Chapter and Metaverse: Pending IP Cases in the Digital Space

1000 649 David Hoppe

Despite the current prevalence of NFTs, it is often unclear what legal rights they convey to the new owner upon resale. Owners of copyright and trademark assets underlying NFTs may claim legitimate rights that conflict with those that NFT owners believe they possess. Below we examine legal questions related to NFTs and intellectual property (IP) rights, exclusivity, and other issues in light of recent lawsuits. We will also examine the impact of unsettled legal questions on the development of the metaverse and other next-generation technologies.

Rights of Copyright Holders to Mint NFTs of Their Works

Recently, New York-based art gallery Tamarind LLC received a cease and desist letter after announcing its plan to issue a series of NFTs based on a 60-foot-long mural known as Lightning or The Guernica of India. Artist Maqbool Fida Husain’s estate claims in the letter that it maintains the copyright to the mural, which Tamarind purchased from the late artist for $400,000 in 2002. Tamarind disagrees, contending the purchase gives it the exclusive, worldwide, royalty-free license “to display, market, reproduce and resell all or any part of the artwork, including on all digital and off-line media.”

Seeking relief from the cease and desist letter, Tamarind filed a complaint with the New York Federal Court on 21 January 2022 for a declaratory judgement stating that it can proceed to mint NFTs based on Hussain’s mural. The suit asserts that Hussain agreed that he would no longer be the owner of the artwork or the intellectual property associated with it.

The case is still pending.

Rights of Trademark Holders To Mint NFTs 

While the Tamarind/Lightning case hinges on whether the IP creator conveyed copyright and trademark rights to the buyer, other cases involve buyers minting NFTs based on IP for which they definitely have not received the trademark holder’s blessing. For example, US-based sportswear giant Nike has sued StockX, an online resale marketplace selling NFTs of shoes, streetwear and other goods, for trademark infringement, trademark dilution, and other violations. Similarly, Hermès filed a lawsuit against Mason Rothschild for NFTs infringing the Birkin trademark. Such unauthorized use raises important questions regarding the NFT rights of trademark holders. As the NFT marketplace continues to expand, trademark holders are increasingly taking steps to protect their IP and assert exclusive rights to commercialize NFTs that depict or are otherwise based on their marks. 

The Benelux Convention for Intellectual Property grants trademark holders the right to prohibit third parties from using identical or similar signs for similar or identical goods and/or services. For stakeholders in digital industries and verticals, that means that trademark infringement likely occurs if a third party uses the trademark without consent and registers the trademark for classifications linked to the metaverse, extended reality, video games, digital music and art, collectibles, or NFTs. However, because NFTs are a fairly recent development and new use cases emerge daily, few companies have registered their trademarks for classes associated with the digital environment. Currently, no case law has been decided, adding to the confusion. To ensure their IP is fully protected, trademark owners should file trademark applications that encompass goods and services associated with the metaverse, virtual spaces, digital art, and NFTs. 

Non-IP Claims

One recent high-profile case raises questions concerning chain of title over NFTs. In Free Holdings v McCoy, the plaintiff, a Canadian entity, alleges that it owns artist Kevin’s McCoy’s Quantum, which is regarded by many to be the first-ever NFT. Free Holdings brought a suit before New York’s Southern District Court, claiming that auction house Sotheby’s wrongly attributed ownership of the NFT when it sold the work for $1.47 million. Free Holdings asserts that it assumed the rights to the NFT after McCoy failed to renew his ownership. According to the suit, the blockchain on which McCoy minted Quantum requires that owners renew their rights every 250 days; McCoy let his ownership expire, and the NFT went unclaimed for years, Free Holdings says.

This case is important as it is the first to address the issue of what it truly means to  own something minted using blockchain technology. While blockchain technology is supposed to provide a permanent and indisputable ledger of provenance, the complexity of the technology muddies the waters. The confusion is worsened by the inconsistent terms related to transfer of content and ownership from one blockchain to another. The court’s decision in this case should create a long-sought precedent and help establish how courts view ownership as it relates to blockchain. It could also shed light on whether blockchain is in fact the game-changing innovation that many of its supporters claim it is. 


