The regulation of NFTS: key legal considerations and potential challenges

by Mads Andenas * and Vincenzo Vietri  **

ABSTRACT: The essay investigates the legal nature of non-fungible tokens (NFTs) considering that disagreement on the proper qualification of NFTs may result in the application of different legal regimes. Furthermore, we explore the numerous attempts by several regulatory authorities in Europe and in the United States of America to claim their jurisdiction over NFTs, which ultimately led to legal uncertainty for the crypto-assets industry. We conclude arguing that harmonized regulatory intervention and legislation is needed and that investor confidence in emerging technologies is best promoted when a transparent regulatory framework with clear rules is in place.

SUMMARY:  1. Introduction. The main features of NFTs. – 2. The legal nature of NFTs. The scope and extent of any transfer of rights. – 3. The European and Italian regimes: an evolving regulatory framework. – 4. Comparative insights: the regulation in the United States. – 5. Conclusions and future prospects.

1. Non-fungible tokens (NFTs) are cryptographic e-certificates used to prove ownership and/or title to rights of various kinds pertaining to (mostly) digital assets, such as songs, videos, photographs, crypto artwork, text messages, tweets, reels and memes.^[1]

Following the sale of a digital art piece at the famous Christie’s auction house for over sixty-nine million dollars in the first quarter of 2021^[2], NFTs have enjoyed tremendous success worldwide.  Artists have been remunerated for their digital creations and certain industries, including crypto art, digital fashion, and online gaming, have thrived in recent years.^[3]

Non-fungibility is the most relevant feature of NFTs. Each digital token is deemed to be unique and cannot be replaced with another (equivalent) token, as each of them has specific characteristics and high utility value. NFTs are distinguished from other fungible digital assets, such as cryptocurrencies as Bitcoin, Ether and Stablecoins, which are instead freely interchangeable as assets with identical value.

NFTs offers the possibility to create an original and exclusive version of digital goods, which would otherwise be easily replicated on the internet, given the universal accessibility of electronic content, for example by playing a video online from anywhere. For the purpose of creating non-fungible tokens, a blockchain registry of metadata (typically, Ethereum) is used, which, by means of a complex sequence of alpha-numeric codes, guarantees the immutability and unquestionable authorship of each NFT, and is traceable to only one individual.

NFTs also incorporate a computerized transaction protocol, a so-called smart contract, characterized by self-execution, when and to the extent certain conditions are met.^[4] An NFT can be set up on the assumption that access to the digital good embedded in the e-token will occur only upon payment made by a buyer, by automatically assigning to the original copyright owner a portion of the amounts paid with each subsequent resale of an NFT.

An additional feature concerns the NFT circulation regime in the marketplace, and the transferability of both the certificate representing the e-token itself, as a guarantee of the exclusive authorship of the digital work piece, as well as any copies. The marketing and exchange of NFTs among users occurs in a decentralized manner, without the intervention of intermediaries and with the frequent use of cryptocurrencies as a means of payment.

In this article, we first explain and analyse the legal nature of NFTs. Disagreement on the proper qualification or classification of non-fungible tokens may result in the application of different legal regimes. Second, we explore the regulatory landscape in the European and Italian legal systems, as well as in the United States of America. Attempts by several regulatory authorities to claim their jurisdiction over NFTs have led to legal uncertainty for the crypto-assets industry, as well as for its clients. There is a pressing need for regulation to put an end to the various endeavours to apply existing regulations, which nonetheless were not envisioned to take into account the specific features of digital assets at the time they were originally enacted. Ultimately, we argue that legal compliance by market participants and investor confidence in emerging technologies is best promoted and encouraged when a transparent regulatory framework with clear rules is in place. Resolving the pressing problems requires regulatory intervention and legislation. It also requires moving across the boundaries that divide the law. Strict doctrinal taxonomies do not resolve the problems. Neither is unmotivated national variation helpful, if ever in the response to new technology and products, and most certainly not in relation to NFTs with their clear international markets and other dimensions.

2. One of the most debated issues regarding non-fungible tokens relates to their legal nature,^[5] and this is a field where the civil law and the common law may diverge. Classification is important in order to apply to NFTs the already-existing legal concepts and provisions in Italian civil and financial laws and regulations.  

The first question is whether an NFT is property or obligation.  In the Italian Civil Code the distinction is between a “legal good” (bene giuridico), subject of rights under Article 810 of the Italian Civil Code,^[6] or a certificate of title (titolo di credito) under Article 1996 of the Italian Civil Code^[7] – interpreted in an evolutionary way due to the technological progress – or even as “complex legal case facts” (fattispecie negoziale), being at the same time a source of both real property and credit rights.  

NFTs that are classified as financial products (prodotti finanziari) or as means of payment (mezzi di pagamento) are subject to different regulatory regimes.[8] That could mean that they should be included among those activities that, as provided by law, can only be provided by parties that are expressly authorized (so-called reserved activities),^[9] due to the fact that they deal with investment services or public savings, as applicable (see infra).  

Based on well-established case law^[10] and the interpretative guidance provided by Consob^[11], which is the government agency responsible for regulating the Italian securities markets, financial products^[12] include all those forms of employment of a capital that are characterized by an expected financial gain in return for taking a risk associated with the capital invested.

La Corte Suprema di Cassazione (the Italian Supreme Court) has held that some forms of crypto-assets (cryptocurrencies in the case at hand) shall be qualified as financial products, affirming the need to apply the rules on financial intermediation to the offering of cryptocurrencies (ICOs).^[13]

Some of the characteristics of NFTs, including non-fungibility and that they attest to the ownership of a digital work product, might not be compatible with the features of “interchangeability” and “being freely replaceable” of financial products. The general equalization between cryptocurrencies and financial products stated in this judgement by the Corte di Cassazione^[14] does not  take into account the multiple types of crypto-assets existing in the market and the need to verify, on a case-by-case basis, whether all the elements to qualify a crypto-asset as a financial product (or to exclude that qualification) are present, based on the indications provided by the Italian Civil Cassation^[15] and Consob guidelines on the matter throughout the years.

