Business NFT Tokenization And Its Legal Implications In Canada – Securities


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Business NFT tokenization and its legal implications in
Canada

Can you breach securities law by trading or issuing non-fungible
tokens (NFTs)? An individual was recently arrested
in the US for insider trading in NFTs.1 This
article focusses on the securities law implications of NFTs and
their tokenization.2

NFTs are a growing digital asset class that raises novel legal
issues. NFTs can be tokenized to allow for part ownership of the
particular NFT to be transferred to others. Recently, tokenization
has been heralded as the “future of Canada’s digital
economy” with “the potential to unlock immense value and
liquidity for many investors”.3

NFTs and tokenization

NFTs are a type of digital asset. They identify an asset such
that the asset, or a fraction of the asset, can be held and
transferred on a blockchain. An NFT can be used to certify
ownership over an asset that exists in the “real” world
or it can be a digital asset. In either case, the asset is uniquely
represented as a NFT on a blockchain; it cannot be duplicated.
Whereas cryptocurrencies and tokens are fungible like cash, NFTs
are not.

NFTs can be tokenized (or fractionalized / f-NFTs) to allow for
part ownership of the particular NFT to be transferred to others.
Tokenization can provide investors with a means to purchase, hold
and trade assets that are perceived to have underlying value. It
can also provide owners of such assets improved liquidity to
realize some value from the asset without completely relinquishing
ownership.

The emerging NFTs space is susceptible to the same forms of
misconduct observed in cryptocurrency markets. According to a
blockchain research firm, there are signs that wash trading (a form
of market manipulation involving frequent trading between non
arm’s length blockchain addresses) is being used to
artificially boost the perceived value of certain NFTs. The
research firm also found signs of money laundering.4

Canadian securities law that may apply to
NFTs

Canadian securities regulators have yet to definitively take a
position on whether and in what circumstances NFTs could constitute
securities. Limited 
guidance from the Canadian Securities Administrators
(CSA) in 2018 endorses the expansive four-pronged
test from OSC vs. Pacific Coast Coin Exchange 
(modeled closely on the U.S. Supreme Court’s…

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