Gherson Solicitor’s criminal litigation, investigations and regulatory team have previously written about the regulation of cryptoassets, even arguing that it is time for a bespoke regulatory regime.
This blog will now consider the regulatory regimes (including anti-money laundering (“AML”) regulations) applicable to a specific type of cryptoasset, specifically a non-fungible token (“NFT”).
What is an NFT?
An NFT is a claim to ownership (in the form of non-interchangeable data stored on a blockchain) of a unique (often digital) item. This claim of ownership, which can be bought and sold, uses blockchain technology to establish the individual ownership of the underlying item, which can be, for example, an (often digital) image, a digital video or music file.
Are NFTs legal in the UK?
Yes, NFTs are legal in the UK.
Are NFTs subject to any specific UK regulations (aside from UK AML regulations)?
Currently, this depends. As noted above, NFTs are a type of cryptoasset. A cryptoasset’s UK regulatory status is dependent on its characteristics and as such, which of the following three categories it falls into – a security token, an e-money token or an unregulated token. Therefore, depending on their characteristics, some cryptoassets may fall into the first category and be specified investments for the purpose of the Financial Services and Market Act 2000 (Regulated Activities) Order 2001 (i.e. security tokens). Some cryptoassets might fall into the second category and be electronic money for the purposes of the Electronic Money Regulations 2011 (i.e. e-money tokens).
There is currently no wider cryptoasset regulation framework, and regulation therefore only currently bites where a cryptoasset’s characteristics cause a crossover into these other areas of regulated financial activity (i.e. a a cryptoasset is either a security token or e-money token).
Collectible and non-collectible NFTs will generally be neither a security token nor an e-money token. As such, they will likely fall into the third category and will be classified as unregulated tokens and likely be unregulated.
What about the UK AML regulations for cryptoassets?
The UK Government has transposed AML requirements relating to cryptoassets into national law, specifically through incorporating the requirements of the EU’s Fifth Anti-Money Laundering Directive (“AMLD5”). UK national law implements AMLD5 via the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (the “2019 regulations”).
As such, the 2019 regulations now expand the scope of persons subject to the existing AML regulations to include cryptoasset exchange providers and custodian wallet providers. Therefore, if UK business provides the services of exchange or custody of a cryptoasset, it will be subject to the 2019 regulations and be regulated for AML purposes. The 2019 regulations also appoint the FCA as the supervisor of cryptoasset businesses for AML purposes and businesses in scope will need to register with the FCA as well as comply with all regulatory requirements.
The factors to consider when determining whether a business with exposure to NFTs is in scope (and will need to comply with the 2019 regulations, including registration with the FCA) will probably include –
- whether the particular NFT involved is deemed a cryptoasset under the 2019 regulations (for 2019 regulation purposes a cryptoasset is defined as a “cryptographically secured digital representation of value or contractal rights that uses a form of distributed ledger technology, and can be transferred, stored of traded electronically), and,
- the particular role that the business plays and interactions that the business manages (i.e. does it provide services of exchanges or custody of cryptoassets).
There is certainly the potential that a business with exposure to NFTs could be in scope of the 2019 regulations and, as such, would need to comply with the 2019 regulations, including applying for FCA registration and supervision.
In summary, a business providing the services of exchanges or custody of cryptoassets will be subject to the 2019 regulations. Technically, this could mean that a business with exposure to NFTs could be under the scope of the 2019 regulations. A detailed analysis would need to be undertaken and expert legal advice sought.
What about UK AML regulations for the art market?
Finally, there is the need to also consider other pre-existing AML regulations. Specifically, and for obvious reasons, the traditional art market is regulated for AML purposes. There are clear cross-overs between NFTs and the tradition art market. As such, AML regulations that apply to the art market must also be considered.
The AMLD5 states that “persons trading or acting as intermediaries in the trade of works of art” must comply with AML regulations in certain circumstances. In the UK, and under the 2019 regulations, “art market participants” (an “art market participant” is defined under the 2019 regulations as a firm or sole practitioner who by way of business trades in, or acts as an intermediary in the sale or purchase of works of art, or who stores works of art) are required to register with HM Revenue and Customs (“HMRC”) for supervision and comply with various requirements of the 2019 regulations. This is in circumstances where the value of a transaction, or a series of linked transactions, amounts to €10,000 or more.
Again, the factors to consider when determining whether a particular business with exposure to NFTs is in scope (and will need to comply with the 2019 regulations, including registration with HMRC) will probably include –
- whether the particular NFT involved is deemed a “work of art”, (A work of art is not defined under the AMLD5, however is defined under Section 21 of the Value Added Tax Act (and accordingly does not include antiques, but could include conceptual works of art)); and,
- (the particular role that the business plays and interactions that the business manages (i.e. is it an art market participant – An “art market participant” is defined under the 2019 regulations as a firm or sole practitioner who by way of business trades in, or acts as an intermediary in the sale or purchase of works of art, or who stores works of art).
There is of yet no specific guidance to assist answering the first question, as such whether a particular NFTs is deemed works of art is probably a question for the regulators. However, when considering both issues, relevant businesses would be wise to take a broad view.
In summary, a business involved with the sales of NFTs for an amount of €10,000 or more could also be subject to the 2019 regulations. Again, seeking expert advice is recommended.
Gherson and MusicArt – a case study
Gherson Solicitor’s criminal litigation, investigations and regulatory team has helped MusicArt to comply with relevant anti-money laundering (AML) law and regulations as it launches into the NFT marketplace.
MusicArt is an online marketplace for single/album artwork, music posters, personalised messages, and autographs, and reportedly allows artists and their fans to have an “accessible entry point” into the NFT space.
The firm advised on all aspects of legal and regulatory compliance. To ensure MusicArt complied with all required provisions, the team also advised on the applicable UK AML regulations. In addition, it successfully applied for registration with HMRC for AML supervision.
To secure the compliance of requirements of the UK AML regulations, the team ensured the successful registration, drafted bespoke policies and procedures which considered the novel features of NFT technology, including to ensure customer due diligence, and advised on all aspects of the regulations.
Do you need assistance complying with the applicable regulations and/or the registration process?
To operate in the UK, relevant cryptoasset businesses need to have applied to register with the FCA and they need to adhere to a number of compliance rules. Given that breaches of the AML regulations can attract potential civil or criminal liability and penalties, it is important that firms seeking regulatory approval are aware of all the requirements and have in place robust policies to ensure compliance. Further, businesses that have an exposure to NFTs will also need expert bespoke advice on which regulations are applicable.
How Gherson can assist
For those who would like advice on this issue, including those who have had issues with the registration process, our specialist regulatory and compliance team can guide individuals and companies through the process.
If you have any questions arising from this blog, please do not hesitate to contact us for advice, send us an e-mail, or alternatively, follow us on Twitter, Facebook, or LinkedIn to stay-up-to-date.
The information in this blog is for general information purposes only and does not purport to be comprehensive or to provide legal advice. Whilst every effort is made to ensure the information and law is current as of the date of publication it should be stressed that, due to the passage of time, this does not necessarily reflect the present legal position. Gherson accepts no responsibility for loss which may arise from accessing or reliance on information contained in this blog. For formal advice on the current law please don’t hesitate to contact Gherson. Legal advice is only provided pursuant to a written agreement, identified as such, and signed by the client and by or on behalf of Gherson.
©Gherson 2022