This post first appeared as Blog post at FIN LAW.
Non-fungible tokens (NFTs) were in the European Union’s regulatory process on the way to the final version of the EU regulation Markets in crypto assets (MiCA) a controversial topic. In the ultimately adopted regulation, NFTs were excluded from the scope of the regulation. Crypto assets that are unique and not fungible with other crypto assets should not be subject to MiCA. However, the regulator left a back door open and formulated a back-exception for crypto assets to be classified as NFTs in the recitals preceding the text of the regulation.
According to the wishes of the MiCA regulator, a token that is part of a series should be considered neither unique nor non-fungible. The mere assignment of a unique identifier such as a serial number should not be sufficient to be able to assume uniqueness in the required sense. Rather, it is necessary that the uniqueness results from the value represented via the NFT or the tokenized right. But is the commercial handling of NFTs in such cases really unregulated, so that crypto service providers, for example, do not need a BaFin license for crypto custody or crypto trading in relation to NFTs under MiCA?
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It’s not just MiCA that is relevant from a regulatory perspective in the commercial handling of NFTs
An obligation to obtain a BaFin permit for providers of crypto custody, crypto trading or other crypto services cannot only arise from MiCA. According to the current legal situation, the MiCA regulations for the provision of crypto services and the public offering of crypto assets on the market do not yet apply, so that the relevant obligations for providers with regard to the need for a BaFin license arise from national law. In Germany, the provisions of the Banking Act (KWG) and the Securities Institutions Act (WpIG) still apply to crypto custody and crypto trading.
However, even under national law, business models with regard to non-fungible tokens are not necessarily subject to BaFin’s approval requirement. This is only the case if the token can be classified as a regulated financial instrument in individual cases. In many cases, this classification of NFTs fails due to the definition of the KWG for crypto assets, which also applies to the WpIG. According to this, a crypto asset must be used as a means of exchange or payment or serve investment purposes based on an agreement or an actual practice. BaFin sees the suitability of NFTs as a means of exchange or payment as fundamentally absurd because of the individuality they represent.
According to BaFin, NFTs can serve investment purposes under certain conditions. However, according to their administrative practice, it is not enough for token holders to purchase NFTs in the hope that an increase in value will occur. According to BaFin, NFTs can only qualify as a financial instrument in the form of a crypto asset if the creator or seller makes advertising statements about the NFT that emphasize its suitability as an investment vehicle.
German lawmakers are working on a MiCA implementation law
The first MiCA provisions relevant to market participants will become legally effective on June 30, 2024. Issuers of asset-referenced tokens (ART) and e-money tokens will then have to obtain BaFin permission before they can offer their crypto assets publicly. The MiCA regulations apply directly to market participants. The German legislature will still have to ensure that the new rules do not contradict the existing regulations under national law. That is why Berlin is currently working on a national implementation law.
For the NFT area, it can be assumed that existing differences between MiCA and the national legal situation with regard to the question of which activities with NFTs require a BaFin license will be largely eliminated. This would be possible either by adjusting the definition of crypto assets in the KWG or even by abolishing them. However, until a corresponding implementation law is passed, crypto service providers with business models relating to NFTs will have to keep both MiCA and national law in mind when implementing their business model.
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