All you need to know about global NFT financial regulations

Financial regulators and consumer protection agencies are concerned about NFTs, although their approach varies globally. Users from many jurisdictions may be involved in an NFT transaction, and developers have difficulty knowing the legal status of their NFT across the regions where it will be available. Therefore, in this article, we examine the worldwide regulations regarding NFTs.

NFTs are digital artifacts, or “non-fungible tokens,” that employ blockchain technology to certify and validate real items or to offer digital objects uniqueness and worth. They are also a current phenomenon, with thousands of artists using the unique features of this new tool to add value to their works all around the globe.

Initially, NFTs invested in the visual arts industry, providing new methods of generating and using works of art and revolutionizing the market. However, the true revolution of “tokenization” has yet to unfold its effects: it will give more customization rights and enable interactions that were previously impossible.

• If you are interested in crypto regulation, read our latest guide. 

Check out our video on NFTs to learn more about what they are and how they work.

Contents

• European Union

• France
• Portugal

• United Kingdom
• United States
• Brazil
• China
• Singapore
• Japan
• United Arab Emirates
• India
• How to buy and sell NFTs on DappRadar
• Conclusion

European Union

There is no formal regulation or legal definition of NFTs in the EU, nor is there a unified regulatory scheme across member states. The European Commission has issued a Markets in Crypto-assets Regulation (MiCA) that expressly excludes NFTs. However, the proposed Regulation should specifically apply if the NFT confers certain rights, such as those of financial instruments, including profit rights or other benefits, to the holder. In these circumstances, the NFT may be considered a “security token.” NFTs will also be subject to any applicable national laws.

France 

Although digital assets are covered under the 5th AML Directive, there is currently no legislative framework for NFT in France. Suppose an NFT is recognized by French law as a token or digital asset. In that case, this may result in restrictions on its marketing and promotion as well as a need for the trader to register as a supplier of digital asset services.

The scope of financial regulation may apply to an NFT if it possesses rights that are exactly the same as those of a financial instrument, such as a transferable security.

The German government said in 2021 that no modifications to the legal system were anticipated in light of the introduction of NFT. NFTs could, nevertheless, come within the purview of some German laws.

NFTs that fit the definition of a cryptocurrency asset or are used for investments will be subject to anti-money laundering regulations, while those that fit the definition of a financial instrument will need to get extra licenses.

The Federal Financial Supervisory Authority (BaFin) will require a license from anyone wishing to sell NFTs that are considered financial instruments, and the issuer of the NFT may need to publish a prospectus if the NFT qualifies as a security under the Prospectus Regulation or as an asset investment under local laws.

NFTs are not specifically regulated in Spain, although if they meet the criteria for a virtual currency, they could be covered by anti-money laundering laws.

To trade, transfer, or provide custody services for NFTs that qualify as investments, businesses or individuals must register as virtual asset service providers.

NFTs in Spain will likewise be subject to the regulations governing their underlying asset. The Spanish Ministry of Consumer Affairs said earlier in 2022, that it is thinking about regulating cryptocurrency games. In order to guarantee that investors are informed of the hazards, it has also established regulations on the marketing of crypto-assets.

Portugal

Like the other members, Portugal does not have a legislative definition or explicit regulation of NFTs; nonetheless, if an NFT satisfies the criteria for a virtual asset, it will be subject to anti-money laundering requirements.

Portugal follows Spain in requiring registration as a Virtual Asset Service Provider from businesses or people that trade, transfer, or provide custody services for NFTs that qualify as investments.

NFTs may qualify as “investment goods” under Article 1, Paragraph 1 (Letter u) of the Italian Consolidated Financial Act, even though there are no particular rules governing NFTs in Italy. This imposes extra responsibilities on the seller, such as licensing.

Again, a case-by-case analysis is required, but if an NFT meets the criteria for virtual currency, it will result in anti-money laundering obligations.

Finally, from a financial perspective, similar to that of income tax, if the NFT is regarded as a transfer of intellectual property rights and the transferor is functioning in their position as an author on a regular basis or just sometimes, it must be taken into account.

