This post is one article in a two-part series on NFTs. This article covers in depth the legal implications of the proliferation of NFTs. Read our other installment to learn more about how NFTs work and where they’re leaving a mark in the arts, entertainment, and sports industries.
If you’ve logged on to any social media platform recently, you’ve likely seen the term “NFT” in a tweet, hashtag, or breaking news. It seems as though they have grown popular overnight! So, what exactly is an NFT and what does it have to do with sports, law, and business?
NFT is short for nonfungible token, meaning that it is a token that cannot be exchanged with another token. In contrast to Bitcoin, which is easily exchangeable, NFTs are unique tokens with their own set of properties. In other words, NFTs cannot be interchanged with something else. NFTs have recently popped up in the creative world and are now trending in the sports world due to the NBA’s Top Shot website, which operates in collaboration with blockchain-based company Dapper Labs.
Launched in 2019, Top Shot is an NFT marketplace for NBA highlight reels, allowing individual fans to buy and own collections of “Moments” (think slam dunks, game-winning shots, you name it). For example, if you’re like me and your favorite player of all time is LeBron James, you could buy a collection of The King’s greatest basketball Moments. Top Shot provides Moments in tiers of collections with increasing levels of exclusive ownership value: (1) Common Tier contains Moments for which there could exist over 10,000 digital copies; (2) Rare Tier contains Moments with digital copies ranging from 4,999 down to 500; (3) Legendary Tier Moments may have 499 to as few as 50 digital copies; (4) Ultimate Tier Moments have only three copies; and (5) Genesis Tier Moments are entirely unique with only one such moment in existence. The latter two categories of Moments are only available via auction.
Top Shot is another way for fans to engage with their favorite athletes and sport; the digital platform is timely since in-person sporting events are still limited by the COVID-19 pandemic. The industry even taps into the current trading card and collectible frenzy. To date, people have spent nearly $530 million buying and trading NBA Top Shot NFTs. However, NFTs in sports are not just limited to basketball. More and more athletes, like Tom Brady, Patrick Mahomes, Rob Gronkowksi, and soccer icon Pelé, are also starting to ride the NFT wave by creating their own companies and launching their respective NFT collections.
When millions of dollars are involved, there’s big business. So what does the law have to say about NFTs and sports? Below, I’ll highlight areas of the law that implicate NFTs and their implementation in the sports world.
The main question here is whether NFTs are considered securities. A security is any financial asset that can be traded (you can learn all about securities here). Whether a particular NFT is determined to be a security or not will depend on its purpose and how it is marketed to buyers. If the NFT relates to an already existing asset like an NBA moment and is then marketed as a collectible through blockchain, then it is unlikely that such NFT would be considered a security. On the other hand, if the NFT is created and sold so that people can earn investment returns, then it is likely that this type of NFT is a security. It is also possible that an NFT could fall under the definition of “investment contract” under the Securities Act of 1933 which would require complex and costly regulatory procedures for the creation and sale of NFTs.
Under the Howey Test, developed from the U.S. Supreme Court landmark case SEC v. W.J. Howey Co., 328 U.S. 293 (1946), an instrument or product is an investment contract if: (1) there is an investment of money; (2) there is an expectation of profits from the investment; (3) the investment of money is in a common enterprise; and (4) any profit comes from the efforts of third parties. The Securities and Exchange Commission (SEC) has used the Howey test to find that digital assets and crypto currencies are securities and subject to sanctions if their creators and marketers fail to comply with securities laws. Ultimately, NFTs are still relatively new, but it is advisable for any major sports franchise, league, or athlete to work with a securities lawyer to ensure that there are no potential issues with an NFT’s purpose that would make it more likely to be a security and subject to securities regulation.
