NFTs And Regulation – The Risks Of Over-Generalising – The Fintech Times

The Department for Digital, Culture, Media and Sport (DCMS) committee’s inquiry into non-fungible tokens (NFTs) is branded reductive for failing to understand the fundamental nature and character of the digital tokens. 

Nick Breen, partner at international law firm Reed Smith, believes that the UK’s approach to the regulation of NFTs is flawed and based on misperception.

UK regulators tend to bundle up crypto, NFTs and utility tokens as ‘crypto-assets’. For this reason, Breen contends that marking them as something only for financial speculation downplays the value and wider application of NFTs.

He puts forward NFTs as simply tokens, or a record of a transaction that is entered on a blockchain; ascertaining that they are not assets themselves.

With the DCMS inquiry currently inviting evidence on whether ‘vulnerable people’ are at risk of NFT speculation and looking at the harms to society caused by NFT speculation, Breen sees a strong element of fearmongering involved in the current approach.

Throughout this guest post, he outlines how the application of NFTs is not commonly understood and why this lack of regulation is now driving a reductive, reactive regulatory approach based on an outlying use case:

NFTs and regulation: the risks of over-generalising

Despite the extensive media coverage afforded to NFTs, largely ignited by the $69million NFT sale of Beeple’s digital artwork in March 2021, they remain significantly misunderstood in the public eye.

This misunderstanding of what they are is then coupled with numerous news stories about hacking, scams and broader crypto volatility. Therefore it’s easy to see why NFTs are seen by many as nothing more than cash grabs and Ponzi schemes.

This negative perception is not helped by the way in which NFTs are often conflated with cryptocurrencies. Consequently, they’re seen as assets for speculation and investment.

As regulators in the UK and throughout the world scramble to figure out whether and how to regulate NFTs, we are beginning to see how these biases and generalisations held by the public are shaping the lens through which authorities are approaching their investigations.

Setting off on the wrong foot

In November, the UK’s DCMS committee launched an inquiry into NFTs and published a call for evidence. The DCMS has asked the public various questions including: is the UK’s light-touch NFT regulation sufficient; what are the potential harms to vulnerable people of NFT speculation; do blockchains offer security to British investors; and what are the potential benefits to individuals and society of NFT speculation?

It’s telling that three of the four questions posed by the DCMS relate to speculation and investment. This is given further context by the chair of the committee, Julian Knight MP, who commented: “NFTs swept through the digital world so fast that we had no time to stop and consider. Now that the market is veering wildly, and there are fears that the bubble may burst. We need to understand the risks, benefits and regulatory requirements of this groundbreaking technology.

“Investors, especially vulnerable ones, are at risk of being swindled into buying NFTs whose value may tank at the moment of purchase. Our inquiry will investigate whether greater regulation is needed to protect these consumers and wider markets from volatile investments.”

Advertising regulation

Prior to the DCMS inquiry, the Advertising