NFT – revolutionary product or new litigation frontier?

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In short – NFTs are said to be the “second wave” of crypto assets, but like everything, where there is value there is the potential for litigation, litigation and fraud. This article identifies four key areas to watch out for when it comes to NFTs: sham trading, money laundering, insider trading, and trademark counterfeiting.

A non-fungible token (NFT) is a blockchain-based virtual commodity that is collected, sold, and traded, which exploded in popularity in 2021 despite having been around since 2015.

It has been a few months since the popularity of NFTs became widespread and there are now clear pathways forming where NFTs will become the next frontier for fraud and litigation.

NFT wash trading

Wash trading is a scam carried out by the owner of the NFT to artificially inflate the value of the NFT.

As an NFT owner or creator, you may have a new collection of NFTs that you are launching and want to increase the “buzz” and “value” of the collection. Similar to the property market of the 90s in Australia, the easiest way to do this is to secretly bid on your own product to drive up the price.

This is “wash trading” in the NFT world where sellers inflate the value of NFT by concocting related party sales, carrying Ethereum gas fees which (although not insignificant) can be a drop in the bucket. in the ocean if they can inflate the price enough.

A Chainalysis report found that “262 users…sold an NFT to a self-funded address more than 25 times [suggesting] that these users are habitual wash traders” and have collectively made a profit of $8.9 million from the “wash”.

money laundering

Purchasing high-value assets is the classic technique to legitimize cash activity for a criminal organization. When some NFTs are sold for $500,000, it’s easy to see why NFTs would be attractive to criminals for money laundering.

An NFT provides a virtual conduit to move money around the world. A criminal could create an NFT, “sell” it to their counterpart for an agreed sum, and the money was successfully legitimized and transferred from Party A to Party B.

Australia’s AML CTF regime monitors cryptocurrency at the threshold between cash and e-money, but it is likely that additional monitoring and reporting will soon be required.

Insider trading

In September 2021, a senior employee of Opensea – the largest NFT market in the world, was arrested and charged with insider trading. It is alleged that the individual used inside knowledge of when new collections were dropped to purchase NFTs before they were promoted on the website.

Trademark infringement

Nike’s “swoosh” and “JumpMan” are recognizable around the world, but how does a brand work in the world of digital products and NFTs? Trademark infringement by NFTs is a major concern for companies that have been protecting their brands for years in trademark litigation and parallel imports.

In February 2022, Nike filed a lawsuit against StockX LLC in New York, alleging that StockX was selling allegedly “100% authentic” Nike shoe NFTs that were not sourced from Nike. This action arises under United States trademark and anti-dilution laws as well as statutory and common law unfair competition. Nike is seeking orders that StockX cease and destroy all NFTs associated with Nike’s trademarks and pay for damages suffered by Nike.

Nike isn’t alone in pursuing trademark infringement rights in NFTs.

In January 2022, Hermès filed a lawsuit against Mason Rothschild who created NFTs depicting fur Birkin bags. Rothschild took issue with the costume claiming his designs as art and comparing NFTs to Andy Warhol’s depiction of Campbell’s soup cans. We recently discussed the counterfeiting issues with Hermès Birkin NFTs here.

Leading the charge, however, was Miramax suing Quentin Tarantino under copyright law over the NFTs he planned to release his hand-written screenplay for Pulp Fiction. The case remains in California District Court.

As NFTs continue to grow in popularity, we will undoubtedly experience a new wave of NFT disputes and litigation.

This is a commentary posted by Colin Biggers & Paisley for general information purposes only. This should not be taken as specific advice. You should seek your own legal and other advice on any question, or on any specific situation or proposal, before making a final decision. Content is also subject to change. A listed person may not be admitted as a lawyer in all states and territories. © Colin Biggers & Paisley, Australia 2021.

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