Cryptocurrencies such as Bitcoin, Ether or Ripple are characterized by the fact, that there are numerous of the individual type. They are designed identically in the sense that one Bitcoin equates to another one exactly in value, which is why they can be used as units of account. This is different with Non-Fungible Tokens (NFT). Those are created via smart contracts on compatible blockchains and are each of individual character. NFTs can therefore not be used as units of account, but instead for the digital representation of individual objects or rights. The future Markets in Crypto Assets Regulation (MiCAR) that has recently been agreed in the wake of the trialogue negotiations between the EU Commission, EU Parliament and the European Council originally intended to create a reliable regulatory framework for the entire crypto market in Europe including NFTs. Nonetheless, the final wording of MiCAR now does not intend for a regulation of NFTs, because crypto assets which are not fungible are exempt from the scope of the new regulation.

Confusion Concerning the Applicability of MiCAR on NFTs

Even though the final wording of MiCAR does not intend for the regulation of NFTs, the EU Commission only agreed to the wording under the condition that NFTs which are generally not subject to MiCAR may be subject to the regulation in individual cases in which the tokens are part of a collection. What a collection exactly constitutes is neither defined nor substantiated in the wording of MiCAR. It is likely that the EU Commission had cases in mind in which an issuer issues multiple NFTs that merely differ in small details from each other, but which apparently are part of an overall emission. Examples would include NFT-based collectors’ cards of players of a professional sports team or a series of NFT-based pictures, which basically all display the same motive with just little variations in the motive or the used colors. Unfortunately, there is no official clarification of the term collection from the EU Commission or any other institution yet, which could ensure a homogeneous interpretation of the term throughout Europe. It is therefore currently unclear which specific NFTs might possibly benefit or suffer from the advantages or disadvantages of MiCAR in the future. The respective competent national authorities will have to position themselves regarding this question and they will need to amend their applicable administrative practices once MiCAR goes into effect. As a result, an international hotchpotch regarding the regulation of NFTs is impending, which MiCAR was originally intended to abolish.

ESMA Needs to Define the Term Collection

Since the final wording of MiCAR has been determined, the European Securities and Markets Authority (ESMA) is now called to elaborate recommendations concerning technical standards and guidelines. These should ensure an homogeneous interpretation of the new provisions by the competent national supervision authorities throughout Europe. In the technical standards to be elaborated, ESMA will have to determine clearly and in explicit terms how it defines the term of a collection in this context. Prior to the publication of technical standards for a new EU regulation, ESMA always conducts a public consultation in which it allows for market participants and experts to voice their opinions to all relevant aspects of the respective technical standard. The NFT industry should use this opportunity to work towards a suitable and practical administrative practice concerning NFTs within the regulatory regime of MiCAR in order to avoid a new European hotchpotch in this matter. 

Attorney Lutz Auffenberg, LL.M. (London)