NFTs and German Law: Rights and Duties of NFT Holders

Just like with any other asset, NFT holders will want to have a clear grasp of what the law entitles them to do, and what it forbids. In other words, they require knowledge of their rights and duties as NFT holders; such knowledge is essential to act in a strategic manner and to remain within the limits of the law. Unfortunately, the nascent NFTs-as-investments industry remains largely under-regulated, and what is already there is often unclear and fragmented. Nevertheless, this article provides an overview of the current landscape under German law: what are the rights and duties of NFT holders, and where can these be found?

Author: Francisca Ducos

Why knowledge of the law leads to smart(er) decision making

In any field of law, an awareness of any applicable rights and duties is crucial to an individual’s understanding of their legal position within said field. In turn, a clear conceptualization of their legal position allows individuals to pursue their own interests to the fullest degree — if the law (often) dictates the manner in which we must (not) to act, how can we take advantage of the opportunities it offers without knowing our own position within its bounds?

When it comes to the rules governing non-fungible tokens (NFTs), the situation is no different; (potential) NFT holders will want to have a clear grasp of what the law entitles them to do, and what it forbids. This is essential if they wish to act in a strategic and informed manner: while knowledge of rights will allow owners and investors to take full advantage of the law and the privileges it confers on them, knowledge of obligations will sequentially ensure that they remain within the limits of the law and make use of their rights appropriately. Thus, this article aims to provide a basic introduction of the German body of law outlining the rights and duties of NFT owners.

Understanding NFTs and their place within German law

Before we really get into it, some basics: an NFT is an electrical identifier stored on a blockchain representing ownership of a digital good. The main characteristic of NFTs is non-fungibility, which means that NFTs are not interchangeable, because they are unique. Non-fungibility is what distinguishes an NFT from a Bitcoin, for example, because Bitcoins are all of the ‘same kind and quality’. This uniqueness is one of the things that makes NFTs interesting as collection items and investments, the same way that the uniqueness of a painting makes the latter so.

While, as of yet, German law does not lay down rules explicitly governing NFTs, it does nevertheless provide for several “categories of financial instruments in tokenized form”.¹ This means that, for the time being, the identification of rights and duties relating specifically to NFT ownership will require a checking exercise to ensure that the NFT in question falls within the scope of the relevant legislation (see Table 1). In other words: does the definition of the tokenized instrument in this legislation cover the NFT I’m interested in?

For example, the German Banking Act (KWG) considers crypto assets to be financial instruments [§1 (11) KWG], and defines them as ‘digital representations of a value that (a) have not been issued or guaranteed by any central bank or public body; (b) do not have the legal status of currency or money, but © are accepted by natural or legal persons as a means of exchange or payment or for investment purposes on the basis of an agreement or actual practice; and (d) can be transferred, stored and traded electronically’.² Whether this definition actually covers NFTs is unclear; on the one hand, because (non-)fungibility is not explicitly included in the criteria, it seems that NFTs, so long as they are technically tradeable, can be regarded as crypto assets and, hence, as financial instruments covered by the KWG.¹ However, another interpretation exists whereby ‘tradability’ in this sense may imply that fungibility is needed, which would exclude NFTs from the scope of the Act.³ As a result, whether this definition is fulfilled would have to be checked on a case-by-case basis, in order to ensure the NFT in question is included in the law’s scope.

Table 1: different NFT characterizations and the relevant applicable law

Further examples can be found where the law applicable to NFTs cannot be determined a priori, but will be dependent on the particular situation, as well as the characteristics of the token in question. It is telling that the law in Germany relating to NFTs and the pertaining rights and obligations differs depending on whether the token can be characterized as an investment asset (under the VermAnlG); a unit of account (under the BaFin); or a fund (under the KAGB).¹ ⁴ The conclusion to be drawn from this is that the legal nature and definition of NFTs, and their particular place under German law remains largely unclear; this is understandable given the relative novelty of NFTs and their recent ‘discovery’ as a more conventional (but still far from ordinary) asset class. Unfortunately, a clear legal stance on NFTs and their legal classification is indispensable to the healthy development of the NFT market as a viable option for investors.

Given the complexities of determining the law applicable to NFTs, this article will, for simplicity’s sake, focus on ownership of digital artworks as NFTs — think CryptoPunks, Art Blocks, etc. — and the correlative rights and obligations of the NFT buyer.

Rights of NFT owners under German law

The rights that NFT owners may be subject to will vary depending on the token in question and how it is being used. Below, NFT owner rights under important fields of law are summarized (see also: Figure 1).

Copyright

Buying an NFT, just like buying a physical painting, will not grant the buyer the copyright. Thus, the right of an NFT buyer will extend to, and stop at “the right to show it in her wallet”.⁵ In other words, the purchase of an NFT gives the buyer control over that particular position on the blockchain⁶, and nothing more — the NFT buyer will not, for example, be able to sell the image for McDonald’s to use it on a billboard.⁷ Furthermore, the NFT owner is not granted the right of hindering the further distribution of the NFT’s core content. Instead, this core content “can still be streamed, viewed, shared or even downloaded”;⁸ however, there is nothing hindering the owner or holder of the copyright from granting the buyer a license conferring further rights, for example to make certain uses of the work.⁵ What this demonstrates is one of the most attractive things about NFTs — they are incredibly versatile, and can be manipulated to fulfil certain criteria, according to the needs of the buyer.

