NON-FUNGIBLE TOKENS: THE GLOBAL LEGAL IMPACT
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NON-FUNGIBLE
TOKENS: THE GLOBAL
LEGAL IMPACT
JUNE 2021
NON-FUNGIBLE TOKENS:
THE GLOBAL LEGAL IMPACT
The market for non-fungible tokens (NFTs), or cryptoassets
representing proof of title to a unique digital version of an
underlying asset, has soared. In the sports and digital arts
sectors, recent NFT issuances have sold out in seconds,
netting their creators millions.
Subject to limitations in any relevant jurisdiction, NFTs have the
potential to facilitate new revenue streams by establishing new
forms of digital property, act as new channels for businesses and
digital creators to reach customers, fans, and audiences and/or
enable the monetisation of physical assets.
While NFT issuance is growing rapidly globally, the legal and
regulatory treatment of NFTs continues to evolve. We have been
advising clients on NFTs in various jurisdictions. In this briefing,
we share our experience to demystify NFTs and consider some
of the key risks, and how the tokens are regulated across some
key financial centres.
NBA Top Shot
The National Basketball Association's NFTs have gained traction to date in the
What are NFTs?
(NBA) Top Shot, is a blockchain-based digital space but also have the potential
online platform hosted by Dapper Labs An NFT is a digital asset whose
to digitise unique physical assets, such as
for basketball fans to purchase and uniqueness and ownership can be
physical artwork, in theory allowing these
trade highlights of NBA sporting demonstrated and verified using
assets to be bought, sold and traded
history (or "Moments") through NFTs distributed ledger technology (DLT). NFTs
more efficiently. In principle, all physical
intended to act as virtual trading cards. can be used to create a tokenised proof
assets could be tokenised either as
Moments are minted (i.e. created) on of title to a unique digital version of an
fungible or non-fungible tokens. Many
the underlying blockchain platform, underlying digital asset (such as images,
businesses have successfully tokenised a
but are graphically displayed as digital videos or other digital content) or physical
range of assets including iconic images,
cubes containing the video highlight asset (such as paintings, sculptures or
athletic highlights, entertainment and
in the online marketplace. other tangible assets).
sports memorabilia, event tickets, music
albums, artwork, famous Tweets, internet
When someone “mints” an NFT, they
memes, gaming and e-sports digital
create a unique digital version of the work
content, unique sportswear and other
as a data file using blockchain, or another
collectibles using NFTs.
type of DLT. Once minted, NFTs cannot
be edited or deleted, and can be viewed
publicly and freely traded with verifiable How do NFTs generate
security of exclusive ownership and revenue?
transaction traceability. An NFT issuance NFTs can enable the efficient
may consist of a single NFT, or may commercialisation of unique assets that
involve thousands or millions of tokens. are otherwise difficult to sell or prove
ownership of, as well as the creation of
Each NFT is unique. In contrast, most entirely new digital product lines and
other cryptoassets, are fungible, i.e. each revenue streams.
token is interchangeable with and
indistinguishable from another As with many other digital assets, some
NFTs offer the ability to "fractionalise"
Some NFTs incorporate smart contracts ownership of the underlying asset, i.e. to
which specify and automate certain rights split ownership so that each purchaser of
and obligations of the buyer and seller, for an NFT benefits from the underlying asset
example, to provide that the NFT creator in proportion to the fraction they own,
receives a percentage of the transaction which can enable new ownership
proceeds every time the NFT is sold on. structures that proponents assert have
2 CLIFFORD CHANCE
NON-FUNGIBLE TOKENS: THE GLOBAL LEGAL IMPACT
the potential to democratise ownership of The sale of those NFTs creates a whole
Buying Myself Back:
assets that have traditionally been viewed new revenue stream. The provenance of
A Model for Redistribution
as inaccessible. However, other NFTs the underlying digital asset is assured by
are indivisible. the NFT. Model Emily Ratajkowski recently sold
an NFT called "Buying Myself Back:
Transaction structures for minting and An artist could also sell an NFT linked to A Model for Redistribution" for
selling NFTs vary. Many NFT creators are a digital version of a physical asset (e.g. US$140,000. Her NFT is linked to a
"crypto natives" with DLT expertise who an image or video of a painting or photograph of herself standing in front
issue the NFT themselves and also create sculpture) to one buyer, while selling the of a painting by artist Richard Prince of
or own the underlying artwork or other physical work itself to another buyer as a photo of herself – for which she was
asset to which the NFT is linked. Where an additional opportunity to profit. NFTs paid US$150 at the time. Her NFT
the content creator/owner is not native to have opened the door to artists and served two purposes – (1) to take
the crypto space (e.g. a celebrity, content producers further commercialising back control of her own image,
musician, athlete or sports club or other their work in a digital environment, by which she believes Prince had
business), a third party may issue the NFT providing an infrastructure in which value exploited; and (2) to generate
on behalf of the content creator/owner. can be ascribed to a digital 'copy' of a revenue. The purchasers of her
The third party may also provide the work due to the uniqueness of that copy. NFT will not receive a physical copy
underlying technology platform for minting of the photograph.
