In brief - NFTs are said to be the 'second wave' of crypto assets, but like anything, where there is value there is the potential for disputes, litigation and fraud. This article identifies four key areas to be on the watch for NFTs - wash trading, money laundering, insider trading, and brand infringement.
A non-fungible token (NFT) is a blockchain-based virtual product 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 went 'mainstream' and now there are some clear avenues forming where NFTs will become the next frontier for fraud and litigation.
Wash trading of NFTs
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 which you are launching and want to increase the 'buzz' and 'value' of the collection. Similar to the 90s real estate market in Australia, the easiest way to do this is to secretly bid for your own product to drive up the price.
This is 'wash trading' in the NFT world where sellers inflate the value of the NFT by cooking up sales between related parties, wearing the Ethereum gas fees which (while not insignificant) can be a drop in the ocean if they can inflate the price sufficiently.
A report by Chainalysis found that "262 users …sold an NFT to a self-financed address more than 25 times [suggesting] that these users are habitual wash traders" and collectively made $8.9 million in profit from 'washing'.
Money laundering
Buying high value goods is the classic technique to legitimise a cash-based business for a criminal organisation. Where some NFTs are being sold for $500,000 it is easy to see why NFTs would be attractive to criminals for money laundering.
An NFT offers a virtual conduit to move money around the world. A criminal could create an NFT, 'sell' it to its counterpart for an agreed sum and the money has successfully been legitimised and moved from party A to party B.
Australia's AML CTF regime monitors cryptocurrency at the threshold between cash and eCurrency, but it is likely that further monitoring and reporting will soon be required.
Insider trading
In September 2021, a senior employee of Opensea - the world's largest NFT marketplace, was arrested and charged with insider trading. It is alleged that the individual used insider knowledge of when new collections were being dropped to buy NFTs before they were promoted on the website.
Brand infringement
The Nike 'swoosh' and 'JumpMan' are recognisable worldwide, but how does a trademark work in the world of digital products and NFTs? Brand infringement by NFTs is a key concern for companies who have for years been protecting their brands in trade mark litigation and parallel import litigation.
In February 2022, Nike filed a suit against StockX LLC in New York alleging that StockX sold Nike shoe NFTs that were claimed to be '100% Authentic' which had not originated from Nike. This action arises under trademark and anti-dilution laws of the United States 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 Nike suffered.
Nike is not alone in pursuing brand infringement rights in NFTs.
In January 2022, Hermès commenced proceedings against Mason Rothschild who created NFTs depicting furry Birkin bags. Rothschild has challenged the suit by claiming his creations as art and comparing the NFTs to Andy Warhol's depiction of Campbell's Soup Cans. We recently discussed the infringement issues relating to Hermès Birkin NFTs here.
Leading the charge, however, was Miramax who sued Quentin Tarantino under Copyright over NFTs that he planned to release of his hand-written script for Pulp Fiction. The matter remains before the District Court of California.
As NFTs continue in popularity we will, without doubt, experience a new wave of disputes and litigation regarding NFTs.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2024.