Regulation of Non-Fungible Tokens – Are NFT Financial Instruments in Germany?

(click here for German version)


Germany assumed a unique position within the European Union early on, concerning the regulation of cryptocurrencies and business models relating to blockchain technology. Shortly after the emergence of bitcoin as the first cryptocurrency, BaFin established for the German jurisdiction that Bitcoin and comparable cryptocurrencies such as Litecoin shall qualify as units of account and therefore as financial instruments in the sense of the German regulatory banking regime. This qualification has not always been uncontested. , BaFin still stucks to its qualification until today, even if due to the introduction of a new category of financial instruments as of January 2020 the majority of transferable tokens can also be qualified as crypto assets and therefore as financial instruments pursuant to the German Banking Act (KWG), as long as they serve as an alternative means of payment or as an investment vehicle. Therefore, a strict regulation which often also requires BaFin authorization prior to the start of any business activity is applicable in many cases that concern business models related to crypto tokens.

Non-Fungible Tokens as a New Form of Blockchain Unit

In the meantime, there have been multiple innovations made in blockchain-technology and connected to those innovations a multitude of new applications for this technology arose. Nowadays, especially the option to run so-called smart contracts within blockchain infrastructures opens up the possibility to create and issue crypto tokens that are not identical to each other, but rather equipped with individual features. Such Non-Fungible Tokens are regularly neither intended nor suited as a means of payment and only under certain circumstances suited for serving as an investment vehicle, because this use-case usually requires the individual tokens to be interchangeable with tokens of the same kind and quality. On the other hand, there is a need for tokens that are non-fungible in the gaming industry and in projects that intend to tokenize valuable objects such as art, automobiles or gemstones.

Non-Fungible Tokens are not Units of Account Pursuant to the KWG

BaFin justified the qualification of Bitcoins as units of account in an expert article published in December 2013 by stating that the definition of units of account in accordance with the administrative practice of the authority also includes value units that have the function of a private means of payment or of a substitute currency as a means of payment in multilateral settlement accounts. NFT regularly will not fulfill this requirement because of their non-fungible nature. Even though they may be accepted as barter for other objects in a settlement system, they will not be generally accepted as a bartering item in multilateral settlement accounts.

Qualification of NFT as Crypto Asset Possible in Specific Cases

Units that are used as means of payment or that serve investment purposes may be qualified as crypto assets according to the wording of the legal definition. The same reasons that prevent the qualification of NFT as units of account also prevent NFT to be used as a means of bartering or payment. The individual design of NFT prevent a usage of the units as units of account in exchange relationships. The situation may potentially be different in the other class of cases that is covered by the law, namely those cases in which the unit serves investment purposes. Tokens that represent the ownership of a valuable object may also serve investment purposes. This may especially be the case, if the token bearer only receives an asset position, but never uses the tokenized object itself or takes possession of it. It is conceivable that in these cases a regulatory qualification of the NFT as an asset investment pursuant to the Asset Investment Act (VermAnlG) is made. Asset investments are financial instruments pursuant to the KWG. Commercial dealings with NFT that qualify as asset investments may therefore trigger authorization obligations, if the business activities of the involved provider qualify as banking business or as a financial service pursuant to the KWG.


Attorney Lutz Auffenberg, LL.M. (London)




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