Non-Fungible Tokens (NFT) – a legal classification

What exactly is behind NFTs and how should NFTs be assessed from a legal perspective? Above all, what rights does the buyer of an NFT acquire?

NFT – at least since the sale of the digital image collage “EVERYDAYS: THE FIRST 5000 DAYS” by artist Beeple in March 2021, it seems impossible to escape this abbreviation. There’s a good reason for that. Because behind this abbreviation hides nothing less than a new (digital) world, with new, hitherto unknown design possibilities. Unsurprisingly, these new opportunities come with hitherto unknown legal issues. These regularly revolve around two focal points: on the one hand there are questions of capital market law, and finally it is about securities and valuables. On the other hand, there are questions that revolve around the creation, use and trading of NFTs and their associated assets.

Blockchain and smart contracts, tokens and assets

The basis of all NFTs is the blockchain technology known from “Bitcoins”, for example. It is a database in which information is stored. The special thing about this database is its decentralized structure: the individual “blocks” are distributed over a peer-to-peer network, built on top of each other in a “chain” and nested. If the information stored in a blockchain needs to be changed, all the blocks in the chain must be changed – making the blockchain highly tamper-proof. So-called smart contracts can be created in the blockchain. Smart contracts are not contracts in the legal sense, but programs that execute, control or document selected specifications. For example, transactions that require a change in the blockchain can be reported to previously specified authorities or prevented.

But what is an NFT? An NFT is a “non-fungible token” stored on a blockchain using a smart contract. A “token” is a token, so it passes a value. A two-euro coin is also a token: it represents the purchasing power that the general public recognizes in two euros. This coin is “fungible”: the value assigned to it is exchangeable, it can be exchanged at any time for any other two-euro coin (or two one-euro coins). However, a “non-fungible token” cannot be traded arbitrarily. It is a unique and non-tradable token because the value it embodies is unique.

In order to understand the legal issues of NFTs, it is important to distinguish between “token” and “asset”. Because the “token” is only a token – it is Not the value itself. The value conveyed by the token is “the asset”. The “asset” can be anything: for example, as in the case of Beeple, a digitally stored image, but also any other digital medium such as sound and image recordings, or virtual objects which are used in the metaverse. Physical objects can also be the “property” attributed to an NFT: for example, the Breitling watch manufacturer issues NFTs to its customers on request, which serve as certificates of authenticity for watches. And of course, combinations are possible, that is, assets made up of different elements and positions that are both numerical and real. The “asset” itself is hardly ever stored on the blockchain. It is located in any storage location – virtual or real – to which the NFT negotiates the right of exclusive access.

In summary, an NFT is a digital token stored in the blockchain that allows access to a specific “asset”.

What are NFTs from a legal point of view?

As stated, an NFT is nothing more than a set of data. Data are not, at least according to the prevailing opinion, independent legal subjects as such. In particular, the data are not things within the meaning of § 90 BGB, which excludes a position of ownership within the meaning of § 903 BGB in an NFT. Protection against intellectual property law, which is characterized by type constraints, is also out of the question, neither for the NFT itself nor for the information it contains. In particular, copyright protection is irrelevant, as an NFT is simply a set of data that has no human author and does not reach the level of creation required under Article 2 (2) UrhG.

Since there is no direct application of property or intellectual property law, many voices want to apply property law analogously to NFTs. There are quite reasonable arguments for this. Nevertheless, one can wonder whether the regulatory vacuum necessary for a similar application exists. Whether that is the case will remain the subject of legal debate, court proceedings, and likely other laws for the foreseeable future. In the opinion of the authors, a similar application of property law and the associated legal consequences will at least not be easy to enforce. This in particular, since the BGB is certainly aware of instruments that enable the processing of NFTs: Thus, § 453 paragraph 1 BGB explains the right to purchase on “rights and other elements“ for applicable. A ranking like “other right“in the sense of § 823 paragraph 1 BGB. As “other right“These rights are to be understood as being comparable to the legal interests (such as property) expressly mentioned in § 823 BGB due to their function of attribution and exclusion. An NFT fulfills these functions and conveys an absolute position, similar to that of an owner: it must assign the holder to the related asset, give him access to it and exclude third parties from access. The holder of an NFT will therefore be entitled to at least protection against torts in addition to the position under the law of obligations vis-à-vis its contractual partners (for example within the blockchain).

What rights are acquired when trading NFT?

When an NFT is sold, the buyer is listed as its “owner” in the blockchain. However, this operation does not necessarily affect the asset linked to the NFT.

This is particularly notable as the Assets are regularly copyrighted works, the lawful use of which requires the prior grant of usage rights. If there is no express grant, the “transfer of purpose theory” of § 31 paragraph 5 UrhG applies: the rights tend to remain with the author, the extent of the grant of the rights of use is determined strictly according to the object of the contract. When in doubt, the buyer of an NFT acquires it Nope Asset Use Rights.

The following case shows how important this discovery is: a group of investors operating under the name “Spice DAO” acquired an NFT at an auction for 3 million US dollars, which was based on the scenario from filmmaker Alejandro Jodorosky for the classic “Dune” as an asset was issued. However, with the NFT, they only acquired the script as a virtual book, but not the rights to use the “Dune” script, screenplay, or characters. Contrary to what was expected, the takeover of the NFT did not allow investors to produce and exploit a television series based on the script.

In order to be able to use an asset associated with an NFT with legal certainty, the purchaser of the NFT must have the desired rights of use expressly granted in a license agreement. Such a license is available free of charge, for example, from the maker of “CryptoKitties” – a blockchain-based computer game that allows players to buy virtual cats based on NFTs and sell them as NFTs. Among other things, this license provides that the purchaser of the NFT has the right to use the asset related to the NFT – i.e. the graphic design of the chat – outside of the computer game.

The fact that the sale of an NFT does not automatically transfer the rights of use to the associated asset also has the opposite effect: the sale will generally not constitute an act of use of the copyrighted asset. . Generally, the asset and the NFT are connected only by a link established during the creation of the NFT and which remains unchanged in subsequent transactions. In particular, the sale of the NFT will not constitute a duplication of the asset (article 16 UrhG) or its making available to the public (article 19a UrhG). In other words: the originator of an asset will generally not be able to prevent the holder of the linked NFT from reselling the NFT.

However, the resale of an NFT can be considered in the smart contract. For example, it can be programmed in such a way that the initiator of the good and/or the creator of the NFT automatically participates in the sale price in the event of resale of the NFT. From the perspective of the authors, therefore, smart contracts are of considerable importance when trading NFTs.

outlook

NFTs offer a wealth of previously unknown opportunities – and at the same time exciting legal challenges. It is worth delving deeper into the subject, especially in the areas of project financing, monetization of digital (art) objects, marketing and customer retention.

CENTRAL MESSAGE

  1. NFTs offer businesses new opportunities, especially in the areas of merchandising, marketing and customer loyalty, whether for physical products (such as watches, sneakers or cars) or digital (music files /movies, digital artworks, etc.), so -called “assets”.
  2. The legal qualification of NFTs is unclear
  3. NFTs and their associated assets must be considered in isolation from a legal perspective
  4. If an NFT is to transfer rights to the asset, this should be expressly regulated in the contract,
  5. Careful drafting of contracts is therefore particularly important when trading NFTs.

Leave a Comment