We’ve discussed NFTs (non-fungible tokens) before on this blog. They represent, perhaps, an entirely new form of intellectual property. These crypto assets can currently only be traded via blockchain transactions. Their value depends entirely on the buyer’s trust in that blockchain. We explained that it’s not clear yet how or even if NFTs will be regulated and recommended the buyer beware.
The National Basketball Association has created NFTs called NBA Top Shot non-fungible tokens. Now, the creator of a marketplace just for these is facing a class-action lawsuit.
The lawsuit was brought by purchasers of NFTs featuring highlights of NBA games called “NBA Top Shot Moments.” These are basically digital video clips of exciting in-game moments. According to the lawsuit, the creator of the marketplace should have registered the NFTs as securities.
What are securities, exactly?
The definition of “security” in financial terms is a “fungible” (tradeable), “negotiable” (of unfixed value) financial instrument that holds monetary value.
Sales of securities are regulated by the SEC and sometimes state regulators. So far, no one at the SEC or any of the industry’s self-regulatory bodies have defined NFTs as securities, but that could simply be that NFTs are so new. However, according to Reuters, the chair of the SEC has called for more detailed regulation of crypto assets.
Could an NFT – specifically an NBA Top Shot Moments NFT – satisfy the definition of a security?
A federal judge in Manhattan is being asked to decide. In February, he ruled that the case could move forward. That means the class of plaintiffs made “facially plausible” arguments that these particular NFTs should be considered securities.
The fact that they made a plausible initial argument does not settle the matter. Part of what they will be required to prove in the lawsuit is that NBP Top Shot Moments NFTs are securities, at least as they are being bought and sold on the marketplace creator’s blockchain.
The reality is, the class of plaintiffs may have trouble proving NFTs are actually valuable, much less that they hold their value. People are paying money for them, so in that sense, they are valuable. However, that value could be a fad and fleeting.
The defendant in this case argues that the NFTs are more like collectibles than securities. His spokesperson said in a statement that consumer goods are generally not securities, according to the courts.
Are NBA Top Shot Moments NFTs more like baseball cards or stocks?