MiCA Law: Regulation of NFTs [COLD]

In 2022, a downward trend was also observed for the keyword “NFT” (Non Fungible Token). On the Google search engine, however, the search volume of “NFT” had peaked in 2021. In times of bear market, investors seem to be losing interest in the NFT offering. Some see this as proof that the NFT market is an artificially inflated hollow shell of speculation. However, this market raises concerns for the European legislator. In this sense, the MiCA law aims to regulate it.

The basics of NFTs

NFT became known through the art market for its non-fungibility. Unlike other digital assets, an NFT has its 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 buyers’ goal is generally to sell these acquired NFTs on the secondary market to make a profit.
However, bringing the NFT back to this characteristic would be an understatement. NFTs go beyond the art market alone, as presented here. From a legal point of view, its infungibility is not sufficient to bring it back 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, the MiCA risks changing this state of affairs. This is a divisive proposal for a regulation of the European Parliament and the Council on digital asset markets. MiCA could apply to three different types of assets. First the stablecoins, the payment tokens (which constitute a means of payment) and finally the utility tokens (fungible digital assets accepted only by the issuer intended to provide digital access to a good or service). Recital 8 of the single cryptocurrency regulation proposal, accepted only by the issuer and not fungible with other digital assets and not divisible.

NFTs seem a priori capable of escaping the scope of the text. However, MiCA specifies to apply to non-fungible tokens that give their owners (issuers or holders) specific rights related to financial instruments. In this case, the NFT will be treated as a securities token and will be subject to the regulation of Union law on financial services. The regulation therefore indirectly provides for a type of NFT that falls within its scope. This decision is surprising from a legal point of view. This type, in fact, could also fall under the MiFID 2 directive which applies to financial instruments.

The future will tell us which regulations will be put in place. Indeed, legislative action 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 address the issue on a case-by-case basis. The complexity of the blockchain makes it difficult to exercise regulation. The legislator must succeed in combining the protection of the monetary system and individuals with the need not to abort the European actors operating in this market.

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Sami AYADI avatar

Sami AYADI

To the angelism of the intercessors of the current monetary system I oppose DeFi, digital assets and the metaverse. Lawyer in Luxembourg, I am interested in cryptocurrency investment funds.

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