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US Crypto Regulatory Enforcement Ramps Up – NFTs Now More In Focus

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For the past decade the crypto space has been described as the
wild west. The crypto cowboys and cowgirls have innovated and moved
the industry forward, despite some regulatory uncertainty.
Innovation always leads regulatory clarity. There’s a new
sheriff in crypto town – the US government and its various
regulatory agencies. They seem intent on taming the wild west.

According to a recent report, the IRS Has Sent 10,000 Letters on
Taxpayer Digital Assets seeking to collect taxes on gains from
crypto assets including NFTs. This is no surprise and we have
cautioned on this dating back to 2017. While many people have focused on the
tax issues with crypto currencies, the IRS is also focusing on NFTs
as reported here. This comes on the heels of
another report this week that the SEC is now
targeting certain NFT uses. According to the report, the SEC is
probing whether NFTs are being utilized to raise money like
traditional securities. The SEC has reportedly sent subpoenas
related to the investigation and is particularly interested in
information about fractional NFTs. Fractionalization is just one of the
potential securities law concerns with certain NFT business models.
NFTs that represent a right to a revenue stream and NFT presales
can also presents issues in some cases.

Other recent regulatory activity relating to NFTs includes the
following. The Department of the
 published a study on the facilitation of
money laundering and terrorist financing through the art trade,
including NFTs. See our report on this 
. The Treasury Department’s Office of
Foreign Assets Control
 (OFAC) sanctioned a
Latvia-based digital asset exchange and designated 57
cryptocurrency addresses (associated with digital wallets) as
Specially Designated Nationals (SDNs). These designations appear to
be the first time NFTs have been publicly impacted as “blocked
property” – as one of the designated cryptocurrency
addresses owns non-fungible tokens (NFTs). See our report on
this here. A number of NFTs are also being used to
facilitate illegal gambling.

In addition to the regulatory issues, the number of NFT-related
lawsuits and other legal disputes continues to increase. Many of
these disputes relate to IP ownership, IP infringement, failure to
apply an clear or enforceable license to the NFT, among others.

Most of these issues are avoidable with proper legal counseling
early on.

The use of NFT technology to tokenized and record ownership of
physical and digital assets, as well as entitlements (e.g.,
tickets, access, etc.) is just getting started. We believe this
technology will see wide scale adoption across many industries. The
vast majority of the NFT business models are legal. It is advisable
to seek competent legal counsel on these issues if you are entering
the space to ensure yours is.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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