Written evidence submitted by the
Digital Currencies Governance Group


Non-fungible tokens (NFTs) and the Blockchain




About Digital Currencies Governance Group (DCGG)


Digital Currencies Governance Group (DCGG) is a trade body that represents digital assets issuers and service providers in both the UK and EU. Our mission is to facilitate an open dialogue and encourage communication between policymakers and digital asset experts to support the design of a sound and proportionate regulatory framework that ensures safety for all market participants. Our Members include Tether – currently the largest stablecoin issuer worldwide, Ledger – a leading custodian service provider, Bitfinex – a crypto-assets exchange, and Iden3 - a company working on self-sovereign identity management.



Our Perspective


The government’s approach towards regulating the sector following consultation with industry is a positive process in building a world-leading regulatory regime for crypto-assets. Further regulation can bring many benefits to protect consumers, as well as providing clarity for market participants. However, it is essential that the design of a regulatory regime for crypto-assets takes into account the diversification of the sector and the different business models that have been emerging. We believe consideration should first be given to whether intervention is necessary: the answer to this question should then guide thinking about how to best develop and apply a regulatory regime that is proportionate to the underlying risks of the crypto-asset activity.  


It is DCGG’s view that a light-touch approach to regulation is sufficient for certain crypto-asset activities that are nascent and already offer high levels of consumer protection. For example, certain self-custody wallet providers now provide several more pillars of security than what was initially available on the market through a combination of software and hardware tools that limit the threat from hackers. Increasing the regulatory and compliance burden for these companies would, we argue, not be proportionate given the increased consumer protection they enable. We believe that the most effective way to regulate the sector to be one that is developed incrementally and takes into consideration the full range of risks and opportunities posed by different crypto-asset activities and business models.


This will require ongoing monitoring and communication between policymakers, regulators, and industry stakeholders. DCGG is committed to supporting these efforts through organised events and meetings with stakeholders to provide relevant information. We welcome the opportunity to respond to the DCMS Committee’s Call for Evidence.. We believe NFTs to be an area of crypto-assets that offer enormous potential and an area to extend the UK’s competitive advantage for attracting and growing innovative businesses. Indeed, we are ourselves planning an NFT showcase event in Westminster this year, to which we would be delighted to welcome members of the Committee.


For any general enquiries or to request information on future DCGG events, please do reach out to info@dcgg.co.uk.






1. Is the UK’s light-touch NFT regulation sufficient?


Non-Fungible Tokens, or NFTs, are understood as a tokenised representation of unique digital items whose uniqueness and ownership can be demonstrated and verified using distributed ledger technology. This technology is characterised by various features, such as the use of cryptography and distributed data across multiple participants.


DCGG strongly believes that a more limited and light-touch approach to regulating NFTs is most effective to support the development of a promising industry with very different characteristics and risk profile to other crypto-assets. NFTs are more akin to digital collectibles than financial services. Though they offer significant  potential to underpin how consumers interact on the next generation of digital platforms (e.g. Metaverse), the sector is still developing as global brands continue to enter the NFT marketplace to offer new and engaging formats of interacting with consumers. Over-burdensome regulation would risk damaging the development of this industry and prove disproportionate to the levels of consumer risk present in what is currently and predominantly a digital marketplace for art and other collectibles.


It is our view that now is not the right time to dramatically deviate from the current light-touch regulatory approach and that the government should continue to monitor how the wider market evolves. However, we believe there are a number of steps which could improve communication with the sector and create an environment that supports the government’s ambition of making the UK a global hub for crypto-asset technology and investment. This includes providing further clarity on the legal ownership of NFTs and what firms will be captured by existing or future regulations.


Firstly, DCGG believes further clarity should be provided to confirm that NFTs will continue to be excluded from within scope of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005[1]. DCGG is concerned that in relation to other qualifying crypto-assets the FCA proposals on a new regulatory gateway for approvers of financial promotions, and their interplay with the UK’s financial promotion regime, will place a significant burden on otherwise compliant crypto-asset promotions both under the existing and proposed regime. This is because crypto-asset firms largely sit outside the regulatory perimeter and the majority of firms are not authorised entities and so require authorisation for a smaller pool of authorised third-party approvers. A future decision to include NFTs within scope of this would damage the growth of the sector in the UK and risk lumping together very different assets with very different risk profiles and governance characteristics with the same regulations. We believe the current guidance issued by the Advertising Standards Authority (ASA) that a prominent statement that the product is not regulated should be present on any advertisements is sufficient for NFT speculation and consumer protection.


