NFTs Consumer NFT Guide

Non-Fungible Tokens (NFTs) have exploded onto the scene with sales such as the Beeple NFT fetching US$69m catching the attention of people across the world. NFTs are increasingly seen as a new digital ownership framework that creates opportunities for new business models. Artists, creators or musicians can attach stipulations to an NFT that ensures they receive some of the proceeds when it gets sold – benefitting if their work increases in value. Similar to DeFi, the blockchain technology adds a layer of security to the trading of NFTs. Smart contracts ensure that assets change hands automatically and the algorithms ensures that both parties honour their agreements. 

At present, the legal status of NFTs is uncertain. Nevertheless, its rise in popularity and high value transactions have resulted in jurisdictions taking steps to try to identify what / if any regulatory approach should be taken towards the use of NFTs. At present, there is not a specific regulatory initiative aimed at NFTs, but some regulations capture certain NFTs. For example, in the UK, certain NFTs may fall under the classification of ‘security tokens’ or ‘e-money tokens’ and thus would fall under the Financial Services and Market Act 2000 or Electronic Money Regulations 2011, however, the reality is that most fall outside of this scope. The EU recently discussed the inclusion of NFTs within the remit of the Markets in Crypto Assets (MiCA) regulation, however the extent to this is yet to be seen. As the NFT market continues to expand, so too will the regulatory focus on this application.

October 2024 North American Securities Administrators Association (NASAA)

The North American Securities Administrators Association (NASAA) released its 2024 Enforcement Report, revealing a sharp rise in investigations related to technology and digital assets, alongside a significant increase in public tips and investor complaints.

September 2024 Government of the United Kingdom

The Ministry of Justice published Policy paper Property (Digital Assets Etc.) Bill, which provides information relating to the Property (Digital Assets Etc.) Bill which was introduced to the House of Lords on 11 September 2024.

September 2024 Parliament

The Property (Digital Assets etc) Bill was introduced in Parliament to clarify crypto’s legal status.

The bill confirms the existence of a third category of personal property into which digital holdings including cryptocurrency, non-fungible tokens and carbon credits could fall.

Previously, digital belongings were not definitively included in the scope of English and Welsh property law.

The new law will therefore "give legal protection to owners and companies against fraud and scams, while helping judges deal with cases where digital holdings are disputed or form part of settlements, for example in divorce cases."

The action being taken on digital assets is in response to the Law Commission’s report in 2023. The Ministry of Justice commissioned the report to identify any barriers to the recognition of digital assets as property under English and Welsh private law and to recommend solutions. 

The Bill has been introduced into the House of Lords under the special parliamentary procedure for Law Commission bills.

The Government also announced in a written statement that it accepts the recommendation to set up an expert group who can provide guidance on technical and legal issues relating to digital assets. The Ministry of Justice has asked the UK Jurisdiction Taskforce (UKJT), an expert group chaired by the Master of the Rolls that produces non-binding guidance on areas of legal uncertainty, to take forward this work.

See also the press release from the Law Commission regarding the new bill.

July 2024 Law Commission

The Law Commission of England and Wales published a supplemental report and draft Bill that, if implemented, would confirm the existence of a third category of personal property into which certain digital and other assets could fall. 

July 2024 Securities Commission of the Bahamas

The Securities Commission of The Bahamas announced the Digital Assets and Registered Exchanges Act 2024 (DARE 2024) has been passed into law by Parliament.

Building upon the foundation laid by the DARE Act 2020, the legislation introduces comprehensive reforms designed to address the evolving landscape of digital assets and cryptocurrency markets.

Key highlights of DARE 2024 include:

1. Expanded scope: The law now encompasses a wider range of digital asset activities, including advisory or management services, digital asset derivatives and staking services. The Securities Commission also has the flexibility to add additional activities as the space evolves.

2. Enhanced digital asset exchange requirements: Digital asset exchanges must adhere to increased investor and consumer protection requirements including stringent systems and controls requirements, which enhance the integrity and security of transactions.

3. Robust custody framework: New provisions bring custody of digital assets or custodial wallet services under DARE 2024 and enhance the protection of client interests by requiring accessibility of digital assets, among other provisions.

4. Staking framework: DARE 2024 introduces a first-of-its-kind disclosure regime for staking digital assets belonging to clients or the operation or management of a staking pool as a business.

5. Comprehensive stablecoin framework: The Act provides a clear definition for stablecoins, provides for the registration of existing stablecoins, specifies acceptable forms of reserve assets and establishes new requirements for custody and management, segregation, reporting and redemption of reserve assets. The issuance of algorithmic stablecoins is expressly prohibited.

6. Digital asset issuers: Investor protection measures are enhanced by the inclusion of fit and proper standards for digital asset issuers, in addition to new disclosure and financial reporting requirements. 

Other notable provisions of DARE 2024 are "robust standards addressing conflicts of interest and connected third-party relations." The Act also addresses the categorization of non-fungible tokens as either "financial or consumer assets", provides for liquidity and reporting requirements, prohibits privacy token issuance and introduces certain restrictions on proof-of-work mining. 

June 2024 South Korea Financial Services Commission

The Financial Services Commission introduced guidelines on non-fungible tokens (NFTs) on 10 June 2024 to provide clear standards and examples on determining when NFTs should be considered as virtual assets.

In its press release, the Commission said:

"After closely examining the regulatory systems in major countries, the FSC, along with the Korea Financial Intelligence Unit (KoFIU), and the Financial Supervisory Service (FSS) decided to apply the following supremacy principle when enforcing laws on NFTs. First, NFTs shall be scrutinized to see if they qualify as securities under the purview of the Financial Investment Services and Capital Markets Act (FSCMA). Then, NFTs shall be seen in light of the Act on the Protection of Virtual Asset Users to determine if they qualify as virtual assets.

 "The legal characteristic of NFTs should be determined by the issuers, distributors, and dealers of NFTs based on their practical characteristics after considering wide-ranging factors, such as the issuance and circulation structure, agreement and advertisement, business and service content, and so on."

May 2024 U.S. Department of the Treasury

The U.S. Department of the Treasury published a 2024 Non-fungible Token (NFT) Illicit Finance Risk Assessment, which explores how vulnerabilities associated with NFTs and NFT platforms may be exploited by illicit actors for money laundering, terrorist financing, and proliferation financing. 

March 2024 The Law Society

The Law Society published its response to the Law Commission’s consultation on digital assets as personal property.

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