Non-Fungible Tokens Education and Emerging Practices

Call for Public Comment 

The Digital Chamber is leading an effort to draft emerging practices for NFTs that we hope will soon be considered for formal recommendations by the CFTC’s Global Markets Advisory Committee (GMAC). The goal? To increase transparency and ensure the report best reflects the beliefs of industry and consumers. 

The report, created by industry leaders, outlines definitions, applications, and emerging practices for NFTs. The comment period will remain open until April 26, 2024. Following the public comment period, The Digital Chamber will review feedback, integrate suggestions, and present the finalized report to the NFT Working Group, then the Digital Asset Markets Subcommittee for presentation to the full GMAC and the CFTC.

Please read the paper and share your feedback in the comment section below. We welcome your feedback! 

9 responses to “Non-Fungible Tokens Education and Emerging Practices ”

  1. Professor James J. Angel, Georgetown University Avatar
    Professor James J. Angel, Georgetown University

    Thanks for doing this important service. I completely agree with the basic concept, that an NFT should be regulated in the same manner as the underlying asset. We currently live in a gray zone where the regulatory treatment of digital assets is unclear.

    I think it is useful to examine why we regulate securities so differently from most commercial products. After all, we have plenty of laws are regulations that cover commercial transactions. We have separate laws for securities for two major reasons: 1) There is a huge asymmetry of information between the issuers of securities and investors, and 2) While the quality of most goods and services can be quickly established, the quality of a financial product may not be apparent for decades. There is thus a higher risk of fraud. With commodity regulation, there are also issues with the manipulation of derivative prices, as well as with the solvency of counterparties and clearing entities. On top of this, we also have concerns over economic growth and stability, along with social concerns such as AML.

    With respect to NFTs, and digital assets in general, the question becomes at what point the asymmetric information and/or delayed revelation of quality demand a higher level of regulation than existing commercial laws. Clearly, there is little asymmetric information about an art object: What you see is what you get. Thus, purchasers of an art NFT do not need the hundred-page registration statements required of stock IPOs. Existing laws on fraud are good enough for such NFTs. On the other hand, consider a series of real-estate-based NFTs such that each NFT gets the rental income from a particular apartment in a building to be built in the future. Such a series of related NFTs looks like a financial product and raises the same need for enhanced disclosure and enforcement as other financial products. This does not necessarily mean that the current regulatory processes for securities is the best solution for such NFTs. We need to rethink and overhaul the complete structure of our securities, commodities, insurance, digital asset regulation.

  2. Victor Newsom Avatar

    From a principles approach, and given that the underlying, core element presented by the “NFT” at its most basic form is property ownership and that such ownership may exist in a trustless environment on open chains such as Ethereum and Solana or even private block chains, the centralized or decentralized nature of the asset should be considered both in terms of potential information asymmetry and the feasibility of implementing any proposed policy. Additionally – the critical difference in the ownership of an NFT on a public chain and ownership represented on a corporate ledger is the potential for a trustless state of provable ownership. The articulation of what particular digital or physical asset is then where this discussion of which rules apply and if new ones are needed. Already – the financial system allows for the purchase of NFT via card schemes and interbank contracts are settling across borders in real time. Since another key aspect of a digital representation of promised goods or services, of office buildings and estate titles, or simple access to a concert is the bundling, structuring, and even compounding rights across one or more sets of NFTs – it is ever more critical that “disclosure” is the focus. Such clear disclosure should assist regulators in knowing which rules to apply in which cases. Given the struggle we have seen with stablecoin framework definition – I see this space as even bigger. In service to assisting in a path forward – I would look to a recommendation made to Treasury regarding stablecoins. Pick a perimeter that is well understood and explicitly approve that space but do not implicitly bar progress in areas outside of understanding or control. i.e. USD backed and denominated stablecoins such as Circle’s USDC need to be backed by cash deposited at a regulated institution or US Treasuries (as a means of liquid risk free revenue) while algorithmic stablecoins will not be covered or approved. This approach provides clarity and structure to move forward while not creating a problematic situation for other emerging models. I would consider how we might constructively recommend a similar approach for NFTs. NFTs representing normal goods and services (concert tickets, a jersey, fan club membership) vs real estate or business ownership of some kind can be dealt with if these uses are discrete and disclosed. Yes – some cases will be defined as a securities case while others are simple retail activity. A rational, principles led evaluation and resulting framework that can be extended over time will end up serving us well. I do not think everything can or should be overhauled but even small change will take time. A simple approach seems most likely to succeed.

