The Tokenization of cars, art objects or other tangible assets can offer many advantages. A token representing a person’s full entitlement to an item could simply be transferred between individuals and companies without the need for a physical handover of the item on site. However, ownership of property cannot be effectively linked to a token under German private law. Under the current legal situation, German property law mandatorily links ownership to the object itself. In order to transfer the ownership of an object, it is required that the seller and the acquirer firstly agree on the transfer of ownership and secondly hand over the object. It is possible that in individual cases the handing over of the object can also be performed in a fictitious way to the effect that it does not necessarily have to actually take place and it is sufficient, for example, that the claim for handing out the object is assigned by the transferor to the transferee. However, the connection of the property’s ownership right with the object itself instead of with a token cannot be changed legally in a discretionary way. Another problem is posed by private international law, according to which it cannot be ensured that German private law is always applicable in a legal relationship. This can lead to undesirable legal consequences if, for example, the token is sold or acquired by a holder who is, for example, a U.S. citizen or a Japanese citizen.

Tokenization of Tangible Assets via the Reward Model

For many business models, a solution can be the so-called reward model. In German private law, the reward model regulates situations in which someone promises a reward to an undefined group of people if they fulfill certain conditions. The classic example of a promise for a reward is a person’s promise, made publicly by posting a notice, to pay a reward to the person who returns a lost item to him. The reward model can often also be used in tokenization models. For example, the owner of an object can issue a token that he or she can sell to interested persons. At the same time, he or she publishes a reward offer promising that he or she will transfer ownership of a particular object to whoever transfers the token back to him or her. In this model, the token can basically be transferred freely across national borders from bearer to bearer on a secondary market. The respective token bearer always has the option of exchanging the token with the issuer for ownership of the object. The token itself is neither associated with a right of ownership nor with a real legal claim for transfer of ownership under German private law. The respective holder is only entitled to exchange the token for ownership with the token issuer because of the issuer’s offer. The legal relationship arising in the context of such an exchange can be entered into by the issuer under German law, so that the problem of the law applicable under private international law can also be solved.

What is Required for an Effective Reward?

In principle, the reward model is only suitable in cases where the issuer of the token also holds ownership of the object to be tokenized. Consequently, the issuer must itself keep the tokenized tangible assets on its own balance sheet and, if necessary, physically store them until they are obtained by a token holder. With regards to the legal effectiveness of the reward offer, careful drafting is required. It must be ensured that all legal obligations associated with the transfer of ownership can be met. For example, for the purchase of tokenized wine bottles, the reward offer conditions should include that the redeeming token holder is of the minimum legal age and provides a deliverable address. In addition, conditions for the payment of shipping costs can be set out in the reward offer conditions. The applicability of German private law should also be ensured – if desired. As a result, the reward model provides an attractive opportunity to link a tangible asset with a token in a legally secure manner.

Attorney Lutz Auffenberg, LL.M. (London)