It is also debated whether NFTs may be regarded as payment instruments, similar to national fiat currencies, in that they would constitute a digital representation of value that can be used as a medium of exchange. While non-fungible tokens are transferable in the marketplace due to the intrinsic value associated with the digital certification of the underlying assets, the primary function of NFTs is not to serve as a payment instrument. This is the role of cryptocurrencies that have become increasingly popular in recent years as a payment instruments. This depends on the type of NFT at issue, given the fact that a “true” non-fungible token is not equivalent to currencies.^[16]

A further critical aspect relates to contract law profiles and, more specifically, to the appropriate identification of the rights, and the related obligations, that are transferred as part of a transaction pertaining to non-fungible tokens. While there is no doubt that an NFT buyer acquires title to the digital certificate, it remains debated what rights (if any) to the underlying asset are actually transferred. Indeed, there does not seem to be unanimous opinion among scholars regarding, for example, the transfer by means of an NFT transaction of the copyright to the original work piece.^[17]  

With the law in the current transitional stage, in a de jure condendo perspective, it is important to foster transparency of contractual terms at the negotiation stage.  They should define clearly the rights that are transferred to a buyer as a result of the sale of such digital tokens. In fact, the transfer of ownership of an NFT is separate and distinct from the transfer of ownership of the copyrights associated with the underlying (digital) asset, unless the contractual parties have agreed on the transfer of the rights (of ownership and economic exploitation of intellectual property) of the asset embedded in the token itself. In this regard, it goes without saying that the current, or future, value of an NFT can significantly change depending on the specific rights that are being transferred – whatever these may be, e.g., the certified ownership of a (digital) asset, the license to use intellectual property rights, or even some limited rights such as the right to use the asset or to enjoy certain specific benefits associated therewith.

If the original authors of the underlying asset retain the rights of economic exploitation, they have the power to issue new NFTs with different rights attached to them, resulting in a decrease of the value of the NFT purchased by the first buyer, thus causing unintended consequences for the latter.

On the one hand, disclosure in NFTs transactions should ensure that the original creator retains, if applicable, the exclusive right of economic use of the digital work, even following the sale of an NFT incorporating it. On the other hand, disclosure should make an NFT buyer aware of the actual scope of the rights acquired over the underlying (digital) asset, and promote transparency and consumer protection.

3. The financial services regulation of NFTs has not kept up with the rapid development of technological innovation. Non-fungible tokens have not yet been the subject of regulation in either the European or the Italian legal systems.^[18]

The proposed European Regulation on crypto-assets markets (MiCAR)^[19] provides for a single authorization mechanism for the distribution of crypto-assets in the European marketplace.  This is not dissimilar to what is already place for traditional financial and insurance services. The Regulation may also apply to NFTs.

Article 3 defines crypto-assets in general as “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology [DLT] or similar technology”. The most common type of DLT is blockchain, which allows transactions and data to be recorded in a synchronized and decentralized manner among network participants. The MiCAR regulates three categories of crypto-assets: (A) asset-referenced tokens,^[20] (B) electronic money tokens,^[21] and (C) utility tokens, which do not fall in either of the aforesaid categories.^[22]

Although not expressly mentioned, some have argued that NFTs fall under the last category of crypto-assets introduced by the MiCAR.^[23] On the one hand NFTs cannot be regarded as a mere “representation of value” – especially with reference to e-tokens that only constitute a form of artistic expression.  On the other hand, NFTs can certainly be referred to as “representation of rights”.

The European Blockchain Observatory is a European Commission initiative to accelerate blockchain innovation and the development of the blockchain ecosystem within the EU. In a recent report it claims that crypto-assets of the non-fungible type would not fall within the scope of the MiCAR, due to the features of uniqueness, rarity and indivisibility that characterize such digital tokens.^[24]

In the absence of NFT regulation at the European level (at least for the time being), the main issue for market participants remains determining the applicable regulatory framework to non-fungible tokens. This is the set of rules which are currently in force and may regulate also the phenomenon at issue.

NFT transactions deal with several legal profiles including the applicable tax regime.^[25] A first example would be the exploitation of copyright-protected works. In this regard, pursuant to Article 1 of the Italian Copyright Law^[26] – which applies to any technological development of any form of expression with a creative character – it is reasonable to argue that NFTs may be included among the protectable works that give the creator both the moral right and the rights of economic exploitation associated therewith. In NFT transactions it is critical to negotiate the terms of licensing agreements between the NFT creator and any licensees to ensure that the use of copyright-protected works (if any) has been authorized for any potential exploitation in the metaverse. Given the extent of the new virtual reality, it will be challenging to monitor the use and distribution of copyright-protected works with the goal to detect any possible copyright infringements and to have unauthorized content removed in a timely-fashion manner.

More problematic is protecting digital creative work created through artificial intelligence.[27] Some scholars believe that the owner of the moral and patrimonial rights associated with the work piece is the artificial intelligence system programmer.^[28] Other scholars argue that the actual user of the artificial intelligence system – that is the person initiating the exploitation of the rights of economic use – shall be regarded as the owner of the aforementioned rights.^[29] The theory according to which copyright should be attributed directly to the artificial intelligence based on the recognition of legal personality to “intelligent” machines is still a minority opinion.^[30]

Trademark protection in the metaverse is also debated. NFTs tied to others’ registered trademarks proliferate without having first received the trademark owner’s authorization, thus resulting in allegations of trademark infringement. In this regard, it is noteworthy to mention the first preliminary injunction order related to the creation and marketing of NFTs issued by a European court, and precisely by the Tribunale di Roma, the first instance court of Rome, in July 2022.^[31]

The case dealt with the production, marketing and online promotion of NFT digital and collectible playing “Cards”.  The image of a well-known football player was portrayed wearing the Juventus football club’s uniform, using the distinctive signs of Juventus. Seeking an injunctive relief pursuant to the Italian Civil Procedure Code,^[32] the Juventus football club pointed out that the creation and marketing of the cards infringed the plaintiff’s registered trademarks. It also constituted unfair competition,^[33] misleading the public about the existence of a particular commercial agreement or group link between the owner of the trademark (the Juventus football club) and the cards’ creators.

The respondent argued that they had been granted permission by the football player for the use of his image portrayed on the cards, and that the use of registered trademarks was justifiable in view of the notoriety pursuant to the Italian Copyright Law.^[34]

The Court of Rome found an infringement of trademarks by determining the likelihood of confusion among the public, due to the identity of the distinctive signs used. Such use of registered trademarks by the cards’ creators had a purely commercial purpose and could not be justified by the interest in the publication of the footballer’s image in view of the character’s notoriety nor by educational or scientific purposes. It was also noted that the consent given by the footballer for the use of his image on the cards did not exclude the obligation for the respondent company to seek permission also for the use of the distinctive signs of the football club itself, since the fame of the latter also contributed to the value of the NFTs offered for sale.

Since Juventus also operated in the sector of crypto games or blockchain games and the registration of such trademarks also covered similar goods than those involved in the sale of NFTs, the conduct of the respondent company also constituted unfair competition as a result of the unauthorized use of others’ trademarks.

The Court found that the conditions existed to grant an interlocutory injunction against the respondent company from further production, marketing, promotion and sale of NFTs associated with digital content bearing the Juventus trademarks. The Court ordered its removal from every website. The ruling is remarkable requiring special authorization by the trademark owner whenever the relevant registered trademark is used by a third-party even in the metaverse, making an illegitimate profit through such use. 

