BaFin, the Federal Financial Supervisory Authority of Germany, has recently stated that it is not yet prepared to categorize non-fungible tokens (NFTs) as securities. Instead, BaFin suggests that NFTs should be evaluated on a case-by-case basis for classification and regulatory purposes.
BaFin Not Sure Yet How to Classify NFTs
On March 8, BaFin released a statement in its journal explaining the legal classification of NFTs. The government body currently does not see how all of them meet the requirements to be classified as securities in a regulatory sense. However, the federal institution may consider NFTs as securities in the future if a significant number of NFTs embody the same repayment and interest dues.
BaFin recommends that NFTs should be classified as “crypto assets” based on their prospectus. Meanwhile, the chance of NFTs being classified as such is low due to the lack of their immediate tradability and standardization. If an NFT contains documentation of ownership or exploitation rights, it could potentially be considered an investment.
NFTs Don’t Fall into the Coverage of ZAG and AML
BaFin does not foresee NFTs complying with the licensing requirements of the German Payment Services Supervision Act (ZAG). Additionally, apart from fungible tokens, which fall under the financial instrument category, NFTs are not subject to the country’s Anti-Money Laundering provisions. However, NFTs that are put in the same light as “crypto assets” should be made and marketed in compliance with AML regulations.
A Survey as to Why People Buy NFTs
In a survey made by Metajuice, only a few NFT collectors purchase these digital assets for expectations of profit in the future. In fact, only 13% of the respondents thought of it that way. Almost three out of four people in the survey, or a good 74% of them, said they acquired them only for their overall status, exclusivity, and design. This particular scenario blurs the status of NFTs as securities.
NFTs Under the Howey Test
One reason why NFTs may fall under the classification of securities is the Howey Test. This test is a legal framework used to determine whether an asset is a security, and it is based on four criteria:
- An investment of money;
- In a common enterprise;
- With an expectation of profits; and
- Derived solely from the efforts of others.
Depending on how an NFT is marketed and sold, it is possible that it could meet these standards and be considered a security.
For example, if an NFT is marketed as an investment opportunity with the expectation of future profits, and the profits are dependent on the efforts of the NFT issuer or seller, it could be classified as a security under the Howey Test.
As the market for NFTs continues to evolve and mature, regulators around the world will likely be looking closely at how these assets are marketed and sold to determine whether they should be classified as securities.
Final Thoughts
BaFin’s note on the legal classification of NFTs is a positive step towards providing greater clarity and certainty for market participants and for regulatory purposes. However, people should not fear or mistake regulation for centralization as the two represent different concepts.
Regulation refers to the process of establishing clear rules and guidelines to ensure compliance and protect consumers, while centralization refers to the concentration of power or control in the hands of a single entity. With these in mind, NFTs can be regulated without necessarily leading to centralization. It is possible to establish regulations as a guiding hand just to ensure transparency and accountability in the NFT market amid its decentralized nature as a part of the blockchain.
Giancarlo is an economist and researcher by profession. Prior to his addition to Blockzeit’s dynamic team, he was handling several crypto projects for both the government and private sectors as a Project Manager for a consultancy firm.
