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.