• There is no general solution for the classification of NFTs
• Whether NFTs qualify as securities depends on the individual case
• It cannot be ruled out that NFTs will be classified as securities in the future
BaFin is still unsure about the classification of NFTs
The Federal Financial Supervisory Authority, BaFin for short, recently explained in a specialist article that there is no general solution to the question of whether NFTs are securities or not.
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“Due to their technical properties, they can be considered for a wide range of applications. NFT should combine the special properties that the market ascribes to crypto tokens, such as good transferability and low susceptibility to forgery, with the possibility of individual assignment. Since NFT are also used in the financial sector, BaFin is concerned with the potential and, above all, with the risks of this phenomenon. From the supervisory perspective, it must be clarified what relevance NFT have for the financial market and what the consequences are for providers, service providers and customers,” says it in the BaFin report.
Probably the best-known classes of NFTs are so-called “collectibles” and digital art. Collectibles are digital collectibles that sometimes also offer additional functions for interacting with the tokens. NFTs, for example, offer artists the opportunity to participate in future proceeds from the resale of collectibles. But NFTs are also used in the areas of gaming and in the metaverse – for example as tokenized game objects and in the form of real estate in digital worlds.
Classification depends on the individual case
As with other tokens, the question of whether NFTs are to be classified as securities will regularly have to be decided taking into account the circumstances of the individual case, explained BaFin. What is important here is which rights an issuer associates with the tokens and how these can be used after the issuance. “With the currently observed use of NFT, in particular for the tokenization of digital works of art, the qualification as a financial instrument in the form of an investment or a debt instrument is not necessarily necessary. Such NFT usually lack further property-related rights and tokens with individual content to the necessary standardization. Without this interchangeability, classification as a unit of account is out of the question”.
The question of whether NFTs are so-called crypto values must also be decided on a case-by-case basis. Crypto assets are digital representations of value that are accepted by third parties for payment or for investment purposes. “Use as a means of exchange or payment for non-fragmented NFTs with individual content hardly seems realistic because of the lack of interchangeability in terms of content. This is different with the second alternative, use for investment purposes, which is not excluded from the outset with NFTs,” says BaFin .
So far, no NFT known to be classified as a security
“NFT are to be classified as securities if they embody rights similar to securities, are transferable and can be traded on the financial market,” according to BaFin. So far, however, the authority is not aware of any NFTs that can be classified as securities in the regulatory sense. The reason for this is that the tokens lack embodied rights similar to securities. In addition, NFTs are usually provided with individual rights and content, which is why standardization and the associated tradability in the sense of the concept of securities are ruled out. However, it cannot be ruled out that NFTs could be classified as securities in the future. This case could arise if, for example, 1,000 NFT represent the same repayment and interest claims.
Editorial office finanzen.net
Image sources: Kai Hartmann Photography – BaFin, archy13 / Shutterstock.com