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The regulatory status of non-fungible tokens, which is being considered by the U.S. Securities and Exchange Commission, could have implications for insurance coverage related to the tokens.
In an April 12 letter to the SEC, Arkonis Capital LLC, a broker-dealer that says it is “very familiar with blockchain technology and digital assets,” said the SEC “needs to provide regulatory clarity with respect to the regulation of a new form of digital assets — non-fungible tokens.” Arkonis said, “We believe in certain instances NFTs may be securities.”
Should NFTs be viewed as financial instruments, “that will have big implications” for their regulation, said Paul King, senior vice president, executive and professional risk solutions national advisor, for USI Insurance Services Inc. in Dallas.
Uncertainty about the classification of NFTs “opens questions about regulation and what potential risk transfer some may need to contemplate,” said Jackie Quintal, who heads up Marsh LLC’s U.S. digital asset group in New York.
Ms. Quintal cited the anti-money laundering concerns of regulators as also potentially relevant to NFT sales, depending on the ultimate classification and regulation of NFTs.
Such regulation and scrutiny could also potentially create a directors and officers liability exposure, Mr. King said, potentially touching on lines such as Foreign Corrupt Practices Act coverage.
The discussion of NFT regulation, even extending to money laundering, is “pretty wide-ranging, but that intersection is a real thing,” Mr. King said.
The sale of digital artwork represented by non-fungible tokens — essentially a point on a digital ledger or blockchain that confirms ownership of an original — is gaining traction in the art world, attracting the attention of regulators and posing unique risk management questions for auction houses, dealers and others involved in the transactions.