Does an NFT platform need a crypto license?

NFT has been the biggest buzzword of the year 2021 for all crypto-enthusiasts. Following the increased exposure, there has been a great increase in the number of projects focusing on issuing and trading in NFTs.

With this article, we answer the most common question related to launching an NFT platform.

Do I need a license or authorisation to operate an NFT platform?

By now it has become common knowledge that operating a business related to crypto might be subject to strict government regulation. Estonia has become the hotspot for entrepreneurs seeking a license for the provision of virtual currency services. Thanks to the freedom of establishment and freedom to provide services, it is generally possible to use the Estonian licensed entity to provide services across all of the EU.

The definitions of virtual currency services are not harmonised across the EU, but the description below is mostly applicable to operations across the entirety of the EU.

Is a license necessary for issuing or operating a platform for trading in NFT? The answer is generally no. Firstly, licensing is usually required only from operators of virtual currencies services. The law defines virtual currencies as a payment instrument, which is not used as legal tender – think Ether (ETH), Bitcoin (BTC), USDT, and others.

Meanwhile, NFT does not fit within the legal definition of virtual currencies, as each NFT represents a unique, limited item or a license to use certain objects (e.g. digital art). In legal terms, an NFT is best compared to a certificate of ownership and is not itself a virtual currency. Therefore, an NFT platform is closest to an online art dealer and not to a virtual currency service platform.

A platform might be offering virtual currency services when in addition to NFT trading, the platform offers wallet functionality for storing virtual currencies or operates an exchange. Integration with a third-party wallet or exchange, however, is not considered a virtual currency service.

So, can an NFT platform operate without a license?

In most cases, a virtual currency license is not necessary, but each case needs to be analysed separately. To the public, NFTs are known as a file on a blockchain representing ownership or license to digital art, but there are countless other applications to the technology.

For example, an NFT can certify ownership of precious metals, shares in companies, or co-ownership in real estate. All these cases could require a platform to acquire a different license (e.g. precious metals wholesale or investment firm licenses) or to entail other additional obligations.

In most cases, the additional obligations mean the requirement to establish strict internal procedures for “anti-money laundering” or “AML”, and “counter-terrorist financing” or “CTF”. Such measures, which are collectively known as “know your client” or “KYC”, include the obligation to identify, assess, and store information on the clients of the platform.

The decisions made during the drafting of the KYC procedures eventually become an integral part of the terms of service and privacy policy of the platform. Becoming a user of any platform means entering into an agreement with some service provider.

The terms of service must essentially explain how the service is operated before the user signs up and should provide information regarding the e-commerce and consumer protection rules. Besides the terms of service, a platform that collects any user data is obligated by EU law and GDPR to set out the terms for collecting and storage of data in the privacy policy of the platform.

To sum everything up, an NFT platform:

Usually does not need a crypto (virtual currency service) license but could require another license or internal procedures for AML, if it deals with other regulated services. An NFT Platform should also have dedicated terms of service and privacy policy.  

Involve an advisor when planning

NFT platforms have always been and remain at risk of violating licensing requirements, which means a constant risk of committing a criminal or administrative offense. It is, therefore, best to consult with legal professionals already during the business development stage to minimise the risks.

Hedman is a trusted partner in matters of regulatory compliance, starting from licensing and through to the development of the terms of service and privacy policies.

Read also about our recent advisories in these fields:

Feel free to contact us with any questions on the topic.

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