If you are following our NFT self-experiment, you already know what an NFT is and what it stands for. If not, you might want to read more. The following article addresses a random first choice of civil law, contractual aspects to be precise, which the authors think are worth considering before you buy (or sell) your first NFT. However, given the novelty of the underlying technology, there is room for dissenting opinions.
1. Random topic 1: Which law applies?
If a potential NFT collector deep-dives into the world of NFTs, they will hardly ever stick to their home territory. NFTs are usually traded on online platforms. Purchasers and sellers are frequently from different countries. Payment might even be demanded in cryptocurrency rather than in the currency of a state. Thus, the agreement that is about to be concluded when purchasing an NFT is "international". In a preliminary step, the applicable law should be assessed.
The general rules
Private international law deals with the question of which national legal system must be applied to an international dispute. The purpose of conflict of laws rules is clear: in disputes with a "foreign connection", a judge is not allowed to choose any discretionary principles to decide this matter but has to apply the laws of a specific legal system. To add to the complexity, a distinction must be made between the laws of obligations (Schuldrecht) and property law (Sachenrecht) aspects of the case.
In Austria, this question is primarily answered either by the EU's "Rome I" Regulation or by the Austrian International Private Law Act ("IPRG"). In terms of the laws of obligations (Schuldrecht), applying those rules (most likely) leads to the law of the country where the seller (for purchase agreements) or the service provider (for service agreements) resides.
In terms of property law (Sachenrecht), the general catch-all provision1 of the IPRG applies. According to it, the "closest relation to the matter" decides the question of which law is applicable. In practice this assessment is naturally quite difficult, in particular in view of the blockchain's decentralised design.
With regard to the laws of obligations the good news is that there sometimes is an easy way out, because instead of those complex rules the parties are also free to agree on the applicability of a specific law. Such a choice of law clause is frequently included in general terms and conditions (GTC). However, this freedom to choose the law meets its limits in the consumer protection area.2 If a consumer concludes the agreement, any national provisions of their country of residence favouring the consumer overrule any "chosen" provisions provided that the entrepreneur (i) pursues his professional or commercial activity in the State where the consumer has his habitual residence; or (ii) directs such activity in any way to that State or to several States, including that State, and the contract falls within the scope of this activity. The choice of law for terms of property law is not possible. However, the choice of law for the laws of obligations could be the decisive point in determining with which law the NFT has the closest relation according to Section 1 (1) IPRG and thus could also lead to the fact that the chosen law's terms of property law must be applied.
In summary, a choice of law seems useful when it comes to NFT transfers. Before any transaction is made, if and which GTC are concluded and what those GTC say about the applicable law should be carefully checked.
2. Random topic 2: Speaking of consumer protection…
2.1. …which agreement is concluded?
In addition to the above, the specific provisions of the Austrian Distance Selling Act (Fern- und Auswärtsgeschäfte-Gesetz) might apply. The Distance Selling Act (and the underlying EU directive, Directive 2011/83/EU) regulates certain aspects of distance, off-premises and on-premises agreements between consumers and traders. Distance selling seems obvious. Pursuant to the prevailing legal opinion, the Distance Selling Act covers purchase agreements (Kaufverträge), exchange agreements (Tauschverträge) and service agreements (Dienstleistungsverträge). Thus, if a trader sells an NFT to a consumer, the Distance Selling Act will be applicable, irrespective of whether the payment is made in cryptocurrency (which would indicate the conclusion of an exchange agreement) or in fiat money (which would indicate the conclusion of a purchase agreement). One could even argue that the concluded agreement is a service agreement, since the NFT is not really transferred but just the allocation of the ownership is changed by adding a new transaction in a block to the blockchain. A service agreement within the meaning of the Distance Selling Act is defined as "any agreement other than a purchase agreement under which the trader supplies or undertakes to supply a service to the consumer and the consumer pays or undertakes to pay the price thereof". The seller of the NFT arguable undertakes to supply the service of "triggering" the change of ownership in the blockchain. The consumer pays the price.