These cases are likely to have profound implications on blockchain technology and its utility in proving digital ownership in the metaverse. It is hoped that they will answer questions including whether minting an NFT is the exclusive right of copyright owners, when and how NFTs violate trademark holders’ rights, and whether minting NFTs is contrary to traditional legal principles protecting intellectual property. Of course, some of these cases may settle without providing any legal guidance, or be resolved by holdings that cannot be used as general references for future cases. Regardless of the outcome, companies in the blockchain, metaverse, and digital asset space should periodically consult with an attorney or a law firm specializing in NFTs and other emerging technologies for up-to-date legal advice on the complexities and technicalities surrounding the rights of IP holders in these spaces.

Gamma Law is a San Francisco-based firm supporting select clients in cutting-edge business sectors. We provide our clients with the support required to succeed in complex and dynamic business environments, push the boundaries of innovation, and achieve their business objectives, both in the U.S. and internationally. Contact us today to discuss your business needs.

Terra Infirma: Seeking Solid Footing in the Wake of an Algorithmic Cryptocurrency Landslide

1000 648 David Hoppe

Many crypto investors – and not just speculators, celebrities, and the wealthy – have suffered major losses in the crypto market this month. As volatility grips the cryptocurrency world, two relatively lesser-known cryptocurrency coins—TerraUSD stablecoin (UST) and its linked Terra Luna token—have fallen into serious trouble. Once a darling among decentralized finance (DeFi) currencies, the Terra project’s collapse highlights several systemic risks inherent in algorithmic stablecoins.

In January this year, the platform established the Luna Foundation Guard (LFG) “dedicated to creating and providing greater economic sovereignty, security, and sustainability of open-source software and applications that help build and promote a truly decentralized economy.” That sovereignty, security, and stability took a hit on May 9 when the price of TerraUSD drastically plunged from its pegged price of $1 to 1 cent. Its sister coin, Luna, also nosedived almost 97 percent from its 2022 peak. Their precipitous drops have shaken the entire cryptocurrency market and caused other coins, including standard-bearer Bitcoin, to shed significant value. Bitcoin has decreased 25 percent over the past week and more than 50 percent in the last six months. The TerraUSD coin and its backup Terra Luna token are now practically worthless. As a result, many crypto exchanges, including Binance, OKX exchange, and FTX exchange, have delisted Terra and Luna.

Algorithmic Stablecoins Aren’t Quite the DeFi Revolution

Cryptocurrency neophytes may not be familiar with stablecoins, which are cryptocurrencies whose value is linked to another asset such as gold or the US dollar in order to reduce volatility, which is typically high for cryptocurrencies. Notable stablecoins include tether (USDT), USD Coin (USDC), Binance Coin (BUSD), and Dai (DAI). These “big four” are the largest stablecoins, with a combined market capitalization of about $160 billion. The stablecoins USDT, USDC, and BUSD are structured around centralized entities which own sufficient stores of US dollars to back every coin issued. Any investor who owns one of these coins may redeem it for $1 at any time, guaranteed. DAI stablecoin, on the other hand, is issued by a decentralized autonomous organization (DAO), Maker DAO, and each coin is backed by the collateralized value of a diversified portfolio of crypto assets.

As a stablecoin, the TerraUSD was designed to be worth $1 at all times. But unlike real asset-backed coins, TerraUSD is based on an algorithm powered by the Terra protocol. Referred to as an algorithmic stablecoin, the Terra USD incorporates the swap procedure described below to attempt to keep the coin price stable. The platform states that it uses “open market” and decentralized Oracle voting to create stablecoins that track the price of fiat currency. It relies on the Anchor lending protocol, which offers market lending yields of up to 20 percent to its users.

Critics of the Terra project voiced their concerns that Anchor was artificially propping up TerraUSD and Luna tokens. In particular, they commented that the interest yield of 20 percent was unsustainable and inappropriately incentivized investors to purchase coins in the UST ecosystem. When Terra project investors became impatient and UST investors started pulling out their coins from Anchor accounts, the unsustainability of the Terra system was confirmed.

