NFT Industry Faces Uncertainty as Federal Judge May Categorize NBA Top Shot Tokens as Securities – Regulation Incoming?
The popular NBA Top Shot NFT trading cards could be deemed securities for regulatory purposes in the US, after a judge allowed a lawsuit against Top Shot’s creator to move forward.
Top Shot creator Dapper Labs was sued by a buyer of the NFTs who alleged that the creator’s failure to register them with the Securities and Exchange Commission (SEC) had harmed her and other buyers.
US District Court Judge Victor Marrero has now let the lawsuit move forward by denying Dapper Labs’ request to dismiss the suit. According to Judge Marrero, the so-called Howey Test, often used to determine whether something is a security, indicates that the NBA Top Shot NFTs could indeed be securities.
“A close call”
In a comment posted on Twitter on Wednesday, Dapper Labs said the court had described the decision as a “close call,” while stressing that it was “not a final ruling on the case’s merits.”
“Courts have repeatedly held that consumer goods – including art and collectibles like basketball cards – are not “securities” under federal law. We’re confident the same holds true for Moments and other collectibles, digital or otherwise,” the Dapper Labs team added.
Courts have repeatedly held that consumer goods – including art and collectibles like basketball cards – are not “securities” under federal law. We’re confident the same holds true for Moments and other collectibles, digital or otherwise.— Dapper Labs (@dapperlabs) February 22, 2023
The Top Shot NFT collection is issued on the Flow blockchain, a network that brands itself as an “eco-friendly,” open and permissionless network with more than 11,000 developers building on it.
In his comments on the lawsuit, the judge referred to Flow as a “private” network. This suggests that the blockchain, in the judge’s eyes, is highly centralized, and assets issued on it are likely to be categorized as securities.
Not surprisingly, Dapper Labs rejects the notion that Flow is a centralized network and says on its website that less than one-third of the network’s consensus nodes are “run by a single entity.”
The NBA Top Shot NFT collection is one of the most popular trading-card-themed NFT collections today. Each unique NFT pictures different iconic moments from basketball history. The digital trading cards hit the market in late 2021, and the collection immediately became a massive hit.