Reverting to the question of the applicable legal regime for NFTs, it has also been pointed out that the issuance and offering of non-fungible tokens may constitute “reserved activities” (see supra), subject to financial and/or banking regulations at both EU and national levels. Indeed, the main fear is that the current world of decentralized finance – known as DeFi, i.e. the ecosystem of finance where technological building blocks, such as blockchain, smart contracts, cryptocurrencies, NFTs, are used – may pose significant risks. They could increase opacity and vulnerability of the entire financial system, similar to the unregulated phenomenon of shadow banking,as similarly occurred for subprime mortgages and credit default swaps during the 2008 financial crisis.^[35]

Should NFTs be classified as financial products (see supra), then both the MiFID II directive^[36] and the Italian Consolidated Law on Finance would apply. If NFTs are regarded as virtual currencies,^[37] both the anti-money laundering regulations prescribed by the Fifth AML Directive^[38] and the Italian Anti-Money Laundering Decree^[39] would apply, together with the annexed obligations of customer identification and verification, and monitoring.

There is an ongoing legal debate as to whether consumer protection rules can actually apply in NFT transactions due to the anonymity that sometimes characterizes blockchain transactions.^[40] When information about the counterparty is not available, and in particular it is not known if the counterparty is participating in the transaction as a professional, parties may have difficulty understanding whether consumer law applies to the case at hand. In such instances, the nature of the counterparties can often be inferred from the circumstances in which the transaction takes place.

Based on the criteria set out by the Court of Justice,^[41] for the purposes of applying European consumer law, the professional or non-professional (consumer) character of the counterparty can be inferred from, among other things, the number and frequency of transactions carried out, the manner in which they take place, and the prices charged. However, it may not be always easy to conduct such an investigation for every transaction, and some degree of uncertainty may remain.^[42] Some have objected that Article 52 of the Italian Consumer Code,^[43] which gives consumers the right of withdrawal (diritto di recesso) in business-to-consumer relationships, cannot apply due to the fact that the blockchain infrastructure would not allow “links in the chain” to backtrack.

Consumer protection rules were designed for the conclusion of B2C contracts in a way quite different from the sale of NFTs. Some would argue that the innovative nature of non-fungible tokens may require new interpretations of existing consumer law, or the creation of new rules that should take into account the peculiarities of NFTs. At the same time, the reasons for consumer protection could be present.  The need for consumer protection could be particularly great in a new field, and in a field with such cross-border and international aspects.

The legal debate has also involved privacy issues given the possibility that NFT transactions can take place on a global scale, with associated risks related to the possible unauthorized disclosure of confidential or other personal information.^[44] In this regard, it is critical to develop and put in place appropriate safeguards to ensure that personal data are handled in a safe and confidential way in the metaverse.

Similarly, with regard to an online NFT exchange platform, cybersecurity issues arise in the event that a third party comes into possession, through phishing practices, of the credentials necessary to access the legitimate owner’s account, to proceed with the unauthorized sale of NFTs. Given the decentralized and immutable nature of blockchain-based transactions, an NFT, once stolen, would not be easily recoverable. It is likely that several other criminal activities may occur in the metaverse. Just to mention a few, the crimes of identity theft, or even cryptocurrency theft for NFT transactions involving the use of virtual currencies. To mitigate such security risks, NFT platforms should implement resilient safeguards, such as a strong multi-factor authentication system, and adopt written cybersecurity policies to be implemented through periodic monitoring activities.

Digital platforms where NFTs are traded are high-energy with significant CO2 emissions. The impact of the European Sustainable Finance Disclosure Regulation (so-called SFDR) is important.^[45] It is debated whether NFT creators should be required to make adequate disclosure of any negative impacts on ESG factors in the investment process,  and be subject to the onerous transparency duties with regard to environmental, social and governance features, also to be included in NFT pre-contractual marketing documentation.^[46]

The regulatory framework currently in place leaves many uncertainties. NFT providers do not have certainty as to what regulatory treatment should be applied in the event of bankruptcy and insolvency proceedings.

The cross-border nature of NFTs may involve several jurisdictions, and legal certainty still remains the main issue, including the identification of the applicable set of rules and the competent forum. In this latter respect, it can be reasonably argued that the regulation of the place where NFTs are marketed (i.e., offered to customers) may apply. Thus, any such European country that may be able to set highly competitive industry standards will be able to provide a competitive business advantage to NFT local providers.

To avoid a fragmentation of the market (especially from a European perspective) and to counter forms of regulatory arbitrage^[47], there is no doubt that the development of the phenomenon at issue shall be regulated at minimum at a European level (or, even better, at an international level – see infra), to enable a level playing field among EU Member States and to prevent any forum shopping within the European market.

4. In 2021 NFT transactions carried out in the United States amount to twenty-five billion dollars.^[48] This was set to grow to thirty-five billion dollars by the end of 2022 and to eighty billion dollars by 2025.^[49]

In contrast to the European Union where a legislative proposal for crypto-assets is currently under discussion, the U.S. appears to be lagging behind in the regulation of the phenomenon at issue, as well as of digital assets in general. While waiting for Congress (the federal legislative body) to take a position on the legal nature of digital tokens and to possibly enact legislation, several federal agencies have claimed jurisdiction over NFT transactions.

The Financial Crimes Enforcement Network (FinCEN), the Treasury Department’s office with regulatory authority over the financial system for the purpose of countering money laundering under the Bank Secrecy Act (BSA),[50] has analysed the possible financial wrongdoing risks of the NFT marketplace, including money laundering and terrorist financing . FinCEN has not yet issued any specific document on NFTs but has provided general guidance on the application of BSA and FinCEN regulations to digital currencies. As far as NFTs are means of payment, both the BSA and FinCEN regulations will apply to NFT transactions. Are NFTs regarded as digital representations attesting to the ownership of the underlying assets – rather than being an alternative to national fiat currencies – NFTs  may escape FinCEN supervision and the related discipline.^[51]

The Securities Exchange Commission (SEC), in its capacity as the federal agency regulating the issuance and trading of securities and similar investments, has also affirmed on several occasions that the vast majority of NFTs are securities[52] pursuant to the Securities Act of 1933[53] and the Securities Exchange Act of 1934[54] and subject to the relevant federal securities laws, with NFT providers being required to register under the Securities Exchange Act (or, alternatively, to apply for an exemption to such registration).[55]

Under the U.S. Supreme Court 1946 Howey test[56], there is a security whenever, based on the analysis of the facts at issue, there has been an investment with the following features: (i) using money,[57] (ii) carried out in a joint venture,[58] (iii) with a reasonable expectation of making a profit,[59] and (iv) with the latter deriving from the efforts of third parties only.[60]

If an NFT has the sole purpose of serving as a certificate of authenticity in regards to the underlying asset, then it is unlikely that the SEC will classify it as a security. But if an NFT is offered to the public with the promise of liquidity and an expectation that its value may increase over time, it is conceivable that the federal agency may identify it as a type of speculative investment, thus, a security.

