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’ request to dismiss a class action lawsuit alleging its NFTs are unregistered securities, potentially setting the stage for a landmark judgment 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 that the case is moving forward under Judge Denise Jefferson Casper.
The test is occurring at a critical time for the NFT market. On July 3, 2024, the NFT space saw a significant cooling off from its 2021-2022 highs. According to data from CryptoSlamQ2 2024 saw a 45% decline in sales volumes from the previous quarter, with total sales reaching approximately $2.28 billion, the lowest figure since Q3 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 dramatically, reaching across multiple industries and creating new forms of digital ownership and engagement.
Sports collectibles like Dapper Labs’ NBA Best Shot—although they have fallen from their dizzying peak—continues to maintain a dedicated following, allowing fans to own iconic moments in sports history. Virtual real estate on metaverse platforms such as Decentralization It is The sandbox are traded as NFTs, creating digital property markets.
Luxury fashion brands including Louis Vuitton, GucciIt is Pradaalong with digitally native “phygital” brands like DressX, are creating NFT-based digital collectibles and wearables, 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 that lie ahead as these tokens increasingly resemble traditional securities or financial instruments.
The judge found that the plaintiff in the DraftKings NFTs case “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 company’s efforts.
This decision could have far-reaching implications for the NFT industry. If NFTs are classified as securities, it could significantly impact how companies create and trade these digital assets. Brands may need to reconsider their NFT strategies to ensure compliance with securities regulations, potentially stifling creativity and innovation in the space.
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 $70M in high-margin revenue next year and grow EBITDA by ~5%,” he wrote in a blog post.
The case bears similarities to Dapper Labs’ recent settlement, where the company agreed to pay $4 million to settle 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.