Regulation of NFTs: creation, purchase and marketing

Production/Copyright: TV-Helden

Web3 and NFTs in particular do not stop at the TV industry and will possibly have a significant impact on it. Christoph Golla from the podcast TV-Helden therefore invited our two NFT experts Diana Spikowius and Alireza Siadat to talk about the regulation of NFTs and the legal framework for their creation, purchase and marketing.

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For those of you who prefer to read instead of listen, Maximilian Agthe (legal trainee at Annerton) has summed up all the need-to-knows of this episode and all around the regulation of NFTs.

NFT – Legal framework for creation, purchase, and marketing

In this episode of TV Helden – moderated by Christoph Andreas Golla- PaytechTalk host Alireza Siadat answers with Diana Spikowius to questions regarding the legal framework that should be considered when creating, purchasing, and marketing NFT. In particular, copyright and regulatory requirements are discussed. The answers cover:

Principle: The NFT market is also regulated

Contrary to the still frequently encountered view that non-fungible tokens (NFT) are not regulated, numerous legal requirements must be complied with at both European and national level. Since the implementation of the fifth EU Money Laundering Directive, all crypto assets and thus also tradable tokens are regulated. The Markets in Crypto-Assets Regulation (MiCAR) is expected to come into force before the end of this year, be directly applicable to market participants after an 18-month transition period and have legal effect.

What does the acquisition of an NFT involve?

In the absence of qualification as a “thing” in the sense of German law, the buyer does not acquire ownership of the NFT itself. What specific rights he acquires with the purchase depends on the respective party agreement – often also and especially on the general terms and conditions used by the seller. As a rule, the buyer will acquire the right to private enjoyment of the work or the right to a certain service, but not commercial exploitation rights. However, it is also conceivable to agree on the acquisition of (fractional) ownership of a movable object underlying the token.

What should be considered when creating and marketing NFTs?

The creator of an NFT should always make sure in advance that he or she is indeed the holder of the rights required in this context. For example, when using a decentralised peer-to-peer method of storing and sharing NFTs, the creator of an NFT needs a right of reproduction on the one hand and a right of public access on the other. If the token is stored in a password-protected cloud, for example, the creator only needs a right of reproduction, but not a right of public access.

If the creator is not yet the owner of the necessary rights, he should acquire them before creating the token by concluding a corresponding licence agreement with the respective owner.

Whether the marketing of NFT is an act of exploitation relevant under copyright law depends above all on the technical processing in the individual case. In principle, a transaction only changes the data entry with respect to the owner, but not the storage location. In addition, the contracting parties can also make arrangements for marketing.

What should be considered when setting up an NFT platform?

Essentially, there should be clarity about the rights to be tokenised and care should be taken to ensure that the provider is actually the holder of the rights required for the issuance of the respective token. Whether a supervisory permit is necessary depends on whether a so-called proprietary business on the primary market or so-called investment brokerage on the secondary market is to be operated: In the case of proprietary business, own rights are tokenised and sold; in the case of investment brokerage, existing third-party token rights are sold.

If investment brokerage is carried out, but the acting broker does not have his own licence, cooperation with a legal entity with a licence as a liability umbrella is an option.

In cases of investment brokerage, it should be carefully examined in each individual case whether the preparation of a prospectus and its submission to BaFin is required. To avoid high expenditure of time and money, a prospectus obligation should be avoided.

Copyright consequences in case of infringement

In the case of infringements, a claim for injunctive relief and damages pursuant to sec. 97 UrhG may be considered. Particularly in the area of NFT, however, there are concerns about the factual enforceability of this claim in view of decentralised storage and the calculation of the amount of damages, because value-forming circumstances such as the enjoyment of the work must be included. There are no court decisions on this yet.

A claim for equitable remuneration or subsequent remuneration pursuant to sec. 32a UrhG may also be considered if the consideration appears to be unreasonably low in relation to the proceeds when taking an overall view of the respective contractual relationship. To avoid such a claim, the author’s percentage share in the proceeds can be agreed.

How does the supervisory authority view the issue of NFT?

BaFin’s publications on the fungibility of tokens indicate that the national supervisory authority is basically innovation friendly. It sees risks above all in the area of consumer protection. At the European level, it remains to be seen how MiCAR will be implemented and what the associated technical regulatory standards will look like.

These NFT products have a future

Despite the current downturn in the NFT market, the technology holds opportunities not only through new ways of addressing customers. In general, it can be assumed that NFT will continue to be increasingly used in meaningful areas of application, for example, the processing of ticket sales via NFT could lead to the curbing of the illegal secondary market and could therefore be of great interest to event organisers.