Storing digital works in the blockchain: the hype about Non-Fungible Tokens

Today, RIMOWA is auctioning four so-called Non-Fungible Tokens (NFT) of works of art. They show a table, a food cart, a lamp and a sound system. The proceeds from the sale are being donated to the artists and a non-profit organisation that promotes humanitarian rights.

In March 2021, a digital work of art was already sold as an NFT for a record sum of over 69 million euros. The artist Beeple had offered and auctioned the artwork "Everydays: The first 5000 days" through the auction house Christie's. The buyer did not receive a real image, however, but a digital graphic file with a certificate stored in the #Blockchain.

These NFTs are becoming increasingly important in case of real products. For example, the shoe manufacturer Sonra has fitted out a shoe model with chips that are in turn linked to a unique NFT in the blockchain. Buyers of the shoe model, which is limited to 200 pairs, can use the digital certificate to establish the authenticity and genuineness of the product and to prove this to interested parties.

What is an NFT?

In principle, NFTs work like the better known fungible tokens such as bitcoins or other crypto-currencies. The digital certificates are stored in the blockchain and are permanently linked to digital or real products. They can fundamentally act as certificates of evidence for a multitude of assets.

Each NFT is thus stored once on the blockchain. Due to the forgery-proof nature of blockchain technology, the NFTs stored there are particularly trustworthy. In the event of a resale of the assets together with the NFT, all previous data of the owners of the NFT can be stored in the certificate. This allows changes in ownership to also be determined retrospectively.

What rights does the owner of an NFT have?

From a legal point of view, various questions arise in connection with NFTs: for example, copyright issues exist particularly in the case of digital assets such as works of art or videos. An acquirer can fundamentally obtain rights of use in copyrighted works from the respective creator. The extent of the rights held by the owner of the NFT or to be received from the creator primarily has to be regulated by contract between the creator and the acquirer. Here, all forms of contract come into consideration: creators may grant and transfer exclusive or non-exclusive rights, territorially limited rights or only individual rights of use (adaptation rights or the right of reproduction). To date, no standard (model) contracts for digital works with NFTs exist.

A matter that is currently still under discussion is whether, in addition to the digital work, the creation of an NFT itself is also subject to copyright. The argument against its classification as a type of use under copyright law is that the creation of an NFT cannot be included in the types of use listed in § 15 German Copyright Act [Urheberrechtsgesetz, UrhG]. This raises the question of how the owner of the rights of use in the digital work can protect himself if a third party wishes to create another NFT in the work.

If one comes to the conclusion that the creation of an NFT constitutes a copyright use of the digital work, then who holds this right of use needs to be clarified. This question would again need to be settled contractually between the creator and the acquirer.

Data protection in the blockchain

The NFTs provide information on the current and previous owners of the asset in question. These data are stored pseudonymously in the NFTs in the form of hashtags. With the help of analysis tools, transactions in the blockchain can also be evaluated by third parties, which means that third parties would fundamentally also be able to view the data in the NFTs. Accordingly, the data protection requirements need to be taken into account in the contractual arrangements.

Are NFTs crypto-assets and therefore subject to financial law obligations?

A topic under current discussion is whether NFTs should be classified as "crypto-assets" within the meaning of § 1 (11) No. 10 sentence 4 German Banking Act [Kreditwesengesetz, KWG].

In this connection a particularly disputed point is whether NFTs "serve investment purposes and can be transmitted, stored and traded electronically". Tradability requires a certain fungibility of the asset, which is precisely not supposed to exist according to the concept of NFTs. In contrast, it certainly can be expected that certain NFTs will be used primarily for trading purposes because of their constant increase in value. A comparable discussion also exists in connection with the Prospectus Regulation. 

The consequence of a corresponding classification as a crypto-asset would be that the brokerage of investments in NFTs, but also proprietary trading in NFTs, would require a permit from the German Federal Financial Supervisory Authority [Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin] and a prospectus obligation could possibly exist prior to the initial offering.

In addition, future developments will have to be monitored: The European Commission has announced that it is going to adopt a regulation with uniform rules for the market in crypto-currencies and assets ("Markets in Crypto-Assets" - MiCA).

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