Introduction

Over the past few years, Non-Fungible Tokens (NFTs) have made a remarkable impact on creative and digital industries. From one-of-a-kind artwork and in-game assets to music and virtual real estate, NFTs allow creators and collectors to attach verifiable ownership and scarcity to virtually any digital content. Because each NFT confers unique characteristics to its holder—unlike traditional cryptocurrencies such as Bitcoin (BTC) or Cardano (ADA)—they raise new and intriguing regulatory questions.

Within the European Union, these questions have come to the forefront with the recent introduction of the Markets in Crypto-Assets Regulation (MiCAR). Designed to bring stability, consumer protection, and market integrity to the broader crypto market, MiCAR seeks to govern various crypto-assets that function as payment instruments, stablecoins, or digital investments. Yet, how—and when—this regulation applies to truly unique and non-fungible tokens remains open to interpretation. In exploring the text of MiCAR, especially Recitals 10 and 11, this paper sheds light on why many NFTs may lie outside the regulation’s scope and under what circumstances certain NFTs could nevertheless be deemed in-scope.

The article first examines MiCAR’s general approach to crypto-assets and its explicit exemptions, then takes a closer look at the notion of fungibility as a key factor. Next follows an analysis of Recitals 10 and 11. The article concludes with an assessment of real-world cases and additional considerations, such as fractionalization, to provide a clear view of NFTs’ regulatory status.

Understanding MiCAR and Its Impact on Crypto-Assets

MiCAR introduces a comprehensive set of rules for individuals, businesses, and other entities involved in issuing, offering, and trading crypto-assets within the EU (Article 2 §1 MiCAR). However, it explicitly excludes crypto-assets that are unique and non-fungible from its scope (Article 2 §3 MiCAR). The deciding factor, therefore, is whether a given token is considered fungible or non-fungible. To address the question of under which circumstances NFTs and related activities are truly exempt from MiCAR, the broader concept of fungibility needs to be explored first.

Fungibility in Law and Crypto

Legal Perspective on Fungibility

In legal terms, fungibility refers to whether an asset can be substituted with another of the same kind and value. This concept is crucial in contract law, commerce, and tax law. Fungible and non-fungible goods are generally distinguished as follows:

• Fungible Goods: Goods that are interchangeable for another of the same kind and present certain standardizable features, such as quality and quantity (e.g., Brent crude oil, bushels of graded wheat, precious metal bars, or fiat currencies).
• Non-Fungible Goods: Items that are unique and not interchangeable, including real estate, art pieces, collectibles, or luxury goods.

Fungibility in crypto-assets

With respect to crypto-assets, fungibility depends on the characteristics and specific features of the type of crypto-asset involved:

• Fungible Tokens (tokens like Bitcoin and ADA): Each unit is identical in value and function, meaning that 1 BTC is always equal to another 1 BTC, and 1 ADA is always equal to another 1 ADA.
• NFTs: Each token is unique, usually representing a certain right in a specific digital or physical asset (e.g. a digital image or a trading card).

Since MiCAR does not apply to "unique and non-fungible" crypto-assets, the interpretation of NFT fungibility under EU law becomes critical.

NFTs Under MiCAR Regulation: Exemptions and Challenges

Exemptions for Unique and Non-Fungible Crypto-Assets

NFTs are specifically singled out in MiCAR’s Recitals 10 and 11, which clarify the legislature’s intent regarding whether and when NFTs may trigger MiCAR’s requirements.

Recital 10 states that MiCAR should “not apply to crypto-assets that are unique and not fungible with other crypto-assets, including digital art and collectibles.” It elaborates that the value of such NFTs stems from “each crypto-asset’s unique characteristics and the utility it gives to the holder” rather than from the sort of interchangeable or standardizable features that define fungible crypto-assets. While NFTs may indeed be traded on secondary markets—sometimes even speculatively—Recital 10 clarifies that trading alone does not confer fungibility. Instead, an NFT’s uniqueness and inability to be readily interchanged with other tokens determine its regulatory treatment under MiCAR.