Under the fourth element of the Howey test above, a profit derived from the efforts of third parties may be found depending on the managerial efforts employed by the NFT issuer (or promoter) and the kind of control (substantial or otherwise) that NFT buyers will continue to maintain over their digital tokens. Precisely, the requirement will be satisfied only if NFT holders are passive investors in all respects.

The qualification as securities can be criticized. The SEC has been reluctant to provide any official statement outlining how each of the four requirements of the Howey test can be  met in transactions involving NFTs (or at least plain-vanilla NFTs, e.g., those without an associated service, utility, or royalty or other income right). It goes without saying that the application of the Howey  test, developed as it was in 1946, does not take into account the  characteristics of digital assets. Unlike traditional securities whose sole purpose is investment, digital assets often have consumer functionality or utility, beyond any investment or speculative value. The extent to which NFT holders can rely exclusively on the efforts of others, or to which such efforts are undoubtedly significant, remains unclear.

Many features of the existing regulatory regime for securities are incompatible with the operation of the digital assets market, making any direct or immediate compliance with the existing rules difficult, not the least from an enforcement perspective. Legislative reform is required. The material disclosures required by the SEC are specific to traditional equity and debt securities, covering the issuer, its management, and its financial performance. It could be argued that disclosure requirements for NFTs should rather be tailored to identify information relevant to the decision-making process of NFT holders, such as the unique characteristics of the digital asset, token-level rights, and risk management measures (such as audits of smart contract protocols).

The better case of NFTs as securities  is the so-called fractionalized non-fungible tokens (f-NFTs). They are the result of tokenization. That is a multi-part securitization of a token, as a result of which separate fractionalized NFTs can be issued after the split and more comparable to investments of a financial nature. Similar to the sale of securities, in fractionalized NFTs each investor appear to share a partial interest with other investors, linked to the value of the NFT as a whole.^[61]  Fractionalized NFTs are interchangeable. NFTs that include governance rights or offer NFT holders rights to royalty or other income right may be classified as securities.

The SEC  has not taken enforcement action against platform operators that facilitate the offering and sale of NFTs.  This is most likely because, as mentioned, plain-vanilla NFTs seem to have very little in common with securities. The SEC may wish to put in place a comprehensive regulatory framework on the matter before  initiating any enforcement actions that may result in arbitrary outcomes, with limited value as a guiding precedent and as deterrent. Enforcement action has been taken against cryptocurrency and in the absence of a specific regulatory framework, such enforcement actions remain limited to the specific case, effectively contributing to the climate of regulatory uncertainty pertaining to the actual limits of what can be considered legitimate conduct.

By contrast, a court action aimed at countering the possible illicit use of NFTs as securities was brought in the U.S. District Court, Southern District of New York in 2021. An opt-out class action was brought against the creator of a popular NFT platform, Dapper Labs, Inc. for selling unregistered securities.^[62] The NFTs involved the so-called NBA Top Shot Moments, which are digital certificates pertaining to videos of highlights from NBA basketball games. In its unsuccessful motion to dismiss, the NFT creator argued that NFTs are distinct collectables, not units of a larger enterprise which would make them “securities”. To date, the litigation moves forward to the trial stage, and it will be interesting to monitor its developments in the coming months.

The Commodity Futures Trading Commission (CFTC) is the federal agency charged with the oversight of the commodities market,  futures contracts and derivative products (such as swaps). The CFTC has claimed that NFTs may fall within its jurisdiction,^[63] as digital tokens should be regarded as “commodities”.

It is worth noting that the CFTC, unlike the SEC, has not invoked any legal test to confirm the legal qualification for their jurisdiction. The CFTC has employed an approach based on general principles and the literal wording of the Commodity Exchange Act, which seems to be sufficiently broad enough to capture art or collectibles.^[64]

Also the Office of Foreign Assets Control (OFAC), in its capacity as the federal agency in charge of sanctions programmes, has taken  enforcement action. The OFAC has declared numerous NFTs, and even an entire exchange platform, illegal. The decentralization feature associated with the use of the blockchain technology in NFT transactions can present a high degree of anonymity, making more difficult to identify buyers and, consequently, any attempt to prevent the involvement of sanctioned persons.

In the U.S., other court cases involving NFT transactions are balancing the protection of intellectual property in the context of new digital technologies, on the one hand, and the defence of artistic freedom of expression, on the other hand.

In the best-known litigations, the prestigious French fashion house Hermès, sued in 2022 for trademark infringements, false designations of origin, trademark dilutions and damage to commercial reputation.  The action was brought against the California-based creator of the “100 NFT MetaBirkins” collection, the metaverse version of the iconic Birkin handbags.^[65] In seeking an injunctive relief from the U.S. District Court for the Southern District of New York to prevent the unauthorized use of the trademark, as well as to obtain damages, Hermès claimed that the defendant, Mason Rothschild, had violated the federal law governing trademark rights – the Lanham Act[66] – by unlawfully appropriating the trademark “MetaBirkins”, created by adding the generic prefix “meta” to the famous Birkin trademark. In the plaintiff’s view, that led to confusion as to the source and/or nature of the NFT digital artwork, leading consumers to believe that Hermès had authorized the creation and offering of the NFT MetaBirkins collection, and diluting the distinctive quality of Hermès’ worldwide known handbags.

In response to the complaint, Mr. Rothschild filed a motion to dismiss on  appealing, in its capacity as a digital artist, to the First Amendment to the U.S. Constitution, which guarantees freedom of speech^[67] – which applies to artistic expression – comparing his MetaBirkins collection to depictions of Campbell’s Soup cans by Andy Warhol.

On May 18, 2022, the court maintained that the MetaBirkins collection deserved First Amendment protection being digital work of art with distinctive character. However, the court also denied Mr. Rothschild’s motion to dismiss on the ground that Hermès’ appeal was based on enough evidence to show that the use of the name MetaBirkins had no artistic relevance to the underlying work, and even if had any, it explicitly mislead as to the source or content of the work.

After the case moved to trial, on February 8, 2023 a federal jury in the U.S. District Court for the Southern District of New York awarded Hermès $133,000 in damages for trademark infringement, dilution and cybersquatting, confirming that trademark protection can extend to the digital frontier of the metaverse.

Last but not least, another open question remains whether an NFT created by artificial intelligence can receive protection under federal copyright law. In  2022, the U.S. Copyright Office, the federal agency that oversees copyright registration, which rejected for the second time an application for copyright protection on work products created by artificial intelligence.^[68]  The Copyright Office held that pursuant to the Copyright Act,^[69] such work products lacked the necessary requirement of human authorship, which is essential for copyright protection, as ruled by the Supreme Court since 1984.^[70]

Nonetheless, it should be acknowledged that the federal law has not been updated in over forty-five years. Congress need to address this additional issue, possibly by moving beyond a traditional view of “original work of authorship”.

