game raise issues concerning the Japanese Criminal Code. As such, the Blockchain Content Association and the Japan Cryptocurrency Business Association recently released guidelines regarding NFTs.
China
Activities related to cryptocurrencies and crypto-assets are strictly regulated and monitored in the People’s Republic of China. Despite a unified regulatory framework, crypto-asset rules are scattered in ad hoc notices and circulars issued by Chinese regulators. The regulatory objective in this area is the Circular on Preventing Risks Related to Initial Coin Offerings (ICOs). It was published by seven Chinese government agencies (including the People’s Bank of China) in September 2017 (the ICO Circular). The ICO Circular marked an unprecedented regulatory crackdown on crypto assets they have enforced in practice. Since 2017, we have seen supervisory actions concerning cryptocurrency-related activities.
The China National Internet Finance Association and the banking and payments associations published a joint statement in May 2021. They reiterate the position of the ICO Circular. Its member institutions (including banks and payment companies) should not offer cryptocurrency-related services in the PRC. The information also sets out other specific restrictions and risk alerts, including exchanging, investing, and trading crypto.
There is no clear description of the crypto-asset under Chinese law, and whether an NFT qualifies may require detailed analysis. If People or companies create NFTs for fundraising, the relevant regulatory risks would be high.