The SEC has recently indicated that it will begin to study the NFT sector to determine if NFTs are being sold which are in fact securities and therefore are being sold illegally in the open markets. Other regulators, such as CFTC are sure to follow, if not involved already. Some states are also likely to dive into this pool as they are potentially missing out on significant tax revenues from regulatory licensing taxation. What is the correct regulatory scheme for NFTs is presently undetermined, and likely to remain so in the near future. What is well known is that NFTs can act as any type of asset including securities, commodities, intellectual property, currency, property, derivatives, and likely as yet unknown assets. The question here is what type of license an NFT platform may require in order to mint, allow 3rd party minting, sell, buy and generally act as a marketplace intermediary for NFTs.
If it is determined that NFTs sold on a single platform are securities, commodities, and or currencies then there is a potential that a single platform may be subject to obtaining multiple license such as broker dealer, commodities pool operator or broker, as well as a money transmitter license from any state where the platform has customers. It is also possible that an NFT platform may not be subject to any of the above license requirements. It is therefore important for a platform to understand the types of NFTs it plans to offer before launch so that a surprise letter or subpoena from a regulator does not shock the founders who thought there merely creating digital intellectual property assets outside any regulatory scheme.
It needs to be noted that private enforcement of intellectual property rights by for-profit organizations such as trademarks and copyrights is very likely being considered and planned as NFTs do not confer copyright/trademark transfers unless expressly effectuated by outside agreement to the on-blockchain transaction and registration of a new owner in public records. At this time anyone can take IP owned by someone else, re-mint it, and sell it on any number of smaller networks other than Ethereum. This is clearly a legitimate violation of IP rights and NFT platforms are very likely subject to DMCA takedown notices, and issuers of infringing NFTs are likely subject to legal action by registered IP owners.
The CFTC regulates the U.S. derivatives markets. This includes the commodity futures, options, and swaps markets as well as over-the-counter (OTC) markets. The CFTC also regulates all intermediaries—entities that act as agents for other people when dealing with futures, swaps, and options. Some of these intermediaries include:
-The operators of commodity pools, which are funds that combine investor contributions to trade on the futures and commodities markets. This could be any enterprise that pools funds to purchase NFTs.
-Commodity trading advisors, those who provide investment advice for the commodity and futures markets. This could be anyone who provides recommendations or advice on which NFTs are likely to be profitable.
-Futures commission merchants, who accept the orders to purchase or sell any commodity for future delivery. Any party that finances or escrows NFTs for future delivery for commission.
-Introducing brokers, who have a direct relationship with a client, but delegates the work of the floor operation and trade execution to another futures merchant. Solicitors of investments into NFTs.
It is important to note that NFTs and related parties involved in the markets can be now, and may in the future, develop the ability to act as any type of derivatives and fall under CFTC regulation.
If any NFTs which are likely to be deemed securities are minted and sold on a platform, such as fractional asset ownership NFTs for example, that platform is likely to need a broker dealer license and registration with SEC.
If NFTs traded on a platform are akin to currency, which most decentralized crypto token projects are, then such a platform is likely to need a Money Transmitter License in every state where it has customers. Coinbase and other US based crypto exchanges have obtained MTLs to be permitted to act as a crypto-asset intermediary. The cost of MTLs for all US states can be in the $350k range inclusive of professional fees. FINCEN defines money transmitters as anyone who:
“engages as a business in accepting currency, or funds denominated in currency, and transmits the currency or funds, or the value of the currency or funds, by any means through a financial agency or institution…”
It is easy to see how some NFTs can fall under this definition if an NFT represents “value of currency or funds” since most NFTs have a certain monetary value attached to them which is measurable by their present market price.
If you have questions regarding your start-up NFT related venture don’t hesitate to call BELENKY LAW FIRM PLLC., to schedule a consultation.