  3. Paul Barron Avatar

    In the near future, #blockchain will play a crucial role in ensuring media authenticity and combating the spread of misinformation. By leveraging the immutability and transparency of #blockchain, content creators and publishers can authenticate and verify the origin of their work, making it easier for consumers to trust the information they receive.

    Imagine a world where every piece of media – articles, videos, images, and audio files – is linked to a unique digital signature on a blockchain. This would create an unalterable record of the content’s provenance, allowing anyone to trace its origin and verify its authenticity. In an era where fake news and deep fakes are becoming increasingly sophisticated, this level of transparency could be a game-changer.

    However, the potential benefits of blockchain technology for media authenticity could be undermined if governments decide to make cryptocurrency and blockchain-related activities illegal, including digital assets. If authorities classify tokens as securities and argue that mining or validating constitutes issuing securities, it could effectively criminalize the processes that make blockchain viable as well as the future of Free Speech.

    This poses a significant challenge for the future of #freespeech and the dissemination of information. Why @elonmusk is so important to protect speech. As more content creators and publishers turn to blockchain to establish trust and credibility, a hostile legal environment could stifle innovation and limit the technology’s potential to combat misinformation. Especially in the US!

    Despite these potential obstacles, it is crucial to recognize the importance of blockchain technology in the future of media and free speech. As traditional politicians of information lose their grip on the narrative, decentralized platforms powered by blockchain could emerge as the new guardians of truth, ensuring that authentic content can be easily distinguished from propaganda and misinformation.

    In a world where trust in media is at an all-time low, embracing blockchain technology and advocating for its legal protection may be essential to safeguarding the integrity of information and the future of free speech. As society grapples with the challenges posed by the digital age, we must find ways to harness the power of #blockchain to create a more transparent, accountable, and trustworthy media landscape.

    This is just one of the uses of blockchain and digital assets for the future.

  4. WebThree Payment Solutions Avatar

    This paper provides an insightful overview of the distinct features and emerging use cases of Non-Fungible Tokens (NFTs), highlighting their potential to transform various industries, as well as emerging practices. With respect to regulatory matters, NFTs present distinct policy challenges, across appropriate financial regulations, intellectual property (IP) rights, consumer protection, energy resources, privacy, and content moderation. While the United States and global policymakers have initiated significant measures to assess both the risks and advantages of this technology, policymakers still have opportunities to further safeguard consumers while fostering innovation.

    The regulatory treatment of Non-Fungible Tokens (NFTs) has undergone a significant evolution in recent years, reflecting the rapid growth and increasing prominence of the NFT market. Initially, we saw challenges posed in categorizing NFTs within existing frameworks, as their unique characteristics posed novel questions. As the popularity of NFTs surged, we began to see regulators around the world move to closely examine their potential implications and risks, leading to a more nuanced approach to regulation.

    Certain NFTs may fall under financial regulation, but determining which rules apply or which regulator holds jurisdiction is often unclear. While some jurisdictions have taken proactive steps to establish guidelines and frameworks specifically tailored to NFTs, others have sought to apply existing securities, copyright, and consumer protection laws to regulate NFT transactions. Due to the variety of use cases and applications, some cases will be deemed securities-related, while others involve basic retail activities. For instance, many recent use cases show applications of NFTs enabling the authenticity of various types of digital media, therefore helping to protect IP rights, which could provide numerous positive benefits across multiple industries in the future. A case-by-case basis may be the best approach in discerning a unique case’s standing, or could initially be determined at high-level amongst differentiating category types, if standardized. With securities vs. non-security based classification being paramount, while stabilizing the effect of federal vs. state level regulations to ensure a fair, inclusive, and innovation-focused participant field, there are also considerable risks posed from money transmission, consumer protection in marketing (UDAAP), as well as tax implications, that require further exploration and clarity in relation to NFTs. Establishing a rational, principle-based evaluation framework that evolves over time is likely most beneficial. This evolving regulatory landscape underscores the need for collaboration between regulators, industry stakeholders, and legal experts to ensure that regulatory frameworks remain adaptive and responsive to the dynamic nature of NFTs while balancing innovation with investor and consumer protection.

