Thanks to tax agencies of major countries these days, the question of whether NFTs should be regulated or not as securities keeps coming up again and again. Generally, the majority consensus has continued to treat NFTs as assets versus an investment security. However, that doesn't mean NFTs are in the clear. A lot of the problem for projects these days has to do with how they communicate their NFT product as well as where that messaging happens.

Technically speaking, NFTs are digital tokens that use blockchain technology to establish proof of ownership and authenticity for the specific asset. Unlike cryptocurrencies such as Bitcoin (BTC) or Ethereum (ETH), which can be exchanged on a like-for-like basis, NFTs are indivisible and represent a unique item, be it digital art, virtual real estate, or collectibles. Each NFT also carries a distinctive identification code that certifies its uniqueness and ownership. Okay, so far so good, that sounds very much like an asset and a unique one at that.

NFTs as Assets

The argument for NFTs as an asset is similar to owning physical painting or a vintage car. They are definitely treated as collectibles and can rise in value over time due to their market demand, but that activity happens on the secondary market after an NFT is issued. In this regard, NFTs have demonstrated significant value in various sectors, attracting millions of dollars in transactions, Opensea big sales are great examples of demand. Collectors and enthusiasts are willing to pay substantial sums to own exclusive digital art pieces, virtual real estate, or even in-game items. And, as assets, NFTs can be bought, sold, and traded on specialized platforms, just like any traditional form of property. Baseball cards are a good comparison.

NFTs as Securities

Here's where things get muddy and worrisome. Securities typically involve investments of money in a common enterprise with an expectation of profit, primarily derived from the efforts of others. Normally, while NFTs do involve financial transactions, they often lack some key characteristics of traditional securities.

However, big concerns happen when an NFT project makes promises that buying and holding a given NFT will produce a value reward. When that kind of messaging occurs, the dreaded security line starts being crossed. While some individuals may purchase NFTs with the intention of reselling them at a higher price, not all NFT holders are motivated by profit. Many collectors acquire NFTs simply for their personal enjoyment or as a means of supporting artists. However, when a project flat-out promises buying their NFT will produce a financial return, we've easily entered into security-land, which would make that project subject to regulation. The decision of value is taken out of the consumer's hand and proactively communicated by the project with the intent of marketing and selling the NFT as a security. Woops.

Regulatory Considerations

Regulatory jurisdictions differ in their approach; some countries view NFTs primarily as assets, subjecting them to existing property laws and regulations. Others are exploring the securities angle, examining whether specific NFT offerings could fall under their securities regulations. In the U.S., the Department of Justice has been actively pursuing projects that clearly pitched their NFTs securities, especially where the inevitable rug pull occurred for millions of dollars. An project caught in this web is literally going to be bled dry in litigation. Aside from basic legal defense from the charges, the project will likely be accused with dozens of charges of not filing a security correctly as well as collecting investments illegally as a security broker. It's so messy, once charged or indicted, the only way out is to settle and hope not to spend time in federal prison. For those not yet so unlikely, shut up and don't ever promise your project returns value to a buyer, period. Your social media posts will be your worst enemy as well.

So, What to Do?

Again, projects should absolutely keep quiet about value, both current and future expectations. The absence of a uniform global approach and the varied intentions of NFT holders make it difficult to categorize them universally, but it also leaves the field open for the regulators to find and use handy examples as well. There is rarely a regulator who wants to see less control and regulation. That would them out of business, obviously. Instead, as the popularity of NFTs continues to grow, regulatory frameworks will likely adapt over time to address the unique challenges posed by these digital assets. Tax agencies are already there, expecting that at the least capital gains taxes are paid on NFT profits, but that doesn't mean taxes are the end of the discussion, by any means.