NFTs’ Wild West’ Days Are Numbered As Global Regulation Looms – Technology

Driven by concerns over potential fraud, intellectual property
theft, tax evasion, and money laundering, governments all around
the world are looking at ways to regulate digital currencies and
non-fungible tokens (NFTs). Nations have taken vastly different
approaches depending on who’s in charge, how they characterize
NFTs, and how bullish their outlook is on digital currencies. While
some countries such as China have taken a more conservative
approach, El Salvador, for example, made cryptocurrencylegal tenderin their
country last fall, in defiance of criticism from the International
Monetary Fund (IMF). US President Joe Biden is now marshaling
federal regulatory agencies in preparation for anexecutive orderthat will
discuss crypto in terms of national security and law
enforcement

US Regulation of NFTs

In the US, NFTs have drawn significant regulatory scrutiny from
multiple state and federal agencies since their popularity spiked
in 2021. This is because the existing regulatory and legal
environment is not designed to manage thecreation,licensing, andtradein NFTs and other
digital assets. While entrepreneurs have found novel ways to
incorporate NFTs intoesports,sports betting,film, and other industries,
digital assets such as NFTs pose significantregulatory hurdles.

The White House’s initial government-wide strategy to assess
the risks and opportunities posed by cryptocurrencies and digital
assets is seen as a sweeping first step toward defining regulatory
approaches to NFTs. Research used to inform this strategy includes
a Department of the Treasuryreportthat details the
impact of NFTs on money-laundering activities in the global art
trade. According to the report, in certain circumstances, an NFT
may be deemed a virtual asset service provider (VASP) under the
Department of Treasury’s Financial Crimes Enforcement
Network’s regulation (FinCEN). However, to date, FinCEN has not
issued guidance specific to NFTs.

Given the complexities, gaps, and redundancies in the current
regulations, it appears inevitable that Washington will issue
additional guidance on how NFTs should be treated as
securities, currencies, collective investments, financial
instruments, or something else. This is especially important since
there is no single federal law that regulates digital assets. State
regulation provides no consistent precedent.

Washington, D.C. and 49 states have at least one proposed or
enacted regulation pertaining to digital assets and
cryptocurrencies. At least 13 states have proposed or enacted
legislation on licensing requirements, 25 have proposed or enacted
a money transmitter law, and 23 have proposed or enacted bills to
create a regulatory sandbox or committee to study the
implementation and use of digital assets and cryptocurrencies.
States typically focus on generating state revenue from NFTs and
other digital assets, with 34 proposing or enacting tax
regulations. These regulations vary widely from jurisdiction to
jurisdiction and change frequently.

Scattershot enforcement of inconsistent law raises additional
challenges:

• Litigation occurs one court at a time and leads to delayed and
  inconsistent decisions
• Enforcement matters that are settled do not carry any
  precedential effect
• Inconsistencies in the way in which enforcement matters are
  resolved can lead to conflicts between state and federal
  authorities.

Europe

Regulators in Europe have taken an interest in digital assets
though they have not yet expressly issued any regulations specific
to NFTs. In 2020, the European Commission proposed a new regulation
known asMarkets-in-Crypto Assets
(MiCA)to regulate virtual assets, streamlinedistributed ledger
technologyand provide legal certainty to digital assets
such as cryptocurrencies, security tokens, and stable coins.
Certain provisions of the MiCA would apply to NFTs, due to the
act’s broad definition of the term “crypto-asset”
which includes asset-referenced tokens, e-money tokens, and other
digital assets. Under Title II of the MiCA Proposal, NFTs would
likely fall into the “catch-all” category of “other
crypto assets.”

In addition to MiCA, some EU member states have issued
regulations that specifically address NFTs. For example, Luxembourg
recently grouped NFTs into three specific categories of collective
investment instruments, electronic money, and financial
instruments, each of which has its own respective qualities and
regulations. Similarly, in 2019 France published theLaw on Business Growth and
Transformation (known as “PACTE Law”)to
comprehensively regulate crypto assets service providers
(“CASPs”).

Other Countries

There has been an increased drive by countries around the world
to regulate digital assets. El Salvador recently doubled down on
its commitment to Bitcoin, buying another $15 million worth during
a recent plunge in the cryptocurrency’s price. Still, the
Central American nation has not yet promulgated guidelines to
regulate digital assets, including NFTs. In February 2022, India
announced a 30 percent tax on income derived from the transfer of
any virtual assets. To capture details of applicable crypto
transactions, India also will assess a 1 percent tax at the source
on all such transactions. Similarly, Ukraine, Japan, Russia,
Switzerland, and others have either devised rules to regulate
digital assets or are in the process of regulating them.
Conversely, China, for example, has taken a notoriously strict
stance on cryptocurrencies, banning them outright. However, Chinese
regulators are currently developing regulations governing and
describing the legal minting, use, and trading of NFTs.

Conclusion

NFTs’ arrival in the mainstream awareness and rapid
proliferation has prodded nations around the world to increase
their scrutiny to protect their citizens and collect their share of
related revenue. With so much money at stake, we can expect even
more regulation at the national and state levels. Government
regulation is inevitable in most countries, as without a robust
regulatory framework, there remains the growing risk of illegal
activities such as tax evasion, money laundering, terrorist
financing, fraud, and theft. NFTs have the potential to disrupt
both existing and emerging technology sectors and drive
commensurate opportunity and risk. Hence, businesses already using
or considering taking advantage of this still-new technology must
keep an eye on applicable regulatory developments.

Consultation with an experiencedNFT attorneycan help
platforms, creators, and others in the NFT space comply with
applicable law and navigate the complex and constantly evolving
legal and regulatory landscape.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.