and selling the NFTs, or another platform Commercialisation of
provider may be involved. Revenue physical assets
sharing models between the various While NFTs have been mostly linked to
participants differ considerably and digital assets to date, fine art, luxury
should be carefully considered. goods and other physical assets have the
potential to be linked to NFTs. This
Commercialisation of digital assets ensures the provenance of the underlying
A digital asset, such as a significant asset but can also assist with increasing
tweet, a video file or digital photograph, liquidity. Considering the collectible wine
can be linked to a finite number of NFTs. investment market for example, NFTs may
Glossary
• Blockchain is one type of DLT in • Non-fungible token (NFT)
which the data is set out and built up An NFT is a unique cryptoasset that
in successive blocks, where each new represents rights to an underlying
block of data verifies the content of ‘tokenised’, often digital asset, which
the previous block. It is known for is created and transferred using DLT.
being the technology underlying This contrasts with many existing
Bitcoin, but has been integrated into cryptoassets, including cryptocurrencies
many other transaction and asset like Bitcoin, which are fungible
types. Most NFTs are minted on the or interchangeable.
Ethereum blockchain.
• Smart contract
• Cryptoasset A smart contract is commonly defined
A digital asset created using as an agreement written in computer
cryptography. Cryptocurrencies are code with automated performance.
a subset of cryptoassets with Smart contracts are automatable and
money-like functionality. The term enforceable either by legal enforcement
token is often used synonymously of rights and obligations (though they
with cryptoasset. may not always amount to legal
contracts) or via tamper-proof
• Distributed ledger technology (DLT)
execution of computer code.
DLT is a decentralised peer-to-peer
data storage system where • Token
participating computers (known as A token is a digital entry on a DLT
nodes) hold and maintain identical register or other digital infrastructure
copies of the ledger. Data integrity is where a person is recorded as owning
achieved through public-private key a unit or other entitlement. Tokens
cryptography, so that an individual may represent a permission to control
node cannot tamper with the a resource native to the DLT platform,
information recorded in the ledger by rights granted to the holder, or a “real
rewriting the transaction. world” asset. The latter is commonly
referred to as the "tokenisation" of
underlying assets.
CLIFFORD CHANCE 3
NON-FUNGIBLE TOKENS: THE GLOBAL LEGAL IMPACT
reduce the risk of counterfeiting and for NFTs develops and regulation
substitution by linking individual bottles of evolves, regulated firms may seek to
wine to a unique NFT (e.g. by way of a offer specialist intermediary services to
QR code) that proves provenance, history help the market develop.
of ownership and provides a record of
how and where the wine has been Asking the right questions
stored. A secure physical storage facility
Understanding the legal and regulatory
is likely to be a key component of any
issues is critical before deciding whether
structure. As such, collectible wines can
to issue, purchase or deal in NFTs. Here
be virtually traded more easily while
are some questions to consider:
showing proof-of-ownership and proof-of-
value. However, in the short term, liquidity
Are there any licensing
may be more limited as investors will
requirements?
need to be comfortable with the
Most jurisdictions do not yet have
technology and the operator of the
legislation or regulations specifically
platform, as well as the issues around
applicable to NFTs, but a host of existing
secure and effective storage that typically
regulations may still apply. This will
accompany collectible wine.
depend on:
Royalty collection as a • the token's characteristics and
payment model features;
Some NFTs are coded to incorporate
• the activities performed in respect of
smart contracts that can be programmed
such token; and
to include the automatic allocation of a
portion of the amount paid by an NFT • the territorial scope of the particular
purchaser to the original owner/issuer of regulatory framework.
the NFT, thus giving the original owner an For example, in the UK, the Money
ability to realise the benefits of the Laundering Regulations 2017 define
secondary marketplace by way of cryptoassets as "a cryptographically
"royalty" payments. Ratajkowski's NFT, secured digital representation of value or
for example, is understood to generate contractual rights that uses a form of DLT
a payment for her every time that it and can be transferred, stored or traded
is resold. electronically", and set out activities that,
when performed in respect of
Who is interested? cryptoassets, trigger a registration
• Potential issuers: as NFTs may requirement. Where NFTs meet this
represent either digital or physical definition, exchanging them for cash or
underlying assets, they open up huge other cryptoassets or making
opportunities for monetisation in the arrangements for others to do so, would
creative sector. Although most NFT trigger a registration requirement. Where
activity has been seen in the creative, an NFT does not qualify as a cryptoasset,
sports, gaming and fashion sectors, we for example because it does not
anticipate issuances across the broader represent value or contractual rights,
retail sector. the regime does not apply to it.
• Investors: NFTs make establishing Regulatory regimes vary significantly
provenance and traceability of assets globally, so it will be necessary to analyse
much easier, making assets such as the regulatory position in each jurisdiction
digital works of art easier to buy, sell where the NFT is issued, marketed and
and trade and broadening access to where key participants are based.
new asset classes.
Are there any tax implications?
