Digital products in the metaverse: how NFTs enable the attribution and distribution of digital products and what legal aspects distributors must consider

As described in our first article in our series on the metaverse (LINK), the metaverse is primarily used by companies to promote their own products and also to sell digital products.

Non-fungible tokens (NFTs) are used to assign unique digital products to their holders. In 2021, the hype around NFT primarily arose with regard to digital artwork. In March 2021, for example, the artist Beeple put the digital artwork "Everydays: The first 5000 days" up for auction at Christies and sold it for a record sum of over 69 million euros.

Since then, NFTs have also become very popular in the metaverse. For example, limited-edition digital clothing for one's own avatar is linked to an NFT and distributed to customers. Ownership of these products can be verified with the NFTs. They are also used in the metaverse to grant exclusive rights to customers, for example, and to offer selected products or pre-emptive rights to a small group of regular customers.

What is an NFT and how does it help with the attribution to the owner of a product?

In principle, NFTs work like Bitcoins or other cryptocurrencies, which are called fungible tokens. The digital certificates are stored in the blockchain and are permanently linked to digital or real products, for example through a URL to a reference object. They basically function as verification certificates for a wide range of assets.

Each NFT is thus stored once on the blockchain. Due to the tamper-proof nature of blockchain technology, the NFTs stored there are particularly trustworthy. In the event of a resale of the assets together with the NFT, all previous data of the owners of the NFT can be stored in the certificate. In this way, changes in ownership can also be determined retrospectively.

What rights do owners of NFTs have and what do sellers/buyers need to consider?

When assessing the owner's rights, it is important to distinguish between the right to the NFT and the rights arising from the NFT.

As far as the respective owners’ rights to the NFT are concerned, particular attention should be paid to the three steps of the NFT lifecycle:

1. Creation of the NFT (minting): After creation of the NFT, for example on a platform, the NFT is assigned to the creator. 
    
2. Initial sale (primary sale): The holder of the NFT can dispose of the NFT and transfer it to a buyer for the first time. Here, the creator can stipulate the terms and conditions of the sale.
    
3. Further transfers (secondary sale): The new owner of the NFT may, after obtaining the rights, transfer them to third parties. However, the creator of the NFT may have secured certain rights at the time of the initial sale, which also apply in the context of the resale. For example, through a corresponding provision in the terms and conditions of sale, the creator of the NFT could claim for itself a portion of the purchase price from the resale (so-called NFT revenue share).

In addition, the owner of the NFT also has rights arising from the NFT to the reference object: The extent of the rights to the reference object held by the owner of the NFT or to be received by it from the creator primarily has to be regulated by contract between the creator and the acquirer. Here, all forms of contract are possible: Creators may grant and transfer exclusive or non-exclusive rights, territorially limited rights or only individual rights of use (adaptation rights or the right of reproduction). There are as yet no standard (model) contracts for digital works with NFTs.

If, on the other hand, the contract for the primary sale of the NFT does not contain any conditions regarding the scope of the rights of use to be granted, then in case of doubt it must be assumed pursuant to Secs. 31 (5), 44 (1) of the German Copyright Act [Urheberrechtsgesetz, UrhG] that no exploitation rights in the reference object are being granted. The acquirer then only receives the NFT as such, i.e. may only use the linked reference object for private consumption and may not exploit it.

Distribution of NFTs to consumers

In addition, if a creator or reseller distributes multiple NFTs and makes sales under the same terms and conditions, the requirements of German GTC law must be taken into account when drafting the legal terms and conditions. This could also apply in cases where a legal system other than German law is chosen in the terms and conditions of sale. Secs. 305 et seq. of the German Civil Code [Bürgerliches Gesetzbuch, BGB] for contracts on the acquisition of NFTs by consumers with their habitual residence in Germany are nevertheless applicable according to Art. 6 (2) sentence 2 Rome I Regulation, insofar as the entrepreneur directs its offer to Germany, since Secs. 305 et seq. BGB represent mandatory consumer protection standards of German law.

In addition, consumer protection law provides that the consumer has a 14-day right of revocation in the case of distance contracts (Secs. 312g, 355 BGB). However, in the context of an NFT transfer, such a right of revocation would undermine the concept of the blockchain that transactions cannot be reversed. Therefore, the right of revocation should be validly excluded in the terms and conditions of sale.

Data protection in the blockchain

The NFTs provide information about the current and previous owners of the asset in question. This data is stored pseudonymously in the NFTs in the form of hashtags. With the help of analysis tools, transactions in the blockchain can also be evaluated by third parties. Accordingly, the data protection requirements also need to be considered in the contractual regulations.

Is the sale of NFTs regulated by law?

In addition to the design of legal contractual relationships between sellers and buyers of NFTs, possible regulatory provisions should be considered:

The preliminary version of the EU Markets in Crypto Assets Regulation (MiCAR), which aims to create a single regulatory framework for crypto assets, fundamentally does not include NFTs. As long as the NFT is technically unique and embodies a unique and non-exchangeable value or right, MiCAR does not apply. In exceptional cases, MiCAR regulations could indeed apply to those NFTs that do not embody unique values or rights, as they are then interchangeable. However, at present, the legislator has not yet provided any further explanation as to when an NFT is technically and actually unique. A further question under discussion is whether NFTs are to be classified as "crypto assets" within the meaning of Sec. 1 (11) No. 10 sentence 4 of the German Banking Act [Kreditwesengesetz, KWG].

A particularly disputed point in this connection is whether NFTs "serve investment purposes and can be transmitted, stored and traded electronically". Tradability requires a certain fungibility of the asset which, according to the concept of NFTs, is specifically not supposed to exist. In contrast, we certainly can expect certain NFTs to be primarily used for trading due to their steady appreciation in value. A comparable discussion also exists with respect to the Prospectus Regulation [ProspektVO]. 

The consequence of a corresponding classification as a crypto asset would be that the brokerage of investments in NFTs, but also proprietary trading in NFTs, would require a permit from the German Federal Financial Supervisory Authority [Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin] and, if applicable, a prospectus obligation prior to the initial offering.

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