MiCA and NFTs – Understanding the Dynamics

There is a prevailing misconception regarding the interplay between MiCA and NFTs that deserves closer examination.

While it is apparent that MiCA excludes “crypto-assets that are unique and not fungible with other crypto-assets”, the misunderstanding stems from a narrow definition of NFTs. For instance, merely being issued as an ERC-721 token doesn’t suffice; the represented value must be unique and non-fungible.

NFTs encompassing digital art and unique collectables, where value derives from unique characteristics and utility, are exempt from MiCA. Similarly, crypto assets representing services or physical assets, like real estate or product guarantees, fall under the non-fungible category, thus staying outside of MiCA’s scope.

However, fractionalized parts of an NFT and NFTs launched in a “large series or collection” will likely not meet the NFT criteria, as quantities suggest fungibility. Instead, a substance-over-form approach is used when determining what constitutes an NFT.

Naturally, one might ask the following questions:

- How large a series or collection must be to fall outside the regulation’s scope?

- How do embedded rights affect NFT status?

The boring lawyer’s answer is that it depends. Considering that it is common to issue and treat NFTs as part of a series or collection similarly in terms of governance, benefits and utility, it is likely that case-to-case circumstances will determine the questions above.

For example, imagine that an artist issues 50 unique artwork NFTs and attaches financial rights, such as royalties, to the NFTs. Furthermore, besides generating royalties to the holders of the NFTs, each NFT also gives the holder governance rights and utility, for example, access to a clubhouse, allowlist for future collections and voting rights. It is my assessment that in such a scenario, and albeit every NFT contains unique artwork, the series will most likely fall within the scope of MiCA.

MiCA’s objective of financial system regulation makes financial rights’ inclusion likely to narrow the possibility of issuing a large series or collection - or even issuing a series at all (while remaining outside the scope of the regulation). However, if one removes the financial rights, the likelihood that the NFTs are excluded is probably higher. To what extent does however remain.

In the end, these questions currently lack regulatory guidance. I would also not be surprised if the regulator refrains from providing clear guidance in order not to limit the scope of the regulation in regard to further development of the NFT market and its associated services.

In conclusion, the interaction between MiCA and NFTs still needs regulatory guidance - clarity which will encourage innovation, provide stability, and protect market participants from uncertainty and potential disputes.