The regulatory treatment of Non-Fungible Tokens ("NFT"s) has been significantly questioned mainly due to their ability to take different forms. Even the latest text of the long-awaited European Union Markets in Crypto-Assets ("MiCA") Regulation does not explicitly cover NFTs. Nevertheless, the interest in NFTs has been only increasing and the Malta Financial Services Authority (the "MFSA") has recently received various queries regarding the regulatory treatment of NFTs. Therefore, in order to establish some clarity on the subject, on 5 December 2022 the MFSA issued a consultation document regarding the regulatory treatment of the NFTs in the context of the Virtual Financial Assets ("VFA"s) Framework in Malta.

Current Regulatory Treatment

The consultation document brings attention to the definition of Distributed Ledger Technology ("DLT") Assets outlined in the VFA Act (Chapter 590 of the Laws of Malta), whereby a DLT Asset is defined as "(a) a virtual token; (b) a virtual financial asset; (c) electronic money; or (d) a financial instrument, that is intrinsically dependent on, or utilises, Distributed Ledger Technology". Considering that NFTs are intrinsically built on DLT and the definition of DLT Assets is not exhaustive, according to the current regulatory treatment, the MFSA is of the opinion that NFTs would qualify as DLT Assets and; thus, should be subject to the Financial Instrument Test for determining the applicable regulatory framework.

Proposed Regulatory Treatment

In the proposed consultation document, the MFSA is hesitant to encompass NFTs within the scope of the VFA Act due to their particular nature of being unique and non-fungible, which goes against the main aim of the VFA Act – to regulate investment-type services offered in relation to VFAs. Therefore, the MFSA also considers it is prudent to follow the rationale of MiCA by excluding VFAs that lack fungibility and are unique from the VFA Framework.

The MFSA is seeking feedback from relevant stakeholders prior to proceeding with the
implementation of the clarifications to the VFA Framework proposed in the Consultation.

The consultation period is open until 06 January 2023. Access to the above-mentioned consultation document is available here. Those interested in submitting their feedback are encouraged to do so via the online form. We will continue to monitor the results emanating from this consultation document and keep our readers updated accordingly.

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