Secondly, we believe that the FCA should improve the process and guidance for crypto-asset firms registering with them for AML/CTF purposes under the Money Laundering Regulations (MLRs). This should include providing more detailed information on the reasons why the regulator has refused many applications from crypto-asset businesses under the MLRs and what senior managers should do to become compliant in the view of the regulator. We think further guidance on the definition of custody in the sector and what activities fall within scope of the MLRs would also be beneficial for businesses and regulators alike given the wide range of business models, standards and services that exist on the market. We support the recognition that publishers of open-source wallet software and non-custodial wallet providers do not currently fall within the scope of the AML regime and believe policymakers and regulators should continue to take an approach towards regulation that is proportionate to the risk, size, complexity and systemic importance that may be posed by the activity.


We support the creation of the FMI Sandbox which will support onward discussions and collaborations between regulators and market participants to limit the risks of innovative businesses that offer strong consumer protection being forced to move to other jurisdictions. DCGG also supports the Law Commission’s proposal for treating digital assets as a new form of property with ‘control’ replacing the concept of ‘possession’. This will provide a stronger legal foundation for market participants through recognising NFTs as a protectable asset. In general, the underlying blockchain technology offers significant opportunities to track the movement of non-fungible assets which means proof of transactions is embedded in the exchange of NFTs, in contrast to, say, the traditional art market. This ownership can easily be tracked and counterfeit products eliminated. As such, the application of legal principles to NFT markets will provide greater security for consumers and give NFT platforms more comfort in demanding to freeze malevolent actors’ accounts. DCGG recognises that these actors exist and operate in NFT marketplaces - as they do other industries - but believe that the underlying security of the blockchain means NFTs are not useful tools for money laundering.


Overall, it is our view that the current light-touch approach to regulating NFTs is sufficient and that further clarification from regulators on the scope of existing regulations will be important as new technologies and business models emerge. As the sector is still developing there may be new use-cases that the government should continue to monitor and engage closely with the sector; however, the predominant and existing purpose of NFTs is to digitally represent artwork and collectibles, which we believe requires less regulatory oversight than  financial services activities. Competitive jurisdictions, such as the European Union, have taken more rigorous measures toward regulating NFTs through a proposed regulatory framework which aims to subject NFTs to the same rules that they wish to apply to the sales of crypto-assets. DCGG disagrees with this approach, as it fails to take into account the different levels of risk and utility of the activity and the opportunities of the underlying blockchain technology.


2. What are the potential harms to vulnerable people of NFT speculation?


DCGG believes that the potential harm to consumers from NFT speculation mirrors other similar activities that are not currently regulated, for example foreign currencies, or other forms of collectibles (e.g. classic cars or baseball cards). Further regulation or enforcement would therefore be disproportionate. We view the risks to vulnerable people to primarily relate to misinformation on the value or authenticity of the NFT, or the risk of market forces resulting in a subsequent fall in value from the initial price paid. As with other similar activities, these consumers should have greater access to information and consumer guidance in order to conduct due diligence. We believe marketplaces and exchanges have a competitive incentive to improve their moderation services and guidance to provide this protection rather than there being a need for explicitly regulatory oversight. Furthermore, there are opportunities presented through the underlying blockchain technology that provides for better security protocols than physical assets in conducting due diligence on the authenticity of the NFT and, as discussed in our response to question 1, we believe the recognition of NFTs as a legal form of property will provide further safeguards for consumers.


It is also our view that the government and businesses should continue to raise awareness of the Cryptocurrency Security Standard (CCSS) to ensure that vulnerable consumers are aware of the range of custodian crypto-asset wallet providers that exist and the different security characteristics they offer which can ensure greater resilience. The company Ledger, for example, offers a cold storage option that provides additional levels of security by letting consumers keep their private keys offline. This way, vulnerable users have an extra layer of protection that is able to shield them from wider volatility within the market (such as the recent collapse of the FTX exchange). Moreover, such high-standard investor protection infrastructures go directly in line with the principle of secure self-custody, which grants consumers enhanced privacy and resistance to economic downturns. We believe the government must remain mindful of these developments in the market, and allow for such solution providers to offer services in the UK without premature or restrictive measures, in order to protect vulnerable users, promote competitiveness, and attract talent and capital. 