• Financial institutions: Trading in NFTs Whilst tax authorities globally have made
could one day be facilitated or engaged progress in considering and issuing
in by financial firms (acting as guidance on the taxation of
intermediaries or on their own behalf), cryptocurrencies, the tax treatment of
mirroring the role they play in markets other cryptoassets, including NFTs,
for more conventional forms of remains unclear. Most jurisdictions
investments or property. As the market consider cryptoassets to be property for
4 CLIFFORD CHANCE
NON-FUNGIBLE TOKENS: THE GLOBAL LEGAL IMPACT
tax purposes, but, without detailed Given all of this complexity, coupled with
legislation or guidance, their precise tax the decentralised and anonymous nature
treatment requires consideration of of cryptoassets, we expect that a
existing tax rules and an attempt to fit a significant proportion of transactions
given cryptoasset within the most involving NFTs and other cryptoassets
appropriate regime. This means looking at remain unreported and untaxed. Tax
a variety of factors including the nature of compliance and evasion risks with
the cryptoasset, what it represents, its respect to NFTs and other cryptoassets
intended use and whether any analogies have largely remained unexplored to date.
can be drawn from the relevant
jurisdiction's existing approach (if any) However, cryptoassets in general are
to taxation of cryptocurrencies. This can becoming more mainstream, and NFTs in
give rise to considerable complexity particular are very much in the public eye
and uncertainty. by virtue of being associated with
celebrities, sports teams and
The exercise becomes particularly
eye-watering sale prices. The OECD is
challenging when considering NFTs.
developing proposals around effective
By way of example, if I sell my NFT to
reporting and information exchange for
you, questions will need to be asked to
cryptoassets, potentially making
ascertain the tax treatment, such as:
exchange platforms responsible for
• What exactly is being sold and why? compliance in addition to taxpayers.
Is it the underlying asset (and if so, is Tax, and tax compliance, is therefore
that underlying asset an intangible likely to become more complex for those
asset, a financial instrument, a physical issuing and arranging NFTs.
asset, or something else), is it certain
limited rights in the underlying asset, or Are there any resale
are such rights so limited that the asset rights implications?
being sold amounts to no more than In the UK and the EU, the Artist’s Resale
the NFT itself? Capital gains taxes, Right (ARR) ensures that creators of
income taxes, VAT/sales taxes and/or original pieces of physical artwork receive
transfer taxes may be relevant a small percentage of the sale price
depending on the answers. whenever their work is resold by
qualifying intermediaries, for example by
• If the sale falls within deemed market way of auction or dealership. ARR is
value rules, how do we go about unlikely to apply to artwork sold by way of
valuing the NFT in a potentially illiquid NFTs and so creators may be concerned
market when it is supposed to that NFTs offer a way to avoid ARR.
represent something unique,
and may in fact merely confer the One of the benefits of NFTs issued on
status of owning the NFT itself without DLT platforms that utilise smart contracts
any meaningful rights in an is that the commission process can be
underlying asset? automated. By incorporating royalty
obligations in the smart contract that
• Which jurisdiction(s) get to claim taxing accompanies the NFT, artists can ensure
rights? Are NFTs located where the that they have similar protection to that
beneficial owner of the NFT is resident, provided by ARR.
as is generally the approach taken with
respect to cryptocurrencies, or might In jurisdictions where the law does not
they be located in the jurisdiction of the recognise resale rights relating to creative
underlying asset (and is it works and contractual provisions have
straightforward to work out where that traditionally given an alternative recourse,
is if the underlying asset itself is digital)? smart contracts that automate royalty
payments could help bypass such
• What happens if the underlying asset is limitations.
later hacked, duplicated, counterfeited,
destroyed or deleted, or the link However, some NFT marketplaces only
between the NFT and the underlying function on specific types of DLT, which
asset is broken? Will the purchaser be means that automated royalty payments
able to claim a loss for tax purposes? might only take place when the NFT is
CLIFFORD CHANCE 5
NON-FUNGIBLE TOKENS: THE GLOBAL LEGAL IMPACT
traded through the same platform it was marketplace or platform offers to ensure
The Nyan Cat meme
issued on. Selecting the right platform is that the creator is not ceding more rights
The minting of an NFT linked to the therefore a key commercial decision for to purchasers than expected.
Nyan Cat meme provides an example the issuer to ensure it can enforce its
of a content producer commercialising royalties, together with inclusion of While certain cryptoassets have been
their work via an NFT drop (the act of appropriate restrictions around resale. recognised as qualifying as "property"
offering the NFT for purchase). Similarly, analysis of the legal recognition (rights "in rem") in some jurisdictions, the
The author of the original Nyan Cat and enforceability of smart contracts in question of whether an NFT would be
meme minted a single NFT of a each relevant jurisdiction is a crucial step. recognised by the courts as proof of legal
remastered version of the Nyan Cat title to a digital version of the asset to
meme. This NFT was purchased for What is the ownership status? which it is linked remains open.
around US$590,000 following a The purchaser of an NFT owns the token Technically, the holder of an NFT simply
bidding war on the crypto art platform, itself, which is a record of ownership of has a unique set of numbers which
Foundation. The purchaser of the NFT the unique digital version of the underlying amount to a token in their wallet, thereby
acquired the token, which is a record work, so that when the NFT is transferred granting the holder the ability to decide
of ownership of the unique digital to someone else, the underlying digital where or to whom the NFT should be
version of the meme. However, the version of the work is transferred with it. transferred. Arguably, this creates factual
copyright in the original meme was An NFT does not (unless stated control of the linked asset in a way akin
retained by its creator. otherwise) represent copyright ownership to property rights. The logic is that when
of the underlying asset. Copyright to the something like a picture, sound or text is
underlying work, or property rights in attached to the NFT, the token proves
respect of a physical underlying asset, that the digital copy of the underlying
would only be transferred where work is an authentic copy of the
specifically agreed (and validly assigned). original work.
