Crypto industry fears EU crackdown on NFTs – POLITICO

Crypto companies fear a new way of selling digital assets like artwork, music, memes — and even tweets — could soon be weighed down by Brussels’ old bureaucracy.

EU legislators are debating whether they should rope the market for so-called NFTs — non-fungible tokens — into an EU bill that will regulate crypto assets and the companies that handle them, dubbed MiCA. The legislation had originally stayed clear of these online collectibles. Not any more.

Lawmakers are determined to stop scam artists and money launderers from abusing the unregulated industry, which has attracted the attention of tax enforcers from Australia, Canada, the Netherlands, the U.K. and the U.S. now that it has become a popular way to buy and sell things like digital artwork. A major NFT marketplace called OpenSea, for example, faces multiple lawsuits in the U.S. amid complaints of stolen and plagiarized digital art, while New York prosecutors recently indicted a former employee for insider trading.

The challenge is that the crypto market has evolved at breakneck speed since the European Commission proposed MiCA almost two years ago to grant investors safeguards akin to those within the financial sector. So legislators are determined to act amid concerns that NFTs might be left unchecked in Europe, letting crypto companies use the sector to circumvent MiCA altogether. Inaction isn’t an option and legislators are hoping to reach an agreement on the topic as soon as next week.

The crypto lobby, however, fears that Brussels’ legislators are going too far in a bid to keep up with crypto technology. It says cramming NFTs into MiCA is a mistake because these assets aren’t financial in nature. They cater more to artists, musicians and video gamers.

The risk is they fear that the EU will bury artistic types under paperwork and customer checks that are ill-fitted to the market, and they warn that a heavy-handed approach could suffocate Europe’s NFT market, which is still in its infancy.

“NFT use cases are just emerging. A big one right now is art. Art moving from physical to digital is fundamentally no different from art moving from cave walls to canvas. We don’t regulate art like stocks, and we shouldn’t regulate the sale of digital art like the sale of crypto assets,” said Seth Hertlein, vice president and global head of policy at Ledger, a company that offers a USB-like digital wallet for people to hold crypto assets and NFTs outside of exchanges.

Apes and birds

NFTs made headlines after celebrities spent hundreds of thousands of dollars on unique digital artwork, such as Bored Ape Yacht Club and Moonbirds. These collectibles exploded in popularity last year, but have since been tempered with crypto’s general market downturn. The NFT sector is now valued at around $12 billion.

NFTs have wider applications than online art. Musicians can sell their songs as NFTs, for example, as an alternative stream of revenue. Investors also buy digital stakes in physical art or real estate. On a smaller scale, cinemas can issue film tickets as NFTs, while video gamers can use the technology to buy accessories for their virtual characters.

This market will come under fresh scrutiny on June 30, as commission officials, MEPs and representatives from EU capitals in the Council are scheduled to meet in a bid to complete the legislative negotiations on MiCA. There’s always a chance that talks will need more time, given ongoing divisions — including on NFTs.

The Commission has adopted a stricter stance amid concerns that investors could be short-changed with NFT sales that are worth much less than the headline-grabbing deals.

“Left unregulated, NFT markets will remain prone to severe market manipulation risks such as wash trading and insider trading,” Commission officials outlined to legislators in the Council and Parliament in a confidential note, obtained by POLITICO, ahead of next week’s meeting.

Finding a compromise

The Commission is determined to ensure that the legislation covers companies that allow for the exchange or the safekeeping of NFTs, while leaving artists and businesses free to create and service their own NFTs without suffering the regulatory burden. Many MEPs also favor this approach.

But the Council isn’t convinced. In its view, MiCA should target large online auction houses like OpenSea or video gaming platforms that fall under certain thresholds, like average monthly trading, according to a separate document that the Council prepared to try to reach a compromise.

That approach seems to have won over some within the crypto industry, even though it would still prefer a separate set of rules outside MiCA.

“Approaching NFTs as purely financial instruments completely misses the point on the innovation these can bring to Europe,” said Robert Kopitsch, secretary-general for Blockchain for Europe. “The objective of the regulators should have been to develop a bespoke regime for NFTs that looks at their variety and deals with the specific risks that each different use case could bring.”