BCAS' position on MFSA’s consultation document on Non-Fungible Tokens



On the 5th of December 2022, the Malta Financial Services Authority (MFSA) issued a Consultation Document titled “The Virtual Financial Assets Framework: Non-Fungible Tokens”, in order to obtain stakeholder feedback in relation to the proposed treatment of Non-Fungible Tokens (“NFTs”) in the context of the Virtual Financial Assets Framework (VFA Framework).

The aforementioned Consultation Document contained three questions relating to i) the treatment of NFTs under the VFA Act, ii) the exclusion of NFTs from the upcoming Markets in Crypto Assets Regulation (“MiCAR”) and iii) any further implications in relation to NFTs by stakeholders. BCAS provided its views on the questions posed by the MFSA in the aforementioned Consultation Document which will be detailed in summary below.

The first question posed by the MFSA related to the applicability of the Financial Instrument Test to NFTs. BCAS stated that NFTs (being DLT Assets as per the Maltese VFA Act), may still be classified as a VFA , irrespective of whether such DLT asset has characteristics of ‘uniqueness’ and ‘non-fungibility’, akin to NFTs. Thus, entities engaging in activities related to NFTs which are classified as VFAs would be subject to authorisation in terms of the VFA Act.

The second question posed by the MFSA related to the exclusion of NFTs from the scope of the VFA Framework. BCAS stated that this would need to be amended by an act of Parliament wherein the definition of 'Virtual Financial Assets' would be amended to exclude the characteristics of ‘uniqueness’ and ‘non-fungibility’. Furthermore, the Financial Instrument Test would also need to be amended to assess whether a DLT Asset has characteristics of ‘uniqueness’ and ‘non-fungibility’, akin to NFTs. This said, BCAS does not agree that the definition of VFAs and/or the Financial Instrument Test should be amended to exclude NFTs from the scope of the VFA Framework at this particular moment in time, at the very least until the final publication of MiCAR in the Official Journal of the European Union (the “OJ of the EU”), since the current public version as approved and proposed by the Council on the 5th of October 2022 cannot be considered as final.  

The text under the current MiCAR draft text is still very unclear about NFTs – most of the considerations with respect to NFTs are made in recitals 6b and 6c, with the only blanket exclusion made in Article 2 stating that "this regulation does not apply to crypto-assets that are unique and not fungible with other crypto-assets". The wording of the aforementioned recitals leave much to be desired as they lack detail on the terms “non-fungible” and “large series or collection”. BCAS is of the opinion that one cannot assume that all NFTs satisfy the characteristics of ‘uniqueness’ and ‘non-fungibility’. There are certain crypto-assets which, although they are called ‘NFTs’, still do not satisfy the aforementioned test of ‘uniqueness’ and ‘non-fungibility’ as they are substantially fungible amongst themselves. Since, at this stage, no other guidance has been provided by the European Supervisory Authorities (the “ESAs”), one may reasonably expect that some changes to the quoted Article and/or relevant recitals may be applied prior to the final publication of MiCAR in the OJ of the EU and that, potentially, technical guidelines would be issued by the ESAs in relation thereto.

In conclusion, maintenance of the VFA Act as is, is but a short-term trade-off since it can reasonably be expected that the final text of MiCAR will be imminently published in the OJ of the EU, and the relevant guidelines by the ESAs would be potentially published concurrently or shortly thereafter.


Crypto regulation