In most of the NFT issuances to date,
there has been a clear intention not to However, as discussed above, the NFT
create ownership interests in the does not necessarily transfer copyright
underlying asset. In this respect, and therefore the scope of an NFT
purchasing an NFT is the same as buyer's enforcement rights is unclear.
purchasing a physical work of art, which This poses the question of whether the
rarely involves an assignment of copyright NFT owner can require the original
in the artwork. creator to take steps against someone
who has created unauthorised versions of
By virtue of retaining the copyright in an the underlying content, and, if that
underlying work, the original creator of an counterfeiter in turn created a counterfeit
NFT retains the exclusive right to do NFT, who would or could take action. It
certain acts in relation to the underlying also raises the question of what action
work which are restricted by copyright, can be taken by the purchaser of an NFT
namely the right to make additional where the creator subsequently issues
copies, distribute, display or sell the work more versions of the NFT, thus increasing
to someone else. The purchaser of the the availability of the asset (and therefore,
NFT receives the token and, typically, in principle, reducing its market value).
the rights to use the unique digital version
of the work for personal use and resell Are there anti-money laundering
that copy of the work. (AML) concerns?
Physical artwork has been used as a tool
The scope of a purchaser's usage rights for money laundering, given the potential
with respect to an NFT are determined by for anonymous purchases of high value
the conditions or licence terms attached artworks to be made. However,
to the acquisition of the applicable NFT, its effectiveness is limited as physical art
which will vary from token to token. The can be hard and expensive to transport
creator of the NFT or marketplace where and store. To the extent that NFTs are
it is acquired could therefore implement developed that provide an actual
more permissive licence terms enabling ownership interest in artwork, they would
the buyer of an NFT broader rights to offer the benefits of purchasing physical
exploit the unique digital version of the art while resolving the problems of
work acquired in connection with the physical transportation and storage and
respective NFT. Equally, creators should therefore could represent serious
be mindful of the licence terms that any AML concerns.
6 CLIFFORD CHANCE
NON-FUNGIBLE TOKENS: THE GLOBAL LEGAL IMPACT
The Financial Action Task Force (FATF), relies on proof-of-work validation, is
the global standard setter in relation to computationally intensive and requires a
AML, has recognised that NFTs may large amount of energy. This type of
create opportunities for money laundering validation is similar to the mining or
or terrorist financing and has called for creation of new Bitcoins, which
further regulation, so we are likely to see Cambridge University recently found
international developments in this space consumed more energy than the entire
in the coming months. country of Argentina on an annual basis.
Validating NFT transactions will continue
Whether NFTs fall within the scope of to consume significant amounts of energy
existing AML regulation will depend on until more sustainable data centres and
local implementations of FATF guidance validation techniques are created at large
in relevant jurisdictions and the specific scale. There is ongoing work around
characteristics of the NFT in question. migrating Ethereum from "proof-of-work"
See page 8 onwards for highlights of the to "proof- of-stake" validation, which is
considerations across key global anticipated to considerably decrease the
financial centres. amount of energy required for validation.
However, proof-of-stake validation raises
What are the practical separate network operation concerns,
considerations? which may impact the overall anticipated
Data and storage reduction in energy consumption,
NFTs are hosted on a DLT platform, including in relation to security, fairness,
which typically does not enable storage of and transaction redundancy. Alternative
large files, such as digital assets. As a platforms may offer issuers more
result, the NFT and its underlying digital sustainable solutions today. This will
asset are typically connected to each be a key consideration for potential
other via a link. If the digital asset is issuers, advisers and purchasers who
stored on a conventional server, there is a are focussed on reducing their
risk that the file could be changed or environmental impact.
deleted, or the server could shut down,
hence breaking the link between the Reputational risks
asset and its corresponding NFT. Brand reputation is key for entities who
Certainty of the reliability and security of have worked hard to build close ties with
the link and the server hosting the digital their fans, followers and supporters.
asset is essential. A more robust The reputational benefits of being
alternative is a distributed, decentralised associated with a nascent technology
storage system, but these are yet to be need to be balanced against the risks
widely adopted. such technologies inherently bring.
If an issuer's NFTs or tokens significantly
Litigation risk reduce in value, there is a great risk of
The usual risk of misrepresentation when brand devaluation. Equally, the issuer's
selling digital assets will apply to NFTs. brand could be affected by issues with
NFT issuers need to be clear with the platform used to sell and trade
purchasers about the risk of market the NFT, which may, in extreme
volatility leading to a complete loss in circumstances, render the
value for them. Whether NFT owners NFT worthless.
have any rights in relation to the
underlying asset in such a case NFT issuers should also consider the risk
remains to be seen. of reputational damage by issuing NFTs
on platforms that have a negative
Environmental cost environmental impact, as set out above.
