Here is what the German regulator, BaFin proposed for NFTs

• BaFin is not yet ready to classify NFTs as securities and recommends doing so on a case-by-case basis.
• BaFin does not expect NFTs to comply with the Payment Services Supervision Act’s licensing requirements.

Non-fungible tokens (NFTs) are not yet eligible to be classified as securities by the German Federal Financial Supervisory Authority (BaFin). The organization recommends categorizing NFTs on a case-by-case basis.

On March 8, the BaFin journal published an explanation of the legal classification of NFTs. The regulators now do not see how NFTs satisfy the requirements to be classified as securities.

But if, for example, 1,000 NFTs reflect the same repayment and interest requirements, BaFin may later see NFTs as securities.

Another provision states that an NFT can be considered an investment if it includes proof of ownership or exploitation rights, such as a distribution guarantee.

Reasons for the same

The organization suggests designating NFTs as an “encryption tool” on a case-by-case basis. However, BaFin claims that given the lack of fast exchange, the likelihood that NFTs will serve as a “crypto-asset” is much lower than investment classification.

NFTs are also spared the “e-money” designation due to the absence of standardization.

BaFin does not expect NFTs to comply with the Payment Services Supervision Act’s licensing requirements due to the challenges with classification.

Furthermore, NFTs are exempt from BaFin’s supervision against money laundering, with the exception of fungibles, which fall under the category of financial instruments. NFTs that are individually considered “cryptocurrency” must comply with AML regulations.

About three out of four NFT collectors on metaverse website Metajuice claim to buy NFTs for status, distinctiveness and aesthetics. Only 13% of survey respondents claimed that they buy NFTs with the intention of reselling.

BaFin and cryptocurrencies

BaFin’s CEO Birgit Rodolphe last year advocated innovative and consistent regulation of the decentralized financial sector (DeFi) across the EU.

The German financial regulatory agency BaFin is responsible for overseeing banks, insurance companies and other financial institutions, including bitcoin businesses. “Crypto custody licenses,” a license required for businesses that intend to offer Bitcoin services in Germany, are issued by BaFin.

The Eurozone country appears to approach NFTs differently than countries such as the US, Singapore and India.

The US Internal Tax Agency (IRS) changed the language around NFTs last year and classified them as digital assets. The department responsible for collecting taxes gave advice for the tax year 2022.