2.2. …how to deal with withdrawal rights?
The Distance Selling Act aims at ensuring transparency of information, in particular pre-contractual information that the consumer will be provided with. When selling NFTs, the seller is advised to double-check those transparency obligations. The Distance Selling Act further ensures withdrawal rights of consumers. This topic requires specific attention, because once an NFT is sold, the allocation of the NFT to the purchaser is recorded in the blockchain. Since the blockchain is designed to be irreversible, withdrawal rights might cause some issues (even though there might be some workaround options).
In general, under the Distance Selling Act, a consumer usually has the right to withdraw from a distance agreement or off-premises agreement without giving a reason within (at least) 14 days. However, the withdrawal right has some limits. With respect to an NFT purchase, two exceptions could potentially be relied on:
- there is no right to withdrawal under the Distance Selling Act with respect to "the supply of goods or services for which the price is dependent on fluctuations in the financial market which cannot be controlled by the trader and which may occur within the withdrawal period"; and
- there is also no right to withdrawal under the Distance Selling Act with respect to "the supply of digital content which is not supplied on a tangible medium if the performance has begun with the consumer's prior express consent and his acknowledgment that he thereby loses his right of withdrawal".
Let's have a look at the first exception: the consumer has no right of withdrawal in distance agreements for goods or services whose price depends on fluctuations in the financial market beyond the trader's control and which may occur within the withdrawal period. On first glance, this exception seems suitable, since NFTs are traded and there is a certain market fluctuation beyond the trader's control.
However, closer scrutiny should be given to the term "goods" before jumping to a conclusion: goods are not defined in the Distance Selling Act, but in the underlying EU Directive as "any tangible movable item […]" with the exception of items sold based on compulsory execution or other judicial measures. Water, gas and electricity are also deemed to be goods within the meaning of the Directive if they are offered for sale in a limited volume or in a certain quantity.
Since an NFT is not a moveable tangible thing, but rather an intangible thing, one could try to argue to exclude the consumer's withdrawal rights by way of analogy to investment gold, precious metals or even to energy. Alternatively, the above-mentioned qualification of the agreement as a service agreement could be reconsidered. Regarding the agreement of the "volatile" NFT as a service agreement would allow the consumer's right of withdrawal to be excluded. This conclusion could be underpinned with teleological considerations. The aim and purpose of the specific provision of the Distance Selling Act (Sec 18   Distance Selling Act, Art 16 [b] Directive 2011/83/EU) is to prevent the right of withdrawal from being misused as an instrument for market speculation.
The Distance Selling Act contains a second exception which might be applicable: According to Section 18 (1) (11), the consumer has no right of withdrawal from distance agreements for "the supply of digital content which is not supplied on a tangible medium if the performance has begun with the consumer's prior express consent and his acknowledgment that he thereby loses his right of withdrawal." Compared to exception no. (i), this provision has considerable disadvantages for the seller, because it does not exclude the possibility of withdrawal ex ante, but only from the beginning of the performance of the agreement/delivery. Furthermore, the right of withdrawal is only excluded if the trader fulfils certain strict requirements: (i) prior express consent of the consumer; (ii) the consumer's knowledge of the loss of the right of withdrawal; (iii) the trader commenced the delivery before the expiry of the withdrawal period; and (iv) the provision of a copy or confirmation of the concluded agreement (pursuant to section 7 (3) Distance Selling Act). Simply put, relying on this exception bears the risk that consumers might successfully claim their withdrawal rights provided that the trader does not fulfil one of those requirements.
As these examples have shown, transactions must be analysed in their "new" technological but "classic" legal contexts. This analysation process is the lawyer's playground. Since we only touched the tip of the iceberg of unresolved legal questions with this article, please stay tuned!
1 Specific provisions of the IPRG address, e.g. the transfer of movable tangible property. However, looking at an NFT as an "intangible thing" (unkörperliche Sache) the applicability of this specific provision fails.
2 If a natural person concludes an agreement for non-professional purposes (as a consumer) with another (natural or legal) person in the exercise of their professional activity (as a trader).