NFTs have gained a lot of popularity lately, but why? There are reports of multi-million dollar sales, such as the sale of the NFT belonging to the work “Everydays: The first 5000 days” by artist Mike Winkelmann for around 70 million US dollars. In the following we will explain what NFTs are and how they work.
What is an NFT anyway?
“NFT” stands for “non-fungible token” and thus a unique, non-replaceable and non-replicable token. A token can be defined as a digital asset on a blockchain, also known as a “cryptocurrency”. NFTs are based on blockchain technology and are linked to a unique countervalue. Unlike other tokens on a blockchain (such as bitcoins), NFTs cannot be split.
This uniqueness allows NFTs to be used ,among other things, for digital collectibles or digital as well as physical art. This is because the buyer has technical control over the stored legal asset (a work of art or similar) after purchasing the NFT. While digital images on the internet can of course be copied, the holder of the NFT is the only true owner of the digital image. It is similar to the Mona Lisa; there are various copies, but there is only one original version of the Mona Lisa and it is in the Louvre. The owner of the NFT is the only person who has the right to resell the NFT. An NFT can thus best be described as a digital real-time certificate and its value depends on the linked equivalent value of the object. The link is made by means of a smart contract, which connects the digital asset to the NFT on the blockchain.
How are NFTs to be qualified under Swiss law?
NFTs are a type of tradable digital asset; through their link to, for example, a work of art, they receive a certain value. Under Swiss law, NFTs are likely to be rival, incorporeal assets sui generis. Unlike, say, a bitcoin (a bitcoin will always represent the same value as another bitcoin), an NFT is rival. That is, an NFT is never equal to another NFT – as shown in the introduction, it represents a unique countervalue and cannot be split on the blockchain. The NFT is therefore incorporeal because it only exists in digital form and is considered a sui generis asset because NFTs are not things in the sense of the CC. However, it is still covered by the Criminal Code as a sui generis asset – and thus offences under Art. 137 et seq. of the Criminal Code in connection with NFTs do not go unpunished.
Possession of an NFT should in this sense regulate the rights arising from possession, in particular terms of sale or exchange. A distinction must be made between intangible goods and physical goods:
Consequently, if the artist sells an NFT for his or her digital work, the artist is not in principle passing on any copyright or marketing right, he or she is only selling the ownership of his or her work. A distinction must be made between the NFT and the work itself. The NFT itself, unlike the work, is not protected by copyright. Furthermore, no transfer of the digital work takes place via the NFT; rather, the NFT shows on the blockchain who owns the digital work. This is because an NFT itself is not much more than a ledger or proof of the underlying work. Nevertheless, parties are free to contractually regulate the transfer of intellectual property rights via NFTs.
The situation is different if NFTs are to represent physical goods, such as movable property. The transfer of property according to the applicable law pursuant to Art. 714 CC or Art. 922 CC does not take place with the transfer of the NFT. However, the new DLT Act, which will come into force on 1 August 2021, has a solution to this. Among other things, it introduces the register value rights (nArt. 973d OR). These are merely qualified uncertificated securities that guarantee the function of securities on a blockchain. Furthermore, the introduction of nArt. 1153a CO allows the issuance of securities in the form of register value rights pursuant to nArt. 973d CO. It follows that by agreeing on the issuance of securities for the representation of property (under Art. 925 CC), the parties – analogously to NFTs under nArt. 1153a CO for its transferability or representation of physical goods. If the sold thing or digital good does not pass, NFTs could serve for the instruction of possession under Art. 924 CC for the acquisition of possession of specific movable things or dematerialised rights.
Furthermore, there will always be an agreement between the parties defining the scope of the transferred rights to the tangible or intangible asset. Therefore, it is usually the individual case that has to be qualified and not a blanket qualification. Per se, as already explained, an NFT does not qualify for the transfer of goods under Swiss law. Indeed, it also works differently: as an example, in the case of an auction of a drawing by Basquiat, the buyer was given the choice to destroy the original drawing. In this case, the NFT would thus be the only remaining form of the drawing. This would generally mean that the NFT would no longer represent a property title per se, but solely a rival incorporeal asset sui generis of the once existing physical drawing – similar to a photographic evidence of a no longer existing object.
The phenomenon of NFTs is currently treated in Switzerland as a sui generis rival incorporeal asset. Under current law, their simple transfer, without any agreement, is not per se a transfer within the meaning of Art. 714 para. 1 CC or Art. 922 CC. This will be the case at least until the new DLT Act comes into force (from 1 August 2021), according to which nArt. 1153a CO provides for the equal treatment of securities and register value rights. However, this must be evident from the parties’ intentions. An NFT should probably already be possible for the transfer of possession by transfer of an NFT under Art. 924 CC under current law, especially in the case of the transfer of digital goods where no transfer of possession actually takes place.
NFT technology is likely to compensate artists of digital art, for example, who until now have not been able to protect their original from copying despite copyright protection. NFTs help to record the rights to a tangible or intangible object or value. For example, as shown in the introduction, the work “Everydays: The first 5000 days”: The project began on 1 May 2007 and records the first 5000 digital images by the artist Mike Winkelmann. Without NFTs, the artist would hardly have received compensation for his digital art – but NFTs made it possible. The time has come for digital art in particular to be given the same prestige as a traditional painting.