Most important points

• Non-fungible tokens (NFTs) are unique digital certificates on a blockchain that are usually linked to a digital object (image, music, collector’s item). Unlike cryptocurrencies (fungible tokens), each NFT is individual and cannot be exchanged.

• Legally, an NFT does not automatically embody all rights to the linked work. In essence, the buyer acquires the token itself (as a record on the blockchain) and thus usually ownership of this record, but copyrights or rights of use to the digital artwork remain with the original creator, unless expressly transferred.

• Typical areas of application are digital art and collector’s items: NFTs enable proof of originality and ownership in the digital world. For artists and creators, NFTs are a way to sell limited digital goods (e.g. only 100 “original” copies of a digital image).

• Startups in the NFT sector have numerous legal issues to consider: Copyright law (are traded designs even allowed to be tokenized?), trademark law (logos as NFTs, beware of infringement), financial law (in some cases, NFTs could be considered securities/assets), and tax law (profits from NFT trading).

• Smart contracts often control NFTs: for example, the code can specify that the creator automatically receives a commission each time the product is resold. However, these automated rules are only as good as their technical implementation – it must be legally clarified whether such claims can also be enforced outside the blockchain.

• Important for buyers: Owning an NFT does not guarantee protection against plagiarism. Although your own NFT is unique, anyone can theoretically copy/view the underlying digital image (unless it is in a protected database, for example). Exclusivity relates primarily to the certificate of ownership, not necessarily to the content itself.

• The NFT market is subject to strong fluctuations and still unresolved legal issues. Startups should communicate transparently what exactly a buyer is acquiring and ensure that no misleading promises are made (e.g. “purchase of the image” although only the token is being sold).

What is an NFT?

NFT stands for non-fungible token, which translates roughly as “non-exchangeable token”. To understand the concept, a comparison helps: a euro or a bitcoin is fungible, i.e. replaceable – it doesn’t matter which specific euro bill you have, the value and function are the same. An NFT, on the other hand, is unique. Technically, it is an entry on a blockchain (often Ethereum, but there are many) that identifies a kind of digital fingerprint of an object and the owner. This makes it clear that this token represents exactly this object and belongs to wallet XY.

In practice, NFTs are often associated with digital art. For example: An artist creates a digital painting. She “mints” (embosses) an NFT from it. This NFT can now be traded. Whoever has it can say: “I own the original digital file, verified via the blockchain.” While digital files can normally be copied infinitely, the NFT creates artificial scarcity and collector’s value.

Copyright consideration

A common misconception: “If I buy the NFT, I own the entire image.” – In fact, you only buy the token itself. As usual, the copyright to the image remains with the artist as long as she does not explicitly sell it. By default, the buyer only has the right to view the image and resell the token. However, they do not automatically have the right to use the image commercially, reproduce it or create modified works from it – these rights of use would have to be acquired contractually from the author.

Many NFT marketplaces (OpenSea, Rarible, etc.) therefore state that no copyright is transferred unless the seller guarantees otherwise. However, some projects link the NFT sale to a license: For example, there are NFT collections in which every buyer of a figure also receives the right to use this figure commercially (this became known with Bored Ape Yacht Club – buyers of an ape graphic were allowed to print the image on T-shirts, use it as a logo, etc.). However, this depends on the terms of the contract, which are usually set out somewhere in the small print or on the website of the NFT project.

Transparency is extremely important here for start-ups that issue NFTs: it should be made clear what rights the buyer receives. For example, will exclusive content be activated? Can the buyer post their NFT image on social media (probably yes) or sell prints (probably only if permitted)? Since an NFT can ultimately also be a contract from a legal point of view, this question should be regulated contractually – this is often done through the platform’s terms and conditions or linked license texts.

Ownership of the NFT vs. ownership of the work

The question of what you “own” in an NFT is interesting. Under German law, crypto value tokens such as NFTs are intangible objects; they are sometimes referred to as “other objects” in the sense of property law, even if they are not objects in the classic sense (physical). However, the owner has de facto sole power of disposal over the token, secured by their private key to the wallet. This can be roughly equated to ownership: The person with control over the wallet is the beneficial owner of the NFT.

However, the actual media file (the image, the song) is often not stored in the blockchain, but on a server or a decentralized storage system (IPFS), for example. The NFT then contains references (URLs or hashes). If the storage location disappears (e.g. the server is switched off), you still have the NFT, but the image is gone – unless you have backed it up. Some projects try to minimize this risk by relying on distributed storage. Nevertheless, the value of an NFT often depends on external factors (existence of the linked file, hype surrounding the project).

