Nfts
US courts to decide whether NFTs are securities as DraftKings case goes to trial
A U.S. District Court judge in Massachusetts has denied DraftKings’ motion to dismiss a class action lawsuit alleging its NFTs are unregistered securities, potentially setting the stage for a landmark lawsuit that could reshape the NFT landscape.
The case, Dufoe v. DraftKings Inc.which was filed in March 2023, claims that DraftKings’ sports-themed NFTs on the Polygon blockchain meet the criteria of the Howey testpotentially classifying them as securities. Now, a new court filing indicates the case is moving forward under Judge Denise Jefferson Casper.
The trial comes at a critical time for the NFT market. As of July 3, 2024, the NFT space has seen a significant slowdown from its 2021-2022 highs. According to data from CryptoSlamIn the second quarter of 2024, sales volumes decreased by 45% compared to the previous quarter, with total sales reaching approximately $2.28 billion, the lowest level since the third quarter of 2023.
Despite this slowdown, the NFT ecosystem continues to evolve, with brands and businesses exploring diverse applications far beyond digital art. The breadth of NFT use cases has expanded significantly, spanning diverse industries and creating new forms of digital ownership and engagement.
Sports collectibles, like those from Dapper Labs NBA Top Shot—although they have fallen from their dizzying summit— continues to maintain a loyal audience, allowing fans to own iconic moments in sports history. Virtual real estate on metaverse platforms such as Decentralized And The sandbox are traded as NFTs, creating digital real estate markets.
Luxury fashion brands, including Louis Vuitton, GucciAnd Pradaas well as digitally native “phygital” brands like DressX, are creating NFT-based digital wearables and collectibles, blurring the lines between physical and digital fashion.
This diverse range of applications demonstrates the versatility of NFT technology, but also highlights the complex regulatory challenges ahead as these tokens increasingly resemble traditional securities or financial instruments.
The judge find that the plaintiff in the DraftKings NFT case “has plausibly alleged that DraftKings’ NFTs satisfy three prongs of the Howey test.” In this case, that includes an initial investment of money in a common enterprise that created a reasonable expectation of profit from the enterprise’s efforts.
This decision could have far-reaching implications for the NFT industry. If NFTs are classified as securities, it could have a significant impact on how companies create and market these digital assets. Brands may need to reconsider their NFT strategies to ensure they comply with securities regulations, which could stifle creativity and innovation in the industry.
Last August, Matthew Sigel, head of digital asset research at VanEck, wrote about the importance of NFTs for companies like DraftKings, where they account for nearly 5% of profits. A change in the regulatory landscape could have substantial financial implications for these companies.
“DraftKing’s Reignmakers, an NFT game on Polygon, is expected to generate $70 million in high-margin revenue over the next year and grow EBITDA by approximately 5%,” he wrote in a statement. blog post.
The case bears similarities to the recent Dapper Labs settlement, where the company agreed to pay $4 million to resolve a class-action lawsuit over its NBA Top Shot NFTs. However, a key distinction lies in the blockchain infrastructure: While Dapper Labs uses its proprietary Flow blockchain, DraftKings issues tokens on the public Polygon network.
Edited by Stacy Elliott.