The execution and validation of NFT
transactions on a blockchain, particularly
under the Ethereum blockchain which
CLIFFORD CHANCE 7
NON-FUNGIBLE TOKENS: THE GLOBAL LEGAL IMPACT
A GLOBAL ISSUE: of non-fungible cryptoassets will not be
required to publish a white paper.
WHAT ARE THE
REGULATORS DOING? Germany
NFTs are available and traded globally • The German implementation of the
because DLT platforms operate beyond 5th AML Directive (AMLD5) defined
borders. Therefore, issuers, advisers and "crypto assets" as financial instruments
purchasers of NFTs will need to consider within the meaning of the German
the legal status and regulatory Banking Act (KWG). Under the KWG,
frameworks across multiple jurisdictions. crypto asset means "a digital
representation of value that is not
There is very little global regulatory issued or guaranteed by a central bank
guidance as to whether NFTs fall within or a public authority and does not
the perimeter of existing regulation possess a legal status of currency or
applicable to cryptoassets. money, but is accepted by natural or
Most jurisdictions have not yet developed legal persons as a means of exchange
regulatory frameworks specifically or payment or which can be used for
applicable to NFTs, although several have investment purposes and which can be
implemented or published plans to transferred, stored and traded
regulate DLT or cryptoassets more electronically". The reference to being
broadly. Liechtenstein is an exception, used for investment purposes is an
having established a law regarding the expansion of AMLD5. As NFTs can, in
civil and supervisory framework for the principle, be used for investment
tokenisation of rights in physical assets, purposes given their unique (value-
which would cover certain NFTs. creating) character, there are good
arguments that NFTs may qualify as
Some highlights of international regulatory crypto assets and therefore as financial
developments across key global financial instruments under the KWG. In this
centres are set out below. respect, the underlying service in
relation to an NFT (i.e. brokerage or
European Union (EU) trading-related activities) may trigger a
• NFTs are not currently specifically licence requirement.
regulated in the EU. However, the • Some NFTs may qualify as investment
features of any proposed NFT issuance products under the German Capital
would need to be considered alongside Investment Act, which governs the
various existing regimes, including in public offerings of investment products
relation to securities, electronic money that promise an interest payment,
and crowdfunding, to ensure that these repayment of invested capital or a cash
are not triggered. settlement in exchange for an
• On 24 September 2020, the European investment of capital. Whether NFTs fall
Commission published the Markets in within this definition is a question of
Crypto-assets Regulation (MiCA), fact, subject to the characteristics of
which proposes to regulate currently the particular token.
out-of- scope cryptoassets and their
service providers under a single Italy
licensing regime. MiCA is anticipated to • Under the Italian implementation of
take effect by 2024 and will apply to AMLD5, the definition of "virtual
any person issuing or providing currency" also encompasses digital
cryptoasset services across all Member representations of value which are not
States, as well as any non-EU firm used as means of exchange but are
seeking to trade in EU member states. held for investment purposes, as long
One of the proposed obligations is that as they are transferred, stored and
cryptoasset issuers would need to traded electronically. In principle, NFTs
issue a prospectus-like "crypto-asset could fall within the scope of such
white paper". MiCA's definition of definition and trigger AML obligations.
'crypto-assets' includes NFTs –
although, as currently drafted, issuers
8 CLIFFORD CHANCE
NON-FUNGIBLE TOKENS: THE GLOBAL LEGAL IMPACT
• Some NFTs may also qualify as one or more of the existing
investment products under the Italian regulatory frameworks:
Consolidated Financial Act triggering
1. Where an NFT qualifies as a financial
additional licensing and other
instrument, a number of activities
obligations. "Investment products"
including the buying, selling,
encompass MiFID instruments as well
intermediation as well as certain
as "any other form of investment of a
ancillary services in respect of such
financial nature". The Italian regulator
financial instrument may trigger a
has clarified that an 'investment of a
licensing requirement as an
financial nature' is one entailing all of
investment firm. Additionally, any
the following: (i) a capital disbursement;
other related financial sector activity
(ii) the expectation of a financial gain;
performed in Luxembourg (e.g.
and (iii) the assumption of a risk directly
custody or lending of financial
linked and correlated to the capital
instruments) may trigger licensing
disbursement. An NFT's features would
requirements and create certain
need to be carefully considered to see
regulatory and prudential obligations.
if it would meet these conditions.
