The hype for non-fungible tokens (NFTs) was extreme at the beginning of 2022, but by the end of the year the level of excitement had settled down a bit. Trading volumes went down just as steeply as they had gone up previously. The market seems to be oversaturated and profit expectations from NFT trading have been downgraded. However, this does not mean that the NFT sector will not continue to develop and create new areas of application. Projects like the Metaverse or tokenized game worlds (GameFi deriving from “Games” and “DeFi”) seem to be lucrative intersections. Similarly, NFTs offer tremendous potential in interaction with real-world objects. Companies can use NFTs to authenticate their products, for example, in order to be able to guarantee the originality of their products to their customers. Through NFTs, both the companies and the end users can trace back the entire supply chain of the manufacturing process to the sourcing of materials, which can even help in proving compliance with the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz). Through NFTs, companies can therefore both effectively combat the successful distribution of counterfeits and increase their customers' confidence in the quality of their goods. Luxury fashion companies, as well as companies in the transportation and logistics industry, are already working on the practical implementation of these scenarios.

So even if NFTs might fail to deliver on the promise as a value asset, they still offer multiple other opportunities – both in the digital and real world. The potential is there and the technology will likely continue to gain even more relevance in the coming years.

At present, German law does not provide for any specific laws regulating business activities in the NFT area.

However, business activities in the NFT area will currently most likely be subject to general German civil law principles. Particularly, in a B2C context, specific consumer protection laws will most likely apply. For instance, NFTs will most likely be qualified as digital content within the meaning of Sec. 327 para. 1 of the German Civil Code (“BGB”). Therefore, in cases where NFTs are sold to consumers by companies, the respective contract will most likely be subject to the provisions set out in Sec. 327 et seq. BGB. These provisions are mandatory and provide, amongst others, for specific warranty obligations of companies and other specific consumer rights. Further, in cases where NFTs are sold online to consumers, specific ecommerce laws will most likely apply. These are also mandatory and provide, amongst others, for information obligations of companies.

Furthermore, it cannot be excluded that NFTs (depending on their functionality) are subject to financial law requirements. Companies should therefore check on a case-by-case basis whether the NFTs they offer are subject to financial regulations. 

From a Copyright perspective, it is unlikely that an NFT, being a computer-generated string of date, will be considered a personal intellectual creation and will therefore not be subject to copyright protection. However, the (digital) work linked to it may be. In this regard, it is important to differentiate between the digital content on the one hand and the digital certificate as such on the other hand, meaning NFTs authenticate (digital) items/works, but have to be distinguished from them. 

Buying the NFT will lead to "ownership" (in Germany, the German Civil Code ("BGB") only provides for ownership in physical objects). However, rights of use of the copyrighted work, such as the right of reproduction or distribution or the right to exhibit the work or make it publicly accessible, will, as a general rule under German Copyright law, still remain with the author. Hence, there is an interest for clear agreements determining which rights of use are acquired by the buyer of an NFT.

In the analogue world, German copyright law provides for the author's participation in revenues generated by resales and/or an appropriate remuneration for proceeds and benefits deriving from the use of the work only in certain circumstances. Through the use of NFTs and blockchain technology, author participation can be ensured for digital works, whereby the distribution of these participations to the author could be made automatically due to the programming of the NFT.

From a trademark perspective, companies should consider whether their trademark portfolios and/or prior rights and delimitation agreements, as well as agreements on rights of use, should be adjusted.

In particular, if companies wish to actively use NFTs for their business it seems advisable to extend the trademark portfolio to include specified "downloadable virtual goods" and related services, for instance. This could also be of importance for a defence strategy if third parties use trademarks in the metaverse for NFTs representing digital equivalents of the companies' goods. The fact that NFTs can, in principle, infringe upon trademarks is also illustrated by a recent ruling of the Court of Rome (Tribunale di Roma, decision of 20 July 2022, ref. 32072/2022). On a European level, the decision is the first of its kind regarding trademark infringements through NFTs. German courts have not yet had the opportunity to discuss this issue. However, due to the steadily growing importance of NFTs, this will only be a matter of time. The update of the Nice classes, which came into force on 1 January 2023, explicitly includes the term NFTs in class 9 (‘downloadable digital files authenticated by non-fungible tokens [NFTs]’) and thus provides for some more legal certainty. If trademarks are going to be used in connection with NFTs, it is therefore advisable to also register them in class 9; in addition to other classes which might be of interest. Otherwise, there is a risk that the trademark might not enjoy sufficient protection in one of its essential fields of application. In particular, this applies to trademarks that are not well-known, since the scope of protection of well-known trademarks is already much broader. 

The main questions from a finance and regulatory perspective in relation to NFTs are around authorization and prospectus obligations. German regulators, i.e. the Federal Financial Supervisory Authority (“BaFin”), have, to date, in particular issued statements on initial coin offerings (ICO). In August 2022, in a Q&A, BaFin clarified in relation to NFTs that in its supervisory practice there is no special treatment compared to its existing administrative practice regarding fungible cryptographic tokens. In particular, interpretative guidance and guidance notices published by BaFin in this regard (such as the guidance notice on ICOs) can also be used for classification of NFTs under regulatory law / practice.

