The Council of Europe approved on the 5th of October the final version of the Markets in Crypto Assets Regulation (MiCA), which does not cover non-fungible tokens (NFTs).
The European Union (EU) Decided to Explicitly Leave NFTs out of the Scope of MiCA
The next steps that remain for MiCA’s green light are the approval by the European Parliament’s Committee on Economic and Monetary Affairs and the approval by the European Parliament’s plenary session, both scheduled to happen as soon as possible.
From the draft that is heading to those bodies for voting, one rule arises: as a general rule, and subject to exceptions, both NFTs and decentralized finance (DeFi) remain outside the scope of MiCA.
When it comes to NFTs, the legislator is very explicit by stating that MiCA “does not apply to crypto-assets that are unique and not fungible with other crypto-assets”.
There are two sets of NFTs that are not covered by this regulation. The first one refers to crypto-assets whose value is attributable to their unique characteristics and the utility they give to the token holder, such as digital art and collectibles. The second one refers to crypto-assets representing services or physical assets that are unique and not fungible, such as product guarantees or real estate.
MiCA goes even further by stating that these NFTs might be traded in marketplaces and accumulated speculatively, but since they are not interchangeable and cannot be compared to an equivalent asset, they do not pose a risk to investors.
The definition of uniqueness and fungibility might bring some problems to the interpreter. Fractionalized parts of an NFT should not be considered unique or non-fungible and the issuance of NFTs in a large series or collection should be considered an indicator of fungibility, qualifying these NFTs as crypto-assets for MiCA’s sake.
So one cannot say with absolute certainty that NFTs will not be encompassed by MiCA, as in some cases their non-fungibility attribute may be put aside in favor of legality, thus providing investors with a more robust framework.
What are the next steps for NFTs?
The EU itself is not sure that this regulation will suffice to cover the ever-growing crypto industry – either by default or by excess.
That’s why MiCA has a provision requiring the European Commission to draft a report within 18 months after the regulation has come into effect, to assess the development of NFTs and the necessity of regulating their creators and services providers.
There’s still a lot of time until a definite decision is taken on this subject, since MiCA will only enter into force 20 days after its publication in the EU official journal, but will only be applicable 18 months after that date.
The NFT market has been booming lately, with lots of decentralized autonomous organizations (DAOs) and companies trying to take advantage of worldwide events, like the FIFA World Cup, to capitalize their market share.
Although NFTs are trending all over the world, some of the biggest European brands, such as Hugo Boss or the luxurious Dolce & Gabbana and Gucci, are beginning to position themselves to take their lion’s share of the market. Any amendment to MiCA to include NFTs in its scope would definitely impact these brands’ role in the NFT industry.