The 13th Century has much to teach us about NFTs
There is now a general acceptance that the crypto industry can either be unregulated or mainstream but not both. Since crypto firms with more customers make more money, we should expect them to prefer the scale that comes from being mainstream. That means they will need to be regulated; the question is how?
The debate concerning crypto regulation revolves around financial regulation. This is because the only current UK regulation directly applicable to crypto is financial regulation – the cryptoasset licence regime to prevent money laundering. Also, because all crypto firms are hardwired to be concerned about the classification of coins and tokens as either security tokens (regulated) or utility tokens (unregulated).
There are, however, arguments against financial regulation being the most appropriate method of regulating the crypto industry. These were put forward by Charles Randall, the last permanent chair of the FCA, the UK’s financial regulator.
Mr Randall said “There is a live debate in many major financial jurisdictions about whether regulators need more powers and tools and clarity of remit to regulate crypto. It’s difficult for regulators around the world to stand by and watch people, sometimes very vulnerable people, putting their financial futures in jeopardy based on disinformation and fear of missing out. But here in the UK there are many other purely speculative activities that we don’t regulate. You can buy gold and other commodities, foreign real estate, foreign currencies, or even old school tokens like Pokemon cards, using unregulated markets.”
Behind this thinking is a concern that regulating crypto will give up the pass if consumers hear the headline but not the story. In other words, if tokens are regulated by the FCA, which is the regulator for investments, tokens must be investments. Pretty much the opposite of what the FCA wants people to think. The FCA is concerned that UK consumers are swayed by the power of syllogisms.
Regulation in this context usually refers to securities regulation, which is why the distinction between security tokens (securities) and utility tokens (not securities) is important.
But there are other methods.
First, in the US, The Responsible Financial Innovation Act, proposed by senators Cynthia Lummis and Kirsten Gillibrand, is a legislative proposal to regulate crypto in the US by classifying most cryptocurrencies as commodities. Commodities, unlike securities, are outside the jurisdiction of the SEC with its fearful reputation and costly registration and reporting requirements. So, regulation, but not as bad as it could have been.
Second, when commentators say that buying tokens is just gambling and the market is a casino, that points a way to a different possibility. In the UK, and most other jurisdictions where it is allowed, gambling is regulated. The UK’s regulator, the Gambling Commission, licenses and regulates firms providing gambling services here. Perhaps they could help with the understanding of consumer harms. But we have some idea of the Gambling Commission’s view of crypto from projects that wish to combine casinos with crypto, permitting punters to place their bets using crypto. The Gambling Commission can be forgiven for not being excited by this possibility. A casino inside a casino doesn’t sound good.
Third, we could say that tokens are the currencies of the online world, powering the digital media, e-commerce, and emerging industries of the future. We have a regulator for that as well. Ofcom is the UK’s communications regulator. It understands digital and regulates the internet (so far as anyone does). But, as Mr Randall says, the internet will continue to be a very challenging space for regulators.
Do we have no good options? Well perhaps history could come to the rescue.
The problem here can be stated as follows: individuals, who are not sophisticated, are spending money, that they can’t afford to lose on items that do not benefit them, and are not good investments, and those items should in fact be reserved for more sophisticated members of society.
Let me tell you about the sumptuary laws. They are perfect for NFTs.
Between the twelfth and the eighteenth centuries, England enforced sumptuary laws. These laws restricted excessive personal expenditures, with the aim of preventing extravagance and luxury. Extravagances of various types were frowned upon in food and drink, furniture, but above all, clothing. People were not permitted to wear clothes or colours reserved for their social betters.
Elizabeth the First passed the Statutes of Apparel and proclamations addressing “excesse of apparel”. She knew what she wanted: “degrees [i.e. ranks] above viscountesses” could wear: “cloth of gold, silver, tinseled satin, silk, or cloth mixed or embroidered with gold or silver or pearl, saving silk mixed with gold or silver in linings of cowls, partlets, and sleeves.” Viscountesses, and below, none of that.
The problems were that extravagant spending impacted the nation’s wealth; young gentlemen ran into debt; and it just generally made people immoral, not knowing their place and so forth. The laws also had a financial aspect because they were intended to balance trade by limiting the import of goods.
We could dust off the old rules and provide that only the rich (hedge fund managers, footballers) and famous (hedge fund managers, footballers) can own an NFT. The state can achieve policy aims of preventing consumer harm, avoiding investment bubbles, and maintaining a sober and discerning society by simply stopping us from spending our money on “excesse of [digital] apparel”.
The European Commission has excluded NFTs from its newly published text of the Regulation on Markets in crypto assets. A chance here for the UK to exercise its hard-won ability to exercise regulatory divergence?
Charles Kerrigan is a Fintech specialist at law firm CMS.