Why Terra Crashed

Terra plummeted back to Earth when the “free market” balance it built between TerraUSD and Luna shattered. Investors bought UST and then deposited it into their affiliated Anchor accounts, which act like savings accounts offering interest accrual rates in far excess of what any bank can offer and that most mutual funds would envy. According to Coindesk, about 75 percent of all TerraUSD purchased—about $14 billion—was deposited into these accounts. In a time of rising inflation and deflating stock markets, the 20 percent interest was an opportunity too good to pass up for many.

TerraUSD is designed to maintain its value of $1 while the Luna crypto token to which it is linked is allowed to fluctuate. When the price of UST rises above $1, the Terra protocol incentivizes users to either burn or destroy their Luna and mint UST to keep it at $1. When UST drops below $1, the protocol encourages users to burn or destroy UST and mint Luna instead. Terra employs a market model to enable atomic swaps between the different Terra coin denominations and between Terra stablecoins and Luna tokens.

In response to the crisis, the Terra project halted all trading on the blockchain, and no new transactions could take place. Once it permitted trading to recommence, the damage had been done. Flaws in the Terra protocol allowed exponential minting of Luna tokens outside the exchange. Unsuspecting Luna investors started buying Luna again, but the price crashed even further. Frantic investors tried to cash out as quickly as possible to recover what monies they could. Many crypto exchanges halted trading due to the meltdown, and bullish crypto investors who sunk money into the Terra project were unable to recoup their losses on crypto exchanges.

Crisis May Spur Washington to Action

The cryptocurrency market has suffered terribly in recent weeks. Many coins lost significant value as panicked sellers offloaded coins. Millions of investors, especially smallholders, endured critical setbacks, including some who lost their entire life savings and retirement nest eggs. Other stablecoins were damaged by Terra’s fate but recovered. Tether, the largest stablecoin by market capitalization, dropped to 95 cents before regaining its footing back to $1.

Many crypto holders, including Ethereum founder Vitalik Buterin, have suggested that Terra investors who suffered the setbacks described above should be made financially whole again. Specifically, Buterin suggested that the smaller Anchor users, comprising 99.6 percent of its wallet holders, should be compensated for their losses. One potential method for this to happen is through Federal Deposit Insurance Corporation-backed accounts that protect smallholder accounts up to $250,000 per person. It would be a step that Buterin claims has precedent. Yet, he stopped short of advocating direct government regulation.

Created in the aftermath of the Great Depression in 1933, the FDIC insures smallholder bank accounts so they won’t be wiped out by market crashes. While crypto investors may be wary of crypto market regulation, the FDIC is aware of the growing demand for oversight, especially over FDIC-supported financial institutions selling crypto assets to consumers who are unaware of the risk.  The FDIC attention comes on the heels of President Biden’s Executive Order issued in March 2022, which directed the U.S. Government to “ensure responsible innovation in digital assets,” and to engage the FDIC for their technical expertise.

As the Terra project has highlighted, cryptocurrencies still have significant risks that average consumers may not realize. This latest crypto crash highlights the debate between protecting smallholder account crypto consumers and maintaining the decentralized, blockchain-based currencies for a “free market.” With U.S. banks and other traditional financial institutions around the world getting more involved in the crypto market, additional government regulation appears inevitable.

Gamma Law is a San Francisco-based firm supporting select clients in cutting-edge business sectors. We provide our clients with the support required to succeed in complex and dynamic business environments, push the boundaries of innovation, and achieve their business objectives, both in the U.S. and internationally. Contact us today to discuss your business needs.

Bulls and Bears and Apes, Oh My! Investing in NFTs

1000 649 David Hoppe

Interest in non-fungible tokens, commonly referred to as NFTs, reached an all-time high over the past year. NFTs are commonly produced from digital art, collectibles, fantasy and esports, static images, memes, video clips, audio files, and a growing number of other media. These use cases are trendy and potentially lucrative, luring many celebrities and social media influencers into minting, investing, and promoting NFTs on their social media feeds. Bored Ape Yacht Club’s owners include Snoop Dogg, Tom Brady, Shaquille O’Neal, Serena Williams, Justin Bieber, and Kevin Hart, to mention but a few. This interest among athletes and A-listers also added fuel to the spark of interest among both institutional and retail investors.

