A federal judge’s decision to allow a lawsuit against Dapper Labs’ NBA Top Shot non-fungible tokens (NFTs) to play out, has prompted comments from legal experts. The Blockchain Association’s chief legal officer says a United States court’s decision to rule that digital assets on private blockchains are securities, would be “absurd”.
U.S. attorney Jake Chervinsky has commented on the judge’s decision to deny a motion to dismiss a 2021 lawsuit accusing Dapper Labs of selling NFTs as unregistered securities. Chervinsky’s statement has been reiterated by a host of lawyers on Twitter, highlighting that the denial of the motion does not mean a ruling has been made on the lawsuit, only that it was “facially plausible.”
Low Bar For Securities Claims
“The judge didn’t decide anything. He allowed the case to proceed past a motion to dismiss because the securities claims were at least ‘plausible,’ an extremely low bar and not a final ruling at all,” he explained. “This dispute aside, it would be absurd if all valuable digital assets stored on centralized databases were securities.”
Private Blockchain Vs Public Blockchain
“This would turn every major video game developer, event ticketing platform, travel rewards program, etc. into a public reporting company regulated by the SEC,” he explained. Another U.S. lawyer, Jesse Hynes, also weighed in on the motion in a Feb. 22 tweet, noting that motions to dismiss are “rarely ever successful” because the plaintiff only needs to plead enough evidence for the case to proceed. “The judge ruled in the Dapper case that the plaintiff pled enough evidence that IF ALL THE ALLEGATIONS ARE TRUE, that there is a securities violation.” “Now we go into discovery to learn what the real facts are. Once that is done Dapper will likely file for a motion for Summary Judgment,” the lawyer added.
Meanwhile, another U.S. lawyer, James Murphy, known as “MetaLawMan,” noted that the allegations that Dapper Labs issued the NBA Top Shot Moments NFTs on a privately-run blockchain were a “fundamental” factor behind the court’s decision to reject the motion to dismiss. This prompted MetaLawMan to suggest that this “could be considered a net positive” for Ripple in its case against the U.S. Securities Exchange Commission (SEC), because XRP is issued on a public blockchain.
Class-Action Lawsuit Against Dapper Labs
The class-action lawsuit against Dapper Labs was filed in May 2021 by plaintiff Jeeun Friel, who claimed that Dapper Labs sold NFTs as unregistered securities. Marreo denied the motion to dismiss the lawsuit on Feb. 22. He said the scheme by which Dapper Labs offers the NFTs potentially creates a sufficient legal relationship between investors and themselves, which satisfies the investment contract criteria under the Howey test. However, it is unlikely that the ultimate ruling of this case would establish a precedent for NFTs, as Marreo said that not all NFTs will constitute securities and that each case will need to be assessed on a case-by-case basis.
The Debate on Private NFTs as Securities
The debate on whether private NFTs should be considered securities has been ongoing for some time now, and it has gained momentum following a recent court ruling in the United States. The debate stems from the fact that NFTs are a new form of digital asset that has not been fully defined by regulators.
The Blockchain Association’s chief legal officer, Jake Chervinsky, recently commented on the issue, saying that it would be absurd for a court to rule that digital assets on private blockchains are securities. This comes after a federal judge allowed a lawsuit against Dapper Labs’ NBA Top Shot non-fungible tokens (NFTs) to play out.
The judge’s decision to deny a motion to dismiss a 2021 lawsuit accusing Dapper Labs of selling NFTs as unregistered securities has sparked a debate among legal experts. Many have argued that the decision does not mean a ruling has been made on the lawsuit, only that it was “facially plausible.”
The Low Bar for Plausibility
According to Chervinsky, the judge’s decision to allow the case to proceed past a motion to dismiss was based on the securities claims being at least “plausible.” He emphasized that this is an extremely low bar and not a final ruling at all.
However, the allegations that Dapper Labs issued the NBA Top Shot Moments NFTs on a privately-run blockchain were a “fundamental” factor behind the court’s decision to reject the motion to dismiss, according to U.S. lawyer James Murphy.
This has led some legal experts to suggest that the ruling could be considered a net positive for Ripple in its case against the U.S. Securities Exchange Commission (SEC), because XRP is issued on a public blockchain.
Potential Consequences
The consequences of classifying NFTs as securities are significant. It would mean that all valuable digital assets stored on centralized databases would be considered securities. This would turn every major video game developer, event ticketing platform, travel rewards program, etc., into a public reporting company regulated by the SEC.
This would have far-reaching consequences for the blockchain industry and would likely slow down innovation. It would also make it more difficult for small and medium-sized companies to enter the market, as they would be burdened with compliance costs.
The Dapper Labs Case
The class-action lawsuit against Dapper Labs was filed in May 2021 by plaintiff Jeeun Friel, who claimed that Dapper Labs sold NFTs as unregistered securities. Judge Victor Marreo denied the motion to dismiss the lawsuit on February 22, stating that the scheme by which Dapper Labs offers the NFTs potentially creates a sufficient legal relationship between investors and themselves, which satisfies the investment contract criteria under the Howey test.
However, it is unlikely that the ultimate ruling of this case would establish a precedent for NFTs, as Marreo said that not all NFTs will constitute securities and that each case will need to be assessed on a case-by-case basis.
Conclusion
The debate on whether private NFTs should be considered securities is ongoing, and the recent court ruling against Dapper Labs has sparked renewed interest in the issue. While the consequences of classifying NFTs as securities are significant, it is unlikely that all NFTs will be considered securities. Each case will need to be assessed on a case-by-case basis.
Legal experts have argued that it would be absurd for a court to rule that digital assets on private blockchains are securities. This would have far-reaching consequences for the blockchain industry and would likely slow down innovation.
