MiCA and Market Abuse: Implications for NFTs and NFT Traders 🚨
October 22, 2023
I previously wrote a text about how most NFT projects (as we know them today) will likely be considered crypto-assets subject to MiCA. Naturally, the following conclusion is that many NFT trading platforms, such as Opensea and Blur, will probably be regarded as crypto-asset service providers (CASPs).
Another interesting dimension of this is that many NFTs will become subject to market abuse rules, and CASPs will have an obligation to prevent and detect market abuse.
MiCA and Market Abuse 🛑
According to the market abuse rules in MiCA, it is prohibited to conduct activities that manipulate or distort the supply, demand, or price of crypto-assets. Such activities include entering transactions, placing orders, or disseminating false or misleading signals about the demand, supply or price of crypto-assets. Also, behaviours like securing a dominant position over the supply or demand of a crypto-asset and using media platforms to voice opinions without disclosing conflicts of interest are potential market manipulations.
I am confident that these new rules will change the current NFT trading scene, especially the PVP element we have witnessed in recent months.
In early August 2023, Hanwe Chang, a famous YouTuber and NFT collector, gained roughly 800 ETH by "tricking" a bot. Hanwe Chang's actions on the Blur NFT marketplace raise important questions about applying MiCA's market abuse rules to the NFT sector. In short, Chang noticed a competitor's bot copying his bid strategy on Blur. He decided to engage in a strategy that led to an inflated price for certain Azuki NFTs with a particular trait. By placing very high bids of his own on this specific trait (and of which he owned several NFTs), he induced another trader (or rather the trader's bot) to copy Chang's bidding strategy, upon which Chang removed his bids and then dumped several of his NFTs into the competitors bids at an artificially elevated price, resulting in significant profits for.
Most NFT traders applauded Chang for his clever scheme and brilliant usage of PVP tactics. However, regardless of what you believe of Chang's actions, his actions align with MiCA's definition of market manipulation.
MiCA and Market Abuse: Not a Good Fit for NFTs 🔍
Unlike the above - and rather straight forward - example about Chang, I unfortunately believe that the market abuse rules will cause significant distress for CASPs and NFT actors. Why? Because market abuse rules and NFTs are not a good match. NFTs in the same collection are often valued very differently, where reasons pertaining to art preference, rarity, and "trait culture" contribute to different demand and pricing.
If we return to the Azuki collection again, the floor price for an Azuki NFT is, at the time of writing, 4,24 ETH on Blur, while the top bid is at 4,19 ETH. However, if you search for certain specific traits, for example, a "Spirit" Azuki, the current floor price is roughly 60 ETH on Blur, and the top bid is 31 ETH.
Interestingly enough, Spirit Azukis are not treated differently in regards to either utility or benefits by the Azuki team. Hence, they get the same airdrop and access as all the other Azuki holders. However, because the Spirit trait is rare, the market values the Spirit Azukis significantly higher than other Azukis. Also, some Spirit Azuki NFT owners have created their own DAO called Spirit DAO (https://twitter.com/spiritdao?lang=en), perhaps elevating the price of the trait even further.
The above is an excellent example of why it will be difficult for CASPs to determine what constitutes market manipulation regarding most NFT collections. Non-fungible tokens are (unlike fungible tokens) often subject to different price principles and market valuation, even when part of the same collection. Furthermore, it will likely cause issues for traders and collectors who are used to operating in a "code is law" environment without protections and constant questioning of motives - motives that can be difficult to determine in a young high volatile market.
#NFTs #MiCA #MarketAbuse #BlockchainRegulation #CryptoAssets