NFTs As A Risky Investment Trend – What Investors Should Know

their viral reputation as their artistic content. It’s a fickle market, and value can skyrocket and bottom out within days. Non-high net-worth individuals considering a plunge into NFT investing should note that information on NFTs circulates very differently from that of stocks. One can learn about stocks through market research, brokerage firms, and overall industry trends. Unlike stocks, however, public understanding of NFTs is based largely on social media posts, trends, and word of mouth. Not all of it is reliable, and it is often unevenly distributed and incomplete.

Additionally, because the NFT market is so new, some financial advisors have cautioned their clients to steer clear of NFT investing altogether. Some suggest purchasing NFTs for fun only, rather than their appreciation potential. In other words, don’t bet the house or the kids’ college fund on a flying cat or an ennui-plagued primate. NFTs should not be relied upon for passive income or building retirement funds. Many financial strategists recommend diverse investment portfolios that allocate less than 5% in total to NFTs and never let that investment get in the way of other long-term financial goals.

Best Practices for Investing in NFTs

If you decide that the potential reward is worth the risk, here are some best practices for NFT investments.

  • Conduct Your Own ResearchThoroughly research the NFT investments that you are interested in. Research their team, trade history, set up, execution, social engagement numbers, artwork, originality, and rarities to best make informed decisions. See here for an excellent Twitter post on the topic.
  • Carefully Vet the Seller: Be sure to perform background research on the person or organization offering the NFT for sale.This is crucial because many celebrities and NFT creators have attracted impersonators who try to sell fake NFTs. Indeed, numerous celebrities and NFT creators have participated in NFT projects that turned out to be complete scams. Learn as much as you can about the seller as humanly possible. Search OpenSea, Foundation, or Rarible, which are the most common NFT markets. Other niche marketplaces exist that specialize in specific types of assets. Also, research niche marketplaces that specialize in the type of NFT that you are interested in.
  • Mind the Middle Ground: High-visibility NFT projects are often expensive, inaccessible, and overpriced. Low-end projects are much easier to get into but have limited traction or potential for financial gains. It is best to mind the middle ground when it comes to investing in NFTs.  
  • Create a Digital Wallet: This is a place where you can ‘store’ your NFTs and cryptocurrency tokens. Various types of cryptowallets exist, but arguably the best method of storage is to spread your crypto assets across different types.
  • Fund Your Account: You will need to connect your bank account or credit card to an exchange to purchase or trade cryptocurrencies. Know Your Customer (KYC) and Anti-money Laundering (AML) requirements vary from jurisdiction to jurisdiction, and this may include an identity verification process. Always protect yourself by correctly completing the identity verification process.
  • Negotiate Terms:Depending on what’s being sold, deals could include upfront payouts or a royalty on all future sales.
  • Guard Against Theft and FraudBecause crypto is difficult to trace, has no central controlling authority, and is internationally accessible, there are potentially large security risks involving user’s data, crypto, and passwords. Even cash transactions can be compromised. Purchasing cyber liability insurance is one expensive option to minimize theft and fraud. Other ways to prevent theft and fraud include common-sense strategies such as using strong and unique passwords, never (ever!) sharing your keys, avoiding public networks and WIFI, using crypto hardware wallets, and not storing anything in the cloud. Another key point is to review and validate every app and crypto exchange you use for security features and reputation.
  • Do Not Infringe on Intellectual Property Rights: Remember that the original NFT creators typically retain the copyright. Thus, buyers and investors own only the specific digital/physical copy that they purchased and the right to display depictions of that copy, unless a creative commons license applies or there is an express transfer of the underlying ownership in the terms and conditions governing the NFT. Intellectual property rights can get complicated. If you are specifically seeking intellectual property rights, you should consult with an attorney who can provide reliable advice.
  • Consider the Tax Implications: The IRS currently views crypto tokens as property and not currency, but one thing is clear: NFTs are subject to capital gains tax. But they may not receive the preferential long-term capital gains rates that stocks enjoy. NFTs may even be taxed at a higher collectibles tax rate.
  • Consult Experts: Always engage an attorney, accountant, or financial planner to assist in understanding both the short-term and long-term risk and impact of your NFT investments. Gamma Law, a San Francisco-based law firm, has been at the forefront of blockchain, cryptocurrency, and NFT market trends.  Gamma Law attorneys specialize in providing sound legal advice for NFT investments.