Additionally, with its Market in Crypto Assets Regulation (MiCA) – that will directly apply in Germany – European legislators originally intended to also set out a legal framework for NFTs. However, MiCA’s final wording does not cover NFTs as non-fungible tokens are excluded from the scope of application. Nevertheless, in certain cases, MiCA will apply to NFTs, in particular when issued in a “large series or collection” (cf. recital 6c MiCA). MiCA has not provided a definition of what “large series” or “collections” means. Therefore, it remains to be seen how regulatory bodies and authorities will deal with this issue.

Hence, as there is no specific law governing legal qualification of NFTs, general rules apply. Depending on the specific structure, prospectus and/or authorization requirements can be triggered when conducting specific business with NFTs.

One main issue is whether a prospectus obligation under Regulation (EU) 2017/1129 is triggered when initially offering NFTs to the public. A prospectus obligation only applies if NFTs are to be qualified as securities under Art. 2 lit. a Regulation (EU) 2017/1129 in connection with Art. 4 para. 1 No. 44 Directive (EU) 2014/65 (MiFiD II). In order to fall within the definition of securities, the decisive question is whether NFTs can be classified as being tradeable. In many cases, it is possible to argue that fungibility is a decisive feature for an asset to qualify as being tradeable. However, since NFTs can be structured in many different ways, a case-by-case analysis is required to assess whether a specific NFT can be traded causing prospectus obligations to be triggered.

In addition, NFTs might serve investment purposes and qualify as investment assets under the Capital Investment Act (“VermAnlG”). However, if a specific NFT is qualified as a security within the definition as set out above, the VermAnlG does not apply because investment assets within the meaning of the VermAnlG and securities exclude one another. If an NFT falls under the VermAnlG’s scope of application, prospectus obligations may apply.

Additionally, authorization obligations under the German Banking Act (“KWG”) might be triggered. In 2018, the German legislator implemented “cryptoasset” as a category of financial instrument into the German Banking Act (KWG), cf. Section 1 para. 11 sent. 1 no. 10 KWG. Under German regulatory law, cryptoassets, as set out in the KWG, are defined as a digital representation of value which has neither been issued nor guaranteed by a central bank or public body; it does not have the legal status of currency or money but, on the basis of an agreement or actual practice, is accepted by natural or legal persons as a means of exchange or payment or serves investment purposes; it can be transferred, stored and traded by electronic means. By adding “serves investment purposes” to the definition, the German legislator gold-plated European law. However, against this backdrop, depending on the specific structure, NFTs might meet the criteria as set out above and hence be classified as a financial instrument under German regulatory law.

Therefore, if NFTs fall under the definition of cryptoassets under the KWG, authorization requirements are triggered. In particular, investment broking (Anlagevermittlung), proprietary trading (Eigenhandel), and custody business (Verwahrgeschäft) are worth mentioning in this context.

According to the prevailing legal opinion, the public keys and transaction data generated in the process of mining and trading NFTs on a blockchain are considered “personal data” within the meaning of EU and German data protection laws, in particular the General Data Protection Regulation (“GDPR”). This is due to the broad definition of personal data under the GDPR, which also covers any information relating to an identified or identifiable natural person. Personal data of participants engaging in an NFT transaction process are considered pseudonymized data (instead of effectively anonymized data), as on most blockchains it remains possible to re-identify the individual.

As a result, companies involved in NFT transactions, such as operators of NFT marketplaces, must usually comply with the comprehensive obligations and  general data protection principles under the GDPR. This includes, for example, the obligation to ensure that the processing of NFT transaction data is covered by a sufficient legal basis, compliance with transparency obligations, or responding to data subject requests. Where NFTs are based on blockchain technology, there remain legal challenges with regard to compliance with the GDPR’s “right to be forgotten”/ right to erasure, given that the blockchain is a generally immutable ledger for the recording of transactions.

Companies involved in the creation of NFTs and/or NFT transactions should consider data privacy requirements from the outset according to the principle of privacy by design, to ensure compliance with GDPR requirements.

As any other digital assets, NFTs are exposed to cybersecurity risks, including theft of NFTs by threat actors e.g. through phishing, scamming or man-in-the-middle attacks. Companies therefore also need to identify and implement appropriate technical and organisational means to prevent such types of attacks and vulnerabilities in their systems in order to avoid damage to their business and to their users.

The German NFT market is expected to grow and become more diverse in the coming years.

Even though it is still at an early stage of development, several large companies have already announced their intention to become active in the NFT sector in the future. Notably, the interest of companies in NFTs is no longer restricted to the more common use-cases like digital art and collectibles. For instance, supply-chain solutions are also increasingly evaluated. In particular, against the backdrop of an increasing demand from consumers for ESG credentials of goods and the entry into force of new supply-chain monitoring obligations for companies with the German supply chain act, companies are increasingly considering the use of non-fungible tokens as a way to ensure traceability in their supply chains. In addition, companies can use NFTs to verify their products in order to be able to guarantee the authenticity of their products to their customers. This allows companies to both effectively combat the successful distribution of counterfeits and increase their customers' confidence in the quality of their goods.

From a regulatory point of view, companies should expect that the German legislator will place a stronger focus on NFTs in the current legislative period. According to the Federal Government’s coalition agreement from 2021, Germany is to be developed into a leading location for FinTechs, platforms and similar companies within Europe. In particular, the German government intends to create a new regulatory legal framework for the crypto industry. However, at the date of this publication no specific legislative projects have been initiated.

Companies should therefore keep an eye on future regulatory developments and evaluate the business opportunities arising from the NFT technology.