NFTs must be included in the EU’s new laws on digital assets and money laundering

Legislators in the European Union (EU) continued to press on the issue of regulating digital assets on Monday 4 July, with members of the European Parliament proposing new changes to the Union’s legislation against money laundering that would bring NFT exchanges within the bloc’s new AML / CFT framework.

The proposal is part of a broader push by the EU leadership to strengthen and modernize protection over the financial system, with a focus on combating money laundering and terrorist financing.

Last week, EU legislators reached an agreement on the proposed MiCA (Market in Crypto Assets) rules, which will constitute a new and comprehensive regulatory regime in the EU for digital assets with a special focus on market abuse and manipulation. The same week, the European Council published a partial position paper on a soon-to-be-established anti-money laundering authority (AMLA) for the EU – one that would have direct authority over high-risk digital asset service providers and designated “committed entities.”

“Recent developments in this rapidly evolving sector have confirmed the urgent need for EU-wide regulation,” said Bruno Le Maire, French Minister of Economy, Finance and Industrial and Digital Sovereignty.

“MiCA wants to better protect Europeans who have invested in these assets, and prevent the misuse of cryptocurrencies, while being innovation-friendly in order to maintain the EU’s attractiveness. This landmark regulation will put an end to the crypto-wild west and reaffirms the EU’s role as a standard setter for digital topics, ”he added.

NFTs were conspicuously absent from last week’s proposal. On 4 July, however, the EU announced proposed changes that would extend the new rules to include entities trading in NFTs.

Specifically, the NFT Supplement will classify digital asset service providers who “trade or act as intermediaries for the import, minting, sale and purchase of unique and non-fungible cryptocurrencies representing ownership of a unique digital or physical asset” as obligated entities subject to the newly established AMLA and the incoming new AML regime. For example, this could potentially mean that exchanges trading in NFTs will be subject to the same strict identity checks and transaction reporting requirements that other obligated entities, such as banks, must do.

The development will put a damper on what relief NFT fanatics must have felt after NFTs were left out of the proposals announced last week.

NFTs have exploded on the digital asset scene in the last 12-18 months, with the most expensive NFTs originally selling for tens of millions of dollars. The excitement surrounding such sales has contributed to a vibrant secondary market. Although NFTs can offer practical functionality, this functionality makes little of their apparent market value. As a result, the NFT market is considered by many to be particularly vulnerable to being exploited for money laundering.

Consumer welfare is also a concern for regulators. OpenSea, a large NFT marketplace that will be caught by the changes, is facing civil lawsuits due to “stolen” NFTs. In other news, a former OpenSea employee was charged with insider trading by the US Department of Justice in June.

Against this background, the regulations that specifically address NFTs seemed inevitable. Until now, the EU leadership has complained about the lack of harmony between regulators in the member states. This disharmony is something the EU hopes to address with its new rules and in particular its proposed dedicated authority to combat money laundering.

If the proposed NFT amendments are adopted, they will be sent for approval to the European Council and the European Parliament. However, it is likely that no further movement will take place until after the European Parliament’s summer break in August.

See: Presentation of BSV Global Blockchain Convention, NFTs: What Can We Do Better?

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