Are NFTs Dead? Well, Not Really: A Comparative Brief – Fin Tech

Non-Fungible Tokens (“NFTs“) have
attracted both enthusiasm and skepticism. It was at both ends of
the spectrum, at one point at the pinnacle of digital assets, then
it was the least transacted with.

In jurisdictions where digital assets could be used as
crowd-funding and safely change hands as commodities, artists,
musicians, and creators worldwide continue to embrace NFTs as
dynamic means of establishing their digital footprint and reshaping
the way we perceive and interact with art and digital assets.

As creators utilize the decentralized and borderless nature of
NFTs, the market expands beyond traditional art forms, including
music, painting, virtual real estate, merchandise and etc.

Are NFTs here to stay for the long term?

The long-term sustainability of NFTs depends on various factors,
including technology, regulatory developments, and shifts in user
preferences. However, several trends suggest that NFTs are likely
to remain a significant part of the digital landscape for the
foreseeable future. One of the most crucial factors in defining the
resilience of NFTs will be their legal status.

This is not just a matter of regulatory compliance; it is about
recognizing the unique features that set NFTs apart from their
fungible counterparts. Increasingly, countries are warming up to
the idea that NFTs cannot be placed in the same regulatory
framework as fungible tokens.

Targeted Update on Implementation of the FATF Standards on
Virtual Assets and Virtual Asset Service Providers
(“FATF Report“) of June 2023 highlights
that the regulation of NFTs varies across jurisdictions, with some
categorizing them under virtual assets definitions, while others
treat them as works of art or collectibles. The FATF emphasizes the
need for a functional approach, urging authorities to look beyond
NFT marketing and assess whether the product or service qualifies
as a virtual asset, virtual asset service provider, financial
institution, or designated non-financial business or profession.
Accordingly, NFTs may fall under the virtual asset definition if
they are to be used for payment or investment purposes in
practice.

European Union

Markets in Crypto Assets (“MiCA“), as
a regulatory instrument, aims to create a comprehensive framework
for crypto assets within the European Union. However, it excludes
non-fungible tokens that are unique and distinguishable from other
crypto assets. According to the regulation, such unique and
non-fungible crypto assets fall outside the regulatory purview due
to their distinct characteristics. While these tokens can be traded
on the marketplace, their non-fungible nature limits their
interchangeability. Consequently, this may hinder the extent to
which those crypto assets can have a financial use, thereby
mitigating risks to holders.

MiCA further clarifies that the exclusion of unique and
non-fungible crypto assets from its scope does not shield them from
other regulatory classifications. For instance, these assets could
still be considered financial instruments, subject to specific
regulations. Additionally, the regulation is designed to apply to
crypto-assets that genuinely have unique and non-fungible
characteristics, avoiding a mere designation-based
classification.

The token’s fungibility can be determined by considering
several factors. ERC-721 is the most well-known standard for
creating NFTs. It allows the creation of unique tokens on the
blockchain. The uniqueness of its metadata and the stored file on
the server is also distinctive. Additionally, the token must not be
interchangeable with other NFTs in the collection to be accepted as
non-fungible. The issuance in a large series or collection may be
considered an indicator of fungibility.

By the end of 2024, the Commission is expected to present a
report to the European Parliament and the Council on the latest
developments concerning crypto assets on matters that are not
addressed in the Regulation. The Commission’s report will
specifically examine the markets for unique and non-fungible crypto
assets, considering the regulatory treatment needed for such
assets. This assessment will extend to the potential regulation of
entities offering unique and non-fungible crypto assets, as well as
those providing services related to such assets.

United States

The United States Securities and Exchange Commission
(“SEC“) evaluates digital assets and
NFTs in the same manner as traditional assets to determine whether
they are securities. On Aug. 28, 2023, the SEC made its first NFT
enforcement action and charged Impact Theory, LLC, with conducting an
unregistered offering of crypto asset securities in the form of
NFTs. On Sept. 13, 2023, Stoner Cats 2 LLC faced similar charges from the SEC for
engaging in an unregistered offering of crypto asset securities
through NFTs. Then, two SEC commissioners dissented and expressed
concern over how NFTs fit into investment regulation. They stated
that the SEC should lay out more clear guidelines for artists and
other creators who want to experiment with NFTs to support their
creative efforts and build their fan communities.

United Kingdom

The United Kingdom extended its financial promotions regime to
include qualifying crypto assets. On 8 June 2023, the Financial
Conduct Authority published a policy statement setting out the
relevant rules. On this policy statement, the term “qualifying
crypto asset” is defined as “any cryptographically
secured digital representation of value or contractual rights that
is transferable and fungible”. Accordingly, NFTs are excluded
from the amendment because they are more suited for use as digital
collectibles than as financial investments.

From loyalty schemes to rewards, marketing, and the verification
of authenticity, the applications of NFTs are expanding rapidly.
Cross-chain NFT exchanges and cross-chain NFT transactions may
further foster the ecosystem. As the popularity of NFTs has grown,
legal frameworks are gradually catching up to regulate this market.
This increased clarity contributes to the legitimacy of NFTs,
attracting a wider audience and fostering a more stable market. As
creators and investors continue to explore the potential of NFTs,
legal frameworks will allow NFTs to address emerging challenges and
ensure long-term sustainability.

Meanwhile, individuals and businesses should seek legal advice
and stay informed in their respective jurisdictions to ensure
compliance and mitigate legal risks. Since it seems that NFTs will
continue to hold legal relevance, service providers must provide a
protective ecosystem for users in today’s evolving
landscape.

Türkiye

Türkiye is on the brink of approving a new law that will
regulate activities concerning crypto assets, bringing about
significant changes. This upcoming legislation is expected to
broaden its scope by incorporating the concept of crypto assets,
specifically including NFTs, without imposing a distinct
categorization. This means that NFTs are set to be integrated into
the upcoming crypto law. However, the NFT assessment report of the
Ministry of Culture and Tourism within the framework of
intellectual rights states that it is necessary to acknowledge that
NFTs have a separate place among other crypto assets.

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.