Tokenization is the linking of a real asset with a digital token using blockchain technology. It it is a fact that the already incipient success of such digital avatars will increase significantly in the coming years. Tokenization enables the simple, fast and geographically independent tradability of economic goods. In this respect, it creates transparent markets in which participations in assets and their value creation are made possible in the first place.

However, the technology, which can be used for almost all conceivable assets - whether they are digital or not, whether they are movable or immovable, whether they already exist or are still an idea - enables more. By linking it to smart contracts, it creates previously unimagined possibilities for the automated and uninfluenceable distribution of revenues to participants without any intermediaries.

We support our national and international clients in finding their way through the thicket of possibilities and promises. In doing so, we create structures in which assets are linked to such digital avatars in such a precise way that it is clear from the outset to all parties involved who owns and is entitled to what. We support our clients in the tokenization process at all stages of value creation.

That means from the decision, assets for such a digital securitization can be optimally prepared and compiled, to the actual tokenization and the documentation with the involved players as well as the possibly required smart contracts up to sales and distribution. We support investors in assessing and selecting tokens and in acquiring and selling them in a legally secure manner.


1. Non-Fungible Tokens (NFT)

„Content is king“. This sentence by Bill Gates from 1996 has lost none of its validity to this day. In connection with Non-Fungible Tokens ("NFT"), this statement will be carried over into the 21st century, as numerous examples of tokenization and media content marketing show: 

FAZ - FAZ - Sotheby`s enters the NFT business
CNBC - 230 Million Dollars spent on a NBA Top Shot
Die Zeit - The Time - Hyper Hyper - NFT Hype is reaching pop culture

Weiterführendes Beispiel: FAZ - Sotheby`s enters the NFT business

What are NFTs?

Using NFT - which is based on the blockchain idea - one-time digital "proof of ownership" of intangible assets (e.g. pictures, videos, music) can be created.

Thus, these NFTs stand for the digital ownership of a certain good. In contrast to the specific good (for example a work of art as a JPEG file), which can be reproduced as often as required, the NFT is unique.

With the help of so-called smart contracts, additional properties can be added to NFTs, such as VIP tickets for the next concert, vouchers for a meet and greet or purchase rights for merchandising items.

Ownership, digital property and real values can be linked with each other so that fans and collectors can be addressed with NFTs in a target group-oriented manner.

What can be tokenized with NFT and how is the NFT marketed?

Because NFT cannot be duplicated or copied, there are numerous possibilities for exploitation. For example, previously unpublished material (interviews, handwritten notes, audio recordings) or "limited" digital art works can be used to create unique digital collectibles that - just like analog collectibles - can be collected, exchanged or also (with the possibility of increasing in value) resold. Old and new content can be evaluated as NFT and offered to the buyer with real added value.

NFTs can be sold by the creator himself, via an established marketplace - such as Opensea - or on a newly created marketplace.

What is there to consider from a legal point of view with NFT?

In order to market NFTs successfully, a large number of legal questions need to be clarified before the content is tokenized:

For content, copyrights of authors, photographers, painters, composers and other creators are affected (§ 2 UrhG) as well as ancillary copyrights of sound carrier producers, film producers, musicians or actors (§§ 73, 85, 94 UrhG). If content is newly created for an NFT, the rights of use scope to be granted by creative people and their remuneration claims can be regulated in new license agreements to be concluded.

Recourse to existing content is more problematic from a legal point of view. Here, old contracts must be checked to see which rights of use creative people have already granted their publishers and other exploiters. In particular, the question of whether content exploitation via NFT is a so-called new type of use under copyright law requires more in-depth examination and an adjustment of old contracts if necessary. The subject is made more complicated by the fact that the Copyright Act contains different regulations with regard to new types of use for authors and those people entitled to protection (§§ 31, 31a, 79 (2), 85 (2) UrhG)

NFTs get their attraction for fans and collectors through the added value that arises from the fact that existing works are combined with new elements to form a multimedia work. Technically, this happened quickly. Under certain circumstances, there may be legal interference with artists' editing rights. It must be checked carefully whether processing affected by NFT has already been taken into account in old contracts.

Furthermore, it must be clarified to what extent authors and other entitled parties are to share income generated from sale, resale or auction proceeds. Is there a digital resale right? Can parties involved in the auction assert a claim for subsequent payment if substantial auction proceeds are achieved (§ 32a UrhG)? Can smart contracts ensure that parties involved also participate financially in later NFT transmissions?

Inasmuch as there is also the option of investing money using NFT, it must also be clarified whether the planned NFT as a financial investment product is subject to regulatory regulations.

Market place

In order to market NFTs as effectively as possible, it is necessary to secure the sales process legally. There are essentially three options for placing NFTs in the sales process: (i) On the one hand, self-distribution, for example via your own website; (ii) on the other hand, using an existing marketplace (such as Opensea) or (iii) establishing your own marketplace. Depending on which option you choose, different legal questions arise as well.

