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The hype surrounding NFTs and crypto assets appears infinite and is raising more and more questions and challenges for the legal profession in Austria and beyond.
NFTs can have significant market values: Only recently, an NFT asset of Beeple was auctioned for more than USD 69m. An obvious question is, therefore, whether NFTs can also serve as collateral.
The legal aspects of taking security over NFTs and other crypto assets in a global context are far from settled (see, e.g. the consultation on the review of the Financial Collateral Directive, in particular Qs 5.4 to 5.6 addressing certain crypto assets).
Nevertheless, we believe that blockchain entries can be an appropriate means for creating and perfecting security over NFTs. Also, blockchain technology offers creditor protection, because its decentralised design significantly reduces the risk of manipulation or errors.
NFTs are considered intangible assets rather than receivables/claims.
Whether crypto assets (and therefore also NFTs) are movable or immovable under Austrian law is not quite clear and good arguments can be made either way. However, for the reasons explained below, this characterisation is not critical when it comes to taking security over NFTs.
Irrespective of the legal characterisation of an NFT, blockchain entries provide most legal certainty (in relative terms) for the party taking security over NFTs.
This is because a blockchain entry showing that the exclusive right to an NFT has passed from one person to the other provides appropriate "publicity" (as required by Austrian law). Accordingly, that entry should be suitable for the creation and perfection of security.
In contrast, the other routes discussed in practice increase (rather than reduce) the number of legal questions:
It is worth noting that blockchain entries will not usually be "pledge entries", in contrast to "title transfer entries". This is because, to our knowledge, the usual relevant smart contracts as well as wallets (the tools to interact with the blockchain) do not technically provide for such pledge entries. Accordingly, the blockchain entry will merely show that the exclusive right to the NFT no longer vests in A (in our case, the security provider) but rather in B (the secured creditor). Such a "transfer" appears suitable (modus) to create and perfect security. The contractual arrangement (titulus), i.e. the security agreement, will usually be entered into between A and B outside and unrelated to the blockchain.
Like many other aspects surrounding NFTs and other crypto assets, taking security over NFTs raises several challenging legal questions, some of which are addressed in this Legal Insight.
Other questions, such as how to arrive at Austrian law as the law applicable to the creation and perfection of security over NFTs (in the absence of a determinable situs of an asset based on DLT and in the absence of a choice of law when minting the NFT and/or in a crypto asset's whitepaper or the relevant smart contract) remain to be clarified by the courts, legal practitioners and potentially also lawmakers. Austrian courts will resort to Austrian law if the applicable foreign law cannot be determined within a reasonable period.
authors: Martin Ebner and Peter Ocko