    Moving forwards, Congress could enact legislation that delineates the responsibilities among competing regulators. The government could enhance enforcement capabilities across federal agencies by creating a joint task force dedicated to identifying illicit activities on public blockchains. Additionally, the development of a user-friendly website to act as a central hub of information on federal government resources concerning digital assets, encompassing cryptocurrencies and NFTs, tailored for both consumers and businesses could be beneficial in helping to simplify complex, disparate information spread across multiple agencies, and streamline this data into a unified, central location for easier access and reference.

    Sentiment leans towards advocating for a regulatory approach that fosters innovation rather than stifling it. This perspective aligns with the dynamic and rapidly evolving nature of the NFT ecosystem, taking into account the variety of risks posed and need for regulatory clarity, but still emphasizing the importance of allowing builders to experiment and explore the technology’s potential as we evolve in years to come.

  5. Rachel Pipan Avatar

    A great document and working draft by The Digital Chamber. For those who may not have read it in full yet, the paper states that it is best for policymakers to adopt a “flexible principles-based approach to any definition of an NFT as it may need to be revisited.” What I encourage us to explore is: How can this kind of flexible approach bring clarity in the near-term, while allowing for the future consideration of use cases and products that we cannot predict, and still remain effective at categorizing and punishing illicit, criminal and/or deceptive use? What has worked well (at least in assisting legitimate players in web3 develop and evaluate digital asset offerings over the past decade) is the widespread knowledge of and application of the Howey test. (And even to a lesser degree, the threshold described by Justice Potter in Jacobellis v. Ohio regarding obscenity: “I know it when I see it.” While not the most descriptive rule, it is a memorable one.) Whether the Howey test is the right test for NFTs is not the point of this commentary (which the paper discusses well on page 4) – instead, what I want to highlight is that there exist examples of helpful tests.

    The CFTC and its Global Markets Advisory Committee would be well-served in the case of NFTs to develop a similar rule/threshold/test that encapsulates its principles. Not only would this make their own evaluation work easier, but it could catalyze a grassroots movement of accountability within the web3 sector and the general public. The more people that can identify and report problematic use of NFTs, the more protected the “normal consumer” is. And indeed the time is now, because many “normal consumers” have already been rug-pulled by NFTs. Therefore, the CFTC and other regulatory agencies would be well-served to make the guidance for what is allowable brief, clear, and memorable. For example – I run a B2B services firm in proximity to, but not exclusively serving, the web3 sector. It would be of great value to my executives when evaluating new business to be able to do a “back of the envelope” calculation on whether a new client in the NFT space is offering a product or service that is legal and appropriate and therefore one we should support. While we can’t ever be certain without a legal opinion, it would be helpful to have an easily understandable guardrail of when to “aggressively verify” whether a project is operating appropriately so we can then evaluate whether to work with it.

    The existence of this rule only becomes more helpful when putting yourself in the shoes of a consumer. Because while a NFT could have a “Can’t Be Evil” license, be bought from a retailer I trust, and have all the markings of a trusted asset: it still may be deceptive or illicit in how it is being marketed to me or in what it is offering. A rule of when to think more carefully about buying or accepting it would go a long way.

    An example of this rule could be the following:
    Is the main attraction of this NFT* most like: an orange grove, a signed baseball, a birth certificate, or a bumper sticker?
    *or application of NFTs, or product or service that is in part made possible by NFTs

    The subtext of the rule would be that consumers, providers and regulations should conduct aggressive verification for the cases involving the idea of financial return or value from sale, and default to more permissive “checking” of the latter cases that are more creative and personal. This would satisfy what Commissioners Peirce and Uyeda said that is referenced on page 4, which is “we ought to lay out some clear guidelines for artists and other creators who want to experiment with NFTs as a way to support their creative efforts and build their fan communities.” Important to note however is the term “main attraction.” Many NFTs offer benefits across these categories, but the evaluation should be on the highest-level or most attractive feature of the NFT to the consumer.

