NFT Regulation

NFT and Collectibles – Regulation of Non Fungible Tokens

Compared to classic cryptocurrencies such as Bitcoin and other crypto tokens, Non Fungible Tokens (NFT) are characterized by the fact that they can be individually structured. While classic payment tokens, security tokens or utility tokens have the same content within their tranche, individual NFTs are linked to very specific rights or content. They are ideally suited for tokenizing collectibles such as art objects or trading cards. But they can also be used for the tokenization of rights, opening up a whole range of new possibilities for numerous use cases. In projects for the tokenization of assets or rights, legal questions always arise in addition to questions about the technical implementation, which can be answered by a specialist lawyer for NFT. The key to a successful NFT project is the effective legal link between the NFT and the asset or right to be tokenized, as well as the regulatory design of the token. The latter is relevant for assessing whether a capital market prospectus must be prepared and approved by BaFin prior to the Non Fungible Token Sale and whether the NFT constitutes a regulated crypto asset.

Non Fungible Tokens Can Be Regulated Crypto Assets

BaFin evaluates NFTs on a case-by-case basis with regard to their classification as regulated instruments. According to its administrative practice, the qualification of Non Fungible Tokens as regulated crypto assets may be considered in certain constellations. According to German law, tokens can only be crypto assets if they are either accepted as a means of exchange or payment or serve investment purposes. Due to their individual design, NFTs are rarely if ever considered as means of payment or exchange. However, Non Fungible Tokens may well be suitable for investment purposes. In this respect, BaFin pays close attention to the expectations the offeror of an NFT tries to raise vis-à-vis potential acquirers. If, for example, he puts the possibility of value increases of an NFT in the foreground as part of the sales arguments, this can already lead to BaFin qualifying the token as a regulated crypto asset. Then, for example, trading the NFT in the secondary market may only be possible with a BaFin license. In this respect, already during the planning of a project, close attention should be paid to which specific rights a token holder will receive and which marketing measures should be applied in sales.

Capital Market Prospectus for NFT Token Sale Required on a Case-by-Case Basis

In its administrative practice, BaFin assumes that NFTs typically cannot be qualified as securities. Since each of them represents individual items and, as a consequence, NFTs are not sufficiently standardized, they cannot, in BaFin’s opinion, be traded on the capital markets like securities. In some cases, however, BaFin considers Non Fungible Tokens to be an asset investment under the German Asset Investment Act. The offering of such NFTs on the market generally requires the preparation of a capital market prospectus, which must be approved by BaFin prior to the token sale. In these cases, it is recommended to consult a law firm specialized in crypto assets. The content of capital market prospectuses is scrupulously checked by BaFin and approval is only granted when full compliance with the statutory minimum requirements for the capital market prospectus is provided. In the case of NFT token sales that are carried out without a prospectus that is in fact required, the responsible parties are threatened not only with administrative measures by BaFin, but also with claims for damages by the NFT acquirers. Careful planning of an NFT project from the design of the token’s features to the sale to acquirers is therefore advisable in any case.

The competent lawyer for questions concerning the regulation of NFTs in our law firm is Attorney Lutz Auffenberg, LL.M. (London).