NFT projects have continued in popularity throughout 2022, with retail brands and entertainment companies alike, despite the average price observed on the markets of all NFTs traded reportedly dropping. With greater commercial viability, particularly as metaverse-type projects expand, also comes greater regulatory scrutiny.
The DCMS Inquiry
On 4 November 2022, the UK Digital, Culture, Media and Sport (DCMS) Committee launched an inquiry into NFTs and the blockchain and it is likely to examine whether more regulation is needed, ahead of a UK HM Treasury review.
The parliamentary announcement highlights that the boom of NFTs has led some to argue that a new, more democratic way of creating and selling assets is developing, albeit that NFT regulation in the UK is largely non-existent.
The inquiry will investigate the operation, risks and benefits of NFTs and the wider blockchain. MPs are expected to consider whether NFT investors, especially vulnerable speculators, are put at risk by the market.
Increased regulatory scrutiny of the sector
UK regulators remain focused on interventions to reduce risks in the crypto sector more generally, including in relation to marketing and financial promotions.
The DCMS inquiry follows the recent confirmation from HM Treasury that it will bring certain cryptoassets into the scope of the UK's financial promotion regime, which regulates the marketing of financial services and investments. Although there has been some indication that for NFTs the fungibility requirement would possibly remove many NFTs from the scope of the regime, we will wait to see how this unfolds.
It is worth also noting that the Money Laundering Regulations 2017 (MLRs), which is the UK implementation of the EU Fifth Money Laundering Directive, brings into scope certain types of crypto-asset activities carried out in the UK and requires registration with the FCA for money laundering purposes.
Many players in the NFT and blockchain ecosystem feel that NFTs should not fall under financial services regulation due to the differing characteristics of NFTs to other types of crypto assets, and there is a general concern shared by industry and regulators alike that increased regulation could stifle innovation in the space. Although there is a strong counterargument that a regulatory framework would provide more legal certainty for participants in the eco-system to allow such participants to develop products and services with confidence of how their products and services will be treated and supervised from a regulatory perspective.
On 21 November 2022, the Bank of England published a speech from Sir Jon Cunliff, Deputy Governor Financial Stability, on DeFi, digital currencies and regulation (see here). Whilst citing the benefits of increased regulation in the crypto space more generally, and with reference to the collapse of the NFT and crypto trading platform FTX, Sir Cunliff noted that “the technologies that have been pioneered and refined in the crypto world, such as tokenisation, encryption, distribution, atomic settlement and smart contracts, not only seem unlikely to go away as our everyday lives become more ‘digital’, but may well have the potential to improve efficiency, functionality and reduce risk in the financial system”.
We will wait to see what’s next from the UK regulators. The DCMS call for evidence closes on 6 January 2023.