Non-fungible tokens (NFTs) have been a controversial topic in the legislative process of the European Union on the way to the final version of the EU Regulation on Markets in Crypto Assets (MiCAR). In the regulation that was ultimately adopted, NFT were excluded from the scope of the regulation. Crypto assets that are unique and not fungible with other crypto assets shall not be subject to MiCAR. However, the legislator left a loophole open and formulated a re-exception for crypto assets to be classified as NFT in the recitals preceding the text of the regulation. According to the intention of the MiCAR legislator, an NFT that is part of a series should neither be considered unique nor non-fungible. The mere assignment of a unique identifier, such as a serial number, should not be sufficient to assume uniqueness in the required sense. Rather, it is required that the uniqueness results from the value represented via the NFT or the tokenized right. But is the commercial handling of NFT in such cases then indeed unregulated, so that crypto service providers, for example, do not need a BaFin license for crypto custody or crypto trading in relation to NFT under the scope of MiCAR?
MiCAR is Not the Only Relevant Regulatory Framework in the Commercial Handling of NFTs
An obligation to obtain a BaFin license may arise for providers of crypto custody, crypto trading or other crypto services not only from MiCAR. Under the current legal situation, the provisions of MiCAR regarding the provision of crypto services and the public offering of crypto assets on the market do not yet apply, so that the relevant obligations for providers with regard to the need for a BaFin license arise from national law. In Germany, crypto custody and crypto trading are therefore still subject to the provisions of the German Banking Act (KWG) and the German Investment Firm Act (WpIG). However, even under national law, business models relating to NFT are not necessarily subject to BaFin approval. This is only the case if the NFT can be classified as a regulated financial instrument in the specific case. In many cases, this classification fails in the case of NFT due to the KWG’s definition of crypto assets, which also applies to the WpIG. This is because according to this definition, a crypto asset must be used as a means of exchange or payment or serve investment purposes on the basis of an agreement or actual practice. BaFin considers the suitability of NFT as a means of exchange or payment to be fundamentally non-existent because of the individuality that constitutes them. It is true that, in the opinion of BaFin, NFTs can serve investment purposes under certain circumstances. However, according to its administrative practice, it is not sufficient in this respect that token holders acquire the Token in the hope that an increase in value will happen in the future. Rather, according to BaFin, an NFT may only qualify as a financial instrument in the form of a crypto asset if the creator or offeror makes promotional statements about the Token that focus on its suitability as an investment vehicle.
German Legislator is Working on MiCAR Implementation Law
The first provisions of MiCAR relevant to market participants will become legally effective on June 30, 2024. At that time, issuers of asset-referenced tokens (ART) and e-money tokens (EMT) will have to obtain a BaFin permission prior to offering their crypto assets to the public. The MiCAR regulations apply directly to market participants. Nevertheless, the German legislator will have to ensure that the new regulations do not conflict with existing regulations under national law. For this reason, a national implementation law is currently being drafted in Berlin. For the NFT subject, it can be assumed that existing differences between MiCAR and the national legal situation with regard to the question for which activities with NFT a BaFin license is required will be eliminated as far as possible. This would be possible either by adjusting the definition of crypto assets in the KWG or even by abolishing it. However, until a corresponding implementation law is passed, crypto service providers with NFT-related business models will have to keep both MiCAR and national law in mind when implementing their business model.
Attorney Lutz Auffenberg, LL.M. (London)
The lawyer responsible for questions relating to advice on the regulatory handling of NFT and on obtaining a BaFin license in our law firm is Lutz Auffenberg, LL.M. (London).