Nfts in austria: legal tips when tokenizing

Nfts in austria: legal tips when tokenizing

Here is a first overview of how NFTS are to be legally classified in Austria, and what legal issues need to be considered. This EY Law article by Martin Hanzl can of course not replace individual legal advice .

1. What are NFTs legally considered in Austria??

NFTs are based on blockchain technology and embody certain rights. They are – unlike fungible tokens – not freely exchangeable. NFTs are unique digital tokens that exist only once on the respective blockchain. In contrast, fungible tokens – such as Ether or Bitcoin – are available in greater numbers and in the same guise. One bitcoin is no different from another in terms of content.

What's interesting from a legal perspective is that NFTs embody certain rights. Depending on which rights are represented by an NFT – or other token – regulatory requirements may arise. Compliance with these will be reviewed by the Austrian Financial Market Authority ("FMA")see point 2 below. In addition to regulatory issues, NFTs also raise other questions, such as what rights (and, if applicable, obligations) are associated with the purchase of an NFT (see point 3). If applicable, anti-money laundering obligations may also apply to NFTs in the art sector. Depending on whether an (open source) template of a smart contract is used to create an NFT, or a custom smart contract is programmed, further (copyright) issues might arise.

Attention: if you use smart contract templates or similar to create an NFT, make sure that the rights to the work to be tokenized are not lost.

Key Takeaway: the embodiment of rights in NFTs holds great potential, but should be well documented and contractually secured. If bspw. If third-party software is used to tokenize works, it should be ensured that the rights to the work are not assigned as a result (check T&C!).

Don't forget: now that NFTs are based on blockchain technology, there are related legal challenges to consider, such as clean structuring under the GDPR.

2. Overview of regulatory issues related to NFTs in Austria

The FMA offers a comprehensive range of information on its website around its legal view on coins and tokens. From a legal point of view, the FMA divides tokens into security tokens similar to securities, payment tokens whose primary purpose is the payment function and utility tokens, which are intended to provide the holder with a benefit with regard to a specific product. Depending on the specific design of the token, issuers, trading venues of tokens and custodians may be subject to certain obligations. The FMA has not yet commented on NFTs at the time of this writing. The legal structuring of an NFT is therefore all the more important.

Among other things, it is important that an NFT does not have any functions similar to securities in order to avoid the application of the Securities Supervision Act, the obligation to publish a prospectus, etc.

In cases of doubt, it may be necessary to contact the FMA (FinTech contact point). Key takeaway: Regulatory issues could also arise around NFTs. Even a brief analysis usually provides clarity here.

3. Contractual framework iZm NFTs – business as (un)usual?

As mentioned at the beginning, NFTs are currently frequently used in the art industry to tokenize works of art. It is often unclear which rights are actually transferred with an NFT.

Right to the NFT ≠ Right to use the work

One might think that the acquisition of an NFT that includes the artwork or a link to it also leads to the acquisition of the right to use the work, but this is not the case per se. Rather, the respective NFT must be granted a license to use the work. Only the scope of this license regulates how the owner of the NFT may proceed with the work.

License agreement& NFTs

From both the investor's and the provider's point of view, the clear contractual regulation of rights of use is recommended. This is similar to classic licensing agreements, taking into account the special technological features. Consider whether the license grant can already be integrated into the smart contract or NFT code.

Key Takeaway: Whether tokenizing existing physical assets (e.g., artworks) or digital works, it is essential to have a contractual agreement between the creator and the acquirer; only then do the rights of use to the respective works pass to them. A contractual provision may possibly already be made in the code of the NFT/smart contract.

4. Caution when advertising NFTs

Although the field of application of NFTs is becoming increasingly broad, it cannot yet be assumed that the "average consumer" knows what an NFT is or what rights (and possibly obligations) are associated with the acquisition of such a NFT.

Any advertising of NFTs must therefore clearly state which rights are acquired with the NFT. It must be shown whether the NFT embodies rights to use the original, the right to request a physical copy of the work, or merely a link to a digital image of a work. If this is not clear, the relevant statements could be considered a "misleading business practice" as defined by the UWG. This could trigger – in addition to the loss of trust in your company – injunctive relief and damages obligations.

Key Takeaway: Make sure that it is clear to potential buyers of NFTs what rights the respective NFT embodies.

Conclusion on NFTs in Austria

NFTs have the potential to revolutionize many business areas – even outside the art market. At present, however, there are still many unanswered questions about NFTs. In order to sustainably secure business models that use NFTs, it is advisable to conduct a regulatory review of the model on the one hand and to provide comprehensive contractual protection (possibly integrated directly into the code) on the other.

Disclaimer: This text as well as the notes and information do not constitute legal advice or any other recommendation. This text can in no way replace individual legal advice and is for personal information only. Furthermore, this text exclusively reflects the opinion and experience of the author.

In THIS guest article in the online magazine brutkasten, Martin Hanzl, Associate at EY Law – Pelzmann Gall Grob Rechtsanwalte, provides an overview of which points should definitely be considered in order to sustainably secure the use of NFTs.

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