In order to determine if VAT is applicable and whether the transfer complies with copyright laws, it is necessary to determine whether the author is subject to VAT.

United Kingdom

There are no NFT-specific rules in the United Kingdom. NFTs are instead regarded as a sort of crypto asset. In its recommendations, the Financial Conduct Authority differentiates between three sorts of crypto-assets: security tokens, e-money tokens, and unregulated tokens. If the NFT meets the features of a security token, it will be regarded as a designated investment under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. If the NFT is an e-money token, the Electronic Money Regulations 2011 will govern it.

Criteria:

• Security tokens provide rights and responsibilities on defined investments like stocks, savings, and insurance.
• E-money is the electronic storage of monetary value.

If the NFT fits under one of the above mentioned categories, marketing them will need FCA approval. This will make the NFT subject to the Money Laundering Regulations and necessitate KYC checks and surveillance on the purchaser.

However, the great majority of NFTs will not satisfy the above criterion and will consequently remain unregulated.

United States

NFTs are presently unregulated in the United States. The applicability of regulation relies on the categorization of a specific NFT, which is often determined by the rights and characteristics connected with that NFT. The Securities and Exchange Commission, for instance, has revealed that it is examining possible unlawful token offers. Currently, NFTs may qualify as securities under the Securities Act of 1933 and the Securities Exchange Act of 1934 if a specific NFT has the features of a security, such as an investment contract, in which case it may be regarded to constitute and be handled as a security.

Infrequently, if a non-fungible token (NFT) has a monetary value, it may trigger regulatory responsibilities from the Financial Crimes Enforcement Network (FinCEN), such as the need to adhere to extensive anti-money laws. A non-financial transaction with these features may also be subject to licensing requirements under state money transmitter legislation.

In loyalty and incentive programs, NFTs having a monetary value are becoming more prevalent. Such NFTs may circumvent FinCEN and state money transmitter regulations, but they must adhere to stringent structural requirements. 

For NFT developers, selling an NFT on a marketplace will result in the payment of income tax on the proceeds. If an investor purchases an NFT and subsequently sells it for a profit, they may suffer capital gains tax liability.

Brazil

In September 2022, the Brazilian Securities and Exchange Commission allegedly intends to pursue improvements to the country’s regulatory framework for cryptocurrencies.

A virtual asset, as defined in the legislation that was adopted, is a digital representation of value that may be electronically exchanged or transferred and utilized for payment or investment reasons. Additionally, it establishes techniques to stop money laundering and provides guidelines for best practices for Know Your Customer (KYC) operations. In accordance with the law, non fungible tokens (NFTs) are also not regarded as securities, but most other tokens are still up for debate.

China

Currently, there are no specific laws or regulations governing NFTs, but on 13 April 2022, the National Internet Finance Association of China, the Securities Association of China, and the China Banking Association issued a joint initiative (the “Initiative”) aimed at preventing NFT-related financial risks. Even though the Initiative is not a rule under PRC legislation, since the three organizations are monitored by the central bank, the banking regulatory authority, and the securities regulatory authority, this Initiative represents the views and policy direction of regulators in China.

The Initiative does not classify NFTs as cryptocurrencies or virtual currencies. However, according to the Initiative, the following code of behavior must be observed:

• Not to include securities, insurance, credit, precious metals, or other financial assets as underlying items of NFTs in order to avoid the issuing or trade of financial products.
• Not to degrade the non-fungible properties of NFTs by splitting ownership or by batch creations, etc., in order to avoid a true initial coin offering (ICO).
• To refrain from providing centralized transactions (such as centralized bidding, electronic matching, anonymous transactions, market makers, etc.), continuous listing transactions, standardized contract transactions, and other similar trading services for NFTs in order to prevent the establishment of de facto trading venues;
• To refrain from using virtual currencies like as Bitcoin, Ethereum, and Tether as pricing and settlement mechanisms for the issuance and trading of NFTs;
• To undertake genuine name authentication of the issuing, selling, and buying parties, to maintain customer identification information and records of the issuance and trading of NFTs, and to participate actively with anti-money laundering efforts; 

As a result of their growing popularity and the stringent regulation of cryptocurrencies and assets, there is room for regulation, and investors and sellers should be careful that it may soon be implemented.

