Regulations can classify digital assets as securities, including non-fungible tokens (NFTs). In this case, prospective buyers may be subject to the country’s securities laws in which they are buying and selling NFTs. China, Hong Kong, the U.S., and the U.K. are among the countries exploring this possibility.
NFTS in the United States of America
U.S. law follows the landmark 1946 Supreme Court case, Howey. This case lays out four elements for determining whether or not an NFT, cryptocurrency, or digital asset is considered a security or investment contract. These include:
(1) investing money,
(2) investing in a common venture,
(3) expecting profits, and
(4) receiving profits as a result of third parties’ efforts.
A state’s securities law may differ from or add to those required by federal law, even though the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) regulate digital assets primarily under federal law.
Sand Vegas Casino Club was issued cease and desist orders in April by Texas and Alabama regulators alleging it was offering securities that weren’t registered. The developer of the online casino missed several crucial steps in marketing its NFTs. A bipartisan bill introduced back in June would clarify the role the SEC and CFTC play in regulating digital assets, including cryptocurrencies. It is currently being debated by the industry.
United Kingdom and NFTs
In the United Kingdom, non-transactional financial transactions (NFTs) are recognized as private property by the High Court of Justice. During May, two NFTs were stolen from Boss Beauties, a project that aims to ensure women and girls are given access to cutting-edge creative opportunities. This “private property” status, however, does not extend to the original authors’ work or the actual content that the NFT represents. NFT marketplaces like Ozone Networks and OpenSea are examples of NFT marketplaces where courts can issue injunctions against specific accounts.
NFTs in Hong Kong
As part of Hong Kong’s anti-money laundering (AML) policies, lawmakers introduced revised legislation to introduce a comprehensive licensing regime for crypto service providers. The H.K. Securities and Futures Commission licenses entities working with crypto projects that want to launch trading platforms. Depending on whether the NFT is a “collective investment scheme” (CIS) or a fractionalized token in Hong Kong or if it targets potential investors, the issuer needs to obtain a license from the SFC.
NFTs in China
While China has rigidly cracked down on cryptocurrency, it has recognized NFTs’ value, separating market hype from actual value. A set of guidelines for how NFT projects will be treated were issued by China’s Banking, Securities, and Internet Finance associations in April.
According to the current political and regulatory landscape, regulators, domestic and abroad, will continue to examine NFTs based on the type of product they’re marketing. They will apply securities laws and policies to every project that becomes successful.