SNEAK PEEK
- DraftKings halts NFT operations after a court ruling classifies NFTs as securities under U.S. law.
- Federal court ruling on NFTs as securities forces DraftKings to close Reignmakers and NFT marketplace.
- Legal pressures on NFTs intensify as DraftKings and Dapper Labs face significant regulatory challenges.
DraftKings has announced the closure of its nonfungible token (NFT) operations, a move driven by recent legal judgments classifying their NFTs as securities under U.S. law. The decision to shut down the Reignmakers fantasy sports game and the associated NFT marketplace was communicated to users via email, emphasizing that this strategic shift aligns with the latest legal insights and the company’s commitment to compliance.
The closure comes on the heels of a federal court’s denial of DraftKings’ motion to dismiss a class-action lawsuit alleging that its NFTs should be registered as securities. This lawsuit, initiated by DraftKings customer Justin Dufoe in March 2023, argued that the NFTs met the criteria of the Howey Test. On July 2, the court concluded that Dufoe had sufficiently demonstrated that the NFTs could be considered investment contracts.
This legal interpretation has significant implications, not just for DraftKings but for the broader NFT market, which has been under increased scrutiny. Similar legal pressures have recently affected Dapper Labs, creators of NBA Top Shot NFTs, who agreed to a $4 million settlement in a comparable lawsuit.
The NFT market is currently experiencing a downturn, with monthly sales volumes reaching their lowest since November 2023. According to data from CryptoSlam, total sales this July have amounted to approximately $407.8 million, a stark contrast to the booming trade seen in previous years. This decline is partly attributed to the increasing legal challenges and the uncertainty they introduce into the market.
Amidst these advanced advancements, two artists have recently sued the U.S. securities and Exchange Commission seeking legal advice on whether NFTs fall under the securities category or not. Their case raises issues of having to register NFT art before sales and whether artists need to inform buyers of possible risks. The closure of DraftKings’ NFT sector shows prudence in the face of legal uncertainty while illustrating the challenges involved in applying advanced technology to traditional laws. While the industry carries on with these complexities, the trend in legal decisions is expected to define the medium and large-scale digital asset offerings in some ways.