Despite the popularity of NFT investing, tokens remain, overall, a volatile asset class and are often saddled with high mark-ups, brokerage charges, and other fees. Still, many high-net-worth investors are willing to take the financial risk associated with investing in NFTs. According to a recent worldwide poll conducted by DeVere, out of 450 clients, 26 percent reported the desire to add NFT investments to their portfolios by the end of the 2022 fiscal year. However, as crypto investor Sina Estavi recently discovered, high-value NFTs don’t always maintain their value. In 2021, Estavi bought the NFT of Jack Dorsey’s first tweet for $2.9 million; when he listed it for sale in April 2022, bids failed to reach $14,000. The moral of the story:  investors should prepare themselves for the possibility they will lose money invested in NFTs.

If you are considering investing in NFTs, it is wise to consult an attorney experienced in the space to understand how the discussion above may impact you and your investments.

Gamma Law is a San Francisco-based firm supporting select clients in cutting-edge business sectors. We provide our clients with the support required to succeed in complex and dynamic business environments, push the boundaries of innovation, and achieve their business objectives, both in the U.S. and internationally. Contact us today to discuss your business needs.

Fungible Funding: Using NFTS for Crowdfunding

1000 638 David Hoppe

Recently, more and more companies are looking to leverage non-fungible tokens (NFTs) to generate funding. NFTs’ adaptability, flexibility, and structure allow for the authenticated transfer of ownership of unique goods on the blockchain and make them a viable alternative to traditional and corporate venture capital, debt financing, and equity sales as a means for raising capital. NFTs can be made or minted from almost anything—a digital image of a sneaker, an athlete, or even a tweet. However, these and other characteristics inherent in NFTs can create complications. This article examines the legal considerations that businesses should keep in mind before using NFTs for crowdfunding or raising capital.  


Crowdfunding campaigns, whether equity- or non-equity-based, invite people to participate by contributing money to help an enterprise reach specific campaign goals such as building a prototype, launching a product, or creating a marketing campaign. These acts of participation can be encoded as NFTs that document the contributions and are owned by everyone who invests in the fundraising campaign. Recently, not-for-profits such as UNICEF and the World Wildlife Fund have used NFTs for fundraising. UNICEF has launched 1,000 NFTs to celebrate the United Nations’ 75th anniversary and to raise money and awareness for education and children’s charities. For-profit businesses can adopt similar tactics to secure capital from NFTs. However, they should keep in mind several key legal considerations:

• NFTs as Securities

The Securities and Exchange Commission (SEC) is investigating whether the use of NFTs to raise money can closely resemble—and therefore should be regulated as—traditional securities. To determine whether an NFT falls under the definition of “security,” regulators apply the seminal guidelines established in SEC v. Howey. In this decision, the US Supreme Court laid out a four-prong test (subsequently known as the ‘Howey Test’) for determining whether a transaction qualifies as an “investment contract” and is thus subject to disclosure and registration requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934:

  1. Is there an investment of money?
  2. Does the NFT represent a common enterprise?
  3. Do contributors invest with the expectation of earning profits?
  4. Would those profits accrue solely from the efforts of others?

Answering “yes” to all four questions would categorize an NFT as an investment contract subject to SEC laws. It is easy to see how NFTs used for crowdfunding purposes could fall under this definition. It is recommended to consult a securities lawyer experienced in the NFT space to determine whether compliance with securities law is necessary to raise money via NFTs.

