MiCA Law: Regulation of NFTs

A downward trend was observed in 2022 also observed for the keyword “NFT” (Non Fungible Token). On the Google search engine, the volume of searches for “NFTs” had however reached peaks in 2021. In times of bear market, investors seem to lose interest in the NFT offer. Some consider this proof that the NFT market is an empty shell artificially inflated by speculation. Nevertheless, this market raises concerns for the European legislator. In this sense, the MiCA law proposes to regulate it.

The basics of NFTs

The NFT became known via the art market, for its non-fungibility. Unlike other digital assets, an NFT has its own specificities. This singularity allows it to be a certificate of authenticity for a work. Overall, there are two types of NFT: one constitutes the work itself, the other is the support of a right. In both cases, platforms have developed to enable the acquisition and management of assets in the form of NFTs. The objective of buyers is generally to sell these acquired NFTs on the secondary market to make a profit.
However, bringing the NFT back to this feature would be reductive. NFTs go beyond the art market alone, as presented here. From a legal point of view, its non-fungibility is not sufficient to attach it to a legal category, and therefore to an applicable regime. Its protean nature requires the intervention of the legislator.

Potential changes following the MiCA law

If there is not yet a specific regime, MiCA risks modifying this state of affairs. This is a divisive proposal for a regulation by the European Parliament and the Council on digital asset markets. MiCA could apply to three different types of assets. First stablecoins, payments tokens (to constitute a means of payment) and finally utility tokens (fungible digital assets accepted only by the issuer intended to provide digital access to a good or service). Recital 8 of the settlement proposal single cryptos, accepted only by the issuer and non-fungible with other digital assets and which cannot be split.

NFTs seem a priori to be able to escape the scope of the text. Nevertheless, MiCA specifies to apply to non-fungible tokens which give their owners (issuers or holders) specific rights linked to financial instruments. In this case, the NFT will be treated as a security token and will be subject to the regulation of Union law on financial services. The regulation therefore indirectly envisages a typology of NFT which falls within its scope. This decision is surprising from a legal point of view. Indeed, this typology could also come under the MiFID 2 directive which applies to financial instruments.

The future will tell us what regulations will be put in place. In fact, legislative intervention is only a matter of time. If the European Union is ready to provide a framework, the legislators of the Member States will have to deal with the question on a case-by-case basis. The complexity of the blockchain makes the exercise of regulation difficult. The legislator must manage to combine the protection of the monetary system and individuals, with the need not to abort the European players operating within this market.

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