Risks of NFT Trading: Do I Own NFTs?

Keep your eyes open when investing in NFTs: How to identify NFT counterfeits

You hear about them everywhere. NFTs are increasingly conquering the art market over time, which is why many people invest their money in them. But what exactly is an NFT? How does NFT trading work? What are the risks and what is the best way to prevent them?

What are NFTs? Where to buy and sell them?

NFT is an acronym for Non-Fungible Tokens. They represent unique cryptographic tokens on a blockchain that have special value in the digital and spiritual world. NFTs can include music, art, tickets, tokens, digital identities.

Unlike fungible cryptocurrencies like Bitcoins, NFTs are non-fungible due to their documented unique nature, meaning they cannot be exchanged for another NFT.

NFTs can be found in various digital markets where users invest in them, sell them and also make them. The most famous marketplaces for NFT trading are OpenSea, Rarible, SuperRare, Axie Infinity.

As the value and interest in NFTs increases, so does the number of those who want to trick inexperienced users, for example by creating fake NFTs.

How are non-fungible tokens classified legally?

Legal disputes arise not only from transactions involving physical objects but also from transactions involving digital works, which is why the legal classification of NFTs is crucial. This is the only way to see what rights you are entitled to.

The legal nature of physical works of art is now clearly defined. They can be held as movables and are also capable of being owned. The right of ownership may be transferred pursuant to § 929 sentence 1 BGB. Whether tokens can be owned as digital devices and how the transfer of NFTs can be legally qualified is still a matter of controversy.

According to the current state of law, only property, ie physical objects, can be established. Because NFTs are decentralized digital devices that cannot be spatially constrained, it is not possible to assume their execution. Therefore, their ownership can not be established. One way to deal with NFTs accordingly would be to issue rules similar to § 90a. Here it says that the rules that apply to things must also apply to animals. So far, however, no such attempt has been made.

However, there are indications that NFTs should be classified as other rights under § 823 (1) BGB. This presupposes that rightholders are in a similar situation as owners. Anyone who has personal credentials stored in the wallet that is only available to them can access the NFTs. So whoever has access to the wallet is the only one who can access NFT. This corresponds to the actual disposition inherent in lawful possession. Therefore, the classification of NFT as another right under § 823, para. 1 BGB, obvious. To date, however, this has not been resolved in court, making it difficult to find appropriate solutions for counterfeit NFTs and other damages caused by NFT trading.

How to recognize the legitimacy of an NFT project?

As NFT trading grows, the risk of being scammed by other users with fake NFTs or encountering an illegitimate collection of NFTs increases and suffers huge losses as a result. However, there are a number of factors to consider when analyzing an NFT project that can help you identify legitimate NFT collections.

First and foremost, brand awareness or market perception of NFTs is one of these factors.

If an NFT collection has a history of active trading and an increasing value of the respective NFTs, it can be considered legitimate with a high probability of success.

The size of the community should also be considered as the most well known NFT collections tend to have vibrant collector communities. The legitimacy of a collection is even more assured once it has been officially approved or launched by a major brand, a celebrity or a recognized artist.

Another way to avoid buying fake NFTs from scammers is to track the NFTs you invest your money in. NFTs are remarkable for their traceability, allowing you to see who originally created them, how many people bought and sold them, and when they were minted, among other things.

You also need to make sure that the NFT brand owns the intellectual property rights to what it sells. If these rights are violated, the owner of the intellectual property right can sue the author. This reduces the value of NFT.

Furthermore, the underlying blockchain may also be an indication of the legitimacy of the collection. If you look at the blockchain network on which the NFT project operates, you can see how secure NFT will be in the long run. Given the high success rate of established blockchains like Ethereum in terms of stability and continuity, it can be assumed that NFTs will exist for a long time and therefore can be trusted. NFTs that are not stored on such a blockchain or are on a non-surviving chain may become worthless. So before you buy an NFT, you should ideally research which blockchain NFT is running on.

Finally, a scam is when you are offered a free NFT or are asked to participate in a raffle. This is typically how scammers try to get your crypto wallet credentials. Thus, they can steal your existing NFTs and any other digital currency or token.

Need help with NFTs

The underlying legal issues of investing in NFTs and NFT trading are complex and case-by-case. We are happy to help you with our expertise. You can also contact us confidentially at the following e-mail address for preliminary questions: info@rechtsanwaltkaufmann.de.

The content of this article is for general information only, does not relate to the specific situation of the person concerned and does not constitute legal advice. The information provided can not replace individual advice from competent persons in specific individual cases.

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