    To give four examples of how this rule could be broadly beneficial – let us consider I am a consumer that owns the following NFTs:

    Situation 1: A creative/artistic NFT, issued by my favorite indie artist
    This is most like a bumper sticker – a way of showing my support and interest in an artist, cause, hobby, sport, etc. There’s little resale value and no promise of financial return. Like buying a bumper sticker, I have it because I like it and it reflects the community I want to be in.

    Situation 2: An NFT that verifies I am the rightful owner of my fully signed (physical) copy of The Beatles’ Sgt. Pepper’s Lonely Hearts Club Band LP (sold in 2013 for nearly $300,000)
    The NFT itself is a verifier / receipt, which makes it more like a birth certificate. It verifies that I own something but it is not the ultimate valuable asset (the album), and I am presumably able to sell the album without the receipt as long as there’s some other form of provenance. A similar use case is redeemables, or the use of NFTs for entry/ticketing, or to issue product warranties (more on this below).

    Situation 3: An NFT of exclusively digital album art for the launch of TTPD (Taylor Swift’s newest album) that grants me guaranteed access to buying a concert ticket for the next tour.
    The main attraction of this NFT is the exclusive access to concert tickets (which are never guaranteed and hard to get, with scalpers charging 400% in some occasions). There’s elements of financial return here – while there’s an artistic appeal (album art), the real interest is in the valuable perk it gives me. I should have carefully considered before buying this NFT whether the cost of the NFT is appropriate given what I will then have to spend on concert tickets (or, rather, if I could get concert tickets without having to buy the NFT, and what the cost would be). A similar use case is something like a BAYC – am I anticipating some kind of financial return from what is purely a digital asset? Or did I buy it just for the album art because I’m in a wealth bracket where I don’t need to worry about the cost of scalpers and concert tickets?

    Situation 4: An NFT representing that I own a fractional share of someone’s full share of the real-world asset and amusement park Dollyland (i.e., a piece of a piece).
    This is a musical, digital orange grove. I should have carefully vetted whether I was in a place to invest financially into this real world asset (as a professional investor would do).

    The rule itself will need workshopping to align with the most important principles, but I hope the development of a rule can be considered for the recommendations section on page 9 of this document.

    Final notes:
    Additionally, on page 3, we should consider including the use case for “digital verification and warranties” – similar to the industrial metaverse, this is the lesser-known but perhaps most beneficial application of this technology. It could fit into “identity/credentialing” but it is much more related to products than people, so it might warrant a separate category. A digital wallet where a consumer can see in one place their warrantied products (regardless of where they were bought from), expiry dates, rights, etc., would be a great step forward for consumer protection as a whole. This is just one such application of NFTs that flexible regulation of the technology could encourage.

    Additionally, in regards to the disclosures, which this paper shares on page 15 – what should be included is this disclosure information is access to it in more than one language (i.e., English and Spanish). Plain language is not enough for any product facing the general public and it should be prioritised that it can be readable in more than just English. Perhaps a guidance here is, for any company selling NFTs that has their website available or serves regions where the dominant language is not just English, they should ensure the disclosures are also translated (and verified as correct) into this other language.

  6. Willkie Farr & Gallagher LLP Avatar

    This paper presents a timely overview of non-fungible tokens (NFTs) as an emerging technology and appropriately captures the broad range of applicable uses, regulatory schemes, and current industry practices.

    Of particular interest is the discussion of potential NFT regulation, which the paper correctly asserts should be flexible depending on an NFT’s use and design. However, as NFTs represent a class of digital assets, which have many use cases, any inquiry regarding their potential regulation should first consider how NFTs should be classified. There are potentially two broad classifications of NFTs—consumptive use NFTs and non-consumptive use NFTs. If the applicable NFT is primarily for an individual’s consumptive use, i.e., for such individual’s enjoyment, household use, display or record keeping, such NFT should not be subject to regulations that have traditionally been applied to securities. The application of securities laws and related regulations (especially in an ad-hoc matter as is currently going on) would likely reduce creator and consumer willingness to participate in the NFT market and hinder innovation and experimentation. Rather, these types of NFTs should be subject to regulations that focus on consumer protection and maintaining market integrity. As discussed further below, much of that regulatory framework is already established, based on the underlying asset linked to the NFT.

