NFTs Auctions' Regulations - Can Big Investors Place Winning Bids?
The Second U.S. NFT Property Is Ready For Auction
Propy disclosed that its second U.S. NFT-backed property would auction at a starting price of 185,000 USDC. USDC is a stable coin backed by the United States Dollar. The transaction will be similar to Propy's previous NFT real estate sale. This is because there will be a transfer of property ownership to an LLC created by Propy. The record of ownership of the LLC will be on the blockchain as an NFT.
The NFT will then auction on Propy's Marketplace. Also, the owner of this NFT, stored on the blockchain, will have full ownership of the LLC that owns the subject property.
Can Big-Time Investors Place Winning Bids?
Yes, they can. Participants and investors must complete a Know Your Customer (KYC) form to participate in the auction. The KYC form is an essential step from both a regulatory and a practical standpoint. It helps Propy combat criminality in the financial sector and money laundering. It also assists the business with customer identification and verification.
This auction proves that NFT-backed real estate will continue to be a viable investment option. While this is an exciting trend, as with any NFT, market participants must be aware of several legal issues. The following is a non-exhaustive list of potential legal issues a real estate transaction backed by an NFT may encounter.
NFT Legal Issues
The enforcement of NFTs appears to be more prevalent than ever before. For example, a recent report indicates that the SEC investigates whether NFTs can raise capital like traditional securities. In connection with the investigation, the SEC has issued subpoenas and particularly has an interest in information regarding fractional currency tokens (such as NFTs).
Although Propy has stated that NFT real estate transactions do not constitute fractional ownership, fractionalization in actual property ownership is emerging in the blockchain and real estate industries. When fractionalization becomes more prevalent, developers, owners, and holders will likely face significant legal barriers. The Department of the Treasury has released a report on financing terrorism and money laundering through the art trade, a recent regulatory development about non-fungible tokens.
In addition, the Office of Foreign Assets Control (OFAC) of the Department of the Treasury approved a digital asset exchange based in Latvia and identified 57 crypto addresses as Specially Designated Nationals (SDNs). As one of the addresses contains NFTs, which are non-fungible, this is the first time that NFTs have been publicly identified as "blocked property" (NFTs).
The Propy website also states that the NFT issued as part of the NFT's second property transfer is a loanable DeFi asset. Decentralized Finance (DeFi) has undeniable benefits. However, investors must be aware of the risks that this relatively new technology poses, especially when it comes to DeFi lending.
What's Next?
With a DeFi platform, lenders can offer cryptocurrency-based loans to users in a permissionless manner without the need for a middleman. However, financial institutions must also comply with anti-money laundering (AML) regulations and Know Your Client (KYC). Each AML and KYC obligation requires the financial institution to conduct pre-requisite due diligence. This includes verifying the identity of their customers to ensure they are not on any sanction lists.
In addition, recent reports indicate that the SEC has intensified its fight against crypto lending and suggested that it may qualify as an investment according to the Howey test (U.S. Supreme Court case to determine if a transaction is an "investment contract).
Are NFTs Subject to Anti-Money Laundering Laws?
Presently, many governments are just beginning to draft legislation designed to combat money laundering concerns posed by NFTs. But, in reality, NFTs were the driving force behind these laws and their expansion.
The U.S. Congress adopted the Anti-Money Laundering Act in 2021 to regulate the activities of financial institutions. The Act does not explicitly define regulations for NFTs. However, it broadens the definition of a financial institution to include firms engaged in the process of exchange that substitutes currency. This applies to cryptocurrency and NFTs in general.
The Office of Foreign Assets Controls (OFAC) has not provided specific NFT standards guidelines. However, they have asserted that U.S. sanctions apply to traditional and digital transactions.
The U.S. government also incorporated anti-money laundering provisions into the National Defense Authorization Act (NDAA). Among these are amendments to the Anti-Money Laundering Act (AMLA) and the Corporate Transparency Act (CTA). AMLA also extended the Bank Secrecy Act to individuals who trade art pieces (consultants, advisors, sellers, consultants, and others).
The European Commission's (E.U.) approach to NFTs and money laundering is similar because there are no specific anti-money laundering regulations for NFTs. However, the E.U. adopted the Markets in Cryptoassets Regulation (MiCA Proposal) in 2021. This proposal for digital finance includes a regulatory proposal for crypto assets.
MiCA contains rules that may apply to NFTs and defines crypto assets as the first in the E.U. Its primary objective is to enhance the efficacy of blockchain technology and virtual asset regulation in the European Union.
Are NFTs Subject to State Regulations Governing Virtual Currencies?
The current state of affairs in the field of virtual currency is comparable to the current state of affairs in the field of anti-money laundering. The government has not yet issued specific guidelines concerning NFTs. However, a few states in the United States have enacted laws governing the operations of businesses that deal in virtual currencies.
For instance, New York has a list of activities that include transferring, exchanging, and distributing virtual currencies. It also includes the creation of virtual currencies, for which businesses are required to hold an authorization and issue surety bonds or establish an account. All of this will aid in customer protection.
NFT Act and Consumer legislation
Since they are non-fungible, available to the general public, and not restricted to professionals, they are typically covered by local laws governing consumer rights. For example, the law on consumer protection requires NFTs to conduct their business with high transparency. It also requires them to adhere to the laws protecting consumers. This includes the right of consumers to access relevant information on NFTs in their native language and to subject the sale of non-fungible tokens to their local laws, among other provisions.