In a technical article dated March 8, 2023, BaFin comments on how it classifies NFT (Non Fungible Token) for regulatory purposes. BaFin understands those to be cryptographic tokens based on distributed ledger technology (DLT), whereby the main manifestation of DLT is blockchain. As already implied by the name, NFTs are not fungible among each other due to their technical properties and are therefore not interchangeable. The potential fields of application are numerous. Collectibles and digital art are likely to be considered the most popular class of NFT. In the supervisory qualification of NFT, BaFin plans to proceed in the same manner as for fungible tokens, according to its publication that has now been published. The decisive factor for the regulatory classification of the tokens should therefore not be their technical characteristic of individuality, but the rights and content assigned to them in the individual case. BaFin therefore intends to decide on a case-by-case basis whether an NFT is, for example, a crypto asset, an asset investment or a security.

NFT May Be an Asset Investment – Classification as Security Currently Not Intended

NFTs may qualify as securities if they embody rights similar to securities, are transferable and tradable on the financial markets. BaFin defines rights similar to securities as membership rights or pecuniary claims, for example, to payment of returns, as in the case of shares or debt instruments. BaFin considers the transferability of the tokens to be given as long as it is not artificially restricted. With regard to the tradability of tokens, the authority expects a certain degree of standardization to the effect that equal rights must be conveyed by the NFT of a tranche. However, because the rights and content associated with NFTs are fundamentally individual in nature, most of them lack the tradability required to qualify as securities under the statutory definition. According to its own statement, BaFin has therefore not yet become aware of any NFTs that qualify as securities. Even if the regulatory classification of NFTs as securities may generally not be assumed, they can nevertheless be asset investments in individual cases and thus still be regulated as financial instruments. The decisive factor in each individual case is the rights with which the token is equipped. For example, if a token serving as proof of ownership for an art object embodies the issuer’s obligation to sell the art object at a profit and to grant the token holder a repayment and interest claim, the NFT is likely to qualify as an asset investment. In the case of a public offering of an NFT qualifying as an asset investment, there is an obligation to prepare a capital market prospectus, unless an exemption from this obligation is applicable.

NFT May be a Crypto Asset – Service Providers May Require BaFin License

In specific cases, an NFT may qualify as a crypto asset within the meaning of the German Banking Act (KWG) or the German Investment Firm Act (WpIG). Crypto assets are digital representations of a value that are accepted by third parties as a means of payment or serve investment purposes. Use as a means of exchange or payment can usually be ruled out due to the lack of interchangeability of NFTs. The situation is different, however, with the second alternative of use for investment purposes, which may well be the case with NFT. In this regard, however, BaFin clarifies that the mere fact that, for example, users speculate on price gains with an NFT, is not sufficient for the assumption of an investment purpose. When examining the legal classification of an NFT as a crypto asset, BaFin rather intends to take into account which rights are associated with the token and which marketing activities are undertaken in its distribution. If, for example, the expectation of price gains is stoked in the course of offering the token to the market, this may be an indicator for the regulatory classification as a crypto asset. To the extent that an NFT must be classified as a crypto asset, this may lead, in particular in the secondary market, to a situation in which the involved service providers require a BaFin license for their business dealings with the tokens, i.e. for proprietary trading, investment brokerage or financial commission business.

Atty. Dr. Konrad Uhink