Developments Regarding the
Legal Nature of NFTs

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Tokens can be created in many ways, represent different assets, and serve various purposes. Therefore, it is not easy to determine the legal nature of tokens. The same is also true for NFTs, which are a kind of tokens. Especially considering that there are different types of NFTs, such as d-NFT (dynamic NFT) or f-NFT (fractionalized NFT), it becomes difficult to determine the legal nature of the token and which fields of law it concerns within this framework. Looking around the world, it can be seen that NFT issuances are inspected in terms of financial crimes, consumer protection, intellectual property, and especially capital market law rules.

FATF's Approach to NFTs within the Scope of Financial Crimes

Financial Action Task Force (FATF) is an intergovernmental organization to establish international standards in the fight against the "laundering of criminal assets, financing of terrorism and the financing of the proliferation of weapons of mass destruction", to take legal and institutional measures compatible with these standards, and to ensure promote the operationally effective implementation of these standards. FATF has also carried out studies on virtual asset service providers (VASP), where financial crimes are frequently on the agenda. FATF also discussed NFTs for the first time in the Guide published by itself in 2021.

Although this Guide is related to the field of combating financial crimes in which FATF operates, it contains significant evaluations in terms of determining the legal nature of NFTs. The Guide states that digital assets that are unique rather than interchangeable and are used in practice as collectibles rather than as means of payment or investment can be called non-fungible tokens (NFTs) or crypto collectibles. The same Guide points out that it is significant to consider the nature, characteristics, and function of the NFT in practice; not what terminology or marketing terms are used. In the report published by FATF in 2023, it was stated that some NFTs could be accepted and regulated as works of art or collectibles; in addition, it was stated that NFTs may also appear as tokenized versions of physical goods such as real estate or precious metals. For this reason, attention is drawn to the significance of adopting a functional approach to determining the legal nature of NFTs.

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The Situation in the USA

Supervision of tokens in terms of capital markets law is carried out by the Securities and Exchange Commission (SEC) in the USA. In this context, in recent years, the SEC has investigated some ICOs (initial coin offerings) and supervised whether the issued crypto assets can be qualified as capital market instruments. In American Law, the “Howey Test” is applied when determining whether a financial contract or transaction has the elements of an investment contract, which is a type of capital market instrument. In this context, an investment contract can be mentioned if an amount of money or material value is directed to investment, if a joint enterprise is involved, if the investor expects to profit from this investment, and if the profit arises from the activities of a third party, not an investor.

At the end of last September, the SEC accused Impact Theory LLC, a media and entertainment company headquartered in Los Angeles, of conducting an unregistered securities crypto asset offering under the name NFT. Between October and December 2021, the Impact Theory company issued and sold the three tiers (Impact Theory calls them “Legendary”, “Heroic”, and “Brutal”) of an NFT known as “Founders’ Keys”. In conclusion, the Impact Theory company is raising approximately $30 million from hundreds of investors, including investors in the United States.

Applying the Howey Test in its decision, the SEC finds out the NFTs issued and sold to investors by the Impact Theory company are investment contracts, and therefore, they can be qualified as securities (capital market instruments). The Impact Theory company encourages potential investors to view the purchase of a Founders’ Key NFT as “an investment in the business”, noting that if Impact Theory is successful in its efforts, “investors will profit from it”. Moreover, the company emphasizes that it is “trying to build the next Disney” and that if successful, buyers of the Founders’ Key NFTs will receive “tremendous value”. According to these, Impact Theory violates capital market rules by issuing these NFTs without fulfilling the conditions stipulated in capital markets law.

The company’s approach to this approach of the SEC is also noteworthy. This also offers solutions on how to turn back time in transactions with crypto assets.

The company’s approach to this approach of the SEC is also noteworthy. This also offers solutions on how to turn back time in transactions with crypto assets. With the SEC's decision, a “Fair Fund” is being established to refund the money that was paid by damaged investors to purchase NFTs. Impact Theory has agreed to destroy all Founders’ Keys NFTs it owns or controls, to post the SEC's decision on its websites and social media channels, and to eliminate any future royalties it may receive from secondary market transactions involving the NFT at issue. Members who opposed the SEC’s decision stated that a more explicit and detailed road map should be framed by the SEC regarding NFTs. This decision was interpreted as NFTs, after cryptocurrencies, were also taken a firm grip on in terms of capital markets in the USA.