2. Where an NFT qualifies as electronic
Japan money, the issuer may trigger a
licensing requirement as an
• In Japan, while fungible tokens are
electronic money institution and be
regulated as security tokens or
subject to ongoing obligations,
cryptoassets under the financial
including conduct of business rules.
regulations, and dealing with them
triggers certain licensing requirements, 3. The issuance of NFTs which qualify
the non-fungible nature of NFTs means as units of a collective investment
that they usually do not have a undertaking could trigger a licence
settlement function and therefore will requirement as an undertaking
not qualify as regulated cryptoassets. for collective investment for the
issuer or its management company
• As a result, many NFTs are not
under the relevant Luxembourg
specifically regulated, and dealing with
investment funds and AIFM laws
them does not trigger any licensing
and regulations.
requirements. NFTs linked to trading
cards or in-game items recorded on the • Pursuant to Luxembourg's AML
blockchain are most common in Japan, legislation as adapted following AMLD5
primarily because the Japanese online and relevant FATF guidance on virtual
gaming market is one of the biggest assets, a virtual asset means "a digital
and most mature globally. representation of value (including a
virtual currency), that can be digitally
• Despite not being caught by specific
exchanged, or transferred, and can be
financial regulations, NFTs issued as
used for payment or investment
in-game items do raise issues in
purposes" with the exception of virtual
relation to the Act Against Unjustifiable
assets which constitute electronic
Premiums and Misleading
money or financial instruments. It is
Representations and gambling crime
possible that certain NFTs may fall
under the Criminal Code. Therefore,
within this definition.
recently the Blockchain Contents
Association and the Japan • Firms who are established or provide
Cryptocurrency Business Association services in relation to virtual assets in
have each formulated guidelines Luxembourg, including exchange,
concerning NFTs. transfer, safekeeping and administration
and the participation in and provision of
Luxembourg financial services related to an offer of
• NFTs are not currently specifically virtual assets, are subject to a
regulated in Luxembourg. However, registration requirement as a virtual
depending on the features and asset service provider with the
purpose of an NFT, certain activities in Commission de Surveillance du Secteur
respect of such NFT could fall within Financier and must comply with
relevant AML obligations.
CLIFFORD CHANCE 9
NON-FUNGIBLE TOKENS: THE GLOBAL LEGAL IMPACT
• Commercial activities not subject to a currency and does not possess a
sector-specific regime and carried out legal status of currency or money,
with a profit-making aim in Luxembourg but is accepted by natural or legal
may trigger a general business persons as a means of exchange
licence requirement. and which can be transferred, stored
and traded electronically", the
The Netherlands activities that amount to (i)
• NFTs are not currently specifically exchanging virtual currencies into
regulated in the Netherlands. However, cash, or vice versa, or (ii)
certain activities in respect of certain safeguarding private cryptographic
cryptoassets (depending on their keys on behalf of its customers to
features) could fall within one or more hold, store and transfer virtual
of the existing regulatory frameworks: currencies may trigger registration
requirements in the Netherlands.
4. where an NFT qualifies as a financial
instrument (e.g. as shares, bonds, People's Republic of
units in collective investment
schemes, or derivatives), the buying,
China (PRC)
selling, intermediation and certain • Activities relating to cryptocurrencies
ancillary services in respect of such and cryptoassets are strictly regulated
financial instruments may trigger a and scrutinised in the PRC. Despite the
licensing requirement as an absence of a unified regulatory
investment firm framework, rules in respect of
(beleggingsonderneming); cryptoassets are scattered in ad hoc
notices and circulars issued by the
5. where an NFT qualifies as electronic PRC financial regulators, as well as
money (electronisch geld) in self-discipline organisations. The
circumstances where it represents a milestone regulation in this area is the
claim on the issuer for pre-paid Circular on Preventing Risks related to
electronic spending power, the issuer Initial Coin Offerings (ICO) (2017) issued
may trigger licensing requirements as by seven Chinese governmental
an electronic money institution agencies (including the PRC's central
(elektronischgeldinstelling); bank, the People's Bank of China) in
6. where an NFT qualifies as an September 2017 (the ICO Circular).
investment object (beleggingsobject), The ICO Circular marked an
which is defined as "an item or unprecedented regulatory clampdown
object, a right to an item or object or on cryptoassets which has been
a right to the full or partial return in sustained in practice; since 2017 we
cash or part of the proceeds of an have seen supervisory and
item or object, (…) that is acquired enforcement actions taken in respect of
other than for no consideration (e.g. crypto-related activities.
for payment in kind), with the • In May 2021, the National Internet
prospect of a return in cash and Finance Association of China, the China
where the management of the object Banking Association and the Payment
is mainly carried out by someone and Clearing Association of China
other than the acquirer", the offering issued a joint statement reiterating the
and intermediation in respect of such position in the ICO Circular that their
investment object may trigger a member institutions (including banks
licensing requirement as a and payment firms) should not offer any
financial service provider crypto-related services in the PRC.
(financiëledienstverlener); and The statement also set out further
7. where an NFT qualifies as a specific restrictions and risk alerts,
"virtual currency", which is defined in including around cryptocurrency
the Dutch implementation of the exchange, investment and trading.
AMLD5 as "a digital representation • However, there is no clear-cut definition
of value that is not issued or of cryptocurrency or cryptoasset under
guaranteed by a central bank or a the laws of the PRC and whether an
public authority, is not necessarily NFT qualifies as such may require a
attached to a legally established "substance over form" analysis. If NFTs
10 CLIFFORD CHANCE
NON-FUNGIBLE TOKENS: THE GLOBAL LEGAL IMPACTare created for fundraising, the relevant Singapore
regulatory risks would be high. Likely
• NFTs are not currently specifically
post-issuance activity may also be
regulated in Singapore. The regulatory
relevant when evaluating potential risks
approach has been to look beyond a
in relation to any NFT.
token's label and examine its
• Notwithstanding the above, neither the characteristics. If such characteristics
ICO Circular nor other regulations fall within an existing regulatory
explicitly prohibit a PRC resident from framework, the NFT will be subject
trading or investing in NFTs, but only to regulation under that
remind people of the relevant risks existing framework.
associated with cryptoassets.