    On the other hand, non-consumptive use NFTs may, among other things, serve the purpose of amassing profit or generating some form of yield for the NFT holder, where the appreciation in value of the underlying asset may be the main benefit of purchasing the NFT. Although generally not viewed as the market standard approach to NFTs to date, in certain instances, the underlying asset is a share or interest in a future business or venture. As this example illustrates, there is a likelihood that these types of NFTs may eventually be regulated by securities laws and similar regulations such as the Bank Secrecy Act (BSA). In addition to providing a more in-depth outline of the two broad classifications of NFTs (under which many different use cases and designs may be implemented), it may also be useful to examine how NFTs are different than other digital assets, e.g. more traditional digital assets, such as bitcoin and ether, to eliminate predetermined confusion and bias as both types of digital assets are often referenced together.

    Relatedly, as the paper points out, the U.S. regulatory framework already largely addresses many of the concerns facing both types of NFTs. For example, most consumptive use NFTs are purchased via NFT marketplaces, certain of which may already incorporate anti-money laundering and illicit financing policies as would be required under the BSA (even though the BSA has not been extended to apply to such businesses). In addition, risks posed by false advertising and marketing practices can be addressed via federal and state laws related to the Lanham Act or Unfair, Deceptive, or Abuse Acts or Practices (UDAAP). However, regardless of an NFT’s classification, Congress and applicable federal agencies should create flexible, but clear and consistent, guidelines rather than stringent rules as the NFT ecosystem is just being developed. The government should also consider creating a task force to study current and emerging use cases, industry practices, and lawsuits to better understand the existing opportunities and challenges affecting the NFT ecosystem and identify the necessary points of government oversight. Additionally, the government could encourage industry stakeholders to create best practice materials related to offering/selling, buying, and holding NFTs (including addressing any privacy concerns and issuing “passports” on the blockchain to verify the reputability of buyers and sellers). Given the continually evolving nature of NFTs, their governance cannot and, in many cases, should not, simply fit within the confines of traditional governmental oversight. Instead, NFT creators, marketplaces, and consumers, collectively, should be provided the opportunity to experiment with different projects and practices and be encouraged to participate in the development of the forthcoming regulatory framework.

  7. Virginia Mijes Avatar

    NFTs ( Non – Fungible tokens ) are a unique type of digital asset that use blokcchain technology to represent ownership and authenticity of digital ítem.The impact of NFT son various markets can be significant such art and collectibles, gaming and Virtual Worlds and Finance and investments. In the market art, NFTs have revolutionized the art world by providing a secure and transparent way to authenticate and trade digital art. This has opened up new opportunities for digital artists to monetize their work and for collectors to invest in unique digital assets. Also, NFTs have been widely adopted in the gaming industry, where they are used to represent in-game ítems, characters, and virtual real estate. This has created new revenue streams for game developers and has allowed players to own and trade digital assets within games. In terms of Financial and investments have also found applications in the financial sector, where they are used to represent ownership of physical or digital assets, such as real estate, fine art, and even intelectual property. This has opened up new investment opportunities and has the potential to increase liquidity in these markets

    , the widespread adoption of NFTs also regarding regulations and law:

    1. Regulatory Uncertainly. The lack of clear and consistent regulations around NFTs has created uncertainly for both consumers and businesses. Different countries and regions have taken varying approaches to the regulation of NFts, which can make it difficult for global markets to opérate seamlessly
    2. Fraud and Scams : The anonymity and decentralized nature of blockchain technology can also make vulnerble to fraud and scams. Bad actors can create and sell counterfeit NFTs, or engage in market manipulation and insider trading, which can harm the integrity of the NFT ecosystem
    3. Environmental Concerns : The energy-intensive nature of some blockchain networks used for NFTs has raised concerns about the environmental impact of the technology. This has led to calls for more sustainable and energy-efficient blockchain solutions
    4. Legal Ambiguity : The legal status of NFTs is still largely undefined, which can create challenges around ownership , licensing, and intelectual property rights. This can lead to disputes and legal battles, particularly in cases where the ownership or use of an NFT is in question

    To address these challenges, policymakers and regulatory bodies around the world are working to develop clear and consistent frameworks for the regulation of NFTs and other blockchain-based assets. This includes efforts to address issues such as consumer protection, anti-money laundering, and environmental sustainability. As the NFT market continues to evolve , it will be crucial for stakeholders to work together to ensure that the technology is developed and used in a responsable and sustainable manner

  8. Michal Fiuk Avatar
    Michal Fiuk

    Thank you to the working group for putting together such a comprehensive document and pushing the discussion on digital assets & NFTs forward. Work like this is critical to continuing to advance Web3 as an industry and providing a better experience for consumers and end users.

