NFT regulatory points and overseas policies

Currently, NFTs (non-fungible tokens) are still in their infancy in terms of regulation. As a product of the application of new technologies such as blockchain, NFT is difficult to characterize and supervise under the existing legal framework. Instead, it has properties that are partly related to a variety of products, including artworks, commodities, financial products, and cryptocurrencies, which pose regulatory challenges.Regulation is not late, just not yet. With the growing market of NFTs and the emergence of related NFT cases, several major directions of NFT supervision have emerged.

In addition, there are also regional differences in policy supervision related to NFTs. On the one hand, in countries and regions where the NFT market is relatively active, there is also an urgent need for NFT compliance supervision. On the other hand, NFT is an important part of the Metaverse and Web3.0 framework, and for countries such as Japan and South Korea that have incorporated it into their development strategies, it is also more important to explore NFT-related policies and guidelines.

1. Key points of NFT supervision

At present, there are many points and difficulties in the supervision of NFT. First, as a form of carrying digital assets, NFT has disputes over ownership and licensing rights, and brings issues such as intellectual property rights. Second, NFTs have different regulatory requirements under different characterizations. For example, when they are regarded as securities, they will face compliance supervision from the financial industry. Third, NFTs also face risks related to cryptocurrencies, such as anti-money laundering and insider trading.

The above regulatory difficulties are also the main directions of the current NFT supervision.

(1) Ownership and License

Ownership and licensing rights are threshold issues for NFTs. Smart contracts can write various rules, such as only writing ownership, or writing copyright, which means that the owner will have non-commercial rights given to individuals, and even broad commercial rights.

  • For CryptoPunks, as in the traditional way of buying art, the buyer does not get the copyright of the NFT. This means that the owner can show the collection to friends, but cannot sell clothes and mugs with the collection printed on it.
  • For the Bored Ape Yacht Club, NFT owners have broader licensing rights. For example, NFT art collector Jimmy McNelis cooperated with Universal Music and selected 4 boring ape images to form the band KINGSHIP. Artist Dan Rollman created a comedy with his boring apes as characters.

Regardless of what rights are carried on the NFT, the licensing treaty should accurately describe the corresponding rights. The seller should accurately communicate to the buyer the rights it conferred on the buyer, and the buyer’s affirmative acceptance of a valid contract is also important. The buyer’s inaccurate understanding of the terms and the seller’s malicious marketing may lead to legal claims and other issues.

(2) Intellectual property rights

NFTs face risks from intellectual property litigation in the process of issuance and circulation. From the casting point of view, content that does not have a valid license, such as artwork, music or IP and other digital assets, will be cast into NFT on the chain, and will face third-party intellectual property rights that are liable for infringement. In the process of circulation, the owner does not have the right to grant the token purchaser the rights that the NFT does not have. For platforms that sell or display digital assets that contain third-party copyrights or trademarks, this part of the exchange or platform may also face intellectual property litigation.

  • On May 18th, American actor Seth Green suffered a phishing attack, resulting in the theft of 4 BAYC series NFTs. Among them, the NFT named BAYC #8398 was resold, which is being used to promote a TV show named White Horse Tavern, and the commercial use rights attached to the NFT were also transferred to the new owner. superior. After unsuccessfully appealing to the head of the theft, Green could only buy back the NFT for 165 ETH ($260,000) to recover his legal rights.


(3) Financial risks

The financialization of NFTs brings financial regulatory issues. Generally speaking, NFTs that only represent a single unique asset and have a single ownership are not securities, and when NFTs involve financial financing or exhibit strong liquidity, they may be judged as securities and subject to securities laws. . Currently, NFTs are more likely to involve securities law in the following situations:

Pool NFTs to share revenue, or split NFTs so that multiple investors have fractional ownership of the NFT.

NFT stands for licensing rights to digital assets such as songs, or a share of an asset’s revenue, such as a percentage of sales.

NFT stands for digital assets that are pre-sold for use on a platform that has not yet been built, and the proceeds of the sale are used to build the platform.

  • On October 8, 2021, Visionrare, the virtual stock NFT market, announced on its official website that the public beta would be closed and that the funds previously purchased by users to purchase VisionShares would be refunded. It is reported that Visionrare is a virtual stock NFT marketplace where users can bid on the NFT shares (VisionShares) of hundreds of different startups in an auction and compete for the best performing virtual portfolio. When Visionrare opened the public beta, it was suspended due to “underestimating the complexity of the law”, and it may be related to securities law, and was later changed to a free investment game.