• Generally speaking, there are three
types of digital tokens – security
Russia tokens, payment tokens and utility
• Russia has recently finalised its legal tokens. If an NFT is determined to be a
framework regulating cryptoassets. It type of security token (i.e. it exhibits the
does not currently specifically refer to characteristics of securities, such as
NFTs, but distinguishes between: conferring or representing a legal or
beneficial ownership interest in a
1. digital utility rights, defined as
corporation, partnership or limited
digital rights to request the: (i)
liability partnership), it may be subject
transfer of tangible assets; (ii)
to the regulatory regime governing
transfer of intellectual property
securities. This may include complying
rights, or (iii) carrying out of works
with the offering regime for an offer of
and/or provision of services;
securities and the licensing
2. digital financial assets, defined requirements for dealing in securities.
as digital rights including monetary
• If an NFT is determined to be a type of
claims, the possibility of exercising
payment token (i.e. it is structured to
rights under securities, the right to
function as a medium of exchange as
participate in the capital of a non-
payment for goods or services), it may
public joint-stock company, the
be regulated under the Payment
right to demand the transfer of
Services Act 2019, which governs the
certain digital securities; and
provision of payment services (which
3. digital currencies, defined as a includes a "digital payment token
combination of electronic data: (i) service"). Currently, the scope of
contained in the information regulation for "digital payment token
system; (ii) capable of being service" extends to dealing in digital
offered and/or accepted as a payment tokens or facilitating the
means of payment and/or an exchange of digital payment tokens.
investment; and (iii) in respect of A person who carries on business in
which there is no person obliged such activities triggers the licensing
towards every holder of such requirements under the Payment
electronic data, save for operators Services Act 2019, unless a relevant
and users responsible for issuance exemption applies.
and making entries to the
• If an NFT is determined to be a type of
information system in accordance
utility token (i.e. it is used to access a
with its rules.
good or service and does not fall
• Depending on the characteristics of a within the former two categories),
particular NFT, it may fall within one of it may be unregulated.
these categories, or be considered as
an asset sui generis. In either case the United Arab Emirates
specifics of issuance of or trading in the
• The recently introduced Crypto Asset
NFT and the related regulatory, legal
Regulations in the UAE, issued by the
and tax implications would need to be
Securities and Commodities Authority
analysed on a case-by-case basis,
with the support of Clifford Chance,
depending on the characteristics of the
are designed to capture cryptoassets
NFT and the underlying asset to which
which are securities or are otherwise
it is linked.
traded on an exchange (a "regulated
CLIFFORD CHANCE 11
NON-FUNGIBLE TOKENS: THE GLOBAL LEGAL IMPACTcommodity token). "Crypto assets" UK
expressly include a DLT record serving
• NFTs are not currently specifically
as a representation of ownership.
regulated in the UK. However, certain
Therefore these regulations will only
activities in respect of certain
apply to the extent NFTs become
cryptoassets (which may include an
tradable through a digital assets
NFT depending on its features) could
exchange, and such NFTs are
fall within one or more of the existing
promoted or offered (or associated with
regulatory frameworks:
other financial activities conducted)
within the UAE. It is unlikely in the near 1. where cryptoassets qualify as
term that NFTs listing on digital assets regulated investments (such as
exchanges will be practical given their shares, bonds, units in collective
unique and non-fungible nature. investment schemes, or derivatives),
Where an NFT is subject to a brokerage the buying, selling, intermediation
arrangement or peer to peer transfer and certain ancillary services in
(whether organised through an online respect of such regulated
platform or not) – this is unlikely to be investments would trigger a
an "exchange" to which the current licensing requirement and ongoing
UAE rules are intended to apply. conduct of business obligations;
Notwithstanding the above, it remains 2. where the cryptoasset qualifies as
possible that activities in the UAE in electronic money in circumstances
respect of NFTs (including for example, where it represents a claim on the
brokerage) will be subject to AML issuer for pre-paid electronic
compliance responsibilities, which spending power, the issuer will
would need to be assessed depending trigger licensing requirements
on the nature of the underlying asset and ongoing conduct of
and the size of the transaction. business obligations;
• The Abu Dhabi Global Market (ADGM), 3. under the UK's AML legislation,
a growing financial free zone in the cryptoassets are defined as
UAE, has become a leading regional "a cryptographically secured digital
zone for virtual assets business. representation of value or
The ADGM has developed its own contractual rights that uses a form
regulations on "virtual assets" and it of DLT and can be transferred,
licenses firms to conduct regulated stored or traded electronically",
activities in respect of virtual assets and activities that amount to
separately to other parts of the UAE. converting cryptoassets to other
However, again, these rules are unlikely cryptoassets or cash into
to apply in respect of NFTs. cryptoassets would trigger
The definition of a "virtual asset" refers registration requirements. Such
to a digital representation of value that regulatory requirement is also
can be digitally traded and functions as triggered by intermediating or
(1) a medium of exchange; and/or (2) a arranging such exchanges.
