The NFT Regulatory Landscape

Commodity, security or something else?

Different NFTs, like different cryptocurrencies, can take different forms. While regulators have not yet weighed in specifically on non-fungible tokens, it is possible that certain NFTs could be considered a "security", subject to regulation by the Securities and Exchange Commission (SEC) and that some could be considered a "commodity" regulated by the Futures Trading Commission (CFTC).

An NFT could be possibly considered a security if it were designed to provide an expectation of profit to the buyer based on the work of others — an investment contract — under the Howey Test. One such example would be a fractional NFT offering. Check out TRM's analysis here. In fact, in May of this year a plaintiff sued in a class action in May 2021 for allegedly selling NBA Top Shot moments as an unregistered security. NBA Top Shot is a blockchain-based digital collectibles platform that allows users to buy, sell and trade video highlights, called moments, as NFTs. Shaker Samman provided a great in-depth look at Top Shot for Sports Illustrated. The allegations in the Dapper complaint are based on lead plaintiff Jeeun Friel’s “personal knowledge,” who, according to documents filed in the Supreme Court of New York, asserts that Top Shot moments are securities because their value increases with the success of the project. The Top Shot case is still in the first quarter. Dapper's response to Friel's complaint, which should provide insights into how Dapper plans to defend the case, has not yet been filed after a series of extensions.

It is also possible that certain NFTs could be covered under the Commodity Exchange Act (CEA) which defines the term "commodity" to include certain cryptocurrencies like Bitcoin and Ether.

Are NFTs subject to U.S. anti-money laundering and sanctions regulations?

While the Financial Crimes Enforcement Network (FinCEN), the U.S. Treasury's financial intelligence unit and anti-money laundering regulator, has not weighed in directly on NFTs, it is certainly possible that NFTs are covered by the Bank Secrecy Act (BSA). FinCEN has published extensive guidance on how the BSA applies to cryptocurrency and that guidance could apply to NFTs. The question may come down to whether or not FinCEN believes that certain NFTs represent "value that substitutes for currency," and thus regulated by the BSA. Similarly, Treasury's Office of Foreign Assets Control (OFAC) has also not offered guidance on NFTs, but has been clear, in recent guidance, that U.S. sanctions apply to cryptocurrencies in the same way they apply to more traditional means of money transfer. In addition, OFAC has provided guidance on the use of art for sanctions evasion. That guidance may also apply to NFT digital art.

Do U.S. state laws cover NFTs?

No U.S. state has specifically regulated NFTs. However, while NFTs and cryptocurrencies have different properties, we may be able to get some sense of how states will eventually weigh in on NFTs. For example, New York regulates cryptocurrency businesses engaged in activities such as exchanging, transferring, controlling, administering, or issuing crypto assets similar to FinCEN definition of money service business (MSB) or FATF's definition of virtual asset service provider (VASP). Such businesses are required to obtain a license to operate. Certain NFT issuers could be such a business.

So, what do regulators say about NFTs?

There is not a whole lot of official guidance from U.S. or global regulators on NFTs. FATF, in its recently issued guidance, stands alone explaining that NFT collectibles are not generally considered to be VAs, but "if they are to be used for payment or investment purposes in practice," then they may be considered virtual assets and thus regulated like cryptocurrencies. Seems like the bottom line, when it comes to NFTs, is that regulators have, to date, held off on weighing in. That said, FATFs view, essentially that if an NFT can transfer value if they are, in BSA speak, "value that substitutes for currency," then they may be regulated under many of the same principles regulators are already applying to cryptocurrencies.

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