Legal Issues behind NFTs in Different Countries
NFT communities emerge and thrive all over the world, the traffic analysis shows. Central and South Asian countries top the chart in terms of NFT adoption. But the trend is global since none of the regions accounts for over 40% of all web traffic, according to Chainalysis.
While NFTs are unique tokens, the legal concerns about these assets are quite similar. Yet, the watchdogs in various countries classify the non-fungible tokens differently. Thus, they’re subject to different regulations. OneArt is getting a sneak peek at regulatory issues that companies jumping into the NFT market may face.
What are the key legal concerns?
- Classification problems. Should authorities treat NFTs as personal-use, ordinary, or capital assets, collectibles, or commodities? Should they lump blockchain-based tokens with crypto or develop separate laws? It’s a bone of contention between experts and NFT communities, creating even more confusion among average non-fungible tokens holders.
- Copyright infringement. As a rule, a creator keeps copyright and IP rights for the underlying digital art. Does it imply that the third party can’t mint and sell non-fungible tokens attached to this artwork? Well, creators and brands think it does, clamping down on projects infringing copyright.
- Royalties. NFTs are to help creators get more control over their revenue. It’s not that easy, as “the smart contracts are unable to communicate with each other when it comes to royalty triggering events across the ecosystem,” Jeff Gluck of CXIP Labs says.
- Cybersecurity issues. Criminals target the NFT hype to hack marketplaces and cash in on stolen tokens.
- AML regulations and sanctions. In some regions, NFTs may be subject to these requirements, so you may need KYC and sanctions screening.
- Taxation. Normally, non-fungible tokens are taxed. But the rate depends on how the regulator qualifies the asset, whether it’s sold or owned, deemed an investment or not.
The legal framework regarding NFTs is still a subject of discussion in many countries trying to establish rules for this relatively new set of assets.
Points a company/project should keep in mind
- Consider creating a corporate entity.
- Develop terms of service and sale, a provision on dispute resolution, and data privacy notice. Clarify what rights all parties receive.
- Verify and research each party’s rights for IP protection.
- Implement KYC and check what other requirements you need to follow (e.g., AML, sanctions, etc.)
- Decide on payment processing (will you conduct it on your own or rather team up with a registered entity).
The U.S. makes up about 21% of visits to the SuperRare webpage alone, showing stabilization in demand after the 2021 exponential growth. As the industry is maturing, the regulations still lag behind, trying to catch up to the developing market.
Typically, the seller specifies the rights accompanying the token. But as a rule, a creator owns IP rights and copyright. So, minting NFTs without a valid license to use content or trademark may result in copyright infringement litigation. The Tarantino-Miramax lawsuit is an example.
Also, the sales are likely to have to comply with AML and sanction restrictions, and companies will have to adhere to an NFT insider trading policy.
There’s no specific NFT-related tax guide from the Internal Revenue Service. It means NFTs may be taxed as collectibles, securities, commodities, personal-use assets. Minting by a creator is not taxable until it’s part of the trade or business. Collectors, dealers, investors, and hobbyists fall under “different tax considerations.” Donating non-fungible tokens seems even more knotty. Before the IRS clarifies the rules, experts suggest complying with the rules of the income taxation of art.
NFTs are legal in the United Kingdom, but there’s no clear regulatory framework as well. They’re neither security nor e-money tokens and thus are likely to be treated as unregulated, experts assume.
However, NFTs might be subject to AML regulations, which means businesses have to register with the Financial Conduct Authority and comply with its rules. Whether an NFT-related company or project is within the scope of these requirements, is still to be reviewed case-by-case.
As for taxation, HM Revenue & Customs doesn’t provide any clear guidance regarding non-fungible tokens. Experts believe taxes applicable to crypto may be applied, while HMRC has specified that NFTs couldn’t be pooled for capital gain tax.
The Dutch don’t classify NFTs as securities or virtual currencies. It means the issuers don’t have to register within the Money Laundering and Terrorist Financing (Prevention) Act. But qualified as pieces of art, non-fungible tokens may be in the scope of AML regulations, such as CDD and transaction monitoring if the transaction volume hits €10,000.
The taxation requirements aren’t clear as there’s no specific guide. If considered digital art as an investment, NFTs are subject to the box 3 tax. But when you sell tokens and authorities deem your activity as entrepreneurship, you’ll pay income tax in box 1, which has way higher rates.
The region is one of the most crypto-friendly. The crypto-related businesses must comply with AML rules and get the license from the Financial Market Supervisory Authority.
The watchdog doesn’t provide specific requirements for NFTs. Local lawyers assume FINMA may deem NFTs subject to income tax, wealth tax, and a 7.7% VAT. But, again, the cases are reviewed individually.
Classifying NFTs under Turkish law is a daunting task, as the regulatory landscape is ambivalent. It allows locals to own crypto, which is within the scope of anti-money laundering/counter-terrorist financing regulations.
And after that, the restrictions and uncertainties begin. In Turkey, you can’t use NFTs in capital markets and payment services. It’s still unclear whether NFT art, images, music, etc., sales are considered artwork trading. Furthermore, experts don’t expect any NFT-focused regulations to appear soon.
In Japan, there’s no law regulating non-fungible tokens. If they don’t have any economic function (e.g., as a means of payment), NFTs can’t be subject to any financial or business regulations in the country, lawyers suggest.
As for ownership, it’s tricky because, under the current civil code, an NFT can’t be subject to ownership as it’s not a tangible object. Additionally, acquiring it doesn’t imply getting the copyright unless there’s a special agreement.
Takeaways and forecasts
The regulatory framework is still to be developed. Experts believe courts will face even more challenges regarding NFT-related lawsuits. And it will have a great impact on digital art and the metaverse.
As some countries impose restrictions, others scrabble to create a clear regulatory landscape to match the market growth. And some changes are on the horizon. The EU is developing the Markets in Crypto-assets Regulation that will impact NFTs, which are currently outside the scope of MiCA. The new bill could require non-fungible tokens issuers to register with the regulator and adhere to its rules.
Experts expect authorities to impose more regulations and scrutiny, such as the recent NFT seizure as part of tax fraud investigations. OneArt will track the upcoming changes — stay tuned for updates.