NFTs provide a digital certificate of ownership, which is what makes them unique. As such, NFTs intersect with copyright law since under U.S. law, copyright provides a certificate of ownership for works of art and includes the right to control who makes copies of the original work; who can sell, license, or transfer the copyright; and who can make derivative works from the original. Let’s closely apply copyright law to NFTs: If you buy an NBA Top Shot Moment or any of the newly launched Pelé NFTs, the presumption is that you are only buying ownership in the NFT. Unless there is a written contract with specific terms stating that the seller is assigning the copyright of the work to the buyer, the buyer does not have copyright ownership. What does this mean? This means that the buyer cannot then legally make copies of the NFT nor sell, license, or transfer the copyright of the NFTs. If the buyer does this and the original owner finds out, the owner can file copyright takedown notices if the owner properly filed copyright ownership. Similarly, a buyer would also want assurance that the seller actually owns the asset and has the right to the NFT. In short, as NFTs continue to explode, it will become even more crucial for buyers to read the terms of sale of the marketplace of NFTs, in order to be sure of what they’re buying and to ensure that they in fact have acquired ownership. Larger and more sophisticated buyers like sports leagues should engage an intellectual property attorney if there is a huge financial investment.
What in the world do anti-corruption laws have to do with NFTs? Turns out that this could be a legitimate concern. Many consumers probably have no idea about what an NFT is, but this is not stopping them from joining the fun. FOMO (feeling of missing out) is real. However, lack of knowledge opens consumers to many risks, and currently, there are no real regulations around recording the sales of NFTs and standardization of buyers’ rights. Essentially, how can buyers (even the big sports leagues) be protected from fraudulent NFT sellers? Security and sanction issues also come up when thinking about NFTs. For example, what happens if an NFT is created and sold from a sanctioned country? Who is regulating this, should it be regulated, and how does it ultimately affect buyers? There is also an added risk that people can use NFTs as another avenue for money laundering and other financial corruption crimes. Who should be responsible for setting these regulations and how can platforms implement safeguards? There are so many questions.
Counterfeit NFTs could also become popular because most people who purchase NFTs may not have the resources to do a deep dive into whether all NFTs truly exist on a blockchain. On the other hand, how can sports leagues, unions, and other organizations within the sports industry adequately protect against corruption and sanction issues? Altogether, these issues are all important to consider as NFTs continue to flourish. Some helpful recommendations include ensuring that sports organizations have robust compliance procedures to mitigate any instances of an organization engaging with counterfeit NFTs. A good organizational compliance policy can be an effective tool in detecting counterfeit NFTs. It is also possible that as NFTs expand, podcasts, articles, guides, and other helpful resources will become available to manage regulation and assist with standardization.
Name, Image, and Likeness (NIL)
NIL has been the talk of the town for many in the sports world. So it’s not surprising that there may be some connections to NFTs, at least as it pertains to how college athletes can utilize digital collectibles of themselves to make money. As a refresher, there has been an increasing conversation and push to allow NCAA athletes to benefit from their name, image and likeness, also known as NIL. Currently, collegiate athletes are barred from receiving any form of compensation, but this is set to change as certain states have passed their own NIL legislation and proposals have been introduced at the federal level. Once NIL regulations are implemented, college athletes can receive compensation for their name, image, and likeness through third-party brand partnerships, collaborations, and endorsements.
Pair NFTs with NIL and you have an additional way for athletes to capitalize off their name, image, and likeness through digital collectibles that can be auctioned. In early April 2021, Luka Garza, from the University of Iowa men’s basketball team, announced that he was auctioning off an NFT; while Garza may be the first to make this announcement, expect more! Student athletes who are interested in learning more about leveraging NFTs can watch this segment on how Humbl, a blockchain firm, works with athletes on NFTs; student athletes can also read more about OpenSea, a company that has helped athletes (including Garza) with listing their NFTs. Still, student athletes will have to wait until NCAA regulations around NIL are finalized in order to fully capitalize. However, there’s definitely potential for innovative ideas in the space that will allow collegiate athletes to take advantage of the new NFT wave.
Now that we have walked through some of the legal implications of NFTs, I hope that many of you will become more aware of things to look out for. NFTs are still considerably new, and while it can be exciting, it is also necessary to understand the limiting and enabling legal factors. As NFTs continue to expand, this burgeoning technology offers more marketing opportunities for sports leagues and athletes. It’ll be great to see college athletes and more women athletes across all levels enter the world of NFTs…stay tuned!
Marvellous Iheukwumere is the Online Content Chair for Sports for the Harvard Journal of Sports and Entertainment Law and a third-year student at Harvard Law School (Class of 2021).