Property rights

An NFT buyer will probably wonder what right(s) the purchase will give her to the “digital original”. Here, it is interesting to note that German property law only deals with corporeal — i.e. tangible — objects, and so the digital work underlying an NFT will not fall under the scope of this legal field in Germany.

The only possible rights in this respect are rights of use, which are the most similar to property rights, and “unrestricted in terms of time, territory and content, which can be sub-licensed and leased”. Use rights could then be complemented by further types of use, such as the right to print on paper.⁹

However, we can expect that the NFT industry will eventually come up with standards allowing buyers to determine what exactly they are entitled to without such difficulty.⁹

Civil law

Under civil law, the “data ownership” debate resurfaces. Here, we hark back to the limitation of ‘objects’ under German law to what is tangible and physical — i.e. data is not covered here. Nevertheless, it is legitimate to consider whether NFTs may at least be classified as “other rights” [823 (1) BGB]. This is especially useful if, despite NFTs not enjoying copyright protection, NFT owners still want to “defend themselves against the unauthorized creation of another, identical NFT or against any other interference with their rights in the NFT”.⁹

Recognition of NFT-holdings under “other rights” requires the legal interest in question (here, the NFT-holding) to have at least ownership-like status. In other words, the legal interest should be assignable to a clear individual person, while simultaneously excluding all other persons from using the legal interest. While for ‘ordinary’ digital data this has so far not been possible (digital data are freely reproducible and a copy cannot be distinguished from the original), the situation for NFTs is clearly different: their non-fungibility and the immutability of blockchains can go towards ensuring that they only exist once and can also be clearly allocated to a wallet.⁹

Figure 1: rights and duties of NFT holders

Duties of NFT owners under German law

The duties that NFT owners may be subject to will, once again, vary depending on the token in question and how it is being used. Below, NFT owner obligations under important fields of law are summarized (see also: Figure 1).

Copyright law

The correlative duty of an NFT owner under copyright law is that the former should not infringe on the applicable author’s rights. In Germany, copyright infringements can be deemed equivalent to theft, and are punishable with imprisonment.¹⁰

Tax law

Because tax law does not explicitly address taxation of income from receiving, exchanging, holding or disposing of tokens, the traditional taxation principles must instead be applied. Thus, NFT holders will be under an obligation to follow the relevant tax provisions – what these are will largely be determined by the type of NFT they hold, and its value.

Contract law

NFTs are minted through smart contracts, which assign ownership and manage the transferability of the NFT in question.¹¹ A smart contract is simply a program stored on a blockchain that will run when certain conditions are met.¹² The conditions may vary according to the agreement made between the two parties (e.g. between buyer and seller), and will determine when transfer of the NFT happens. Thus, NFT buyers may have to comply with obligations stipulated in their contract to obtain the token – in a way, and to a limited extent, the parties determine the law applicable to their transaction, and will be bound by it.

Thus, determining NFT regulations will require frequent use of every lawyer’s favourite phrase: “it depends”. The complexity that comes with establishing the rights and obligations of token holders is only natural at this early stage of the development of the NFT market, and the only-recent surfacing of tokens as legitimate financial instruments.

Conclusion

As is apparent from the abovementioned findings, the legal framework surrounding NFTs and crypto assets in general has a long way to go. This lack of clear guidelines and definitions is a significant problem for the NFT and blockchain industry,¹¹ and must be addressed by the legislator if the market is to continue growing and developing in a healthy and transparent manner.

The regulating of NFTs under German law may call for drastic measures, such as a reconceptualization of important notions like that of ‘ownership’.¹¹ Officials will also likely need to make provisions broader, so as to keep up with and encompass new technological advances, which will inevitably take place at a faster pace than the development of the applicable law.

All in all, it is arguable that while (potential) NFT holders do not necessarily have to suffer from a complete lack of accessibility when it comes to determining their rights and duties, the obstacles posed by such an inconsistent and fractured body of law will likely hinder the progress of this still-emerging industry. It is thus essential for legislators to clearly determine the applicable law as quickly as possible, so as to allow the market to continue to grow.

About datash

Our mission at datash is to become a one-stop shop for NFT data analytics, data extraction and NFT portfolio overview. Structuring the currently widespread and unorganized NFT ecosystem for our users, to empower educated investment decisions. Starting with Flow chain, we will make organized data for all popular NFT contracts easily accessible via our API. Powered by our collected data, we will provide our users with data driven NFT analytics and customizable dashboards to get a comprehensible NFT portfolio overview.

Authors

Francisca Ducos is a research lead for Blockchain Founders Group (BFG). She studies European Law at Maastricht University, and is currently working on projects dealing with NFTs and blockchain, focusing on their relationships with the law. You can contact her via .

References

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