NFTs vs Securities: The battle for regulatory classification in the crypto world

Non-fungible tokens (NFTs) do not qualify as securities, according to a statement released by the German Financial Supervisory Authority (BaFin).

BaFin officials argued that NFTs, which only designate ownership of a digital asset for speculative purposes, cannot be considered investment instruments.

NFTs vs. Securities

BaFin maintained that NFTs lack features similar to traditional financial securities, such as stocks and debt instruments, which means they cannot be classified as securities from a regulatory standpoint. As of now, BaFin has not identified any features in NFTs that would change this classification.

“So far, BaFin is not aware of any NFTs that are to be classified as securities in the regulatory sense.”

The regulator noted that there is a possibility that NFTs could be classified as securities in the future. Additionally, it stated:

“If NFTs are to be classified as securities under the EU Prospectus Regulation or as investments under the Asset Investments Act ( VermAnlG ), a prospectus must always be prepared.”

Focus in Europe is now on the Markets in Crypto Assets (MiCA) regulation, which is considered the first comprehensive pan-European crypto framework. Although the final vote on MiCA was delayed until April 2023, it does not currently include provisions for NFTs.

Last summer, Peter Kerstens, an adviser to the European Commission, suggested that NFT issuers could be classified as crypto asset service providers, which would require them to regularly report on their activities to the European Securities and Markets Authority through their local governments. This hints at the possibility of future regulation for NFTs under MiCA or other similar frameworks.

European Crypto Regulatory Environment

The regulatory environment for cryptocurrencies is constantly evolving as governments and financial institutions try to manage the risks and opportunities associated with digital assets.

At a recent Financial Action Task Force (FATF) Plenary in Paris, over 200 representatives from various jurisdictions participated in discussions aimed at setting and establishing rules for certain crypto activities. Meanwhile, the French National Assembly has approved a bill to bring local legislation in line with proposed EU standards for crypto-related activities.

The bill is currently awaiting approval or return by President Emmanuel Macron before March 16. If passed, the new guidelines will apply to newly registered entities offering crypto services from July 2023. Existing entities must comply with the regulations of the Financial Markets Authority until the Markets in Crypto Assets (MiCA) regulation is passed.

With the regulatory landscape for cryptocurrencies and digital assets constantly evolving, governments and financial institutions grappling to balance risk management and the opportunities presented by these assets will continue to face tough choices, and even tougher definitions.