The multi-billion dollar NFT market has for years anxiously awaited the answer to a single question: Will the U.S. government classify non-fungible tokens as securities?
A federal judge in Manhattan on Wednesday gave the first glimpse of an answer, ruling against one of the top companies in the NFT space: CryptoKitties and NBA Top Shot maker Dapper Labs.
Dapper sought to dismiss a lawsuit against the company over allegations that it violated securities laws in its offering of NBA Top Shot NFT Moments. Judge Victor Marrero denied Dapper’s motion to dismiss because he found arguments labeling Top Shot NFTs as securities “plausible”—a first for this novel technology. Several NFT collectors took to Twitter following the news to eulogize the industry, but such reactions may be premature, legal experts tell Decrypt.
“For most people who mint NFTs using public blockchains, and who allow their NFTs to be traded on marketplaces, I think this is actually a pretty good decision,” Jeremy Goldman, an attorney specializing in blockchain technology, told Decrypt. “They can have a sigh of relief.”
Goldman reasons that the court’s decision may actually bode well for the broader NFT market because of the emphasis that Judge Marrero placed on Dapper Labs’ Flow blockchain as a “private” network. Top Shot NFTs may be securities not only because Dapper Labs created them, said the judge, but also because the company built the Flow blockchain upon which the NFTs were launched.
“If, hypothetically, Dapper Labs went out of business and shut down the Flow blockchain, the value of all Moments would drop to zero,” Marrero wrote. “That is the critical causal connection that other collectibles cases lack.”
Holders of Top Shot NFTs are therefore unavoidably invested in the success, or at least the survival, of Dapper Labs, according to the judge. Such a relationship between a passive product and the active work of a separate entity is core to the definition of a security under U.S. federal law.
“That Dapper Labs created and maintains a private blockchain is fundamental to the Court’s conclusion,” Marrero said.
That dynamic, in which a company builds both an NFT collection and the blockchain on which it lives, is atypical in the industry— the vast majority of NFT collections exist on public, permissionless blockchains like Ethereum and Solana.
But not everyone agrees that this distinction is particularly important when determining whether an NFT ought to be considered a security.
“It would be a mistake to conclude from this, ‘Well, I’m on a public blockchain, so this is irrelevant to me,’” Lewis Cohen, an attorney focusing on blockchain and tokenization, told Decrypt.
“Judges are cutting through the BS. They’re really trying to understand what’s going on, and they’re doing a pretty good job of it,” he said. “And if [an NFT project] looks and feels like something where people are giving money and relying on a promised roadmap, it may find itself in the same position.”
If the impact of Wednesday’s ruling on the broader NFT market remains up for debate, one point that doesn’t is that things don’t look great for Dapper Labs. The company’s founder and CEO Roham Gharegozlou referenced Wednesday’s ruling in a letter to employees in which he announced another 20% reduction of Dapper’s staff, after slashing 22% of its workforce in November.
Original article: https://decrypt.co/122148/nba-top-shot-lawsuit-dapper-good-for-nfts
