NFTs' legal regulation in the USA, Europe, and South Korea
Now that you’ve created your NFT, or plan to buy one or sell it, you should be interested in the legal part of the NFT business flux.
NFTs have taken the world by storm in the past few years, and the assumption is they'll continue to do so in the future. However, despite being smitten by them, the current situation regarding NFT-related laws is still somewhat unclear.
Even though NFTs have been around since 2014, until two years ago, little was known about them, and over the course of the last two years, the industry has grown substantially. The increase in popularity leads to many legal and regulatory challenges in the market, such as copyright, taxation issues, security, etc.
Despite the fact that there is no legal structure for NFTs yet, certain existing laws are related to them.
Now let’s talk more about the legal regulations tied to NFTs in the USA, Europe, and South Korea.
Legal issues tied to NFT-s
Ownership and copyright
When you buy an NFT, that does not mean you own the actual art that it represents. It only means you own the token without the copyright to the original art. It is not common for the creator to transfer ownership of the copyright along with the NFT.
Let us clear it up a bit.
When you purchase an NFT, you are merely purchasing a license to use that particular NFT unless otherwise stated in the smart contract. So before utilizing your NFT, make sure you own the intellectual property rights. Otherwise, you may violate certain laws related to NFTs. A smart contract is not a legal document; rather, it is a tool for enforcing transactional laws on the blockchain; it establishes specific rights that are embedded into NFTs.
Regular transactions contain some of the owner's data, and some laws allow people to delete or change their personal information. However, unlike conventional transactions, NFT transactions are conducted differently through blockchain.
When storing your data in the blockchain, they are stored in a way that prevents anyone from altering it - even you.
In light of this, it is essential to know that data protection rules may be breached by NFTs containing personal information.
The explanation is that it may be necessary to handle personal data, retain it for a set period of time, and then delete it once it is no longer needed, but because of the way the blockchain works, the data, public keys, account names, and transaction information stored on it cannot be erased or altered. Unfortunately, NFT security and data exchange concerns have largely gone unnoticed.
Non-fungible tokens are also subjected to taxation; therefore, for any income you make from NFT sales, tax laws will have to be applied. Whether you're buying, selling, or trading an NFT, you are obligated to pay taxes.
But what if you receive one as a gift or a prize?
We all know when you win something of considerable value, you need to pay the tax rate determined for such occasions in your country, but how exactly it is done with NFTs is unclear.
Minting one is not subject to tax laws as long as you want to keep it to yourself.
NFTs are considered digital art.
We can say they have the same characteristics and are, therefore, susceptible to money laundering. Since they are entirely digital, it is much easier to manipulate them. Although what makes them most attractive for money laundering are their significantly varying prices.
Cryptocurrencies follow specific rules regarding the value of the currency, while the NFTs market is highly volatile, and a particular NFT can have a low worth one day, while the other day, the price can go up sky high.
Blockchains do authorize traced transactions between wallets, but without the Know Your Customer (KYC) procedure, it is impossible to do so. KYC is a standard used to prove customer identity utilized by Banks, Fintech companies, and all kinds of investment firms dealing with financial transactions.
Unfortunately, due to the anonymity of NFTs, money laundering is a real threat. However, given that the laws related to this area are still in development, we can assume that the responsible institutions will solve this regulatory problem as well.
Wash trading is a method of falsely inflating the price of NFTs.
The owners have found a way to increase the value of their NFTs by selling them to the wallets in their possession. Since there is no need to reveal your identity on most platforms, this has been a fairly common practice.
There have been multiple wash trading transactions conducted through self-funded wallets or including a different buyer and seller. However, the transactions stated above are traceable by analyzing sales made through wallets that are part of those transactions. Most of the mentioned transactions are performed in a short period of time, which proves that there has been fraudulent activity.
How are these activities regulated in the USA, Europe, and South Korea?
In the USA, it is a question of whether an NFT will be considered a commodity or a security.
Some NFTs may likely be classified as "security" and overseen by the Securities and Exchange Commission (SEC), an independent federal government entity in charge of protecting investors, ensuring the securities markets operate fairly, and promoting capital formation. At the same time, others will be classified as "commodities" and controlled by the Commodity Futures Trading Commission (CFTC), an independent federal agency that is responsible for overseeing the nation's derivatives markets, including those for futures contracts, options, and swaps. Its objectives include fostering competitive and effective markets and safeguarding investors from manipulation, malpractices, and fraud.
According to The Financial Action Task Force (FATF), if NFTs are value equivalents for currency, they might be governed using the same criteria governing cryptocurrencies. The FATF's goals are to establish norms and encourage the efficient application of legal, regulatory, and operational measures to combat money laundering, terrorism financing, and other challenges associated with the integrity of the global financial system. Under the Bank Secrecy Act ("BSA") and other relevant legislation, the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Department of Treasury, has legal responsibility for the monetary sector. FinCEN has not yet released NFT-specific guidelines, but it has published broad information on how the BSA and FinCEN rules apply to virtual currencies that may be relevant to NFTs. Whether FinCEN considers NFTs to be a "value that substitutes for currency" is another question. NFTs may be subject to BSA and FinCEN restrictions if they are regarded as currency substitutes by FinCEN.
In Europe, there are no specific regulations regarding NFTs, and some laws related to cryptocurrencies are being considered to determine whether they even apply in situations where NFTs are in question.
Markets in Crypto-assets Regulation (MiCA) is supposed to offer full oversight of crypto assets that are not currently regulated by EU financial law. The MiCA Proposal aims to simplify distributed ledger technology and virtual asset regulation in the EU by providing complete regulation of crypto-assets that are not yet covered by EU financial law.
Currently, the legislation is going through the first reading stage, where the European Parliament and Council of Ministers will decide whether to adopt or change the proposal (The proposal was in the process of reading at the time of writing the blog).
The FSC stated that NFTs are not considered a virtual asset in South Korea unless they are used as a means of payment, and since they are said to be mostly used for that purpose and not so much as collectibles, only then can they be considered as such. In November 2021, the FSC determined that they do not intend to regulate NFTs in South Korea under the definition of virtual assets set by the FATF. Nevertheless, FATF sees NFTs as digital assets that are unique and immutable and as collectibles rather than the means of payment.
NFTs are subject to taxation in South Korea starting in 2022 by the National Tax Service at a rate of 20% on income derived from the sale of NFTs that exceeds KRW 2.5 million.
To buy or not to buy?
The NFT market is evolving, and new legal issues continue to emerge every day, just like existing laws are being customized, and new ones are being created to fit the idea of NFT. It would be best if you were mindful that the incredible interest in NFTs would undoubtedly result in illegal practices. That is why doing your research before purchasing or investing in NFTs is becoming increasingly crucial. But don't let the lack of legal regulations discourage you from venturing into the world of NFTs. It is only a matter of time before the legal framework is defined, and it becomes much easier to act within it.
Your take on the subject
They say knowledge has power only if you pass it on - we hope our blog post gave you valuable insight.
If you want to share your opinion or learn more about NFTs and legal practices, feel free to contact us. We'd love to hear what you have to say!