Draft EU law could see NFTs regulated as securities: Law Prof

The European Union’s landmark and now finalized Markets in Crypto Assets (MiCA) Bill asserts that NFTs sold as components of large collections have little or no distinctively unique qualities or utility and will therefore be subject to the same regulatory scrutiny as cryptocurrencies. , according to a leaked draft of the legislation obtained by Decrypt.

According to University of Kentucky law professor Brian Fyre, the language of the legislation amounts to the EU noticing major bruises NFT collections which Bored Ape Yacht Club (BAYC), Cryptopunksand Doodles, among others, as securities.

“This sounds like Europe saying they think securities regulators should look at large PFPs [profile picture] projects as securities, for regulatory purposes, said Fyre, who specializes in NFTs and securities law. Decrypt.

MiCA – the EU’s answer to a comprehensive crypto regulatory framework—has been anticipated for years, and is expected to enter into force in 2024. The MiCA draft obtained by Decryptdated September 21, is expected to be the final version of the legislation, hashed out after months of negotiations between the European Parliament, the European Commission and the European Council.

The legislation, which primarily deals with the issue of regulation of cryptocurrency activity in Europe, exempts digital assets that are “unique and non-tradable … including digital art and collectibles” that have “unique characteristics” and provide “benefit … to the token holder. »

However, the bill specifies that “issuance of crypto-assets as non-fungible tokens in a large series or collection should be considered as an indicator of their fungibility.”

The legislation continues: “The mere attribution of a unique identifier to a crypto-asset is not sufficient to classify it as unique or non-fungible. The assets or rights represented should also be unique and non-fungible for the crypto-asset to be considered unique and non-fungible.” »

According to Fyre, that language takes a direct shot at dominant NFT collections like the Bored Ape Yacht Club, which consists of 10,000 visually similar NFTs but are distinguished by numbering mechanisms (e.g., Bored Ape #6443) that allegedly give each NFT -holder of fully-fledged intellectual property rights.

“What they’re saying is that when you sell a 10,000 NFT collection, what you’re really selling is shares in the project as a whole,” Fyre said. “In other words, each NFT is functionally just a tradable share in the value of the entire project.”

Essentially, MiCA’s language, in Fyre’s interpretation, asserts that in the eyes of the EU, each Bored Ape NFT holder does not own a unique work of art, but instead a share in the collective value of the Bored Ape brand, and the collection’s owner, Yuga Labs.

Although the distinction may seem semantic, if enacted into law and interpreted as such, it can have enormous implications. It would effectively treat and regulate popular NFT collections – such as BAYC, CryptoPunks and Doodles, among others – as securities.

It is likely to establish a far more practical relationship between such NFT collections and the European government than exists now.

The SEC may regulate NFTs in the same way

The question of which components of the crypto industry should be considered securities by government regulators has long been a hot-button issue, which has recently escalated. Earlier this week, the SEC in the US implied in a federal lawsuit that the entire Ethereum network should be considered a securities exchange under US regulatory purview.

If the EU were to start classifying blue-chip NFT collections as securities, Fyre believes the impact on US regulators would be inevitable.

For years, Fyre has lobbied the SEC to clarify its position on whether NFT should be classified as securities.

“I think the SEC will take notice of this,” Fyre said. “They ignored me when I said that. But they will not ignore this.”