In all of the aforementioned sales processes, the fundamental question to be clarified is which national law is applicable to creating and distributing NFTs via the platform. The place of business of the platform operator, creator or buyer of the NFT can serve as a connection point. This is followed by the question of whether and to what extent consumers are entitled to special property rights (e.g. revocation of remote sales, effective inclusion of general terms and conditions, warranty). Finally, here too the question arises as to whether further regulatory requirements have to be met.

All of these questions have to be checked and clarified in each individual case, because the answer depends essentially on the specific NFT content and the way it is distributed. Contracts and/or general terms and conditions can only be drawn up after the above points have been clarified.

2. Regulatory

The regulatory legal situation for token issues and projects is complex and token issue providers must check very carefully in each individual case which regulatory facts are triggered by their market participation. Regulatory obligations can arise at various points, such as issuing, distributing, safekeeping or trading tokens.

In addition, these obligations can vary greatly depending on the type of token offered and on the capital market law sub-segment in which it operates.

Unlike many other European countries, the German legislature has already integrated crypto values regulations into the existing legal system.

On the one hand, the new law on introducing electronic securities opens up a new legal framework for digitizing securities trading - both in primary and secondary markets. The Law on Electronic Securities (eWpG) should and must fit into an existing, complex capital market regime made up of national, European and directly applicable European regulations, whereby custody account aspects are central.

Services may also require authorization if a token has the characteristics of a financial instrument under KWG. Financial instruments also include crypto values, i.e. "means of exchange and payment" as well as "digital representations used for investment purposes."

Depending on how they are structured, virtual assets can therefore be treated as a financial instrument under KWG. In this case, certain activities and services aimed at this are subject to a permission reservation, such as brokering, trading or safekeeping such tokens.

With a view to the regulatory classification, tokens can be assigned to different types of tokens depending on their design: security tokens, utility tokens, crypto currencies (payment tokens) and hybrid tokens.

Security token

Within the meaning of the EU Prospectus Regulation, security tokens have the characteristics of classic securities that can be traded on the capital market. According to the Federal Financial Supervisory Authority (BaFin), tradability requires a minimum level of standardization that makes the securities comparable in terms of a class. Tokens that meet the three criteria of transferability, standardization and tradability on a capital market and are also comparable to one of the examples listed will almost certainly also represent transferable securities under European capital market law.

Utility token

In contrast to payment or security tokens, utility tokens typically do not contain any digital assets of their own, but rather represent a tokenized right to a product or service owed by the token issuer.

Payment token

BaFin classifies crypto currencies (payment tokens) as units of account and thus as financial instruments within the meaning of the KWG. Actions and services aimed at this are basically also subject to KWG authorization requirements, i.e. in particular with regard to sales, custody and trading.

Hybrid tokens

Regarding NFTs, it must be taken into account that individual NFTs are tradeable in the sense of the security concept and could therefore be covered by the wording of the Prospectus Regulation and thus qualify as securities. However, as a rule, there will be no comparability with the listed securities examples. As a result, classification as a security token is likely to be ruled out on a regular basis.

At the European level, the Regulation on Markets for Crypto Assets (MiCAR) will also be added in the future, which is intended to create a comprehensive regulatory framework for digital assets in the EU. For the scope of all tokens that are not covered by MiFID II, a system of interlocking transparency, authorization and ongoing supervisory obligations will be established, which has the overall design of an EU Single Rule Book.

In individual cases, until MiCAR comes into effect, the question will arise whether approval requirements under German law - think about the crypto custody permit under the Banking Act (KWG) - already cover MiCAR requirements and which readjustments and licensing may be necessary.

3. Smart Contracts

We advise on smart contracts and work with software developers who can program them as required. Smart contracts link tokens of all types and crypto currencies with each other and the real world. They are software with which a legal exchange of services (e.g. transmitting an NFT against ether) can be controlled depending on digitally verifiable events and, under certain circumstances, real and/or contractual agreements can be concluded.

They are automatically executed and enforced on blockchains. This can reduce transaction costs. Smart contracts also enable an increase in the processing speed of transactions and facilitate their documentation.

4. Tax

Tax issues in connection with tokens, crypto values and crypto securities have only been partially clarified by the tax authorities and case law. Special legal regulations are currently still sparse. In this respect, tax treatment of individual issues must be derived from existing instruments and regulations. Cursorily, some topics should be pointed out here.

Balance sheet presentation and illustration

In the context of accounting for tokens, crypto values and crypto securities, it must be clarified whether these represent an asset that can be accounted for and, if so, how this is to be shown, recognized and valued. If, for example, it can be shown under receivables or securities, it must be clarified whether the principles that have so far been applicable to these, in particular for valuation and depreciation, are also applicable or whether other principles should be applied due to their virtual nature. If, on the other hand, it embodies rights of use alone, it should be examined whether general leasing principles apply. In this context, there may then be a divergence between the tax and trade balance sheets.

