Specialist lawyer Lutz Auffenberg and his law firm Fin Law have specialized in the field of fintech and innovative technologies. In particular, blockchain technology and its regulation are at the center of his work. In his guest article he addresses the question of whether NFTs are actually regulated financial instruments.
Everyone is talking about non-fungible tokens (NFTs). We can speak of a real hype that has gripped the crypto scene for almost a year. The special thing about NTFs is that they are individual, definable tokens that can be transferred directly between users via a compatible blockchain. Before the emergence of NFTs, crypto tokens were regularly created in a certain number via smart contracts and had the same content in relation to the underlying emission and thus were designed to be fungible. In any case, from a technical point of view, NTFs enable the digital, tokenized representation of individual objects. Current examples of NFTs are particularly provided by the art market with the tokenization of works of art. Often, however, you can also find NFTs on the Internet that are simply linked to a link to a video clip or a sound file, for example a certain song or an interview. The idea is that ownership of the NFT should represent authorization to use the content associated with the NFT. Whether this is legally possible must be answered by the applicable national private law. For the German legal area, however, providers of NFTs file exchanges in particular often ask whether the individual tokens are also financial instruments in the regulatory sense.
Like BTC and comparable cryptocurrencies, blockchain tokens are based on blockchain technology. Since BaFin classified cryptocurrencies as financial instruments early on, the question may well arise whether blockchain tokens such as NFTs are generally considered financial instruments in Germany. Since 2013 at the latest, BaFin has represented the legal opinion that bitcoins and comparable units are units of account that represent a category of regulated financial instruments in Germany. At the beginning of 2020, German legislators also introduced crypto values, a new type of financial instrument, into the German Banking Act (KWG). As far as blockchain tokens qualify as financial instruments, the business dealings with them can constitute regulated activities. If this is the case, market participants who want to carry out the activities need prior approval from BaFin. The operation of activities requiring a permit without such a permit is a criminal offense. In particular, professional trading in financial instruments, for example as the operator of an exchange platform, can trigger authorization requirements.
BaFin defines units of account as alternative means of payment that are used on the basis of agreements under private law or an actual practice in clearing groups. However, NFTs regularly fail to serve as an alternative means of payment. Their individual design means that they are hardly suitable for use as a means of payment. Classifying NFTs as units of account should therefore rarely or never come into consideration. In contrast, the legal definition of crypto values is not limited to a means of payment function. Rather, crypto values can also be present if the items in question are used for investment purposes. This cannot be ruled out categorically with NFTs. NFTs have seen significant increases in value over the past few months. Insofar as the motivation for creating an NFT is based solely on being able to make monetary profits by trading with the NFT, the investment purpose can actually be in the foreground so that the NFT can represent a crypto value. Of course, the other criteria of crypto values must also be met for this.