MFSA Likely To Treat NFTs In Line With MiCA – Financial Services

The regulatory treatment of Non-Fungible Tokens
(“NFT”s) has been significantly questioned mainly due to
their ability to take different forms. Even the latest text of the
long-awaited European Union Markets in Crypto-Assets
(“MiCA”) Regulation does not explicitly cover NFTs.
Nevertheless, the interest in NFTs has been only increasing and the
Malta Financial Services Authority (the “MFSA”) has
recently received various queries regarding the regulatory
treatment of NFTs. Therefore, in order to establish some clarity on
the subject, on 5 December 2022 the MFSA issued a consultation
document regarding the regulatory treatment of the NFTs in the
context of the Virtual Financial Assets (“VFA”s)
Framework in Malta.

Current Regulatory Treatment

The consultation document brings attention to the definition of
Distributed Ledger Technology (“DLT”) Assets outlined in
the VFA Act (Chapter 590 of the Laws of Malta), whereby a DLT Asset
is defined as “(a) a virtual token; (b) a virtual
financial asset; (c) electronic money; or (d) a financial
instrument, that is intrinsically dependent on, or utilises,
Distributed Ledger Technology“. Considering that NFTs are
intrinsically built on DLT and the definition of DLT Assets is not
exhaustive, according to the current regulatory treatment, the MFSA
is of the opinion that NFTs would qualify as DLT Assets and; thus,
should be subject to the Financial Instrument Test for determining
the applicable regulatory framework.

Proposed Regulatory Treatment

In the proposed consultation document, the MFSA is hesitant to
encompass NFTs within the scope of the VFA Act due to their
particular nature of being unique and non-fungible, which goes
against the main aim of the VFA Act – to regulate
investment-type services offered in relation to VFAs. Therefore,
the MFSA also considers it is prudent to follow the rationale of
MiCA by excluding VFAs that lack fungibility and are unique from
the VFA Framework.

The MFSA is seeking feedback from relevant stakeholders prior to
proceeding with the

implementation of the clarifications to the VFA Framework proposed
in the Consultation.

The consultation period is open until 06 January 2023. Access to
the above-mentioned consultation document is available here. Those interested in submitting their
feedback are encouraged to do so via the online form. We will continue to monitor the
results emanating from this consultation document and keep our
readers updated accordingly.

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.