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Are NFTs an animal to be regulated? A European approach to decentralization, part 1



Nonfungible tokens (NFTs) are constantly in the news. NFT platforms are mushrooming and champions are emerging, such as OpenSea. It’s a real platform economy that’s on the rise, like the one where YouTube or Booking.com got a foothold. But it’s a very young economy – one that struggles to understand the legal issues involved with it. Regulators are starting to take an interest in the subject and there is a risk of backlash if the industry doesn’t regulate itself soon. And, as always, the first blows are expected east of the Atlantic. In this first article, devoted to the legal framework of NFTs, we will focus on the application of the digital asset regime and financial law to NFTs in France. In a second article we will return to the issues of liability and copyright. Related: Non-Replaceable Tokens From A Legal Perspective A Digital Asset? In France, the definition of digital assets includes two types of tokens. On the one hand, there are utility tokens, i.e. all intangible assets that in digital form represent one or more rights, which can be issued, registered, stored or transferred by means of a shared electronic recording device that enables the owner of the asset in question identify directly or indirectly. NFTs are intangible assets that can be issued, registered, held or transferred through shared electronic files. On the other hand, payment tokens, i.e. any digital representation of value that is not issued or guaranteed by a central bank or government agency, is not necessarily associated with legal tender and does not have the legal status of money, but is accepted by natural and legal persons as a medium of exchange that can be transferred, stored or exchanged electronically. Is an NFT a digital asset under French law? An NFT is acquired to obtain a property right, but can also be acquired to claim the performance of one or more services related to that NFT. Furthermore, an NFT can be seen as a digital representation of value that is not issued or guaranteed by a central bank or government agency, that is not necessarily linked to a legal tender or has the legal status of money, and that can be exchanged electronically. stored or exchanged. It follows that NFTs can be classified as digital assets, either as a sign of use, a sign of payment, or both. The consequence of classifying NFTs as digital assets would be twofold. Registration as a service provider for virtual assets If the platform that implements NFTs implements, in addition to the primary market, a secondary market in which users could benefit from: 1) a service for the storage of digital assets or access to digital assets on behalf of a third party party to hold, store or transfer these digital assets, and/or 2) a service for the purchase or sale of digital assets in legal tender, and/or 3) a service for the exchange of digital assets for other digital assets, and/or 4) operating a digital asset trading platform, a mandatory registration as a provider of digital asset services with the French financial regulator, the Autorité des Marchés Financiers (AMF), is required. In addition, customers must be identified through a Know Your Customer. Our analysis is supported by the fact that NFTs are referred to as “crypto-assets” by the proposed European regulation, “Markets in Crypto-assets” (MiCA). Related: How Should DeFi Be Regulated? A European approach to decentralization The Financial Action Task Force (FATF) also issued an opinion on the assimilation of NFTs into “digital assets” in its famous October 2021 recommendation, stating that NFTs are generally not considered [virtual assets]. However, like its approach to DeFi, the FATF stresses that regulators should “consider the nature of the NFT and its function in practice, not the terminology or marketing terms used.” Specifically, the FATF states that NFTs “used for for payment or investment purposes” virtual assets. Related: FATF Virtual Assets Guidance: NFTs Gain, DeFi Loses, Everything Else Unchanged. Although the Guidance Doesn’t Define “For Investment Purposes” The FATF Probably Plans To Catch Those Who Use NFTs buy with the intention of later selling them on for a profit. While many buyers buy NFTs because of their connection to the artist or work, much of the industry buys them because of their potential to increase in value. In other words, many NFTs qualify as digital assets to follow this interpretation.Application of the ICO regime?Once there is a public offering of digital assets (at more than 150 pot buyers) is in France, the French ICO regime applies. The issuer is then subject to the following rules: The “simple” advertising of the token offering is allowed, but any solicitation would be prohibited, as would any “quasi-recruitment”, unless the issuer has obtained the AMF visa. This is a delicate point here because the NFT issuer could not “invite” French residents to register on its site without breaking the law. It would then be required to never target “French” groups or communities. However, we do not believe that the ICO regime applies to NFTs as this regime is designed to regulate a fundraising operation and protect the investor. Some provisions of the law are incompatible with an NFT offering (ie offering limited to 6 months, sequestration of funds during the ICO, etc.). This is the spirit of the proposed MiCA regulation, which considers NFTs as digital assets by default, but excludes them from certain obligations specific to ICOs (publication and notification of a white paper). Anti-Money Laundering Obligations and KYC? We have already mentioned the risk of qualifying as a virtual asset service provider (VASP), which would entail a KYC obligation (from 1 euro transaction). In addition, persons who act as intermediaries in the art trade, including when it is carried out by art galleries, when the value of the transaction is equal to or greater than 10,000 euros, are subject to an obligation to apply due diligence measures based on assessing the risks of their money laundering and terrorist financing activities. Related: NFTs and Compliance: Why We Need to Have This Conversation In short, all NFT platforms associated with digital artworks should implement KYC procedures even if they don’t qualify as digital assets, which is far from the case today. In the United States? We know that the approach is different in the United States than in Europe because the US Securities and Exchange Commission (by applying the famous “Howey Test”) qualifies tokens that would be considered digital assets in Europe as securities. The risk that the SEC classifies tokens as “securities” is therefore significant. The SEC has not yet reached a final conclusion on the matter, but suggestions have already been made that some NFTs qualify as securities, especially when sold on a fractional basis. This article does not contain investment advice or recommendations. Every investment and trading move carries risks, and readers should do their own research when making a decision. lawyer in Paris and Brussels since 1993, is a partner at Metalaw, where he heads the division dedicated to fintech, digital banking and crypto financing. He is the co-author of several books, including the first book on blockchain in French. He acts as an expert at the World Bank. Thibault is also an entrepreneur, having co-founded Payfoot.com. In 2020, he became president of the IOUR Foundation, a public benefit foundation that aims to promote the adoption of a new internet, merging TCP/IP and blockchain.
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