5. The regulatory framework for NFTs is fragmented in both the European and the U.S. legal systems, as is the oversight activity over industry players. Various authorities in charge of market supervision moves towards expanding their jurisdiction over the digital asset industry, including NFTs. None of the authorities has so far claimed full jurisdiction, in the absence of express authorization granted by the legislator.

This regulatory gap and the current climate of regulatory uncertainty may prevent market participants from exploiting the efficiencies of various kinds underlying the new technology, while also hindering the additional capital formation that underpins economic development.

As noted above, underlying these conflicts is the lack of a shared view on the legal nature of NFTs, as there is no unanimous opinion as to whether they should be considered “securities”, “means of payment”, “commodities” or something else.

Legislator bodies need take action as soon as possible in order to outline an organic and coordinated regulatory framework in their respective jurisdictions, including by establishing the competence of the respective governmental agencies. Until legislation is enacted, regulatory fragmentation and competition among multiple national agencies will continue to cause legal uncertainty and to cast a shadow over the entire digital asset market.

It is imperative to initiate open discussions with various stakeholders. Developing effective and efficient solutions require a broad understanding of the technology behind the market practices and products being developed.

But there is more. Given the implications of NFTs transactions transnationally, a collective regulatory effort by the various legislative and regulatory authorities of any major jurisdictions is critical. The ultimate goal is to promote shared market practices and to ensure a level playing field across jurisdictions, countering possible regulatory arbitrage and forum shopping.^[71] In implementing this ambitious project, balancing the interests at stake will  be of fundamental importance. On the one hand, the protection of market participants and the containment of possible systemic risks; and on the other, the support of technological innovation, which is one of the hallmarks of a vibrant and competitive economy. This has to be balanced with the goal to avoid the introduction of overly burdensome regulation that could push new digital phenomena towards the offshore sector.^[72]

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[1] For an overview of NFTs in general see ANNUNZIATA F., CONSO A., NFT, L’arte e il suo doppio. Non fungible token: l’importanza delle regole, oltre i confini dell’arte, Hoepli, 2021; ANTE L., The non-fungible token (NFT) market and its relationship with Bitcoin and Ethereum, in Blockchain Research Lab Working Paper Series, 20(1), 2021; FLORA M., MAGGI L., GIORDANO M. T., BOSSIO S., Guida pratica agli NFT: Arte e Diritto al tempo dei Non Fungible Token, 42 Law Firm, 2021; LEAL J. A.B., NFT and Metaverse: legal limits, independently published, 2022; MORABITO S., Profili giuridici degli N.F.T. (non fungible tokens). Tra arte e blockchain in Italia, in BusinessJus, 2021; NOTARO A., All that is solid melts in the Ethereum: the brave new (art)world of NFTs, in Journal of Visual Art Practice, Vol. 21, No. 4, 2022, p. 359 ff.; SARZANA DI SANT’IPPOLITO F., PIERRO M. G., EPICOCO I. O., Il diritto del metaverso. NFT, DeFi, GameFi e privacy, Giappichelli, 2022; TRAUTMAN, L. J., Virtual Art and Non-fungible Tokens, in 50 Hofstra Law Review, 2022, p. 361 ff.; TREVISI C., MORO VISCONTI R., CESARETTI A., Non-Fungible Tokens (NFT): business models, legal aspects, and market valuation, in Rivista di Diritto dei Media, 1, 2022; TRUJILLO A., La crescita degli NFT (“gettoni non fungibili”) e le implicazioni per i diritti della proprietà digitale nel contesto della governance di Internet, in Rivista italiana di informatica e diritto, 1, 2022, p. 125 ff.; ZETZSCHE D.A., ANNUNZIATA F., ARNER D.W., BUCKLEY R., The Markets in Crypto-Assets regulation (MiCA) and the EU digital finance strategy, in Capital Markets Law Journal, , 2021, p. 203 ff..

[2] See REYBURN S., JPG File Sells for $69 Million, as ‘NFT Mania’ Gathers Pace, in The New York Times, March 11, 2021, available at the following link: https://www.nytimes.com/2021/03/11/arts/design/nft-auction-christies-beeple.html.

[3] See, ex multis, CARRIÈRE P., La “cripto-arte” e i non-fungible tokens (NFTs): tentativi di inquadramento giuridico, in dirittobancario.it, August 2021; VULPIANI G., Non fungible tokens, smart contracts e blockchain nell’arte e nella moda: crypto art e digital fashion, in Rivista Cammino Diritto, 2021. In Italy, a non-profit organization, the National Association of New Digital Arts (Associazione Nazionale Nuove Arti Digitali – ANNAD), was founded in January 2022 to support the growth of artwork in the form of NFTs (see annad.org).

[4] In Smart legal contracts. Advice to Government, CP 563, November 2021 (https://www.lawcom.gov.uk/project/smart-contracts/), the Law Commission of England and Wales , defines a smart contract as “a legally binding contract in which some or all of the contractual obligations are defined in and/or performed automatically by a computer program”.   At the European level, the EU regulators continue to carry out several projects to gather feedback from stakeholders on risks and benefits associated with smart contracts. Noteworthy is a Discussion paper on blockchain and smart contracts in insurance issued by the European Insurance and Occupational Pensions Authority on January 31, 2023 (https://www.eiopa.europa.eu/consultations/discussion-paper-blockchain-and-smart-contracts-insurance_en), where smart contracts are defined as “deterministic computer programs that are deployed and executed on a blockchain and that are capable of carrying out the terms of an agreement between parties without the need for human coordination or intervention”. In Italy, Article 8-ter of Italian Law No. 12 of February 11, 2019, converting Decree Law No. 135 of December 14, 2018, defines a smart contract as “a computer program that operates through technologies based on distributed registers and whose execution automatically binds two or more parties on the basis of effects predefined by them.” The Law assigns the Agency for Digital Italy (Agenzia per l’Italia Digitale – AGID), responsible for ensuring the implementation of the goals set by Italy’s digital agenda, with the task of developing the technical standards that are necessary in order to recognize the full legal value of smart contracts. For an in-depth discussion, see FINOCCHIARO G., Riflessioni sugli smart contract e sull’intelligenza artificiale, in Giustiziacivile.com, 11, 2020, p. 1 ff.; DI DONNA L., Diritto e tecnologia. Il contratto ai tempi dell’intelligenza artificiale e la giustizia predittiva, in CAPRIGLIONE F. (ed.), Liber Amicorum Guido Alpa, Wolters Kluwer-Cedam, Milan, 2019, p. 317 ff.; FAUCEGLIA D., Il problema dell’integrazione dello smart contract, in I Contratti, 5, 2020, p. 591 ff.;  JANSSEN A.U., PATTI F.P., Demistificare gli smart contracts, in Osservatorio del diritto civile e commerciale, 1, 2020, p. 33 ff.; MAUGERI M., Smart contracts e disciplina dei contratti, in Osservatorio del diritto civile e commerciale, 2, 2020, p. 381 ff..

