Leon Wisskirchen • 2023-04-15
To not address legal uncertainties can be costly for NFT business builders, leading to delays or even failure.
When building a NFT (non-fungible token) business, there are many legal unknown unknowns that can quickly become overwhelming. Many legal questions must be considered before launching a NFT venture. However, startup founders often hesitate to ask themselves these legal questions before fundraising or launching their product. This can result in expensive delays or even failure.
Defining the right legal questions is the most critical part of structuring a NFT business in a legally sustainable way. Here are four legal questions that founders should consider before launching their NFT business:
Question 1: What assets are represented by the NFT?
NFTs can represent various assets, such as intellectual property (e.g., art or music), physical items (e.g., antique cars or sneakers), and rights or claims (e.g., for access to services). This question is the stepping stone for figuring out the contractual relationships (i.e. contract types and contents) between your stakeholders (e.g., NFT platform, artists, and NFT holders).
Question 2: Are the represented assets individual or standardized?
NFTs can represent individual assets (e.g., a unique piece of art) or standardized assets (e.g., 1,000 payment claims on music license fees). The degree of standardization is an important factor for determining the NFT's potential for financial use, which increases by the degree of standardization. Regulators like the BaFin or EU therefore use the degree of standardization as one key indicator for deciding whether a token should be regulated.
Question 3: How pronounced is the NFT's investment character?
NFTs can be used for investment purposes, as an investment vehicle, or be marketed as an investment opportunity. If NFTs are marketed as an investment opportunity or if it becomes otherwise clear that users will buy them mainly for investment, it is more likely that the NFTs fall under financial regulation (e.g., as a financial instrument under German regulation or security under the US Howey test).
Question 4: How is your relationship to the private keys of users?
NFTs require private keys to authenticate ownership and transfer ownership. The relationship with private keys is an important element for determining whether the venture falls into the scope of a crypto custody business - a business model that requires a license in Germany.
In conclusion, asking the right legal questions is crucial when building a NFT business. Once these questions are set, looking for answers becomes so much easier. If you are building a NFT venture, using software can help you define and answer questions like the above. By understanding the legal implications of each question, startup founders can avoid expensive delays or even failure and launch their NFT business with confidence.
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