Non-Fungible Tokens: Guidance notes issued in Mauritius

On 30 November 2022, the FSC issued Guidance Notes on the regulatory treatment of NFTs. Failure to comply with these Guidance Notes may entail regulatory sanctions and may constitute an offence where any person acts against a direction from the FSC to comply with these Guidance Notes.

NFTs may take different forms and are often linked to items such as artworks, music or videos. The Guidance Notes define an NFT as a token recorded using distributed ledger technology such as Blockchain, whereby each recorded NFT is distinct with unique features from any other NFT and can be associated with a distinct physical or virtual asset.

In formulating these Guidance Notes, the FSC has considered the guidance issued by the Financial Action Task Force (FAFT) relating to Virtual Assets and Virtual Assets Services Providers. NFTs are generally not considered to be Virtual Assets under the FATF definition.

According to such guidance, NFTs are: “digital assets that are unique, rather than interchangeable, and that are in practice used as collectibles rather than as payment or investments instruments”. However, they may fall under the Virtual Assets definition “if they are to be used for payment or investment purposes in practice”.

For the purpose of providing more clarity into what would be regulated under the Virtual Asset and Initial Token Offering Services Act 2021 (VAITOS), the FSC laid down 3 scenarios in its Guidance Notes shedding some more light on its regulatory position with respect to NFTs:

1. NFTs as digital representations of collectibles with no payment or investment characteristics

The carrying of activities such as marketing and issuance of NFTs as only a genuine digital collectible which is not used for payment or investment purposes shall not fall within the regulatory purview of the FSC. It is worth highlighting that the FSC equally specifies that such NFTs may be linked to an underlying asset.

2. NFTs with securities characteristics

Some NFTs may have overlapping characteristics of a digital collectible and a transferable financial asset which would then bring such NFTs under the definition of securities as defined under the Securities Act 2005.

Likewise, where the NTFs constitute a share or confers ownership or economic rights, they shall be deemed as a Security Token and shall constitute a regulated business activity, in accordance with the provisions of the Securities Act 2005, Securities (Collective Investment Schemes and Closed-end Funds) Regulations 2008 and the Guidance Notes relating to Security Token Offerings and Security Token Trading Systems issued by the FSC on 15 June 2020 and which has been updated on 23 August 2022.

Such regulated business activity whether in Mauritius or targeting Mauritian residents would require an appropriate licence issued by the FSC.

3. All other NFTs

This third scenario seeks to capture the NFTs which fall under the category of virtual assets. (i.e. those which are not digital collectibles and are not securities). Such NFTs are therefore regulated under the VAITOS. The issuer of such virtual token needs to apply for registration as an issuer of initial token offerings with the FSC in accordance with section 24 of the VAITOS. In addition, any person who administers, hold, transfer or exchange such virtual token is required to apply for the relevant licence as a Virtual Asset Service Provider as per Section 8 of the VAITOS.

Conclusion

In today’s world, NFTs are the latest trend and are attracting huge investments. It is important to consider the nature of the NFT and its function in practice and not what terminology or marketing terms are used to describe it.

In that context, the functional approach taken by the FSC should be applied on a case by case basis to determine into what scenario type an NFT would fall into.