[5] See, ex multis, MASI D., Non-Fungible Tokens (NFTs): riflessioni sulla natura giuridica e la disciplina applicabile, in Rivista Giuridica Europea, 1, 2022, p. 83 ff., and, with reference to crypto-assets in general, ANNUNZIATA F., Speak, If You Can: What Are You? An Alternative Approach to the Qualification of Tokens and Initial Coin Offerings, in Bocconi Legal Studies Research Paper No. 2636561, Febbraio 2019; CARRIÈRE P., Le “criptovalute” sotto la luce delle nostrane categorie giuridiche di “strumenti finanziari”, “valori mobiliari” e “prodotti finanziari”; tra tradizione e innovazione, in Rivista di Diritto Bancario, 2, 2019, p. 117 ff.; GUACCERO A., SANDRELLI G., Non-fungible tokens (NFTs), in Banca borsa tit. cred., 6, 2022, p. 824 ff.; NAVA G., I non-fungible token, in GIORDANO R., PANZAROLA A., POLICE A., PREZIOSI S., PROTO M., (a cura di), Il diritto nell’era digitale. Persona, Mercato, Amministrazione, Giustizia, Giuffrè, 2022, p. 237 ff..

[6] Pursuant to Article 810 of Royal Decree No. 262 of March 16, 1942, as subsequently modified (i.e., the Italian Civil Code, in effect as of April 21, 1942), legal goods are “those things that can be the subject of rights.” In support of this thesis, see FAUCEGLIA D., La moneta privata. Le situazioni giuridiche di appartenenza ei fenomeni contrattuali, in Contratto e impresa, 3, 2020, p. 1257; LEMME G., Le risorse digitali nel paradigma dell’art. 810 cod. civ. ai tempi della blockchain, in Nuova giurisprudenza civile commentata, 5, 2021, p. 1215; NORI G. M., Bitcoin, tra moneta e investimento, in Banca Impresa Società, 1, 2021, p. 173. See also the ruling of the Italian Supreme Court, Penal Division II, No. 11959, April 10, 2020, according to which computer files (which could also include NFTs, following an extensive interpretive effort) can be regarded as “legal assets” and, therefore, can be the subject of the crime of embezzlement (appropriazione indebita). Conversely, some scholars have argued that the notion of “legal good” referred to in the Italian Civil Code may only refer to “corporal” goods, which by its nature excludes digital assets. See ZENO-ZENCOVICH V., voce Cosa, in Digesto IV ed. Disciplinare privatistiche – Sezione Civile, IV, Utet, 1989, p. 438; DE LUCA N., PASSARETTA M., Le valute virtuali: tra nuovi strumenti di pagamento e forme alternative d’investimento, in Le Società, 5, 2020, p. 574. For the thesis that maintains that Article 810 of the Italian Civil Code only prescribes a closed-end list of legal goods (numerus clausus), see GAMBARO A., MORELLO U., Trattato dei diritti reali. Proprietà e possesso, I, Giuffrè, 2010, p. 68 ff.; GAZZONI F., Manuale di diritto privato, Edizioni Scientifiche Italiane, 2021, p. 200.

[7] According to Article 1996 of the Italian Civil Code, “[The] certificates representing goods give the holder the right to receive delivery of the goods specified therein, possession of them, as well as the power to dispose of them by transfer of such certificate.” Thus, it may be conceivable to bring NFTs within said definition, since they are e-tokens representing an underlying (tangible or, more frequently, digital) good, granting the holder the right of disposal through the transfer of the certificates themselves.

[8] See ALPA G., ANDENAS M., European Private Law, Pacini Giuridica, 2022, p. 245, and ANDENAS M., CHIU I., The Foundations and Future of Financial Regulation, Routledge 2014, p. 237 and p. 332.

[9] See Article 114-sexies of the Italian Legislative Decree No. 285 of September 1, 1993, as subsequently amended (so-called Italian Consolidated Law on Banking – TUB) and Article 18 of the Italian Legislative Decree No. 58 of February 24, 1998, as subsequently amended (so-called Italian Consolidated Law on Finance –TUF).

[10] See, among the latest, the ruling of the Italian Supreme Court, Civil Division II, No. 5911, March 12, 2018, which identified an investment contract of a financial nature with regard to the case of buying and selling a work of art sold at a 5-7% discount of the original price, coupled with the buyer’s right of repentance, giving him/her the right to return the work of art after paying an amount equal to the original price, thereby guaranteeing a financial return on the sum that was initially invested.

[11] See, ex multis, CONSOB Resolution No. 20207 of December 6, 2017, which, in the case at hand, prohibited a foreign company operating in Italy from continuing to offer “investment portfolios” in cryptocurrencies, as it was conceivable as a public offering of financial products.

[12] See Article 1, paragraph 1, letter u) of TUF, according to which financial products are “[i] financial instruments and [ii] any other form of investment of a financial nature; bank or postal deposits not represented by financial instruments do not constitute financial products.”, with the latter being an open-ended clause.

[13] See the ruling of the Italian Supreme Court, Penal Division II, No. 44378, November 22, 2022. The decision was rendered, in criminal proceedings, as part of an appeal concerning a request for preventive seizure in regards to a wallet containing virtual currencies collected in the context of an ICO launched in 2017 in order to finance the implementation of a decentralized logistics process management system based on blockchain. The Supreme Court ruled that all of the distinctive features of an investment of a financial nature were present in the case at hand, as the individuals who had invested in the virtual currencies (i) had disbursed capital (in the form of bitcoins), (ii) with the expectation of obtaining a return (i.e., the payment of other virtual currencies), and (iii) had taken upon themselves a risk associated with the capital invested. It followed that virtual currencies must be considered investment instruments because they consist of financial products, thus being subject to the rules on financial intermediation. In light of the above, the ruling seems to extend the notion of financial products to crypto-assets in general, including utility tokens (see infra), which were thought not to fall under such category, at least according to the most widespread interpretation. For a commentary to the ruling, see RAZZANTE R., Le cripto attività come prodotti finanziari, in ilpenalista.it, February 16, 2023.

[14] In fact, as illustrated above, the Supreme Court seemed to mistakenly overlap the categories of “financial instrument” and “financial product”, attributing to the former the typological characteristics of the latter, thus affirming an equalization in principle between cryptocurrencies and financial products, without assessing whether the expected financial gain (and the associated risk in connection therewith) constituted an intrinsic element of the transaction itself.

[15] See the ruling of the Italian Supreme Court, Penal Division II, No. 44337, November 10, 2021, which provides that bitcoin should be considered a financial product only if it is purchased for investment purposes. To the same effect, see also the ruling of the Italian Supreme Court, Penal Division II, No. 26807, November 25, 2020.