• NFTs as Collateral

One of the biggest advantages of using NFTs for crowdfunding or other fundraising activities is their status as collateral for securing loans. Like other secured loans, if the borrower fails to pay back the loan, the lender can seize the collateral. With NFT loans, however, the NFT owner offers his or her token as collateral to borrow money in the form of ERC20 tokens, stablecoins, other cryptocurrencies, or fiat currency. If the borrower fails to pay back the loan, the borrower risks forfeiting ownership of the NFT. In the event the borrower defaults, the NFT will be transferred to the lender, who becomes the new owner. In general, any default should be advantageous for the lender as the amount lent should always be less than the value of the NFT.

Currently, few platforms facilitate startups’ efforts to raise capital via NFTs. As the trend toward NFT loans grows, however, several established platforms are becoming involved. One such platform is Arcade which provides private individuals and startup companies a means to raise capital from independent lenders and angel investors by using NFTs as collateral. The idea is to give people holding significant NFT collections a way to leverage them for investment without forcing them to sell their digital assets outright. The borrowing terms and conditions vary from platform to platform.

• Using NFTs to Attract Investors and Maximize Investor Value

On a very broad level, startup founders hope to achieve three major goals: attracting investors, increasing market share, and maximizing exit value. NFTs can assist entrepreneurs in furthering one or more of those goals. A video game startup, for instance, could use NFTs to limit and track the distribution of its software. By authenticating ownership of the intellectual property tied to the NFT, the company can distinguish pirated software from legitimate, licensed versions. This can be used to protect and increase revenue to the benefit of both the company and its shareholders. Startups, particularly those selling software, may wish to leverage NFTs as temporary substitutes for formal intellectual property protection. At the same time, it is important to understand that NFTs cannot replace traditional copyright and trademark protections and do not grant ownership over the underlying content unless explicitly stated in their terms of sale or licensing.

Any business or startup can use NFTs to raise money. The notification issued by the SEC on NFTs as securities suggests that the definition of a security under US law can be quite broad. However, commentators have suggested that the basic logic behind the Howey Test should not apply to digital assets such as NFTs. In light of unsettled business and legal questions, emerging technologies companies intending to use NFTs to raise money for their business should consult a lawyer to ensure that their use of NFTs does not run afoul of US securities laws and regulations. SEC Commissioner Hester Peirce has cautioned that certain digital assets can be considered investment products and thus subject to US securities law. This is a legal gray area and companies should proceed carefully.

Gamma Law is a San Francisco-based firm supporting select clients in cutting-edge business sectors. We provide our clients with the support required to succeed in complex and dynamic business environments, push the boundaries of innovation, and achieve their business objectives, both in the U.S. and internationally. Contact us today to discuss your business needs.

Nike Kicks Up a Fuss over StockX Sneaker NFTs

1000 648 David Hoppe

StockX is a leading online sneaker and streetwear marketplace that, like dozens of other retailers, recently plunged into the NFT pool. Earlier this year, StockX announced its VaultNFT collection of digital avatars of real-world sneakers. Not long afterward, Nike also ventured into the NFT universe when it mobilized RTFKT Studios, which it had acquired in late 2021. Nike filed a lawsuit against StockX for a host of intellectual property (IP) infringement claims. Welcome to the Metaverse, where blockchain and IP law collide in a cosmos of lawlessness.

As the case plays out, we look at the legal issues involved.

Background to the NFT Feud

StockX serves as an online marketplace where consumers can buy and sell high-end shoes and streetwear. It was founded in 2015 by Quicken Loans founder and CEO Dan Gilbert. He then purchased Campless from Josh Luber—an online repository for sneaker sales data that was the predecessor of StockX. Operating much like eBay, it has become one of the most popular online destinations for consumers to purchase hard-to-find luxury shoes and streetwear.

