Non-Fungible Tokens (NFTs)

MiCAR and NFTs: Differentiations and Regulatory Classification

In recent years, a surge in interest in Non-Fungible Tokens (NFTs) has been observed in various areas, including art, music, gaming and sport. The legal interpretation and potential regulation of NFTs has been the subject of even more intensive debate as a consequence of this interest.

General information about Regulation (EU) 2023/1114 on Markets in Crypto-assets (MiCAR) can be found under Markets in Crypto-Assets Regulation (MiCAR).

NFTs under MiCAR

MiCAR also addresses crypto-assets that are unique and not fungible with other crypto-assets. Such unique and non-fungible crypto-assets are often referred to as Non-Fungible Tokens (NFTs). Under Article 2(3) MiCAR unique and non-fungible crypto-assets are excluded from MiCAR’s scope of application.

The assessment of whether crypto-assets are actually unique and non-fungible as defined in MiCAR, however always requires an assessment of the individual case in hand.

Note: The exclusion of unique and non-fungible crypto-assets from MiCAR’s scope of application does not mean that such crypto-assets may not be subject to other requirements under supervisory law.

Legal classification of NFTs

It should generally be noted that the technical features and the legal definition of NFTs may diverge from one another regarding the properties of uniqueness and non-fungibility:

Technical classification: From a technical perspective it is possible to ascertain that NFTs are to be understood as crypto-assets, for which the underlying technology makes every individual such asset individually identifiable. This may, for example, be done by using unique identifiers, specific token standards (e.g. ERC-721) or other specific technical features.

Legal classification: Its legal qualification as defined in MiCAR requires a comprehensive assessment of a crypto-asset’s uniqueness and non-fungibility. Such an evaluation extends beyond technical identifiability and also considers an economic perspective (e.g. presented values or rights etc.).

The FMA explicitly points out the central significance of the legal qualification when classifying crypto-assets under MiCAR. Therefore, it is not sufficient to focus solely on technological properties, such as unique identifiers.

The legal qualification of crypto-assets as being unique and non-fungible presupposes that they are not readily exchangeable and that their value is not able to be determined by comparing them with an existing market or an equivalent asset. This is the case, for example, where crypto-assets constitute unique and non-fungible services or tangible assets, such as product guarantees or physical works of art (excluding fragmentation constructs), including digital art or collectibles, if these are unique and non-fungible.

The evaluation of crypto-assets’ uniqueness and fungibility is always based on an individual case-by-case assessment using various indicators. Particular significance is afforded to whether the values or rights presented are actually unique and non-fungible. The issuance of crypto-assets in a large series or collection constitutes an indicator for their fungibility. Merely allocating a unique identifier does not suffice to classify a crypto-asset as unique and non-fungible. In addition, the economic perspective also constitutes a material feature for any such qualification, which is based both on the prevailing de facto features as well as the features correlating with the existing de facto usage purposes.

Note: Issuers designating crypto-assets as “NFTs” is in any case not decisive for their classification under supervisory law.

The classification of a crypto-asset as unique and non-fungible is addressed both in MiCAR as well as in (draft) ESMA Guidelines:

Conclusion

In principle MiCAR excludes unique, non-fungible tokens from its scope of application. However, it is necessary to consider indicators going over and beyond the purely technical classification for specifically determining the existence of uniqueness and non-fungibility. These include, for example, whether the crypto-assets were published in a large collection or a large series. The assessment of whether it is an NFT, which is excluded from the scope of application of MiCAR, is always conducted based an assessment of the individual case in hand. Where ambiguities or uncertainties exist, it is recommended to contact the FMA at an early stage to clarifying existing questions in a timely manner.