Propy has announced that the second US NFT-backed asset (see our blog about the first NFT sale here in which we discussed blockchain technology, and specifically how the sale works) is to be auctioned, with a starting price of Rs. 185,000 is USDC. USDC is a stablecoin backed by the United States Dollar (we discussed stablecoins here earlier).
As discussed in our earlier blog, this transaction is similar to Propy’s first NFT real asset sale, in which ownership of the asset is transferred by the seller to an LLC formed by Propy, and then ownership of that LLC is transferred. is molded on the blockchain. an NFT. The NFTs will then be auctioned on Propy Marketplace. The NFT itself, which is stored on the blockchain, provides the holder of the NFT with full ownership of the LLC that owns the subject assets.
To participate in the auction, the bidder has to fill up the Know Your Customer (KYC) form. The requirement of a KYC form is an important step from a regulatory standpoint and from a practical point of view, as it helps fight potential financial crime, prope against money laundering, and assists the company with customer identification and verification. This second auction is further proof that NFT-backed real estate will continue to emerge as a trend as it remains in power, and it seems clear that we are only at the beginning. While this trend is exciting, as with any NFT, there are several legal considerations that market participants should be aware of. The following is a non-exhaustive list of potential legal issues that may present an NFT-backed real estate sale.
NFT Legal Issues
As we have discussed earlier here, here, here and here, NFT enforcement is now in greater focus than ever before. According to a recent report, the SEC is investigating whether NFTs are being used to raise funds like traditional securities. The SEC has reportedly sent summons related to the investigation and is particularly interested in information regarding fractional tokens (such as NFTs). While the prop is clear that these NFT based real property transactions are not fractional ownership, fractionation of ownership of real property is another emerging trend in the blockchain and real estate space. Fractionalization can result in significant legal hurdles that owners, developers and holders need to be aware of as these transactions become more common.
Other recent regulatory activity related to NFTs is occurring at a rapid pace, including a study published by the Treasury Department on money laundering and terrorist financing through art trading, including NFTs (see our blog on the study here). Additionally, the Treasury Department’s Office of Foreign Asset Control (OFAC) approved a Latvia-based digital asset exchange and designated 57 cryptocurrency addresses (linked to digital wallets) as Specially Designated Citizens (SDNs) (on restrictions). See our blog here). This designation marks the first time NFTs have been publicly impacted as a “blocked asset” – because one of the designated cryptocurrency addresses owns a non-fungible token (NFT). Check out our report on it here.
The Propy website also states that an NFT issued in connection with another NFT-backed real property transfer is a “DeFi asset that can be borrowed.” Decentralized finance (DeFi) certainly has benefits, but investors should be aware of the risks presented by this relatively new technology, particularly in DeFi lending. On the DeFi platform, lenders allow users to offer cryptocurrency loans without any intermediary permission. Financial institutions are required to comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) laws. Both AML and KYC obligations require the financial institution to perform prerequisite due diligence, which requires the institution to know the identity of its client to ensure that they are not on any sanctioned lists, etc. Additionally, the SEC recently expanded its campaign against crypto lending and indicated that it may constitute a security under how should testing.
There are many other legal issues that NFTs and tokenized real estate assets can raise depending on their representation and their use. If you have any questions about your specific NFT, Blockchain and/or real asset, and how they may intersect, we recommend that we consult one of our attorneys.