Recital 11 focuses on the boundaries between “truly” non-fungible tokens versus those that merely claim to be “unique.” It cautions that:

• Fractionalizing a purportedly unique NFT into many parts generally indicates fungibility: owners of the fractional parts share proportional rights in what is effectively the same underlying asset.
• Large-series or collection “NFTs” can be indicators that a token is, in fact, fungible. Labeling tokens as “NFTs” by giving them unique identifiers, when they otherwise have the same features or represent equivalent rights, is insufficient to bring them outside MiCAR’s scope.
• The decisive factor is the “substance over form” approach, which means that regulators must look beyond designations used by an issuer and instead examine the token’s actual characteristics, transferability, and interchangeability.

Together, Recitals 10 and 11 illustrate the EU legislature’s position: where digital assets do not function like crypto-assets typically covered by MiCAR (e.g., stablecoins, utility tokens), but instead represent genuinely unique and non-fungible rights—such as a one-of-a-kind piece of digital art—they fall outside MiCAR’s scope.

Interpreting MiCAR

Regulating every blockchain-based token—including purely digital collectibles or in-game items—would run counter to MiCAR’s stated objective of proportionate regulation. It would also depart from the principle of technological neutrality: any new technology can be used to represent “traditional” goods and services without automatically triggering financial regulations. Consequently, NFTs representing unique digital or real-world collectibles should generally not be considered in MiCAR’s scope because they do not pose the typical user-protection or systemic risks MiCAR aims to address (e.g., mass adoption as a payment or store-of-value instrument).

MiCAR’s primary goals are:

• Protecting consumers (retail holders) and market integrity, particularly where tokens can serve as “payment-like” instruments or investment vehicles.
• Ensuring financial stability by regulating large categories of “stablecoins” and other crypto-assets that may present systemic risk if widely adopted.
• Supporting innovation while preventing an unregulated “wild west” in the crypto markets.

Moreover, Recitals 10 and 11 aim to ensure that MiCAR’s broad definition of “crypto-assets” does not unintentionally sweep in truly unique tokens. MiCAR’s entire thrust is geared toward stablecoins (asset-referenced tokens, e-money tokens) and utility tokens offered to a broad investor base—often in a crowdfunding context. Non-fungible assets do not squarely fit MiCAR’s investor- and market-protection rationale, and thus their exclusion is purposeful and consistent with the regulation’s overall design.

Understanding MiCAR’s goals helps frame the debate around NFT regulation. But how does this translate to real-world applications? To obtain indicators of whether a specific NFT structure falls within MiCAR, common use cases and the factors that regulators are likely to consider are examined.

When NFTs Are Likely Inside or Outside MiCAR’s Scope

Below is a revised draft of Sections 4, 5, and 6 in light of the additional teleological interpretation that fractionalization or a large series in and of itself does not automatically bring NFTs into MiCAR’s scope.

Likely Outside MiCAR

• Digital Art, Collectibles, and In-Game Items: If tokens represent purely collectible or decorative items—particularly where holders primarily value the asset’s uniqueness or in-game utility—they typically do not pose the investor protection or systemic risk concerns MiCAR targets. Even if fractionalized or issued in a large series, genuinely unique digital items with no stable-value peg or payment functionality generally remain outside MiCAR’s scope.
• Small-Scale or One-Off Issuances: NFTs conveying exclusive ownership of a single digital artwork or asset—and not part of a capital-raising scheme—are unlikely to trigger MiCAR, especially if the arrangement does not advertise or incentivize any investment or payment use.