unit of account; and/or (3) a store of
value. Unlike the UAE rules, this does • Whether an NFT qualifies as a
not expressly include a "representation cryptoasset under the UK's AML
of ownership". Therefore NFTs are legislation requires careful
arguably not captured. However, to the consideration, particularly if, based on
extent a particular NFT is determined a its characteristics, it amounts to a
constitute a virtual asset, the ADGM's representation of value or
Financial Services Regulatory Authority contractual rights.
only permits firms to conduct activities • There are various proposed regulatory
in respect of "Accepted Virtual Assets" changes currently being consulted on
– which must satisfy a number of in the UK, including around the
criteria (including maturity and market regulatory perimeter applicable to
cap). These criteria are unlikely to be cryptoassets and stablecoins and
satisfied by NFTs. extending the scope of the financial
promotions regime to apply to currently
out-of-scope cryptoassets which might
impact NFTs.
12 CLIFFORD CHANCE
NON-FUNGIBLE TOKENS: THE GLOBAL LEGAL IMPACTUS However, the situation could change –
for example, if certain NFTs are actively
NFTs are not currently specifically
traded and come to have an
regulated in the US. Thus, the legal status
established value at which they can
and regulatory classification of NFTs
readily be converted to currency. In the
under US law remains unclear. However,
case of intermediaries who facilitate
as with other cryptoassets, the features of
NFT trading but also engage in other
an NFT and how it is marketed and
activities that are subject to established
purchased or sold could cause an NFT to
regulation, this argument may have less
fall under existing US federal regulatory
force. Recent changes to the Bank
frameworks. The following key points
Secrecy Act included in the Anti-Money
should be considered:
Laundering Act of 2020 (the 2020 Act)
• From a US securities law perspective, amend certain definitions to include
pieces of memorabilia and collectibles businesses engaged in the exchange or
are not ordinarily considered to be a transmission of "currency, funds, or
"security" standing alone. However, an value that substitutes for currency" as
NFT marketed as a financial investment financial institutions that are subject to
whose holders have been led to expect AML regulatory requirements.
profits from an entrepreneurial venture
• US federal regulators could also
involving the NFT, or the managerial
interpret anti-money laundering
skills of the NFT's promoter, is more
regulations governing dealings in
likely to be deemed to be part of an
"antiquities" or "art" to cover NFTs.
"investment contract", which is a type
The 2020 Act amended the Bank
of "security" that is subject to US
Secrecy Act's definition of "financial
securities law. While no US federal
institution" to include persons engaged
regulator has taken enforcement action
in the trade of antiquities, and directs
against an NFT issuer to date, we have
FinCEN to promulgate implementing
seen private litigants filing civil class
regulations. The 2020 Act also instructs
actions against NFT issuers alleging
the Treasury and other agencies to
that the issuance of their NFTs
perform a study of the facilitation of
constituted an unregistered securities
money laundering in the trade of works
offering under US law. Class action
of art, and report to Congress in
suits can be expensive to defend
January 2022 to inform the debate over
even where claimants are
whether to extend AML regulatory
ultimately unsuccessful.
requirements to art dealers. The impact
• The Financial Crimes Enforcement such actions will ultimately have on
Network (FinCEN) and the courts have NFTs, if any, is not known at present.
yet to issue specific guidance on NFTs.
• US federal sanctions laws may also be
From a US anti-money laundering
relevant to the issuance, purchase, and
standpoint, whether an NFT can be
sale of NFTs. NFT transactions can
characterised as a "medium of
occur between counterparties located
exchange" and ultimately as a
anywhere in the world. Thus, US and
"convertible virtual currency" under US
certain non-US persons transacting in
law is not entirely clear at present. NFTs
NFTs, and NFT dealers in particular,
that are truly non-fungible should not
should ensure compliance with
be considered a medium of exchange
regulations issued by the US Office of
or convertible virtual currency because,
Foreign Assets Control prohibiting
unlike Bitcoin or other virtual currencies,
business dealings with certain persons,
most NFTs are not designed or
as NFTs of any value could be used to
intended to serve as a currency
evade US sanctions.
substitute or medium of exchange.
Clifford Chance is unique in having a truly global sports industry group
advising clients on novel legal issues such as these. Please contact a
member of the group in your jurisdiction for more details of our experience.
https://www.cliffordchance.com/sports
CLIFFORD CHANCE 13
NON-FUNGIBLE TOKENS: THE GLOBAL LEGAL IMPACTNAVIGATE THE DISRUPTION: YOUR FINTECH TOOLKIT
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Our clients have access to a range of free fintech resources – a selection of which are set out below:
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of articles on topics including AI, data, cyber, blockchain and cryptoassets and information on upcoming tech-focussed events
from our global network.
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developments, including the latest developments on global stablecoins such as Facebook’s Diem, as well as access to our
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financialmarketstoolkit.cliffordchance.com/fintech
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