MiCA and NFTs: How Europe's New Crypto Rules Could Be a Game Changer for Your Digital Collectibles
April 18, 2023
This week, the markets in crypto-assets regulation (“MiCA”) will be debated and voted on by the European Parliament 20 April 2023. MiCA is undoubtedly the most comprehensive regulatory framework for crypto-assets to date in the EU and most likely also the world. Hence, actors within the ecosystem must understand the impact of the regulation, and especially the legal obligations that will follow.
There is also a common misconception that NFTs are excluded from the scope of MiCA. At first glance this misconception is easy to understand considering that it is clearly stipulated that the "regulation does not apply to crypto-assets that are unique and not fungible with other crypto-assets."
However, if one looks closer, it is clear that the definition of an NFT is relatively narrow, and it is also clear that it is insufficient for the underlying token to be issued as a non-fungible token, for example, an ERC-721 or ERC-1155 token, in order for the asset to be considered an NFT. Instead, the value represented must also be unique and non-fungible in order for the asset to be considered an NFT.
For example, digital art and collectables, where the asset's value is attributable to the asset's unique characteristics and utility, are considered non-fungible assets and hence excluded from the scope of MiCA. Also, crypto-assets representing services or physical assets that are unique and not fungible, such as product guarantees or real estate, are considered unique and non-fungible and subsequently excluded from the scope.
Meanwhile, on the other hand, it follows from the recital of MiCA that fractionalized parts of NFTs are most likely not considered NFTs. The same applies to NFTs launched in a large series or collection, as the quantity speaks for the fungibility of the tokens. Hence, the days of launching a 10k PFP collection with pictures of animals without any regulatory scrutiny are most likely over.
Furthermore, even if NFTs may appear unique and not fungible, their features or linked features can make them fungible or not unique. For example, if an NFT collection of 1000 NFTs has distinctly unique artwork for each NFT, but all NFTs give the same benefits and utility, the NFT collection could be considered fungible and hence a crypto-asset subject to MiCA.
In conclusion, while NFTs are outside the scope of MiCA, the definition of NFTs under MiCA is narrow, and many assets based on NFTs fall within the scope of the regulation. It should also be noted that even if an asset is considered an NFT, and hence outside of the scope of the regulation, such exclusion does not affect the asset's potential classification as a financial instrument. As the NFT market continues to grow and NFTs gain more real-world utility, it becomes increasingly important for actors within the ecosystem to understand the regulatory landscape. It is undeniable that MiCA will be a game changer for the NFT industry, and subsequently, builders, founders and other participants should stay informed and compliant with the new regulations to innovate and participate safely.