NFTs and financial market regulation

Another aspect: could NFTs be legally classified as securities or investments? This depends very much on the individual case. In most cases, NFTs represent art or collector’s items – comparable to physical trading cards or paintings. They are then not subject to financial supervision. However, if an NFT is designed with the promise of profit sharing or as an investment product, the Securities Supervision Act or crypto-asset regulation could suddenly come into play. For example, if a startup were to say: “Buy this NFT and get XY share of our profits” – then you would quickly be in the regulated area and might need a prospectus, etc.

However, most common NFTs do not securitize any claims or rights to the company, but only the uniqueness of a collector’s item. As a result, they currently often operate in a gray area outside of strict regulation, which also contributed to the hype – it was easy to issue them. With the upcoming EU regulation (MiCA – Markets in Crypto-Assets Regulation), however, crypto assets such as NFTs will also be monitored more closely. MiCA partially exempts NFTs as long as they are truly individual and unique and not traded “fungibly as part of a series”. But the demarcation will be exciting, as many NFT projects issue thousands of almost identical tokens (e.g. generative art with 10,000 variants) – are they still “non-fungible”? The authorities will be keeping an eye on this.

Smart contracts and automated rules

The technology behind NFTs enables clever features: smart contracts – i.e. self-executing contracts in the code – can give NFTs certain rules. For example, a royalty fee for resales: the program code can specify that 5% of the sales price automatically goes to the original artist’s wallet for each sale. This allows the creator to share in the long-term success of their work (in the traditional art market, the painter gets nothing from the subsequent million-dollar deal). Many platforms already support such royalty mechanisms.

However, this sometimes collides with marketplace-specific rules, and technically it can be circumvented (for example, by trading NFTs peer-to-peer without the standard marketplaces, the automatic fees may not apply). From a legal perspective, it is also questionable whether an artist could sue for resale proceeds outside the blockchain if someone finds a trick to circumvent the smart contract fee. In the EU, there is a resale right for visual artists (the author is entitled to a share of the resale price, Section 26 UrhG), but this only applies to physical works of art – this law is not directly tailored to digital NFTs. This means that we are moving into new territory here.

Risks and legal disputes

In the short time of their existence, NFTs have already generated all kinds of legal cases:

• Accusations of plagiarism: If someone sells images as NFTs to which they do not have the rights (e.g. protected comic figures or photos by other people), this is of course a copyright infringement. Unfortunately, this happens – the low barrier to entry also enables abuse. Marketplaces then have to remove NFTs and buyers may be left with worthless tokens.

• Name and trademark rights: One prominent case was the “MetaBirkins” dispute – an artist sold NFTs of digital images depicting Hermès birkin bags with a fur look. Hermès sued for trademark infringement, as “Birkin” is a protected trademark. This is where artistic freedom and trademark law collide. Hermès won at first instance, which shows that trademark rights are also taken seriously in virtual spaces. Startups should therefore not use brand logos or well-known names as NFTs without permission.

• Fraud and security: Phishing and wallet hacks are a major issue. Legally, this is more criminal law than civil law, but anyone offering services to NFT customers, for example, must pay attention to security. If customer tokens are stolen due to your own negligence (e.g. security gaps), you may be liable. In addition, compliance rules (money laundering prevention, KYC – know your customer) must be checked, depending on the business model.

Recommendation for start-ups

Anyone entering the NFT business – whether as a marketplace, an artist or a company using NFTs for marketing purposes – should take an interdisciplinary approach: Bring in tech expertise with blockchain, but also legal advice.

Clear terms of use should regulate what buyers may and may not do. For example: “The purchase of the NFT entitles you to display the associated digital artwork for private purposes, but not for further commercial use.” Such sentences prevent misunderstandings.

Buyers also appreciate transparency: What do I really get? Are there utilities (added value) such as membership benefits, physical items in addition to the NFT, voting rights in a community (DAO)? All of this has legal components (memberships, tokens as securities, etc.) that need to be considered.

Conclusion

NFTs combine technology, art and law in an exciting way. They have created new opportunities to monetize digital content, but also raise new questions. Because many things are new and not yet explicitly regulated by law, NFT projects operate in a field that is only becoming more concrete through practice and case law. For start-ups, this means seizing opportunities, but in a conscious and informed manner. The purchase of an NFT is not synonymous with the acquisition of all rights to the work – and this should be clear to both sides. If you pay attention to the small print and know your obligations, you can build innovative business models with NFTs without getting into legal trouble.