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Dapper Labs Settles NFT Lawsuit, Signs of Regulation?

NFTs | Jun 5, 2024

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Dapper Labs Settles NFT Lawsuit, Highlighting Broader Regulatory Uncertainty

Dapper Labs, the creators of NBA Top Shot NFT collectibles, has came to a $4 million settlement on Jun 3, 2024 with a class action group of investors who had sued the company back in 2021.

The main issue in the complaint was whether NBA Top Shot Moments NFTs qualified as unregistered securities and that Dapper Labs was effectively offering investment contracts for sale under the pretence of digital collectibles. The plaintiffs contended that, like a stock sale, the firm controlled the NFTs' supply and future worth.

See:  New York Judge Rules Emojis Count as Financial Advice in Dapper Labs Court Case

According to Dapper Labs, NBA Top Shot Moments are not securities and they're more like regular old fashion trading cards.  Although this legal outcome does not create a precedent in law, the settlement frees Dapper Labs from the burden of the litigation.  On Monday, Dapper Labs Founder, Roham Gharegozlou, shared the news of the settlement and thoughts on platform X:

"After discovery, it was understood and agreed that Flow blockchain is a decentralized public network and that digital collectibles like NBA Top Shot are not securities. These were the main allegations we wanted to prove..."

"The future of our products is fully open and composable, letting owners do anything they want with their assets and letting developers build new and innovative experiences without traditional limits. This includes working alongside existing third-party platforms..."

Current NFT Regulatory Landscape

Lack of regulatory clarity is creating continued uncertainty for market participants, individuals and businesses surrounding the laws governing NFTs.  The U.S. Securities and Exchange Commission (SEC) has begun enforcement action against certain NFT projects that it believes to be unregistered securities, although it has not yet released clear guidelines about how it categorizes NFTs.

See:  NFT Market Divergence as Cryptocurrencies Soar

The NFT market's expansion is being hampered by this ambiguity. Cointelegraph reports that the amount of NFT sales fell by 54% in May 2024 as compared to the same month the previous year. Clearer laws, according to industry analysts, may contribute to a rebound in market confidence and draw in new investors.

Will FIT21 Help Clarify NFTs?

FIT21 refers to the Financial Innovation and Technology for the 21st Century Act (FIT21). With bipartisan backing, the House of Representatives enacted FIT21 in June 2024. The Senate is still debating the bill as of today.

This is a significant piece of legislation currently in the US Congress that aims to address the regulatory treatment of digital assets.  Aims to establish clear regulatory frameworks for digital assets in the US. This would provide much-needed clarity for businesses and consumers in a rapidly evolving market.  FIT21 seeks to define responsibilities between different regulatory agencies, particularly the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). This would help determine which agency oversees different types of digital assets.

See:  U.S. House passes FIT21 with Bipartisan Support

Clarifying the classification of digital assets would be a big step forward because market participants, individuals and businesses are all unclear on the status of NFTs due to lack of a clear classification.

  • The bills language may make a distinction between NFTs that are regarded as securities and represent investments, and those that are not (such as collectible digital art).
  • The SEC will have a significant influence on the classification of NFTs under FIT21. The NFT market will be greatly impacted by their interpretation of the bill's text.
  • Certain NFT categories may receive an exemption from the bill, such as those pertaining to digital art or collectibles.

Outlook

All things considered, FIT21 could be a good thing for the NFT sector since it brings much-needed regulatory clarification. Markets will have to wait to see what the exact impact may be, assuming the bills execution passes all approvals, the final provisions, and language.


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