Operating facility

The question to what extent a server or platform can qualify as a operating facility is already known from e-commerce. This is answered in the affirmative if the server is intended to serve a certain company exclusively for a certain period of time. After all, a server is a physical object suitable to be the basis of a company activity and then represents an operating facility. Even if it has only been leased, in this way there may be a legal position which gives the content provider the necessary power of control over the server as such (not only over a certain storage capacity) to establish an operating facility.

In contrast, there is no operating facility if the rental of a "server" only includes the rental of computing time and/or storage capacity within the server network framework. Likewise, a homepage as such does not represent an operating facility, because it only exists electronically. Furthermore, the use of a German access provider’s services alone, as is the case with data transmission, is not regarded as sufficient to set up an operating facility for the foreign content provider, because it lacks the necessary disposal power over the domestic access provider's network.

From the point of view of treaty law, the server function must not be limited to a preparatory or ancillary activity, because under most double taxation agreements there would be no operating facility in such a case.

Whether these principles can also be transferred to tokens and crypto values depends on what their respective content is and how different access rights are designed. An in-depth examination is required here because there may be profit definition and allocation issues, such as which country is allocated the expenses for creating the crypto value, if a transfer takes place to the platform or the server and the income generated there is taxed fully or according to the OECD rules of profit sharing or allocation.

Private sales processes

With regard to the possibility of generating tax-free income after a period of time, the question arises how to classify individual tokens, crypto values or crypto securities, especially when it comes to private assets.

With regard to crypto currencies acquired and held as private assets, tax authorities have stated that profit (or) loss from their sale leads to other income from private sales transactions, provided that acquisition and sale took place within one year (Section 22 No. 2 EStG i V. m. § 23 Paragraph 1 Clause 1 No. 2 EStG). The prerequisite, however, is that the crypto currency was not generated by the customer because the "acquisition" is then lacking.

Use as a payment means should also be regarded as a sale. The extent to which the otherwise posed problem of amalgamating and mixing in order to determine the acquisition value according to average prices or the first-in-first-out arises with crypto currencies, should essentially depend on whether an unambiguous identification of the same crypto value is possible, which for example could be achieved through blockchain technologies.

In the case of crypto securities, however, this is not clear and may depend, among other things, on what is being securitized:

  • If this concerns a plot of land or rights equivalent to real property, it could lead to extending the period to 10 years (Section 23 (11) No. 1 EStG);
  • If income is generated from the crypto security at least once a year, extending the period to 10 years could also be considered (Section 23 (11) no. 2 sentence 4 EStG);
  • If they are NFTs or content tokens, sales should be tax-free after one year.

However, taxation according to § 20 EStG (capital assets) should also be considered. This should depend on whether and to what extent the crypto security can be classified as a capital claim within the meaning of § 20 para. 1 no. 7 EStG.

Accordingly, a distinction should be made between general crypto values and tokens.

Value added tax

In the aftermath of an ECJ ruling of October 22, 2015 (C-264/14, Hedqvist), German tax authorities put so-called virtual currencies (crypto currencies, e.g. Bitcoin) on an equal footing with legal tender with regard to VAT treatment, but only to the extent these so-called virtual currencies have been accepted by those parties involved in the transaction as an alternative contractual and direct means of payment and serve no other purpose than payment means. The consequence of this qualification is that associated so-called other services are exempt from sales tax.

However, this would not apply to virtual play money (so-called game currencies or in-game currencies, especially in online games). However, the extent to which services related to this, such as mining, wallets or operating trading platforms, can also be classified as VAT-exempt services has not been conclusively clarified and depends crucially on the respective service design.

The legislature has already acted for e-commerce trade, in particular via platforms, by imposing special obligations on the operators of an electronic marketplace with § 22 f UStG and establishing its strict liability for sales taxes in § 25 e UStG, unless it has sufficiently fulfilled obligations from § 22 f UStG. Furthermore, § 3 a (5) of the UStG contains special regulations for other services provided electronically for determining the service place: It is based on the recipient's habitation or permanent residence.

This is particularly relevant for the question of the invoice, withholding of sales tax and possible input tax deduction. Significantly, the focus is not on the recipient's location or place of service purchase, but on the person's income tax domicile. Although this represents a certain breach of general sales tax law principles, it makes taxation manageable after all. The question could arise here whether this also applies to tokens and crypto values, insofar as they are provided electronically or via electronic platforms.

Inheritance and gift tax law

In accordance with sales tax law, the Bavarian State Tax Office and FinMin. Brandenburg crypto currencies for inheritance and gift tax purposes are also classified as financial instruments within the meaning of § 1 Para. 11 sentence 1 KWG and therefore as financial resources within the meaning of § 13b Para. 4 No. 5 ErbStG. As a result, crypto currencies held as business assets are generally classified as administrative assets and must be taken into account in the financial resources test according to § 13b Para. 4 No. 5 sentence 1 ErbStG. Valuation of virtual currencies is based on the common value according to § 9 BewG.