Types of NFT marketplaces and how to legally structure them
The market of NFTs has come a long way from being worth mere cents to now trading in billions of dollars. It has also grown into its own independent community, which lives its own life, bearing its own unique problems and achievements. Today, there are increasingly tremendous deals taking place in this market segment, often involving famous artists and individuals actively participating in NFT marketplaces.
The growth of these mega marketplaces, where people buy and sell their NFTs prompts an analysis of NFT marketplaces from a legal perspective. What are the different types of these marketplaces and what are the legal requirements for each? How should a Web3 entrepreneur choose the right country to establish an NFT marketplace? Taras Zharun, Web3 Virtual Legal Officer at Legal Nodes, explores these questions and more.
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What is an NFT marketplace?
Generally speaking, an NFT marketplace is the vehicle, the main activity of which is organization of the sale of NFTs for virtual assets or fiat currencies. NFT marketplaces should not be confused with virtual currency exchanges (cryptocurrency exchanges). The latter facilitates the exchange of one asset into another, which is always a regulated activity in countries with VASP regimes. This differs from NFT marketplaces, which enable the sale of one-of-a-kind (or one-of-few) assets, which sometimes qualifies them as e-commerce platforms.
There are two main roles in each NFT marketplace user flow: creators (those who sell NFTs) and collectors (those who buy NFTs). From a practical point of view, creators could be either the operator of an NFT marketplace, which is common for specialized marketplaces (see below for a further classification on NFT marketplaces), or third party, which is common for universal ones. Creators, as the general rule, register with the relevant marketplace and generate NFTs by means of minting. In turn, collectors may buy NFTs for virtual assets (a common occurrence) or for cash (something that rarely happens).
Types of NFT marketplaces by business model and technology
The most common model of making money with an NFT marketplace is via transaction commission in various amounts and forms. For example, OpenSea charges a commission from the seller for each transaction. Another platform, Rarible charges a fee made up from payments from each party to the transaction.
There are many types of NFT marketplaces that have varying characteristics concerning their functionality, technology, and the individual peculiarities of the NFTs sold, for example. Subsequently it should be noted that the following classification offers a more universal, or holistic definition of NFT marketplaces.
NFT marketplaces can be subject to different regulatory regimes depending on their underlying technology:
- Custodial, where the administrators of the infrastructure control NFTs of users
by holding their keys, allowing them to execute transactions or freeze them at
any time. These types of NFT marketplaces can be subject to the VASP regime, if it is established.
- Auctions, where transactions (auctions) with NFTs are organized centrally and fees are collected from successful bids. Those will most likely fall under the e-commerce regulation of auctions and require a different license.
- Non-custodial, where users own and hold private keys and are able to perform transactions with NFTs at any time. This last type of NFT marketplaces can normally operate without a special license.
NFT marketplaces vary depending on the traits of NFTs sold
- Universal, where any–or almost any—NFTs could be sold. Examples of universal marketplaces include OpenSea, Rarible, and SuperRare.
- Specialized, where all or the majority of NFTs sold are dedicated to a certain project or theme. Examples include Axie Marketplace, which is dedicated to the Axie video game and NBA Top Shot, which is solely dedicated to NBA events.
NFT marketplaces could be also classified depending on payment method (only virtual assets or virtual assets and fiat currencies) their place in project (independent marketplaces, such as OpenSea or Rarible, or in-project marketplaces, the examples of which are Axie Marketplace, Binance Marketplace, Crypto.com NFT), etc.
Where to establish an NFT marketplace
When structuring an NFT marketplace, several points should be considered, from securities to intellectual property regulation. As a general practice, NFTs are not typically considered as security in most jurisdictions (there are, of course, certain exceptions). Consequently, Web3 entrepreneurs looking to launch an NFT marketplace have a wide and decent selection of jurisdictions to choose from.
Common law jurisdictions tend to be a popular choice for establishing NFT marketplaces. This is because common law jurisdictions tend to offer the necessary legal flexibility, including, but not limited to, regulations concerning intellectual property. These jurisdictions are also frequently considered reputable for launching these types of Web3 projects. Taking into account the latest best practices for choosing where to establish an NFT marketplace, the following jurisdictions might be considered:
- The United States of America (currently home to OpenSea, Blockparty, Rarible, SuperRare, Foundation, Mintable, Magic Eden, and MakersPlace);
- Canada (NBA Top Shot);
- Hong Kong (Crypto.com NFT);
- The United Kingdom (KnownOrigin);
- The Cayman Islands (Axie Marketplace);
Future development of regulation affecting NFT marketplaces
There are many kinds of NFT marketplaces with their own special features and characteristics and this area of Web3 is rapidly developing, creating its own trends, popularizing its own stars and building a big business niche. In light of this ongoing and substantial development, it is likely that in the future, further regulation will be implemented.
One noticeable transformation happening in the world of NFTs is the shift away from NFTs solely serving a community of software enthusiasts and now catching the interest of big business. There is potential, therefore, of further regulation development to occur in this wealthy market, especially in terms of anti-money laundering. Examples of regulation already emerging include the so-called Fifth Anti-Money Laundering Directive issued in 2018 from the European Parliament, which has extended its applicability to “virtual currencies” and “persons trading or acting as intermediaries in the trade of works of art”, although it does not contain the specific regulation of NFT trading. However, in September 2020, a proposal on markets in crypto-assets was adopted by the European Commission, which could potentially apply to the NFT marketplaces in the future.
Written by Taras Zharun, Web3 Virtual Legal Officer at Legal Nodes