(4) Anti-money laundering

The U.S. Department of the Treasury released a Study on Money Laundering and Terrorist Financing through Art Transactions, classifying NFTs as an emerging online art market and noting that the market could introduce new risks. Including the risk of money laundering in the field of digital art.

The report states that NFTs can be used to conduct self-money laundering. Criminals can buy NFTs with illicit funds and trade them with themselves to create a record of the sale on the blockchain; the NFTs will then be sold to an unwitting individual who will receive clean funds from the latter unrelated to the crime profit.

  • According to analysis by analytics platform Chainalysis, out of 262 suspected habitual wash traders (who sold NFTs to self-funding addresses more than 25 times), 110 profitable wash traders received a total of nearly $8.9 million from the campaign Profits, and to make matters worse, the $8.9 million likely came from sales to unsuspecting buyers.

(5) Insider trading

Insider trading is one of the most common fraudulent ways for illegal traders to profit. Through material non-public information, traders can pre-purchase or sell assets for profit. On NFT issuance and trading platforms, NFT pre-sale allocation and related information need to be handled with care, otherwise, insider trading will improperly manipulate NFT prices and trading volumes. At present, Opensea, the largest NFT trading market, has been exposed to insider trading incidents.

  • In June 2022, Nate Chastain, a former product manager at OpenSea, was charged with insider trading. It is reported that Chastain is responsible for screening NFTs that appear on the website’s homepage.Knowing in advance which NFTs will appear on the site, it purchased a batch of NFTs that were about to be featured on the OpenSea homepage in advance, and then after the NFTs landed on the OpenSea homepage, Chastain sold them for two to three times the original purchase price. Between June 2021 and September 2021, Chastain used confidential information to buy dozens of NFTs and was charged with wire fraud and money laundering.

The company has since released two new employee policies, including a ban on OpenSea team members from buying and selling when the company introduces or promotes collections or creators, and a ban on employees “using confidential information to buy or sell any NFT content, whether or not it is in available on the OpenSea platform”. Legal sources said the actions could lead to further scrutiny of the industry.

2. Overseas NFT Policy

From the perspective of the regulatory performance of global NFTs, it is still in the exploratory stage. Among them, the similarities between NFT and cryptocurrencies in terms of decentralization make them face anti-money laundering and financial-related controls from various countries, and compliance is the main direction of the current policy. In addition, countries have also begun to consider intellectual property protection, taxation and other aspects in their policies.

From a regional perspective, Europe and the United States, especially the United States, are the most active regions for NFT-related industries, and one of the regions that are at the forefront in terms of NFT characterization and compliance. In addition, South Korea and Japan have included the development of Metaverse, Web3.0 and other industries into their national development policies, so they have also explored the policy development direction of NFT.

(1) European and American countries

On October 28, 2021, the global anti-money laundering agency, the Financial Action Task Force (FATF), released updated guidance for companies dealing with cryptocurrencies and virtual assets, incorporating new areas such as DeFi, NFTs, and DAOs into its framework. According to the latest FATF guidelines, NFTs are not interchangeable, unique, and are used as collectibles, not as means of payment or investment vehicles. However, if NFTs are used for “investment purposes”, NFTs will be the subject of regulation in this guideline.

As encryption enforcement steps up to combat ransomware, NFTs need to step up their compliance to avoid sanctions. On October 15, 2021, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) released customized guidance for the cryptocurrency industry that highlights sanctions compliance requirements and provides industry-specific advice on OFAC’s compliance expectations. In November, OFAC sanctioned Chatex, a Latvia-based exchange, for holding 42 NFTs, worth approximately $531,600, including certain designated crypto addresses associated with Chatex.

The announcement of the EU Draft Regulation on Markets in Crypto Assets (MiCA) will bring new compliance challenges to NFTs. On March 14, the European Parliament’s Economic and Monetary Affairs Committee voted on the draft Regulation on Markets in Crypto Assets (MiCA). The main object of supervision this time is stable coins, but MiCA’s definition of encrypted assets is not limited to stable coins, but takes decentralized ledger technology (DLT) as the core. In this way, NFTs have the possibility of being regulated by MiCA. This means that “the NFT issuer must be a legal person” rather than a decentralized entity, and must also register with the authorities and comply with other consumer protections mandated by law, the document said.