Singapore

The central bank of Singapore has said that it would not control the NFT market. It considers the nascent market to be in its infancy and has no current plans to control anything in which individuals are investing.

Nonetheless, if an NFT meets the definition of a capital markets product under Singapore’s Securities and Futures Act (SFA), it will be subject to MAS’ regulatory obligations. For instance, if an NFT is constructed to reflect rights to a portfolio of listed shares, it will be subject to the same prospectus, licensing, and business conduct regulations as other collective investment schemes.

Similarly, if an NFT has the characteristics of a digital payment token under the Payment Services Act (PSA), the vendor of such an NFT may be subject to certain limitations and requirements.

Japan

Although there are presently no particular regulations in Japan that govern NFTs, the government said in January 2022 that it was creating an NFT task group, which suggests that regulation is soon to come. Currently, an NFT may meet the definition of a security under the Financial Instruments and Exchange Act if the holder receives cash or other assets that represent a share of profits. NFTs used in games should in particular be taken into account when determining if they are in violation of any gambling regulations in Japan.

United Arab Emirates

The Abu Dhabi Global Market (ADGM) has just released a consultation document titled “Proposals for upgrades to capital markets and virtual assets in ADGM.” The ADGM proposes that, in order to support NFT trading, enterprises will require a license from the free zone’s financial authority. In addition, it believes that NFTs may need compliance with ADGM’s anti-money laundering and Sanction Rules. These duties are still in the consultation phase, so sellers and investors should keep them in mind.

In extremely specific instances, NFTs may be subject to Crypto Asset Regulations. These restrictions apply to crypto assets that are either securities or exchange-traded. Depending on the underlying asset’s characteristics, anti-money responsibilities may be triggered.

India

India’s Supreme Court has struck down an order by the Reserve Bank of India in June 2018, advising banks not to deal in crypto-currencies. Trading in NFTs would be illegal in India if they are considered a derivative. If an NFT is simply a reference to an existing asset and used as proof of its authenticity, classifying it as derivative would be incorrect. The owner does not get the copyright to the underlying piece of art. Under Section 14 of the Copyright Act, only the owner of a work has the right “to reproduce and distribute copies of it”.

As a result, unless the buyer and seller expressly restrict resale or copying of the NFT, such action may not be accorded protection. However, the buyer’s digital item will have protection from illegal copying or disseminating. For income tax purposes, a digital art NFT could be considered an intangible asset or good and appropriate taxes should be declared and remitted on the same.

How to buy and sell NFTs on DappRadar

Using the DappRadar Portfolio Manager, users can not only see the value of their NFT collection, but also immediately list their NFTs on the open marketplace. While visiting other portfolios or NFT pages, DappRadar users can directly buy and acquire NFTs from the market.

Conclusion

The purchase and sale of tokenized artwork raises concerns regarding its legality as well as other legal matters including NFT holders’ rights, creator and holder culpability, the application of several other intersecting laws, and the exhaustion of copyright holders’ rights after the initial sale.

It is evident that artists are unfazed by the crypto winter in this sector, which is still booming, and our latest NFT report shows that. The NFT bubble hasn’t crashed; instead, it sparked a fresh surge of innovation that resulted in a larger and better NFT implementation. 

Andrius Serpenkskas, DappRadar Legal Counsel states that “it is essential to distinguish cryptocurrencies from NFTs. Cryptocurrencies are a type of currency with economic value and fungibility. This implies that, within a certain cryptocurrency, it makes no difference whatever crypto token you own; they all have the same value, 1 ETH = 1 ETH. However, NFTs are non-fungible, and their worth transcends economics.”

He continues stating that “as new blockchain technology opens up new cultural and financial opportunities, the world of NFTs is constantly evolving. And while laws usually move more slowly than trends, we have seen that, at least in certain areas of the globe, regulations are gradually starting to consolidate into tangible regulatory systems.” 

Andrius views these upcoming regulations as a good sign since they signify a more developed and reliable market, which will eventually encourage web3 adoption.