[16] Perhaps, the qualification of NFTs as a medium of exchange may be applicable only in very limited circumstances. For example, in the game industry a user can sometimes buy digital items within the game using NFT as a means of exchange. See GRIFFIN C., NFT for beginners. The Revolutionary Guide to Understand, Create, Sell and Invest in Non-Fungible Tokens Projects and Crypto Art (Crypto Art and Non-Fungible Tokens Collection Guides), independently published, 2022.

[17] See, ex multis, ÇAGLAYAN AKSOY P., ÖZKAN ÜNER Z., NFTs and copyright: challenges and opportunities, in Journal of Intellectual Property Law & Practice, Volume 16, Issue 10, 2021, p. 1115 ff.

[18] An exception among European countries is the case of Liechtenstein, where a legislative act –  the Token and Trusted Technology Service Provider Act(referred to as TVTG) – was enacted in October 2020 with the goal of introducing a supervisory system for the tokenization of digital assets, under which NFTs would also fall. Liechtenstein takes part in the Internal Market through the European Economic Area Agreement with the other EFTA States Iceland and Norway.

[19] Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto Assets of September 24, 2020, amending Directive (EU) 2019/1937 (COM(2020) 593 final), covering crypto-assets that do not fall within the scope of other existing EU financial services legislative acts. In short, the MiCAR, which is expected to be enacted in the first half of 2023, includes a package of measures aiming at promoting digital finance, in terms of innovation and fair competition, while mitigating the related risks.

[20] Asset-referenced tokens are described by the MiCAR as crypto-assets that are intended to “maintain a stable value by referring to the value of several fiat currencies that are legal tender, one or several commodities or one or several crypto-assets, or a combination of such assets”; see Article 3(3) of the MiCAR.

[21] Electronic money tokens include those crypto-assets that are meant to be used “as a means of exchange and that purports to maintain a stable value by referring to the value of a fiat currency that is legal tender”; see Article 3(4) of the MiCAR.

[22] Utility tokens, on the other hand, are qualified as crypto-assets aimed at providing “digital access to a good or service, available on DLT, and is only accepted by the issuer of that token”; see Article 3(5) of the MiCAR.

[23] For a discussion on whether NFTs should be included in the scope of MiCAR, CARRIÈRE P., Il Regolamento MICA e il rebus NFT, in dirittobancario.it, April 2022; CULICCHI, Regolamento europeo MiCA per le criptovalute: cosa prevede e i nodi da sciogliere, in http://www.agendadigitale.eu, 2022.

[24] EUBLOCKCHAIN OBSERVATORY AND FORUM, Demystifying Non-Fungible Tokens (NFTs), Report No. 7/2021, November 29, 2021, available at the following link: https://www.eublockchainforum.eu/reports.

[25] For an attempt to shed light on legal and tax issues related to NFTs, see TOMASSINI A., Criptovalute, NFT e metaverso. Fiscalità diretta, indiretta e successoria, Giuffrè, 2022.

[26] Law No. 633 of April 22, 1941. Article 1 thereof outlines the scope of application of the legislative act by reference to works “of a creative nature belonging to literature, music, figurative arts, architecture, theater and cinematography, whatever the mode or form of expression.”

[27] For an in-depth study on the legal aspects of the development of artificial intelligence and privacy, see ALPA G., L’intelligenza artificiale. Il contesto giuridico, Mucchi, 2021.

[28] MIERNICKI M., NG (HUANG YING) I., Artificial Intelligence and Moral Rights, in AI and Society, 2020, p. 319 ff.. In a recent copyright infringement case, the Corte di Cassazione (the Italian Supreme Court) seems to have recognized that an image generated by a software may receive copyright protection depending on the specific circumstances of the case and whether sufficient human creativity was implied in the generative process of the software. Pursuant to the ruling, the digital work generated through artificial intelligence systems shall be protected by copyright and the artist shall be granted both the moral right to be recognized as an author and the rights of economic exploitation of the digital work so long as the artist’s creative contribution played a significant role in the process. Conversely, no protection shall be granted if it is found that the artist’s creative contribution was marginal. See the ruling of Corte di Cassazione, Civil Division I, No. 1107, January 16, 2023.

[29] GUIZZARDI S., The copyright protection of the intellectual work created by Artificial Intelligence, in AIDA, 2018, p. 59 ff..

[30] In a critical sense on this theory, see MUCIACCIA N., Related rights and the protection of works of artificial intelligence, in Jur. comm. , 2021, p. 761 ff..

[31] Court of Rome, Specialised Section on Business Matters (Tribunale di Roma, Sezione Imprese), July 20, 2022.

[32] See Article 700 of the Royal Decree No. 1443, October 28, 1940, in effect as of April 21, 1942, as subsequently modified.

[33] See Article 2598 of the Italian Civil Code.

[34] See Article 97 of Law No. 633 of April 22, 1941, pursuant to which “The consent of the person portrayed is not required when the reproduction of the image is justified by the notoriety or public office covered, by the necessity of justice or the police, by scientific, educational or cultural purposes, or when the reproduction is related to facts, events, ceremonies of public interest or held in public.”

[35] ALLEN H. J., DeFi: Shadow Banking 2.0?, in William & Mary Law Review, 2022. According to the Author, the difficulty in understanding the DeFi technological infrastructure could cause progressive investor distrust in new technological products, possibly leading to a sudden sell-off of such products, with the subsequent production of negative effects on the financial system as a whole.

[36] Directive 2014/65/EU of the European Parliament and of the Council of May 15, 2014, on markets in financial products.

[37] Pursuant to Article 1(2)(d) of Legislative Decree No. 90 of May 25, 2017 (which transposed EU Directive 2015/849, the so-called Fourth AML Directive), a virtual currency consists of a “representation of digital value that is not issued or guaranteed by a central bank or public entity, is not necessarily linked to a legally established currency, does not possess the legal status of currency or money, but is accepted by natural and legal persons as a medium of exchange and can be transferred, stored and exchanged electronically.”

[38] Directive EU/2018/843 of the European Parliament and of the Council of May 30, 2018.

[39] Legislative Decree No. 231 of November 21, 2007, most recently amended by Legislative Decree No. 125 of October 4, 2019 (which implemented the Fifth AML Directive in the Italian legal system). For a discussion on the application of anti-money laundering regulations to NFTs, see MINTO A., Riflessioni sull’applicabilità della disciplina antiriclaggio ai Non-Fungible Tokens (“NFT”), in Rivista di diritto bancario, 1, 2023, p. 31 ff..

[40] See ANNUNZIATA F. & CONSO A., NFT, L’arte e il suo doppio, cit.  ALPA G., ANDENAS M., European Private Law, Pacini Giuridica, cit., p. 57.

[41] See European Court of Justice (ECJ), C-105/17, October 4, 2018.

[42] In this regard, we should point out that the MiCAR may provide a partial solution as it prohibits the anonymity of crypto-asset holders for admission to trading platforms. However, as discussed above, it is still debated whether the MiCAR will eventually apply to NFT transactions, once it enters into force in the following months.