Of course, there is no shortage of voices supporting NFTs.

In February 2022, the New York Stock Exchange (NYSE) filed an application with the United States Patent and Trademark Office (USPTO) to provide an online marketplace for a variety of digital goods, including NFTs, cryptocurrencies, digital media and artwork. If the exchange moves forward with these plans, it will compete with the likes of OpenSea and Rarible. According to legal sources, if the application is approved, the New York Stock Exchange will become an exchange for cryptocurrencies and NFTs, and both the project party issuing the NFTs and the NFTs themselves will be managed by the New York Stock Exchange.

Tennessee lawmakers have proposed allowing the state to invest in cryptocurrencies and NFTs , and the bill has now passed to the House Finance Subcommittee for further consideration. Tennessee has become a modest tech hub by attracting crypto companies and investors, and crypto-friendly laws will help attract more businesses to the state.

(2) Japan and South Korea

The NFT market in South Korea is relatively active, and its Financial Supervisory Authority is also concerned about the risks of NFTs. In February 2022, the Korean Financial Supervisory Service (FSS) announced that it will strengthen the monitoring of new trading assets including NFTs, including strengthening the verification of IPOs of emerging market companies such as NFTs and Metaverse, and will target fast-growing digital assets. Develop countermeasures for factors in the market that cause harm to consumers.

South Korea’s Financial Services Commission (FSC) will follow FATF’s guidance on NFTs and their regulation , that NFTs generally fall outside the definition of virtual assets and are not subject to such regulation. “If NFTs are virtual assets, they will be required to report under the Certain Financial Transaction Information Act to comply with anti-money laundering obligations,” an FSC official explained.

In September 2021, a policy document from Japan’s financial regulator, the Financial Services Agency (FSA), revealed that the agency will begin regulating NFT tokens as well as initial exchange offerings (IEOs). While the document does not specifically explain what action the FSA will take on NFTs, DeFi, CBDCs and IEOs, the facts mentioned in the document suggest that establishing a regulatory framework for NFTs is already on its agenda.

In addition to regulating NFT-related issues, Japan and South Korea are also exploring the possibility of developing NFTs at the policy level.

The Seoul government of South Korea has issued policies and plans, and announced that it will build the Seoul Metaverse platform within 5 years, and NFT, as an important part of the Metaverse, has also attracted attention. At present, South Korea may introduce its first NFT regulatory rules. On April 12, 2022, the Korean government will prepare an NFT copyright policy to address the issue of “fake NFTs” issued without the consent of the copyright owner. At present, the Ministry of Culture, Sports and Tourism of South Korea has issued a tender announcement for “Metaverse, NFT-related copyright issues research services”, and is preparing to select relevant research companies and formal signing procedures.

On January 28, 2022, the ruling party of Japan established an NFT policy review project group to incorporate blockchain and NFT-related businesses into the government’s growth strategy. According to a white paper released by members of the working group, Japan must “promote innovation in the Web 3.0 era,” and in the process, the government must view the NFT sector as a “new engine of growth.”

(3) Other overseas regions

Members of the Russian lower house submit a bill to the State Duma to incorporate NFTs into legislation. In June 2022, a bill was submitted aimed at introducing the term NFT into the Civil Code of the Russian Federation. “The rights of those who own non-fungible tokens need to be protected, and currently Russians are dealing with NFTs at their own risk,” said the draft’s authors.

In February 2022, India’s Ministry of Finance announced the country’s budget, revealing that digital assets will be taxed at a rate of 30%. According to the budget, “for the purposes of this article, ‘non-fungible tokens’ are digital assets that may be designated by the central government by notification in the official gazette.” This means that the government of India will have the right to designate or certify NFTs, and to levy taxes on them. Tax.

Abu Dhabi Free Zone seeks comments on NFT rules. Opening a solicitation in March 2022, the Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) is currently “not proposing a formal regulatory framework for NFTs.” According to the draft proposal, companies licensed and regulated by ADGM for services such as trading and custody will also be able to offer these services to NFTs, said Simon O’Brien, executive director of markets at FSRA.

Posted by:CoinYuppie,Reprinted with attribution to:
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