    Overall, the document is measured and clearly well-researched, diving into a cross-section of key points in understanding and providing recommendations around NFTs and digital assets. I have included specific feedback and recommendations below, but appreciate the thoughtfulness of the research and am generally aligned with the direction of providing clear guidelines or “rules of the road” for innovators to build within and consumers to enjoy the benefits of.

    Happy to provide any additional context on my thoughts (below) or help support the discussion more broadly, however I can.

    Specific Feedback:
    – The definition is well crafted and fully agree with the need to be flexible. Use cases, form factors, and even the concept of what an NFT is will likely to continue to evolve as the space does.

    – It may be worth calling out a hybrid or Web3-native class of NFT, often referred to as the “profile picture” or PFP. While it has elements of identity, membership, and even art NFTs, it is a unique category where the digital asset literally stands for a user in their online presence. Critically, PFP collections have been, and continue to be, some of the largest, most valuable, and most prominent collections, including CryptoPunks and the Bored Ape Yacht Club. This type of nuanced, sector-specific definition would provide additional credibility to the research and user that a reader has confidence that the working group has truly studied NFTs in depth. Happy to help craft the description for this class of NFT.

    Industry Emerging Practices
    – Make the delineation between “offers and sales” clearer. While secondary sales are explicitly addressed, I would recommend also explicitly calling out primary sales as the nomenclature for the initial purchase. Replacing the “offers and sales” language with a clear “primary” versus “secondary” market and sale mechanism more closely aligns with the language used in the industry today and will be more readily understood by readers.
    – As part of the AML discussion, it may be worthwhile calling out that the fact that NFTs are, by definition, on chain is very much an additive feature in this regard. If a transaction takes place where the value of the two assets is misaligned, purchasers can’t hide it in a closed-door auction or some other private sale mechanism like in the legacy collectible & art world – the global audience of blockchain users can identify a suspicious transaction, confirm its existence on the blockchain, and they have immediate visibility into both wallets involved and their subsequent on-chain history and associated wallets.
    – In addition to the developments in fraud prevention mentioned, the market itself is functioning more and more efficiently and reducing the surface area and opportunities for fraudulent NFT “projects” or “rug pulls.” While the technological innovation has been excellent in this regard, the open & observable market that the blockchain and Web3 enable have made it easier for users to learn from previous market cycles and waves of innovation and make more informed decisions around how to collect digital assets and what digital assets best meet the needs or wants they’re solving for, therefore successfully avoiding fraudulent projects at an increasing rate.

    – Recommend calling out specific entities and initiatives, such as the Creator’s Alliance spearheaded by Yuga Labs and Magic Eden, that are attempting to elevate the discussion on royalties and present a united front from across the ecosystem. Creators should be able to set royalties and consumers or collectors can “vote with their dollars” on which collections they support via royalty-earning purchases, rather than allowing marketplaces to arbitrarily reduce or remove creator royalties from transactions. Magic Eden is a marketplace, as an example, that has vocally supported creator royalties and has moved to ensure transactions on their marketplace respect creator royalties.

    – Taxonomy / NFT definition. Recommend the working group continue to review membership and proactively reach out to leaders in emerging fields (i.e. Ordinals/Runes, soul bound NFTs, Base L2 NFTs, etc.) to ensure the principles-based and flexible definition continues to capture the rapidly evolving & expanding vision for what an NFT can be. Fully agree with viewing it as a living definition that is reviewed/revised periodically.
    – Focus on fraud and abuse. Could not agree with this recommendation more strongly. Unfortunately, there are still examples of explicit fraud and abuse in the NFT space and these present the clearest, most acute opportunity to improve consumer protections and enforce existing legislation and regulations. While other actors in the space may act in a “grey zone” or with unclear regulatory guidelines, there are, unfortunately, ample opportunities to pursue enforcement against actors that are clearly ill-intentioned and do not follow even basic principles of engaging with their consumers in good faith.

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