The role of the ASA in regulating NFT advertising: a legal perspective

As the crypto-asset sector marked May 22, 2024, as so-called “Bitcoin Pizza Day” (the equivalent of cryptocurrency as a cultural touchstone – the 14th anniversary of the purchase of two large pizzas with Bitcoin), the Advertising Standards Authority (LIKE A) saw an opportune time to revisit its role in the ever-changing landscape of non-fungible tokens (NFT) advertising (available for reading here). While the Financial Conduct Authority (FCA) is now responsible for overseeing the advertising of cryptocurrencies like Bitcoin, the ASA continues to play a central role in regulating the promotion of NFTs, a crypto-asset which still falls under its jurisdiction. Advertisers must therefore continue to be vigilant and follow the ASA’s guidance to stay on the regulator’s good side and avoid investigations, possible sanctions and reputational risks.

The release of the ASA’s guidance provides a welcome reminder of how it addresses these issues, lessons to be learned from previous ASA decisions, and how to remain compliant when advertising NFTs.

Understanding NFTs and the ASA Approach

NFTs are digital tokens representing ownership or proof of authenticity of a unique item or content. NFTs are typically created on a blockchain via smart contracts and can represent anything from digital art to other assets, such as tickets. The ASA recognizes that the wide diversity of NFTs presents a complex regulatory challenge and that different categories of NFTs give rise to varying risks and should be regulated accordingly. This nuanced understanding is crucial as advertisers navigate the complex terrain of promoting digital assets that may not fit neatly into traditional categories.

Suppose you are not familiar with NFTs

Anyone promoting, marketing or advertising NFTs should be aware of Section 3 of the UK Code of Non-Broadcast Advertising, Direct and Promotional Marketing (CAP Code) which relates to misleading advertising. Rule 3.3 states that advertisements must not omit important information that consumers need to make informed decisions. This is particularly relevant given the newness of NFTs and the average consumer’s likely unfamiliarity with their functionality. Advertisers must be careful not to take advantage of consumer inexperience in this area. Advertisers who omit important information may be subject to investigation by the ASA. For example, ASA decision on FC Barcelona considered an advertisement for an NFT depicting Johan Cruyff’s “impossible goal” in 1973. This was deemed misleading because it did not clearly state:

1. the risks associated with NFTs (including the fact that their value may increase or decrease);
2. that auction house fees, sales tax and third-party wallet transfer fees apply; And
3. that there were significant restrictions on ownership rights (such as prohibiting the buyer from modifying the token in any way or displaying it for commercial purposes).

Investment rules may apply to NFTs

The investment potential of NFTs is a grey area that advertisers must navigate with caution. The ASA has previously stated that some advertisers tend to trivialise investments in crypto and NFTs, leading to irresponsible advertising. While some NFTs may be considered collectibles, the ASA has ruled that they can also be perceived as investment products, falling under the strict rules applicable to financial products, services and investments outlined in Article 14 of the CAP Code. Advertisements must therefore clearly communicate the risks associated with NFTs, including their unregulated nature and the volatility of their value. Additionally, due to their volatility, fine print warnings may not be enough. This was a key factor for the ASA when assessing the FC Barcelona advert and one of the main reasons why the advert was found to be misleading, as it did not indicate that the value of the NFT could go down or up. The ASA has also previously reported that adverts may need to include information about the tax implications of purchasing and trading NFTs.

Be clear about the technical characteristics of the NFT

The ASA also highlighted the need for transparency regarding the technical requirements for obtaining and holding NFTs. Advertisements must not mislead by omitting information about the necessary cryptowallet or blockchain on which the NFT operates. This was seen in the ASA Decision FanCraze Technologies Inc. Buyers could only trade their tokens with other users on the FanCraze platform, within the FanCraze Marketplace, and needed a crypto wallet to purchase the NFTs, which was not clearly stated in the advertisement.

Due to the average consumer’s inexperience with NFTs, advertisers must also be careful not to overestimate the benefits of purchasing NFTs. Purchasing an NFT does not necessarily prevent others from purchasing a different copy of the NFT nor does it confer copyright on the purchaser of the underlying material. Advertisers must ensure transparency and not overpromise in their advertising, not to mention the technical and legal restrictions of the NFT.

Communicate all costs and fees

Finally, cost is an important consideration in NFT transactions. Advertisements must not mislead by omitting information about additional fees, such as minting or gas fees, which are commonplace in the NFT market (this issue was addressed in the ASA decision on Turtle United NFT).

Conclusion

As the NFT market continues to mature, advertisers must remain vigilant and informed of evolving ASA guidelines. In an industry where innovation outpaces regulation, keeping up to date with ASA decisions is not only good practice: it’s a necessity for those looking to navigate the exciting but complex world of advertising NFTs.

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