Legal consequence for failure to perform a utility token?

What are utility tokens?

Utility tokens are one of the most common variants among blockchain providers. They are intended to promise or provide a benefit and are therefore often considered vouchers for tax purposes. Utility tokens are therefore tokens that provide access to certain services or products, similar to an admission ticket or voucher. For example, the holder of a utility token gets access to or content for computer games that are being developed. It is important to note that the holder of Utility Tokens does not receive any financial consideration, because unlike Security Tokens, Utility Tokens are not subject to the requirements set forth in Section 2 No. 2 of the German Securities Prospectus Act (Wertpapierprospektgesetz) or Section 2 para. 1 of the German Securities Trading Act (Wertpapierhandelsgesetz), as they do not represent a participation in a company. Many of these tokens are stored on the Ethereum blockchain as ERC20, but do not need to be….

What if the service is not provided?

Utility tokens are often used to finance projects and sold before projects are fully developed. They therefore definitely represent an alternative financing option for companies. The gray area is accordingly large. Unlike normal financing, which cannot yield a profit, which is the typical risk of an “investor”, the buyer of a Utility Token has a claim to the provision of the service with the acquisition of the token, with all legal consequences from the BGB, which knows the non-provision of a service in German law. A right of withdrawal would be conceivable here, which could lead to a claim for repayment of the amount of money paid for the Utility Token. Whether this is possible depends, of course, massively on exactly what performance the company has promised or promised (and what of it has become part of the contract) and, above all, at what time the performance of the service was promised. If no precise information is available on either point, for example because meaningful product descriptions or correct GTCs are missing, these must be interpreted according to the usual rules of contractual interpretation. Due to the often rather consumer-friendly attitude of the companies, this can quickly turn out to the disadvantage of the issuer.

Ultimately, of course, claims for damages for non-performance or – in the worst case – for fraud are also conceivable.

Issuers are also strongly advised not to rely too heavily on the fact that a project that has not yet been developed cannot have a fixed schedule either. This would generally be negative for the seller both in the interpretation of the purchase agreement, but more importantly would also quickly raise issues with the gray area discussed above that a Utility Token is not a direct corporate investment or corporate financing.

As a buyer, should you file a claim?

Of course, this is difficult to say and must be examined on a case-by-case basis. Compensation for non-performance is only possible if the service is already due. Whether the payment is already due depends, as explained above, on the circumstances of the individual case and must be decided by the courts in case of doubt. In some cases, the due date of performance may arise from a contract or from the law. In other cases, the maturity depends on certain agreed conditions or events. It should also be noted that damages for non-performance are not automatically due, but that the injured party must prove that he has suffered damage as a result of the non-performance and that this damage is attributable to the non-performance. Conversely, however, the question quickly arises for the issuer as to whether it wants to expose itself to a large number of proceedings (all of which cost money and the outcome of which may be uncertain) and whether it wants to expose itself to potentially bad publicity if it rejects claims from potentially dissatisfied buyers on principle.

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.