Regulation of NFT – are NFT in Germany financial instruments?
With his law firm Fin Law, specialist lawyer Lutz Auffenberg has specialised in the field of fintech and innovative technologies. In particular, blockchain technology and its regulation is the focus of his work. In his guest article, he looks at the regulation of non-fungible tokens.
When it comes to regulating cryptocurrencies and blockchain-related business models, Germany quickly assumed a special position in the European Union as well as globally. Shortly after the emergence of Bitcoin Bank as the first cryptocurrency, BaFin determined for the German legal area that Bitcoins and comparable clones such as Litecoin or similar constitute financial instruments as units of account within the meaning of German banking supervision regulations. The classification was not always uncontroversial. Ultimately, however, BaFin has stuck to the classification to this day, even though since January 2020 there has been the additional option of classifying the majority of all transferable blockchain units as crypto assets and thus as financial instruments within the meaning of the German Banking Act, as long as they serve the purpose of either an alternative means of payment or an investment vehicle. In Germany, business models related to crypto tokens are therefore subject to strict regulation in many cases, which often requires obtaining permission from BaFin before commencing business operations.
NFT as a new type of blockchain entity
In the meantime, there have been numerous innovative further developments of blockchain technology and, associated with this, a multitude of new possible applications. In particular, the possibility of executing so-called. In particular, the possibility of executing so-called smart contracts on blockchain infrastructures nowadays enables the creation and issuance of crypto tokens via smart contracts that are not identical in content but have individual properties. Such non-fungible tokens (NFT) are regularly not suitable as a means of payment and only under certain conditions as an investment product, as exchangeability against other crypto tokens of the same type and quality is usually a prerequisite for these use cases. In contrast, there is even a need for non-fungibility of crypto tokens, especially in the gaming industry and in the context of projects to tokenise valuable objects such as works of art, automobiles or precious stones.
Non-fungible tokens not units of account under the KWG
BaFin stated in a technical article from December 2013 to justify the qualification of bitcoins as units of account that according to its administrative practice, the term units of account covers units of value that have the function of private means of payment or substitute currencies in multilateral clearing systems. NFTs cannot regularly fulfil these requirements due to their lack of fungibility. It is true that they can be exchanged for other items in an economic circuit. However, they are not suitable as a generally accepted medium of exchange in clearing systems.