BaFin unsure whether NFTs qualify as securities

BaFin, Germany’s federal financial regulator, has recently stated that it is not yet prepared to categorize non-fungible tokens (NFTs) as securities. Instead, BaFin proposes that NFTs should be evaluated on a case-by-case basis for classification and regulatory purposes.

BaFin is not sure how to classify NFTs

On March 8, BaFin issued a statement in its journal explaining the legal classification of NFTs. The government body currently does not see how everyone meets the requirements to be classified as securities in the regulatory sense. However, the federal institution may consider NFTs as securities in the future if a significant number of NFTs contain the same repayment and interest charge.

BaFin recommends that NFTs should be classified as “crypto-assets” based on their prospectus. Meanwhile, the chance of NFTs being classified as such is low due to their lack of immediate tradability and standardization. If an NFT contains documentation of ownership or exploitation rights, it can potentially be considered an investment.

NFTs do not fall under the coverage of ZAG and AML

BaFin does not expect NFTs to comply with the licensing requirements of the German Payment Services Supervisory Act (ZAG). Additionally, except for fungible tokens, which fall under the category of financial instruments, NFTs are not subject to the country’s anti-money laundering regulations. However, NFTs that are put in the same light as “cryptocurrency” should be created and marketed in accordance with AML regulations.

A survey on why people buy NFTs

In a survey made by Metajuice, only a few NFT collectors buy these digital assets for expectations of profit in the future. In fact, only 13% of respondents thought of it that way. Almost three out of four people in the survey, or a good 74% of them, said they bought them only for their overall status, exclusivity and design. This particular scenario blurs the status of NFTs as securities.

NFTs under the Howey test

One reason why NFTs may fall under the classification of securities is the Howey test. This test is a legal framework used to determine whether an asset is a security, and it is based on four criteria:

• An investment of money;
• In a joint enterprise;
• With an expectation of profit; and
• Derived solely from the efforts of others.

Depending on how an NFT is marketed and sold, it is possible that it may meet these standards and be considered a security.

For example, if an NFT is marketed as an investment opportunity with the expectation of future profit, and the profit is dependent on the efforts of the NFT issuer or seller, it may be classified as a security under the Howey test.

As the market for NFTs continues to develop and mature, regulators around the world are likely to look closely at how these assets are marketed and sold to determine whether they should be classified as securities.

Final thoughts

BaFin’s note on the legal classification of NFTs is a positive step towards providing greater clarity and certainty for market participants and for regulatory purposes. However, people should not fear or mistake regulation for centralization as the two represent different concepts.

Regulation refers to the process of establishing clear rules and guidelines to ensure compliance and protect consumers, while centralization refers to the concentration of power or control in the hands of a single entity. With these in mind, NFTs can be regulated without necessarily leading to centralization. It is possible to establish regulations as a guiding hand just to ensure transparency and accountability in the NFT market amid its decentralized nature as part of the blockchain.