10.05.2023

Digital Assets: Managing Non-Fungible Tokens in B2C-Contracts

Background

Crypto values have been experiencing a massive increase in market capitalisation for years and are therefore also one of the emerging applications in blockchain technology in the financial sector in Germany.

The European Parliament is already aiming for an international legal framework for the regulation of crypto assets with the draft Regulation on Markets in Crypto Assets and Amendment of Directive (EU) 2019/1937 ("MiCA-Regulation") in order to create a level playing field for all participants across the EU. The MiCA-Regulation is expected to enter into force as early as the beginning of 2024.

In addition, the Federal Ministry of Finance and the Federal Ministry of Justice have launched a draft bill for a law on financing future-proof investments, the Future Financing Act ("ZuFinG"). This is intended in particular to advance the digitalisation of the capital market by opening up German law for electronic shares and crypto securities.

Crypto assets: Fungible vs. Non-Fungible Tokens

In the case of crypto assets that are decentrally organised and based on blockchain technology, a distinction is made between fungible tokens and non-fungible tokens. Both fungible tokens such as Bitcoin or Ethereum and non-fungible tokens ("NFTs") have become central terms in the international financial world as crypto assets and have also been massively represented in consumer financial markets for several years.

Legal classification of NFTs

NFTs are non-exchangeable digital certificates ("tokens") that refer to any digital or haptic asset (e.g. digital or analogue image, music file) ("reference object" or "asset") and perpetuate this assignment based on blockchain technology. The creation of an NFT takes place through the connection of token and reference object, the so-called "minting". Each NFT exists only once and can therefore be assigned to exactly one "holder". The respective owner and the entire transaction history are recorded on the blockchain and can thus be derived from the respective token.

The NFT is only a kind of token in the form of a data record, not the value itself; this results solely from the asset. However, according to prevailing opinion, data are not independent legal subjects. A property-law ownership position and also the, possibly corresponding, application of property law are ruled out. In the absence of a human author and the required level of personal intellectual creation, an NFT probably also does not constitute a work protected by copyright. As a rule, NFTs also do not meet the requirements for a crypto security, since NFTs are not issued.

The provisions of the "digital sales law", Sections 327 ff., 453 of the German Civil Code, which regulate "digital contents" and thus allow a qualification of NFTs according to sales law and tort law, are more appropriate. However, this legal framework is very limited and leaves numerous questions unanswered for practice. As a result, the legal classification of NFTs cannot be conclusively clarified on the basis of the current legal framework, which poses considerable risks, especially when drafting contracts.

Sale of NFTs – Smart Contracts

Furthermore, NFTs are based on so-called "Smart Contracts". Smart Contracts are (contractual) conditions for the execution of transactions within the blockchain that are defined in the data record of the NFT and are executed automatically when a specific condition occurs.

The acquirer is entered in the blockchain as the holder upon sale. However, the transfer of the NFT does not necessarily include the transfer of the reference object. This means that in case of doubt, the owner does not receive the rights of use to the reference object, which is regularly protected by copyright. The legally secure use of the asset associated with the NFT therefore also requires the transfer of the rights of use to the reference object, which usually takes place through the deposited Smart Contract. 

General Terms and Conditions for the sale of NFTs

But beyond that, numerous other legal questions arise in the drafting of GTC which, without detailed contractual regulations, harbour considerable risks for all parties involved, e.g.

  1. When is the time of the conclusion of the contract? There are numerous possible points in time during the minting and selling process (e.g. whitelisting, minting, connection of the wallet, allocation).
  2. Warranty rights? The de facto separation of NFTs from the actual asset and the impossibility of reversing an entry on the blockchain make subsequent performance in connection with NFTs particularly difficult.
  3. Rights of withdrawal in consumer transactions? In principle, these also exist in the sale of NFTs, which entails risks for the seller due to the difficult reversal and the costs of transferring crypto assets and currencies.
  4. Payment with "cryptocurrencies"? This can be particularly problematic in consumer transactions, as this payment method does not involve an official currency and is usually not free of charge for the consumer.
  5. Rights to the NFT itself? The rights associated with the NFT, e.g. rights of use and resale, copyrights and rights in rem, should also always be regulated in detail.

These are just a few examples of the aspects to be considered when drafting B2C-contracts. GTC for the sale of NFTs should be drafted taking into account the numerous modalities for the respective sales process and should be included in the contracts with consumers.

Conclusion

The legal classification of NFTs is currently in flux. The MiCA-Regulation and the German Future Financing Act could create further legal certainty in connection with crypto assets. Whether this will be the case, remains to be seen until they come into force. Due to the legal uncertainty that currently still exists, there is a need for comprehensive contractual regulations to create the necessary legal framework.

Author
Dr Christoph von Burgsdorff, LL.M. (Essex)

Dr Christoph von Burgsdorff, LL.M. (Essex)
Partner
Hamburg
christoph.von.burgsdorff@luther-lawfirm.com
+49 40 18067 12179

Robert Burkert

Robert Burkert
Senior Associate
Hamburg
robert.burkert@luther-lawfirm.com
+49 40 18067 14837

Luisa Kramer

Luisa Kramer
Associate
Hamburg
luisa.kramer@luther-lawfirm.com
+49 40 18067 18792