Potentially Within MiCAR

Merely labeling tokens as “fractionalized” or issuing them in “large collections” does not, by itself, automatically subject them to MiCAR. Rather, the decisive factor is whether the tokens function in practice like regulated crypto-assets. Indicators that they could fall within MiCAR’s scope include:

1. Resemblance to Crowdfunding: If the tokens are marketed to a broad base of purchasers, encourage investment-like returns, and effectively serve to raise capital—mirroring an “ICO” structure—regulators could deem them subject to Title II (or other relevant titles) of MiCAR.
2. Stable-Value or Payment Function: If a fractionalized or “collection-based” NFT seeks to maintain a stable price by referencing currency or other assets, or if it is widely used as a means of payment, it may be construed as an asset-referenced or e-money token, triggering MiCAR’s stablecoin rules (Titles III and IV).
3. Exchangeability / Fungibility in Practice: Where “fractional NFTs” are so standardized and interchangeable that they behave like a fungible token (particularly if owners trade them in high-volume markets or if they are advertised as easily exchangeable assets for profit), there is a risk that regulators could classify them under MiCAR.

The overarching test is not just labeling or structure but substance over form: Does the token’s actual use and marketing align with MiCAR’s purpose of regulating crypto-assets that may raise investor protection, market integrity, or financial-stability risks?

Additional Considerations

The classification of NFTs under MiCAR is not always straightforward. Even when tokens appear to be non-fungible at first glance, certain characteristics—such as fractionalization, large-scale issuance, or economic function—could shift the regulatory scale. By applying a holistic view, considering methodological legal interpretation and principles, MiCAR’s scope should be refined based on the regulation’s fundamental objectives.

Teleological Reading of Recitals 10 & 11

A teleological reading of MiCAR suggests that the EU legislature did not intend to regulate purely collectible or in-game NFTs simply because they reside on a blockchain. Rather, the focus is on crypto-assets that raise typical financial or payment concerns. Recitals 10 and 11 emphasize excluding truly unique NFTs but caution that fractionalization or large-series issuance might undercut uniqueness—only if the tokens are in fact interchangeable or marketed for investment or payment use.

Substance Over Form

Regulators will examine real-world usage and marketing. If an issuer is effectively offering NFTs with returns tied to speculation, stable value, or broad investor demand, MiCAR’s provisions could apply—even if the issuer calls them “NFTs.” Conversely, if a large set of NFTs is functionally unique and not used to raise capital or for payments, that alone suggests they remain outside MiCAR.

No Automatic Trigger

Fractionalizing or creating a large NFT collection does not automatically bring it under MiCAR. The question is whether such tokens de facto operate as investment products or payment tokens. If they merely represent purely aesthetic, collectible, or in-game functionalities, they remain outside MiCAR’s scope.

Conclusion

Ultimately, MiCAR’s approach to NFTs should not be driven by rigid definitions but rather based on a functional assessment, involving nuanced interpretation of a crypto-asset’s characteristics and real economic function.

While fractionalized or large-series NFTs can appear more “fungible” under a superficial reading of Recitals 10 and 11, a close teleological analysis shows that MiCAR intends to regulate crypto-assets that pose financial or systemic risks (especially stablecoins or broad-based investment tokens). If an NFT—fractionalized or otherwise—serves merely as a unique collectible or in-game item, does not purport to maintain stable value, and lacks a payment or capital-raising function, it typically sits beyond MiCAR’s ambit.

Put differently, MiCAR’s core focus is investor protection, market integrity, and financial stability. NFTs representing truly unique digital items—even if issued in a large run—are unlikely to threaten these interests unless they are functionally interchangeable or marketed for investment or payment uses. In that sense, Recitals 10 and 11 carve out a clear safe harbor for genuine NFTs, upholding MiCAR’s fundamental objective: regulating the crypto “wild west” only to the extent tokens resemble more traditional regulated assets in their economic function.

This document is for informational purposes only and does not constitute legal or regulatory advice. MiCAR’s interpretation may evolve, and enforcement may vary by jurisdiction. Readers should seek professional advice for compliance matters. No liability is assumed for errors, omissions, or decisions based on this content.

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