Nature of NFTs

While NFTs do not explicitly fall under the definition of a virtual asset (VA), they are assessed based on their use and not by terminology. 

Finreg business tip
Activities involving NFTs are likely regulated if they are used for payment and investment purposes. Refer to the MAS requirements of DPT service that take into account FATF’s Standards.

According to FATF Guidance on Virtual Assets

last revised October 2021

[On NFTs, FATF specifically explains:]

53. Digital assets that are unique, rather than interchangeable, and that are in practice used as collectibles rather than as payment or investment instruments, can be referred to as a non-fungible tokens (NFT) or crypto-collectibles. Such assets, depending on their characteristics, are generally not considered to be VAs under the FATF definition. However, it is important to consider the nature of the NFT and its function in practice and not what terminology or marketing terms are used. This is because the FATF Standards may cover them, regardless of the terminology. Some NFTs that on their face do not appear to constitute VAs may fall under the VA definition if they are to be used for payment or investment purposes in practice. Other NFTs are digital representations of other financial assets already covered by the FATF Standards. Such assets are therefore excluded from the FATF definition of VA, but would be covered by the FATF Standards as that type of financial asset.¹⁷ Given that the VA space is rapidly evolving, the functional approach is particularly relevant in the context of NFTs and other similar digital assets. Countries should therefore consider the application of the FATF Standards to NFTs on a case-by-case basis.
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[FATF defines virtual assets as:]
b. “Virtual asset” as a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes. Virtual assets do not include digital representations of fiat currencies, securities, and other financial assets that are already covered elsewhere in the FATF Recommendations;
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[FATF also expounds on the type of transactions captured under the definition of a VA:]
84. Just as the FATF does not seek to regulate the individual users (not acting as a business) of VAs as VASPs—though recognizing that such users may still be subject to compliance obligations under a jurisdiction’s sanctions or enforcement framework—the FATF similarly does not seek to capture the types of closed-loop items that are non-transferable, non-exchangeable, and cannot be used for payment or investment purposes. Such items might include airline miles, credit card awards, or similar loyalty program rewards or points, which an individual cannot sell onward in a secondary market outside of the closed-loop system. Rather, the VA and VASP definitions are intended to capture specific financial activities and operations (i.e., transfer, exchange, safekeeping and administration, and the provision of financial services associated with issuance, etc.) and assets that are convertible or interchangeable at a market rate—whether virtual-to-virtual, virtual-to-fiat or fiat-to-virtual. The acceptance of VAs as payment for goods and services, as in the acceptance of VA by a merchant when effecting the purchase of goods, for instance, also does not constitute a VASP activity. A service that facilitates companies accepting VA as payment would, however, be a VASP.