CRS Considers Risks in the NFT Market
Commentary by Steven Lofchie
The Congressional Research Service ("CRS") described the market for non-fungible tokens ("NFTs") and considered risks for NFT investors. Among the risks, CRS highlighted:
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the absence of protections against consumer fraud;
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the possibility that some NFTs may be subject to financial regulatory schemes, including the securities laws;
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the uncertain scope of the intellectual property inherent in ownership of an NFT; and
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the environmental impact of NFTs.
CRS described similarities between NFTs and cryptocurrencies but underscored the fundamental difference between them: Cryptocurrencies are inherently fungible and NFTs are intended to be unique.
CRS noted that there is less risk to the overall digital asset market in the event of an NFT market collapse, given that the core structure of the former is not reliant on NFT markets. The CRS suggested that Congress (i) facilitate support for the further development of NFTs and (ii) mitigate risks associated with NFT markets.
Commentary
A unique NFT would seem to be neither a security nor a commodity. Attempting to apply the rules of financial regulation to misconduct in NFTs would be the wrong solution. This should be, more appropriately, an area within the jurisdiction of FTC or of other regulators of consumer marketing, including state regulators.