NFTs - Hype or Future?

NFTs - Hype or Future?

If you are involved with issues around blockchain, so-called non-fungible tokens (“NFTs”) are currently unavoidable. But what are NFTs in the first place and what needs to be considered from a legal perspective? 

Like all tokens, NFTs are a kind of digital unit that are made tradable through blockchain technology – mostly the Ethereum blockchain. The designation of these tokens as “non fungible” – which means “not exchangeable” or “not replaceable” – is due to the fact that each NFT in its concrete form only exists once. Because of the unique nature of an NFT, it cannot simply be replaced by another. In contrast, a certain number of Bitcoin payment tokens can be replaced by the same number of units at will, without this making any difference to the holder. 

Due to this special property, NFTs are suitable for all those things that are unique and one-of-a-kind. Thus, the areas of application for NFTs are currently mainly in virtual art, virtual collectibles or in the gaming sector. For example, there are NFTs of trading cards, video sequences of the NBA, objects usable in computer games or other artistically designed images or animations. 

The great advantage of NFTs is that they represent transparent proof of the authenticity and ownership of a certain thing. For example, if one is the owner of a certain crypto-art NFT, this provides proof of ownership of this work of art and at the same time proves that it is original and not counterfeit. Due to this legitimisation function, NFTs have a similar function to conventional deeds, and thus have a broader scope of application. 

These technical possibilities lead to other very creative ideas – for example, on “opensea”, one of the largest NFT platforms, you can find an NFT containing a video sequence of a short property inspection. The special thing about this NFT is that when you buy it, you also acquire the property shown in the video. 

One often encounters legal obstacles when implementing such innovative ideas. For example, the legal acquisition of ownership of a property via NFT is not quite so simple. Even if the technology already shows how an acquisition process could be simplified in the future, the national property laws must of course still be observed. In Austria, the acquisition of real estate requires a notarised deed and an entry in the land register. These requirements are not fulfilled by the mere transfer of an NFT. 

The acquisition of such an NFT can therefore at most represent a kind of preliminary contract for the acquisition of real estate, which, among other things, determines a binding purchase price and the subject matter of the contract. This is later followed by the necessary legal acts to allow effective transfer of ownership. Such a transaction does not exploit the full potential of the blockchain and – due to the lack of simplification in the acquisition process – at best profits from the current hype. 

In order to exploit the potential of the blockchain as far as possible and to be able to place the buyer of such a land NFT in a similar position to an owner without such formal requirements, special legal constructs are needed. This is because by establishing sophisticated legal constructs, the token holder can be placed in an economic position very similar to that of an owner, even without land registry registration. 

Blockchain has great potential to optimise and simplify many current processes. Whether for financing, increasing security and transparency or increasing liquidity – blockchain can offer the parties involved significant advantages on different levels. It is vital that such applications are handled in a legally correct manner. We are happy to support you with the necessary expertise. 


AUTHORS:

Mag. Ronald Frankl, Attorney-at-Law and Managing Partner at LANSKY, GANZGER + partner
Mag. Peter Virtbauer, Associate at LANSKY, GANZGER + partner

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