Semi-fungible tokens (SFTs) in a legal context

Introduction: The distinction between SFTs and NFTs

As a lawyer specializing in advising clients in the blockchain sector, I am regularly faced with the challenge of legally evaluating and structuring innovative and complex digital assets. I am currently advising a client that is planning to implement semi-fungible tokens (SFTs) in its business model. This decision underlines the increasing relevance of SFTs in the digital economy and at the same time entails specific legal considerations.

SFTs represent a fascinating interface between fungible and non-fungible tokens. While fungible tokens such as Bitcoin or Ethereum are characterized by their mutual exchangeability, with each unit being identical and equivalent to another, NFTs stand for uniqueness and non-exchangeability. They often serve as digital representatives for works of art, collector’s items or other unique objects.

The special feature of SFTs is their ability to switch between these two states. Originally fungible, they can lose their fungibility after a defined event or point in time and become non-fungible tokens. An illustrative example of this is an SFT that serves as a ticket for an event: until the event, the token is fungible and exchangeable; after the event, it turns into a unique, non-fungible memento.

For my client, who wants to use SFTs in her business, this raises special legal issues. These relate, among other things, to the drafting of contracts, the definition of the transition from fungibility to non-fungibility and the clarification of copyright aspects. It is essential to address these points precisely in order to create legal clarity and fully exploit the potential of SFTs. As a lawyer with experience in the blockchain industry, my aim is to provide my client with comprehensive advice and ensure that her use of SFTs is both innovative and legally secure.

Legal aspects of SFTs

As a hybrid form between fungible and non-fungible tokens, semi-fungible tokens (SFTs) represent a legal innovation on which there is as yet little case law and legal literature. As a lawyer, however, you can try to transfer and adapt established legal aspects to this new area in order to create legal certainty and clarity.

When drafting contracts involving SFTs, it is crucial to take into account the unique characteristics of these tokens. It must be clearly defined how and when the transition from a fungible to a non-fungible state takes place. This is particularly important in order to avoid misunderstandings and legal disputes about the value and exchangeability of the token. The contracting parties must clearly understand under what conditions and at what point in time a token loses its fungibility. This requires precise wording and forward-looking contract drafting that takes all eventualities into account.

The general terms and conditions (GTC) for platforms that trade or issue SFTs must be specifically tailored to the particularities of these tokens. This includes regulations on handling the transition from fungibility to non-fungibility, liability issues and the rights and obligations of users. It is important that the T&Cs are transparent and understandable to ensure that users understand how SFTs work and their specifics. This also includes clear regulations on liability in the event of malfunctions or misuse of the tokens and on responsibility in the event of loss or theft.

Since SFTs are often related to digital content such as artwork, music or other copyrighted works, it is important to consider the copyright aspects in the contracts. This includes the clarification of usage rights, license conditions and the transferability of these rights in the context of SFTs. It must be clearly regulated which rights the acquirer of an SFT acquires, in particular if the token changes its status and changes from a fungible to a non-fungible token. This can raise complex issues, especially when it comes to the resale or modification of digital content.

Data protection regulations and compliance requirements must be observed when dealing with SFTs. This applies in particular to platforms that operate in several jurisdictions. Compliance with local laws and regulations, including data protection regulations, is essential. Platforms must ensure that they respect and protect the data protection rights of their users, particularly with regard to the storage and processing of personal data. This can be a challenge as the blockchain technology on which SFTs are based is often decentralized and transparent, which can create tensions with privacy requirements.

In summary, SFTs as a new phenomenon in the field of digital assets pose a number of legal challenges. These range from contract design and copyright issues to data protection and compliance. As a lawyer in this field, my aim is to provide my clients with comprehensive advice and to ensure that their use of SFTs is legally secure. This requires a careful analysis of the existing legal situation and the adaptation of established legal concepts to the special features of SFTs.

Conclusion

Semi-fungible tokens (SFTs) open up a new spectrum of possibilities in the field of digital asset management. However, their unique nature, which is a mixture of fungible and non-fungible properties, requires careful and specialized legal consideration. This applies in particular to the areas of contract design, general terms and conditions, copyright and data protection. For lawyers and companies operating in this innovative sector, it is crucial to take a close look at the specific challenges and opportunities presented by SFTs in order to develop effective and legally compliant solutions.

The hybrid form of SFTs is particularly exciting as it builds a bridge between two previously separate asset categories. This hybrid nature requires a differentiated approach in order to determine exactly which legal regulations are necessary and which may be superfluous. It is important to develop a deep understanding of how the properties of tokens change over the course of their lifetime and what legal implications these changes entail.

One interesting aspect is the use of SFTs in blockchain-based games. In this context, SFTs can often be unproblematic, as many aspects, such as the presentation and function of the tokens, can be communicated clearly and transparently during the purchase process. In such cases, the legal complexity may be less, as users are already informed in advance about the properties and value of the tokens. This helps to avoid misunderstandings and legal disputes.

Nevertheless, it is important to carefully examine the legal framework even in such seemingly uncomplicated cases. This includes compliance with copyrights, clarification of terms of use and ensuring data protection. Even if the presentation in the game is clear and correct, the underlying legal aspects must be carefully considered and regulated in order to provide security for both developers and users.

In conclusion, SFTs represent a fascinating development in the field of digital assets. They offer both challenges and opportunities and require an adapted, careful legal approach. As a lawyer in this field, my aim is to provide my clients with comprehensive advice and support in order to fully exploit the potential of SFTs while minimizing legal risks.

Author: Marian Härtel

Marian Härtel ist Rechtsanwalt und Fachanwalt für IT-Recht mit einer über 25-jährigen Erfahrung als Unternehmer und Berater in den Bereichen Games, E-Sport, Blockchain, SaaS und Künstliche Intelligenz. Seine Beratungsschwerpunkte umfassen neben dem IT-Recht insbesondere das Urheberrecht, Medienrecht sowie Wettbewerbsrecht. Er betreut schwerpunktmäßig Start-ups, Agenturen und Influencer, die er in strategischen Fragen, komplexen Vertragsangelegenheiten sowie bei Investitionsprojekten begleitet. Dabei zeichnet sich seine Beratung durch einen interdisziplinären Ansatz aus, der juristische Expertise und langjährige unternehmerische Erfahrung miteinander verbindet. Ziel seiner Tätigkeit ist stets, Mandanten praxisorientierte Lösungen anzubieten und rechtlich fundierte Unterstützung bei der Umsetzung innovativer Geschäftsmodelle zu gewährleisten.