WILL AN NFT MARKETPLACE BE REGULATED LIKE A STOCK EXCHANGE IN THE FUTURE?
NYSE, the world’s largest stock market has decided to trade NFTs and crypto just like stocks.
NFT marketplace regulations are in process. But the news about NYSE stepping into the digital currencies and assets have made NFT regulations the need of the time.
Cryptocurrencies and blockchain have brought forward a whole new world of decentralised financial services. The graph of the crypto market is constantly going up in the long run.
Crypto has given us access to peer-to-peer fast transactions, low conversion rates and borderless digital currencies. Though its advantages are not limited to these we cannot ignore its misuse.
Cryptocurrencies and digital assets like NFTs are being used for money laundering, tax evasion, funding illegal businesses, terror funding and black marketing.
Seeing the use of cryptocurrencies for illegal activities, governments and agencies across the world are putting regulations over it. Countries across the globe are ready with rules to regulate the use of digital currencies.
Does NFTs come under the regulations of digital currencies?
Regulating NFTs are tricky. Every asset is unique and of different value. So NFTs representing them are unique and non-interchangeable. It is difficult to implement one NFT rule to define all assets.
Government agencies are stuck as to how to regulate NFTs. Should they categorise NFTs like the stock market? Or release new rules for the NFT marketplace?
Is 2022 The Year Of NFT Regulations?
The year 2020 and 2021 was the year of crypto regulations all around the globe. Governments could not accept something that they cannot regulate. Agencies were coming up with reports and rules to monitor the crypto transactions and processes.
However, they failed to understand that the basic fundament behind the digital economy is its decentralisation. It was built so that no government or institution could control it.
But seeing its misuse against the welfare of humanity, some regulation becomes necessary.
China banned all activities related to crypto and have even prohibited people from working in crypto companies. FinCen, the US regulatory body came up with an infrastructure bill and several other rules to monitor digital currencies. FinCen has also asked crypto and Fintech companies to keep record of transactions exceeding a specific amount to be presented as and when asked.
Bank of England’s report has supported using stable coins in our routine life. However, they urge that it should be regulated by the government if its to be used in everyday transactions.
India has neither legalised digital currencies nor considered them illegal. The government in its 2022-23 Finance Budget has declared a 30% tax on digital currencies transactions and profits.
The concern is that these bills do not cover digital assets like NFTs. If they include NFTs, then can the rule for crypto and NFT be the same?
NFT are tokens that store valuable assets. It is completely different concept than cryptocurrencies. NFT investors and exchanges are demanding separate rules for the NFT marketplace.
NFT are very hard to pinpoint and categorize. NFTs have several utilities. They can be used as security, trading cards and to trade assets.
Like fungible tokens, NFTs can also be categorised into currency, security and utilities. That is why regulators bundle up NFTs with other crypto assets. In their eyes, 100 stable coins worth a dollar bill is the same as 100 NFTs worth the same.
However, on a deeper level, it is not the same. NFTs may represent different kinds of assets. Some may represent art, while some are just in-game items like tanks and weapons. On the other hand, some NFTs may hold valuable real estate property rights.
Moreover not all NFTs need regulations. In-game NFT trading cards like Pokemon cards are just a waste of time if you are thinking of regulating it.
But FATF reports state that hundreds of dollars are hidden and shuffled in the name of NFT arts. It is impossible to track this illegal money. According to FATF, NFTs do not come under Virtual Assets. The report has urged governments to regulate NFTs as separate commodities or crypto-assets.
Luxembourg has divided NFTs into three categories. They are:
- Electronic money
- Financial instruments
- Collective investment instruments
They have shown other countries a sample framework to define NFTs.
NFT revenues get messy if you start to calculate them. That is why NFT marketplaces should have regulatory restrictions. NFT minters and platforms should clearly state their utility and define the NFT once it’s minted. Defining the nature of NFT during the minting process will help regulatory bodies sort out if it needs supervision or not.
NFT Marketplace Regulations In The UK
In the UK, currently, NFTs comes under crypto assets. Whether a crypto asset will come under the regulatory bodies is dependent on its status. The status of a crypto asset is decided through its categorisation.
Crypto assets are divided into three categories:
- Security token
- E-money token
- Unregulated token
As a result, some crypto assets may fall into the first category for specified investments and come under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, depending on their characteristics (i.e. security tokens). As per the Electronic Money Regulations 2011, some crypto assets may fall into the second category and be considered electronic money (i.e. e-money tokens).
NFTs, both collectible and non-collectible, will be labelled as unregulated tokens and will almost certainly be unregulated.
The UK government has also imposed AML regulations for crypto companies. The AML regulations cover the crypto assets wallet, exchange providers may be an NFT marketplace company. These companies have to comply with the Money Laundering and Terror Financing Regulations 2019 and require FCA registration.
However, if a company comes under the AML regulations it depends on whether the NFT involved comes under the definition of crypto assets as per the 2019 regulations.
NFT Marketplace Regulations In The USA
Although no official guidance on NFTs has been offered by regulators, it is feasible that an NFT might be classified as a “commodity” under the Commodity Exchange Act (“CEA”), which defines the term to encompass a list of listed things as well as a catch-all for “all other products and articles.”
The Commodity Futures Trading Commission (“CFTC”) has also stated that cryptocurrencies such as Bitcoin and Ether, as well as renewable energy credits, emission permits, and other intangible goods, fall under the “commodity” definition.
In the same way, as cryptocurrencies are bought, sold, and held using blockchain technology, NFTs are also traded.
It is a matter of time when all the financial regulatory bodies will be running over NFTs. It is best for the NFT marketplaces to be prepared to define NFTs as per their functionalities as we all know one rule won’t be able to define all NFTs.