Guidance Notes issued by FSC Mauritius on the Regulatory Treatment of Non-Fungible Tokens (NFTs)

The Financial Services Commission (FSC), following the enactment of the Virtual Asset and Initial Token Offerings Services Act (“VAITOS Act”), and the guidance issued by the Financial Action Task Force (FATF) relating to Virtual Assets and Virtual Assets Service Providers, has deemed it necessary to clarify the regulatory stance that will be adopted with respect to Non-Fungible Tokens (NFTs).

To provide a brief overview, an NFT is a token recorded using distributed ledger technology (such as Blockchain), whereby each NFT recorded is distinguishable from any other NFT. This allows each NFT to be given unique features and to be associated with a distinct physical or virtual asset. NFTs are often linked to items such as artworks, music or videos.

The Guidance Notes issued on 30th of November 2022 are to be read together with the Relevant Acts, and other guidelines and circulars issued by the FSC. Within the said Guidance Notes it has been stressed out that, NFTs may take different forms and therefore, warrant different regulatory treatments; thus, the FSC decided to differentiate into three (3) distinct Scenarios for each subcategory of NFTs.

Firstly, NFTs that are issued and marketed to the public as unique digital collectibles but they are not used for payment or investment purposes shall not be subject to the regulatory scope of the FSC, regarding the activities associated to them.

Secondly, some NFTs display characteristics of securities and therefore they shall be treated as such, according to FSC. For instance, fractional NFTS, which are assets that allow investors to invest in a particular NFT by owning only a fraction of it, can be considered as ‘securities’, as defined in the Securities Act. Therefore, FSC makes explicit that NFTs that are considered as ‘securities’, or constitute a share or an interest in a collective investment scheme must be regulated in accordance with its marketing and distribution practices to the general public. More precisely, regarding Virtual Asset Platforms that facilitate the sale and secondary trading of NFTs identified as ‘securities’, as per the definition of the Securities Act, targeting Mauritian residents or based in Mauritius, need to be licensed by the FSC as a securities exchange or securities trading system.

Last but not least, the third Scenario announced by FSC has to do with ‘other NFTs’, that are not part of the previous Scenarios mentioned above. For the issuance of NFTs which fall under the category of virtual assets and are neither unique digital collectibles, nor securities, the relevant persons shall apply for registration under section 24 of the VAITOS Act. In addition, persons that intend to transfer, exchange, hold and administer NFTs which fall under the category of virtual assets need to apply for the relevant licence in accordance with section 8 of the VAITOS Act.

Lastly, FSC notified investors who are not sufficiently knowledgeable in virtual assets to be cautious as there are various risks associated with NFTs including illiquid secondary markets, volatility, opaque pricing, hacking and fraud. Finally, FSC also mentioned that these Guidance Notes shall not be interpreted as legal, financial or other professional advice.

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