It’s a total fool’s errand to regulate NFTs right now

Repost of article published on Blockworks written by George Basiladze, co-founder of Wert.

It’s a total fool’s errand to regulate NFTs right now

What will NFTs look like in 25 years? If we regulate them as they exist now, we might never find out. The smart devices and laptops you’re reading this on right now would be considered science fiction 25 years ago.

Because in a relatively short amount of time, technology has taken us from analog phones to supercomputers operating as communication devices. 

The fact that many of us refer to our smart devices as “phones” demonstrates that our understanding of technology and function is outpaced by the technology itself. Your iPhone is so much more than just a phone; in fact, the phone aspect is probably the function you use the least.

Tech advancements created an environment where intense innovation flourished, eventually bringing us cryptocurrency and blockchain. Then came NFTs: A digital token that holds a complete history of every transaction it has taken part in, and can identify or indicate ownership of virtually anything, is still a very new concept to wrap our heads around. 

NFTs can literally be anything — who is to say what NFTs can do or look like 25 years from now? We can guess, but it may sound like science fiction. 

So please, let’s not regulate NFTs out of existence before we even see what else they can do.

The trials and regulations of crypto

If you work in crypto, regulations are always top of mind — for good reason.

Washington, DC, is buzzing with debate over proposed crypto regulations in the United States. The European Union successfully passed its landmark slate of regulatory rules for the crypto industry, known as Markets in Crypto Assets (MiCA). 

With the near constant chatter about regulations across our industry, a debate that has escalated is if NFTs are securities or not: And if they then need some of this regulatory scrutiny pointed their way. 

Yes? No? Yes and no? 

An NFT is a digital collectible of LeBron James breaking the NBA’s all-time scoring record. An NFT is a car title in California. An NFT is a recording of John Lennon’s first live performance of “Imagine.”

So are NFTs securities that need to be regulated? My answer is that the NFT is just the vehicle; its underlying asset decides whether it’s a security. This means the underlying asset is what regulators need to consider when discussing how exactly NFTs should be regulated. 

As NFTs can be defined in various ways now, it’s uncertain how they will develop in the future and how regulators will keep pace with them. If regulators apply the Howey test, which identifies security as an investment contract, they might determine that at least some NFTs qualify under the definition. 

For example, in the case against Dapper Labs over NBA Top Shot digital memorabilia, the judge ruled that promotional tweets with emojis suggested the collectibles would gain value. In this case, it was the suggestion and promotion of return on investment on the company’s Twitter account in promoting these NFTs that made them securities instead of simply digital trading cards. 

Regulators eager to jump the gun might view the Dapper Labs decision as reason enough to adopt a draconian approach of designating any NFT as security. But given the virtually limitless applications and ever-changing nature of the technology, adopting such a policy would needlessly stifle innovation and chill the adoption of Web3. 

Given that even regulators and legal experts are strongly divided over what NFTs are, it’s reasonable to be concerned that wide-reaching regulations could smother a multi-billion dollar industry. 

That’s why the exclusion of NFTs from the European Parliament’s MiCA crypto regulation was a wise decision. By adopting a regulatory oversight focusing on clarity and consumer protection, NFT technology can continue to grow and develop as a game-changing technology. 

NFTs might prove to be the greatest digital tool to date, and we have no concept of what they could be capable of years from now. It’s vital that proposed crypto regulations need to give NFT technology the freedom to grow and develop.