Legal nature of NFTs

Publication date: March 01, 2023

NFTs is not only related to intellectual property law. Of course, intellectual property law plays an important role in this aspect, but NFTs can refer to other areas of law, which are mainly national laws. Examples of such areas of law include: contract law, property law, tax law and in some cases also banking law and finally also the aforementioned intellectual property law.

At the beginning, there should be asked the question of what legally NFT is or what rights the possession of NFT provides. Everything in principle depends on the smart contract and other contractual frameworks related to NFT. From the technical side, NFT consists primarily of a number (tokenID) and an alphanumeric code (smart contract address code) that is somehow associated with a digital file or physical asset. The buyer of such a token first acquires the right to hold NFT in his wallet and to sell the token. In addition to the above-mentioned rights, the buyer may also acquire ownership rights to the underlying assets, an exclusive license or a limited license relating to the underlying assets. In view of the above, it can be concluded that the nature of NFT is non-uniform.

At the time of “minting” NFT in one’s own user account, the creator of such NFT can transfer ownership of the NFT to another user’s account. The entire process of such a transaction is recorded on the blockchain, where everyone has access to it. The buyer receives the purchased NFT and becomes the new owner, which allows him to dispose of his token, e.g. by transferring it to another account. It is worth noting that the mere possession of NFT does not necessarily go hand in hand with the ownership of the assets it represents. The mere purchase of the NFT leads to the acquisition of ownership rights to the NFT in the sense that it can be managed (changed, sold or disposed of).

National regulations on NFTs

Currently, we will not find harmonization of property law in the EU, therefore the answer to the question regarding the legal nature of NFTs should be sought in national systems. Looking at German civil law, NFTs cannot be classified as property under the German Civil Code (BGB) due to the lack of physical nature of tokens that are digital. According to regulations in Germany, physical objects must be tangible and spatially definable. Therefore, NFT ownership under German law is not possible according to the German Civil Code. Currently, there is a discussion in Germany about ownership and NFT, as the German legislator has decided not to include NFT in the property classification, arguing that the data is very easy to reproduce. It is worth noting, however, that due to the specific blockchain technology, NFTs are very similar to ownership because they can be assigned to one person and also exclude other people from ownership. It is possible, however, that in the future, due to its form, NFT will be covered by appropriate laws.

In the UK, the NFT situation is much different. In the case between Osbourne and Persons Unknown[1] UK Supreme Court recognized NFT as legal property. Due to the fact that NFT was recognized by the Supreme Court in such a character, it issued a ruling in which it included the criterion for defining ownership. According to this ruling, there are four principles of ownership: being definable, being identifiable by third parties, that which by their nature can be taken over by third parties, and finally having a certain degree of permanence. Due to the fact that cryptographic assets meet these criteria, the Supreme Court in another decision stated that “cryptocurrencies are a form of property that can be the subject of property collateral”[2].

Also the Supreme Court in Singapore presented an interesting approach to NFT. In the case of May 13, 2022, the plaintiff sought the issuance of a sale order and the transfer of ownership of NFT. He used the token as financial collateral for cryptocurrency loans. However, each of the loans contained information that the lender could not exercise a repossession option to become the owner of the NFT if repayment was not made on time. Despite this, the lender acquired the NFT and put it up for sale on the OpenSea platform. However, the Singapore High Court issued an injunction blocking such sale and transfer. In this decision, the court followed the reasoning of a recent UK General Court case.

Draft regulation (MiCA) on the cryptocurrency market

At the moment, no specific rules have been introduced in the non-fungible token law. However, the draft law on the cryptocurrency market provides for very extensive regulations in relation to the cryptocurrency market. It is worth noting that these regulations do not apply if the cryptocurrency is unique and cannot be exchanged for other crypto-assets. In addition, recitals (6b) and (6c) provide information that the Regulation in question should not apply to digital art works and collectibles whose value results from the characteristics of each crypto-asset and the utility it gives to the holder. The Regulation also indicates that its provisions do not apply to crypto-assets representing services or physical assets that are unique and non-interchangeable, such as product guarantees or real estate. Although such crypto-assets are tradeable in the markets, they are not easily traded and an estimate of the relative value of one crypto-asset to another cannot be established by comparison with the current market. In addition, the Regulation contains information that fractional parts of a unique and non-fungible crypto-asset should not be considered unique and non-fungible. It was also clarified that the Regulation applies to crypto-assets that appear to be unique and non-fungible but whose characteristics related to their actual use would make them fungible or non-unique. Therefore, when evaluating and classifying crypto-assets, the principle of substance over form should be adopted, according to which the qualification should be determined by the characteristics of a given crypto-asset and not by the issuer’s designation.

Right of use and NFTs

The acquisition of any rights at the time of NFT transfer is subject to what has been agreed. If nothing is agreed between the parties, the buyer does not acquire any rights other than those provided for in the exceptions for private use pursuant to Art. 5 of the Directive 2001/29/EC on the harmonization of certain aspects of copyright and related rights in the information society (InfoSoc Directive). It is worth noting, however, that the smart contract as well as the regulations applicable on the market where we purchase NFTs may grant the owner certain rights. However, whether they will be respected all depends on the provisions of the applicable national copyright contract law.

[1]Osbourne v Persons Unknown [2022] EWHC 1021

[2]AA v Persons Unknown, Re Bitcoin [2019] EWHC 3556