Are NFTs securities?
The answer to this question very much depends on which country you live in and the views of that country’s securities regulators. In truth, any digital asset can be defined as a ‘security’, so if you are buying or selling NFTs, you need to be aware of the specific rules in your country.
The evolution of the metaverse and the incorporation of digital assets into that world, means that it is more likely that these assets will eventually become commercialized and potentially subject to these securities laws. At the moment, many jurisdictions are undecided, because they are still learning about them, but some, including the USA, UK, Hong Kong, and China, are a little further ahead already and are exploring this question.
The USA view
The USA follows the landmark 1946 U.S. Supreme Court case of Howey, which sets forth four four elements that help determine whether or not a cryptocurrency or digital asset such as an NFT is considered a “security” or “investment contract” — they are: (1) investment of money, (2) into a common enterprise, (3) where there is an expectation of profits, and (4) profits received from efforts of third parties. Also, the regulation of digital assets is primarily housed under federal law with the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), each state has its own securities law, which may have different or additional requirements to that of federal law.
The UK view
In May 2022, the British Web3 community achieved a crucial legal milestone after its High Court of Justice ruled that NFTs represent “private property” in the United Kingdom. However, the High Court cautioned that this “private property” status does not extend to the actual underlying content that the NFT represents, providing the necessary protections for the underlying work of the original authors.
The Hong Kong view
In June, Hong Kong lawmakers proposed a new law that seeks to introduce a new licensing regime for crypto service providers as it relates to the region’s anti-money laundering (AML) policies. The Hong Kong Securities and Futures Commission (SFC), also issued guidance on how investors should approach the purchase and sale of NFTs. It also stated that any NFT issuers in Hong Kong or those targeting potential investors must obtain a license from the SFC if their NFT is a “collective investment scheme” (CIS) or a fractionalized token.
The China view
In April, China laid out its stance on NFTs, wherein its Banking, Securities, and Internet Finance associations set out guidelines for how NFT projects will be treated by China’s Internet Financial Association, the China Banking Association, and the China Securities Association.
The guidelines specifically state that:
- The underlying assets of NFTs should not include bonds, insurance, securities, precious metals, or other financial assets.
- Platforms should not provide centralized exchanges for NFTs.
- NFTs should not be transacted in cryptocurrencies.
- Platforms should impose real-name identity checks on and store transaction records of customers to eliminate money laundering.
- Entities should not directly or indirectly provide financial support to NFT investments.