With the increasing popularity and growing application possibilities of NFTs, the question of legal regulation is also increasingly arising. This article assesses NFTs from a financial market law perspective. What exactly is meant by the term NFT and how they are to be legally classified can be found here.

For the time being, it should be noted that there is still no legally established practice for NFTs compared to “ordinary” tokens. Apart from its uniqueness, however, an NFT does not differ significantly from another token. From a financial market law perspective, the categorisations made by FINMA can therefore also be used for the treatment of NFTs.

I. What are tokens?

DLT (Distributed Ledger Technology) is a digital system for recording transactions. The DLT is a digital and decentralised register that shows the entitlement to a value or value carrier. This value or value carrier is called a token. Financial products based on the DLT are therefore to be understood as digitally created assets whose transfer and safekeeping takes place on this DLT infrastructure. The holders of the tokens are uniquely identified and the token represents the digital information registered in the ledger.

II. FINMA’s token categorisation

Payment token (Payment Token)

This refers to tokens that are actually or, depending on the intention of the organiser, are accepted as a means of payment for the purchase of goods and services or are intended to serve the transfer of money and value (cryptocurrencies). The issuance of payment tokens is subject to the provisions of the Anti-Money Laundering Act(AMLA, SR 955.0). However, there are no claims against the issuer. Payment tokens are not treated as securities by FINMA.

Utility token

Tokens that are intended to provide access to a digital use or service on or using a blockchain infrastructure are classified by FINMA as so-called usage tokens. No regulatory authorisation is required for the issue of usage tokens, provided the digital usage or service is fully functional at the time the token is issued. In principle, usage tokens are therefore not securities within the meaning of Art. 2 lit. b FMIA, unless they do not yet have the functionality announced by the issuer at the time of issue and fulfil the requirements pursuant to Art. 2 lit. b FMIA.

Asset token

Tokens that represent assets fall into this category. In particular, such tokens can represent a debt claim. In terms of economic function, such a token can represent, for example, a share, a bond or a derivative financial instrument. In principle, FINMA assumes that investment tokens are a form of uncertificated securities whose ledger of values is maintained on the blockchain. If the requirements under Art. 2 lit. b FinfraG are also met, they qualify as securities and the associated consequences under financial market law follow.

Hybrid tokens

Mixed forms are also conceivable, e.g. a token can be classified as a usage and payment token at the same time; these are referred to by FINMA as hybrid tokens. Such categorisations are also currently being made in the EU. However, although the EU followed the process in Switzerland, a slightly different categorisation was made in the Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937. More on this can be found here.

III. Classification of NFT under financial market law

The FINMA guidelines are silent on NFTs. However, since NFTs are tokens in the same way with the only but essential difference that they are “non-fungible”, i.e. not fungible, the categorisation can be used for a legal qualification. In our opinion, the categorisation made by FINMA should not be interpreted rigidly. Rather, a case-by-case approach should be taken, especially in the case of NFTs.

Since there are various possible applications and forms of NFTs, they cannot generally be assigned to a specific category. In our opinion, a case-by-case assessment leads to the result that, depending on the concrete design, an NFT could at least partially fulfil the requirements of each category. For example, an NFT that represents a football player in a game can be classified as a usage token, as it grants the holder the exclusive use of this player in the game. This is not the case with NFTs that represent digital art, as is the case on the OpenSea platform, for example. Although the digital art itself is usually not stored on-chain, i.e. on the blockchain, but on an external server and the buyer thus only acquires the link to the image stored on the server, including proof of ownership, via the NFT, “digital” assets are nevertheless linked to it in a broader sense, which are sometimes traded at very high prices. In our opinion, this justifiably raises the question of whether such forms of NFTs do not qualify as asset tokens, especially against the background that investors are trying to realise profits by buying and selling them. In games, equipment for avatars is increasingly issued in the form of NFTs, which in turn serve as a means of payment for other items, so that the NFT takes the form of a payment token, at least in this in-game ecosystem.

For an assessment of NFTs under financial market law, it is ultimately central whether or not NFTs constitute securities within the meaning of Art. 2 lit. b FinfraG. In order to take the latest technological changes into account, ten existing laws were amended with the so-called DLT Mantle Act. Among other things, the definition of securities was expanded. Pursuant to Art. 2 lit. b FinfraG, securities are now “standardised securities suitable for mass trading, uncertificated securities, in particular simple uncertificated securities pursuant to Art. 973c CO and registered uncertificated securities pursuant to Art. 973d CO, as well as derivatives and intermediated securities”. The register value rights now also include tokens that represent or depict a legal position (claim or membership), such as share tokens. In order for NFTs to be subsumed under the concept of securities under financial market law, an NFT would therefore have to represent a register value right within the meaning of Art. 973d et seq. of the Swiss Code of Obligations. For this to happen, the following four conditions must be met:

  • It must be a transferable right that can also be recorded in a deed/securities and can be converted into a token
  • There must be a transparent register in which the right holder is granted power of disposal
  • The existence of a register agreement that links the right to the register in such a way that the right can only be exercised via the register
  • The registration itself

Whether an NFT fulfils these requirements is questioned in the doctrine. Problems arise in particular if the NFT merely represents a link to a digital object or certifies authenticity. However, the design of an NFT as a register value right is not completely ruled out. The situation would be different if the right were integrated into the token (“tokenised right”) and this was freely transferable.

Another approach would be to qualify the NFT as a derivative within the meaning of Art. 2 lit. c FinfraG and thus as a financial instrument within the meaning of Art. 3 lit. a FIDLEG. For this to be the case, however, the price of the NFT would have to be made dependent on an underlying. This is usually not the case with NFTs. Exceptions would also be conceivable here, for example, an NFT could include the right to acquire a digital work of art at a certain value. In general, the tendency is for NFTs to be understood neither as registered securities nor as derivatives.