The pandemic’s digital asset boom may now be in the world’s rearview mirror, but the impact that COVID-19 had on Web3 products is still being felt throughout the financial industry as officials continue their legal battle with crypto purveyors and NFT promoters. As we know, Binance, Coinbase, FTX, and other major cryptocurrency industry players have long been engaged in hefty lawsuits brought on by the Securities Exchange Commission and investors; but recently, litigators have had their sights on another volatile digital asset: NFTs, or non-fungible tokens.
There’s no doubt that crypto cases are prevalent in the industry, but some litigators are claiming that NFTs are the next frontier in digital asset conflicts, which pushes us to wonder: why are NFT makers, promoters, and buyers heading to court? And how can experts assist in creating a successful strategy for those embroiled in conflicts surrounding NFTs?
Examining the NFT Market
Though the first NFT was minted way back in 2014, their popularity exploded throughout 2020 and 2021 as the market’s interest in blockchain technology expanded following the pandemic and the rising popularity of crypto coins. At the time, these collectibles, virtual plots of real estate, and digital art pieces were selling for millions. And despite market volatility, many celebrities, big brands, and reputable companies bought into the hype, using their name to promote the public’s investment in these “valuable” tokens. But now, that act is catching the attention of regulators looking to enforce securities laws and investors looking to recoup losses on now meaningless digital tokens.
Two years ago, the NFT market boasted more than $2 billion in monthly trading volume. Today, 95% of NFT collections now have a market cap of zero ether– meaning almost 23 million people are holding essentially worthless assets. And this volatility has pushed the SEC and investors to sue NFT providers and peddlers for everything from securities fraud to price manipulation.
The NFT Litigation Landscape: Major Lawsuits with Major Implications
There are currently a multitude of major disputes hitting the courts over the distribution or promotion of NFTs. In the class action space, investors are looking to prosecute the parties involved with the marketing of Yuga Labs’ Bored Ape Yacht Club (BAYC) assets. The original suit, filed in December 2022, charged Yuga Labs on the claims that it “deceptively promoted” its collection of NFTS. In addition, the filing alleged that celebrity endorsements from Justin Bieber, Paris Hilton, and more were unethical as it was not explicitly disclosed that they were paid to promote the assets, resulting in nine public figures being named over allegations of fraud. This past August, Sotheby’s Holdings was also added to the list of 30 defendants in the case after the four plaintiffs claimed that the auction house colluded to inflate BAYC NFT prices and “misleadingly promoted” the assets.
In addition, Yuga Labs has been involved in a trademark case over the Bored Ape logo; the BAYC creator won a lawsuit earlier this year after a federal judge ruled that two artists, Ryder Ripps and Jeremy Cahen, violated a trademark after using the same images seen in the original Bored Ape NFTs for their asset project. This decision came on the heels of the industry’s first case that illustrated how NFTs and IP laws intersect; Hermes International SA received a winning verdict from a Manhattan jury after a digital artist infringed on the fashion house’s trademark with their “MetaBirkin” NFTs. These two suits have undoubtedly set the precedent for how future trademark suits involving NFTs are litigated. As digital assets, artificial intelligence, and more continue to evolve, guidance from these cases will set a path for more creators as they seek to protect their valuable IP.
Most recently, a federal class action has been brought against superstar Shaquille O’Neal by none other than the attorney who registered the first nationwide class action against FTX. In August, Adam Moskowitz filed an amended 111-page complaint against Shaq citing a slew of securities violations, and it is twice as long as the original complaint from earlier this year. The former NBA player endorsed tokens and NFTs created for his Solana-based Astrals Project, of which he was the main promoter.
It is alleged that the NFTs were not properly registered as securities before being offered to the public, and in failing to register the tokens, O’Neal violated provisions of the Securities Act. The venture capital firms that helped fund the project are mentioned in the complaint, and Moskowitz reports that sometime in the near future, they will be served in the suit. Shaq has also been named in a class action suit alongside other athletes for endorsing the defunct FTX, and he has denied the allegations mentioned in both suits. He sought to dismiss the Astrals case, but the motion was denied last month, and he has not yet responded to the amended complaint.
In August, the SEC engaged in its first lawsuit targeting an NFT entity when it charged LA-based Impact Theory with breaking securities laws. The regulator claimed that the media company raised almost $30 million through the sale of NFTs that were not registered or did not qualify for an exemption, violating Sections 5(a) and 5(c) of the Securities Act. Under the Howey test, Impact Theory’s NFTs met the definition of a security and as a result, the company, without admitting or denying the findings, paid a combined total of more than $6 million in penalties, interest, and disgorgement. This enforcement action may indicate the SEC’s interest in regulating the NFT market and signal impending litigation from the Commission as they continue their attempts to reign in the digital assets industry as a whole.
How Experts Can Assist in Digital Asset and NFT Litigation
Each of the aforementioned cases culminates to mark the official start of fintech’s NFT litigation wave, and according to legal experts, this is just the tip of the iceberg of what’s to come for the industry as regulators attempt to reign in the digital asset space. There have been billions of dollars in NFTs sold, and with that comes billions in litigation, especially in cases where the digital assets in question qualify as securities.
To prepare, those operating in the NFT realm should engage with capable experts now to safeguard their operations against future litigation and impending regulation. Collaborating with experts early in the litigation process can help firms uncover questionable or potentially illegal practices happening under their noses. With the legal need in the digital assets market expanding fast, a highly-credentialed expert witness can help address issues that may enable firms to extricate themselves before they get indicted in a conspiracy.
No matter the issue, WIT has teams of fintech experts prepared to address incoming disputes in the crypto and NFT spaces. Our world-class testifying experts include leading academics, industry veterans, and technical subject matter experts and have the insight to assist clients involved in complex litigation including SEC enforcement actions and DOJ criminal prosecutions, consumer class actions, bankruptcies, and securities disputes.