[43] Legislative Decree No. 206 of September 6, 2005.

[44] See, ex multis, URIBE D., Privacy Laws, Genomic Data and Non-Fungible Tokens, in The Journal of The British Blockchain Association, Volume 3, Issue 2, 2020.

[45] Regulation 2019/2088/EU of the European Parliament and of the Council of November 27, 2019, on sustainability reporting in the financial services sector.

[46] PIATTELLI U., The regulation of fintech: from new payment systems to artificial intelligence, Giappichelli, 2020, p. 240 ff..

[47] On the issue of regulatory arbitrage in general, see MINTO A., PRINZ S., WULFF M., A Risk Characterization of Regulatory Arbitrage in Financial Markets, in Eu. Bus. Org. L. Rev., 2021, p. 719 ff..

[48] See HOWCROFT E., NFT sales hit $25 billion in 2021, but growth shows signs of slowing, in Reuters.com, January 11, 2022, available at  the following link: https://www.reuters.com/markets/europe/nft-sales-hit-25-billion-2021-growth-shows-signs-slowing-2022-01-10/.

[49] See CANNY W., Jefferies Sees the NFT Market Reaching More Than $80B in Value by 2025, in Coindesk.com, January 20, 2022, available at  the following link: https://www.coindesk.com/business/2022/01/20/jefferies-sees-the-nft-market-reaching-more-than-80-billion-in-value-by-2025/.

[50] The Financial Record Keeping and Reporting of Currency and Foreign Transactions, Pub. L. 107-56 (October 26, 1970).

[51] LEVIN R. B., TRAN K., The Regulation of Non-Fungible Tokens in the United States, Global Legal Insights, September 7, 2021.

[52] Among the most recent speeches, see U.S. SECURITIES AND EXCHANGE COMMISSION, Commissioner Hester M. Peirce, Remarks before the Investor Advisory Committee, December 2, 2021.

[53] See 15 U.S.C. 77a et seq..

[54] See 15 U.S.C. § 78a et seq..

[55] The Securities Exchange Act (also known as the Exchange Act), Pub. L. 73-291 (June 6, 1934).

[56]  SEC v. W.J. Howey Co., 328 U.S. 293, 298 (1946), which refers to a security as an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” The Howey test has been reaffirmed in subsequent case law: see Tcherepnin v. Knight, 389 U.S. 332 (1967); United Housing Found., Inc. v. Forman, 421 U.S. 837 (1975); SEC v. Edwards, 540 U.S. 389, 395 (2004).

[57] The requirement of “investment of money” refers to the case of raising money from the public by offering and selling a digital asset in exchange for value in the form of a fiat currency, a different digital asset, or other consideration. See U.S. SECURITIES AND EXCHANGE COMMISSION, Framework for “Investment Contract” Analysis of Digital Assets, as last updated on April 3, 2019, available at: https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets#_edn1, which are meant to be SEC guidelines explaining under which circumstances the Howey test is met in digital asset transactions.

[58] With reference to the second element of the test, the “common enterprise” appears to be present when the events that involve purchasers of digital assets turn out to be closely related to each other (the so-called horizontal commonality) or to those of the promoter of the same digital assets (the so-called vertical commonality).

[59] As for the “reasonable expectation of profits”, this requirement is fulfilled when buyers of digital assets have a reasonable belief that they will realize a gain from the capital appreciation of such digital assets.

[60] The “efforts of others” has proven to be the most discussed element in the Howey test. To satisfy this requirement it is fundamental to assess the economic reality of the transaction at issue, specifically whether the buyer has a reasonable belief that he/she will make a profit by receiving dividends in a passive manner or through other methods that do not require direct efforts of the buyer.

[61] KINDERLIN S., The SEC’s ‘Crypto Mom’ Hester Pierce says selling fractionalized NFTs could be illegal, in Business Insider, May 26, 2021.

[62] Jeeun Friel v. Dapper Labs, Inc., No. 21-CV-05837, U.S. District Court, Southern District of New York.

[63] This was stated by the CFTC Chairman in a recent speech at the Senate Committee on Agriculture; see COMMODITY FUTURES TRADING COMMISSION, Testimony of Chairman Rostien Behnam Regarding “Examining Digital Assets: Risks, Regulation, and Innovation, February 9, 2022.

[64] See 7 U.S.C. § 1 et seq. which provides a very broad definition of commodity in the following terms: “wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice, and all other goods and articles, except onions (as provided by section 13–1 of this title) and motion picture box office receipts (or any index, measure, value, or data related to such receipts), and all services, rights, and interests (except motion picture box office receipts, or any index, measure, value or data related to such receipts) in which contracts for future delivery are presently or in the future dealt in.”

[65] Hermès International and Hermès of Paris, Inc. v. Mason Rothschild (U.S. District Court for the Southern District of New York, Case 1:2022cv00384, filed on January 14, 2022).

[66] The Lanham (Trademark) Act, Pub. L. 79-489 (July 5, 1946) which provides for the “likelihood of confusion” test.

[67] See the Constitution of the United States of America, First Amendment, 1787, which states: “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.”

[68] Letter of the U.S. Copyright Review Boardin response to the “Second Request for Reconsideration for Refusal to Register A Recent Entrance to Paradise”, February 14, 2022.

[69] Copyright Act, Pub. L. No. 94-553 (Oct. 19, 1976). Section 102 of the Copyright Act affords protection to original works of authorship, as further supplemented by Articles 306 and 313.2 of the U.S. Copyright Office Compendium (Third), which states that a work must necessarily be created by a human being.

[70] Burrows-Giles Lithographic Co. v. Sarony, 111 U.S. 53 (1884).

[71] Argues in favor of the need for harmonized regulation of digital assets in a framework of international cooperation, CAPRIGLIONE F., Le cripto attività tra innovazione tecnologica ed esigenze regolamentari, in Riv. trim. dir. econ., 3, 2022, p. 233 ff.; LEMMA, FinTech Regulation. Exploring New Challenges of the Capital Markets Union, Palgrave Macmillan, 2020, p. 373 ff..

[72] See CAPRIGLIONE, Industria Finanziaria, Innovazione Tecnologica, Mercato, in Riv. trim. dir. econ., 4, 2019, p. 372 ff., who underlines the importance that the regulatory framework should not provide for excessive constraints that may be an obstacle to the production and value chains related to (technological) creativity.

Author

* Professor of Law at the University of Oslo. Director of the Centre for Corporate and Financial Law at the Institute of Advanced legal Studies, School of Advanced Study, University of London. UN Human Rights Special Mandate Holder and Member of the UN Working Group on Arbitrary Detention

** Phd in Uniform Comparative Business Law 

Although this paper is the result of a joint reflection of the authors, Mads Andenas wrote the paragraphs 1-2 and Vincenzo Vietri wrote the paragraphs 3-4-5.