3. Do Blockchains offer security to British investors?


Blockchains provide a secure way to trade assets and record the transactions in different places at the same time, using a distributed ledger - that is, a database that is consensually shared and synchronised across multiple sites, institutions, or geographies, accessible by multiple people. There are a range of factors that may eliminate the need for centralised intermediaries, which can reduce counterparty risk and lead to other benefits such as reduced transaction fees and operating costs. The cryptographic ‘fingerprint’ left by users makes transactions conducted via the blockchain virtually tamper-proof. Consensus protocols also help determine the legitimacy of each transaction, while smart contracts are automatically triggered to execute pre-agreed contractual obligations.


Custody providers and exchanges are developing new clearing and settlement processes to ensure investors can gain easier access to a broader range of diverse assets and sources of return. The underlying technology of different blockchains can create new opportunities for mutualised ledgers which could remove significant portions of the technological and administrative friction facing investors. This would include speeding up and simplifying the process of reporting to stakeholders and regulators via an easily accessible audit trail. This offers new security mechanisms for investors. Furthermore, the tokenisation enabled via the blockchain can lower the threshold for investors. Corporate bonds are an example of an industry which could be disrupted and opened up to more investors to deepen liquidity. Investors could then tailor their return profiles and align it to their individual investment goals.


There are a range of opportunities built on different blockchains. Stablecoins offer new possibilities of access to financial services for millions that are unable to open a bank account, while also operating in areas not covered by traditional institutions at a lower cost. The transparency of the blockchain can create confidence to invest in new businesses through increased options enabled through data. For example, a smart contract could generate credit ratings automatically and work out if the business is real, or the risk of lending acceptable. Furthermore, all transactions within blocks are validated and agreed upon by a consensus mechanism that ensures each transaction is correct. This not only lowers counterparty risk and streamlines operational processes, but also provides more secure access to lending platforms.


Ultimately, the industry is constantly developing innovative solutions to emerging demands within an ever-growing digital asset space, notably in the area of user protection - a core objective for our Members. DCGG believes that Blockchains offer the most sustainable and lowest-risk framework for investor protection, consumer trust and resilience, and that the UK government would be able to reap significant benefits from implementing solutions such as Zero-Knowledge Proof (ZKP). As a future-proof and cost-effective technology, ZKP facilitates digital authentication without disclosing sensitive personal information. ZKP prevents the possibility of any data, either from the sender’s or receiver’s end, from being compromised; it is essentially a sophisticated mechanism for not only providing an effective protection framework for investors, but largely, a sound foundation for enabling KYC and AML best-practices in the UK market.



4. What are the potential benefits to individuals and society of NFT speculation?


DCGG is a firm proponent of harnessing the potential of NFTs. We believe there is a significant opportunity for the UK to become an internationally competitive global hub for new investment, skills, and innovation in the sector. 


NFTs will continue to develop and underpin the way that consumers and businesses interact on digital platforms. This will not only unlock new opportunities for investors to diversify their portfolios purchasing unique and cryptographically secure artwork, but also power future services provided by businesses for consumers, such as an NFT of a digital ‘outfit’ for characters on a gaming platform. Some NFTs also incorporate smart contracts to fix how interactions with the content can take place, which self-executes when defined events occur (e.g., following receipt of payment). This offers new opportunities for owners of the Intellectual Property, or creators of the NFT, to receive some benefit when it is sold on. It also creates new consumer experiences which creates tools to boost growth and innovation in the wider UK crypto market.


Moreover, the decentralised nature of NFT speculation is an important prerequisite for the overarching democratic principle for economic freedom. With NFTs entering the UK markets, users are given the opportunity to acquire art and build upon their portfolio without third-party interventions and with the guarantee that the NFT is one-of-a-kind and not fake, which is not always the case within the traditional art world. NFTs and NFT marketplaces allow the UK customer to derive value from the industry’s significant growth potential and the development of custodian wallet providers can offer heightened layers of security in comparison to certain physical assets. In order to take advantage of the benefits for individuals and society of NFT speculation, it is imperative that the UK government continues to enforce the current regulatory rules applicable to NFTs, as the consumer-friendly, simplified and accommodating framework that currently governs this industry is compatible with pro-innovation principles, and does not threaten incumbent systems.





DCGG welcomes the DCMS Committee’s initiative to gain better understanding of non-fungible tokens and Blockchain use-cases to assess the current state of regulation. DCGG encourages the Government to engage in further research, as well as expert and public consultations to ensure all opportunities for users and the economy that come from the NFT industry are seized. We believe this is an important leadership opportunity for the UK, and that the suggestions above will contribute to holistically fostering NFT and Blockchain innovation, leading to economic growth and early-mover advantage in a fast growing industry.





[1] NFTs that contain features which would bring it within the regulated products category are captured e.g., security, e-money, units in a fund or a derivative.