In our latest blog posts we’ve covered the recent successes surrounding NFTs, but we haven’t yet gone over their legal aspect. With all the innovation surrounding NFTs, it’s crucial to keep legal considerations in mind. For that reason, this blog will be focused entirely on the current legal situation of NFTs.
An NFT is a non-fungible token, meaning each NFT is one-of-a-kind. Every NFT has its own set of intellectual property rights. This adds a layer of legal complexity that cryptocurrency, such as Bitcoin, doesn’t have. However, just as any other commodity, NFTs are still subject to basic laws surrounding their acquisition and use.
Legal regulation of NFTs
Disclaimer: The contents of this article are not a substitute for legal advice, but rather an explanation and a guide.
Currently the NFT regulatory framework has yet to be designed. Aside from NFTs being relatively new, they can also be hard to categorise – in legal terms. There are 3 main ways NFTs can be categorised:
- As a commodity: According to the Commodity Futures Trading Commission (CFTC), cryptocurrencies are included in the definition of commodity. NFTs could fall under the same category as they are also based on blockchain technology and can be purchased and sold.
- As securities: This is where it gets tricky. In order to be classified as a security, NFTs have to pass the Howey Test (states that a security is an investment of money, which is expected to bring profit as a result of the efforts of others). Artwork NFTs don’t pass the Howey test, however, fractional NFTs, “where an investor shares a partial interest in an NFT with others, may be considered a security” (PixelPlex, 2022).
- As intellectual properties: Finally, NFTs could also be classified as intellectual properties, particularly in the case of artwork and other creation NFTs.
Now, just to be clear, without consulting with a lawyer who deals with NFTs, it can be difficult to know what specific laws apply to your NFT. As we mentioned previously, there are no specific NFT regulations yet. However, this ambiguity mainly affects creation NFTs (e.g. artwork, music, avatars etc.). NFTs that represent tangible assets, such as gold or real estate, are subject to pre-existing laws and therefore far easier to regulate.
Existing laws that regulate NFTs
Since NFTs are a new and largely unexplored field, there are a lot of misconceptions surrounding their legality and legitimacy. As a result, many of us overcomplicate the process of buying and selling NFTs.
Consumers are actively protected in the EU, here are a list of laws, directives and acts that directly apply to the sale of NFTs:
– European Consumer Agenda 2012
– Consumer Programme 2014-2020
– Unfair Commercial Practises Directive
– Unfair Contract Terms Directive
– Consumer Injunctions Directive
– European anti-discrimination legislation
– European private international law
There are too many to include, but this list is a snapshot of the ways consumers are protected when purchasing real estate in the EU, and yes, this directly applies to real estate NFTs as well. We’ve picked a few to discuss in more depth below.
Basic consumer protection:
Companies promoting NFT opportunities are covered by consumer protection law in the EU, also known as the Consumer Rights Act 2015 in the UK. According to the Consumer Rights Act (2015), companies supplying goods must ensure that “the quality of the goods is satisfactory.” To read more about this in depth, visit here. Essentially, you must be accurately informed before purchasing an NFT.
Protection against false advertising:
NFT companies (along with all companies) cannot promote false advertising. This is enforced by the Unfair Commercial Practises Directive which states that “a range of misleading and aggressive trading practises are banned” and that it’s prohibited to “provide untruthful information to consumers or use aggressive marketing techniques” to influence their choices.
Property law protection:
Pre-existing laws also apply to the specific NFT being sold. For example, a real estate NFT is regulated the same as “normal” real estate, and therefore is covered by EU property law (in the EU) and/or the Law of Property Act (in the UK). The only difference with it being a real estate NFT as opposed to just real estate, is that you get a digital contract in addition to the physical asset itself. That doesn’t mean the entire product is regulated differently.
Real estate transactions in the EU are predominantly regulated by national law; however, there are EU laws that are applicable irrespective of national law. Within the European consumer law and policy is the Unfair Contract Terms Directive which “eliminates unfair terms from contracts between a professional and a consumer.”
Protection of securities:
As mentioned earlier, an NFT can also be considered a security. If this is the case, then as long as the company/marketplace is registered to sell securities, they can sell security NFTs. It’s that simple. Security law will then apply to that company, and they will be regulated the same as any “regular” company selling securities. If an issuer of securities (in this case NFT-based) is traded in the EU it must comply with the Transparency Directive (TD). The TD requires “issuers of securities traded on regulated markets within the EU to ensure appropriate transparency through a regular flow of information to the markets.” This is aimed at protecting investors.
Bottom Line
Even though there is limited legislation specifically related to NFTs, there are literally hundreds of laws in every country dictating how people can operate a business and present a product. The key to understanding the legal aspect of NFTs is to simplify it. At the end of the day, NFTs are still considered goods/services and are regulated as such. If you are still unsure, you can always get a second opinion from a lawyer who has experience with NFTs.
Current legislation is aimed at protecting the consumer, and the provider, and there are ways to minimise potential consumer harm.
One of the ways issuing authorities do this is by taking into consideration where a company is based and who is running it. This will be particularly important when it comes to NFTs as it’s a way to get rid of the bad apples. They are likely to favour companies that are established in reputable and secure countries, for example in the UK, Sweden, Estonia, Germany etc. If an NFT company does manage to get registered, they have most likely undergone rigorous examination by these authorities, which have essentially done the hard work for you.
If you’re considering investing in NFTs, particularly those that are tied to tangible assets (eg. gold or real estate), this article should bring you some peace of mind by simplifying the legal aspect of NFTs.
Disclaimer: The contents of this article are not a substitute for legal advice, but rather an explanation and a guide.