On January 18, 2022, StockX diversified into the NFT marketplace with the launch of its VaultNFTs collection. However, rather than selling NFTs based purely upon art such as photographs, drawings, paintings and the like, the online resale platform has created an NFT-based avatar system for physical sneakers held in its inventory. The sneakers are minted “under custodial authority” as ERC-1155 tokens on the Ethereum blockchain. While the e-commerce platform sells myriad brands, the VaultNFT avatars are a proverbial step forward as they tie the NFTs to physical items, primarily Nike-branded shoes.

Nike’s purchase of RTFKT Studios—an NFT sneaker brand where one sale earned it $3.1 million in seven minutes—launched the sportswear giant onto another plane of existence. The move was true to form: Nike has always been about style and substance, using forward-thinking engineering and innovative materials to always stay one step ahead of its competitors. In February, Nike filed suit against StockX in the New York Southern District Court, alleging that StockX committed trademark infringement, trademark dilution, and related causes of action with its virtual products registered on the blockchain.

The First Sale Doctrine and Minute Lawsuit Details

The overarching issue in this case is whether or how the “first sale doctrine” applies to digital goods. The first sale doctrine is a legal principle that states a copyright or trademark owner cannot prevent a consumer who has lawfully purchased a copyrighted good—such as a CD—from selling, lending, or giving that item to another person. This principle permits the distribution (or resale) of the copyrighted materials after the initial sale by the copyright owner. Without the first sale doctrine, no person, business, or non-profit entity would be able to resell their Nikes, lend a novel, or auction a Norman Rockwell. Federal copyright law has codified the first sale doctrine, stating “the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” With trademarks, the resale of an item bearing a trademark is permissible unless likely to confuse or deceive consumers—courts have recognized these limitations for trademarks and the first sale doctrine.

The first sale doctrine predates the digital era but is still applicable. While NFTs are digital assets, copyrights and trademarks still apply, especially if the NFT represents an image, slogan, song or a sports clip. For copyright purposes, does the first sale doctrine apply to NFTs minted in the image of Nike shoes, which are linked to the actual physical asset available for purchase? Does the trademark exception apply because consumers may be confused or deceived about the relationship between StockX and Nike? How should these rights be balanced? The issues are further complicated because there are no standard terms applicable to the grant of rights in the art underlying NFTs. Until general rules are promulgated, these issues will be resolved on a piecemeal basis.

To date, the Nike v. StockX case has generated more questions than answers regarding ownership, creative freedom, public domain, and fair usage in the NFT marketplace and digital assets in general. In its complaint, Nike raises five causes of action: 1) Trademark Infringement under 15 U.S.C. § 1114; 2) False Designation of Origin / Unfair Competition pursuant to 15 U.S.C. § 1125(a); 3) Trademark Dilution pursuant to 15 U.S.C. § 1125(c); 4) Injury To Business Reputation and Dilution under the New York General Business Law § 360-1; and 5) Common Law Trademark Infringement and Unfair Competition; it seeks a jury trial and monetary damages. Nike has several federally-registered trademarks for its shoes pursuant to 15 U.S.C. § 1065 that they claim StockX is using illegally because there is no collaboration between Nike and StockX, which the latter is “using Nike’s trademarks to market, promote, and attract potential purchasers to its Vault NFTs.”

Nike asserts that “StockX has chosen to compete in the NFT market not by taking the time to develop its own intellectual property rights, but rather by blatantly freeriding, almost exclusively, on the back of Nike’s famous trademarks and associated goodwill.” Further, Nike claims that the VaultNFTs based upon Nike footwear constitute an “unauthorized and infringing use of Nike’s famous marks.” Nike’s lawyers also contend that StockX “minted” a Nike-branded NFT as an “investable digital asset” that it sold at a “heavily inflated” market price to “unsuspecting consumers” who are buying these tokens likely thinking they are approved by Nike.

Nike argues that it owns the copyrights and intellectual property rights to its real-world sneakers and that VaultNFTs avatars infringe upon these rights. VaultNFT owners can “redeem” the avatars as coupons for lowering the cost of obtaining real Nike shoes unless StockX exercises its right to not redeem the shoes under the contract. Additionally, Nike possesses common law rights in asserted marks used in connection with its goods and services in interstate commerce for the sale, distribution, promotion, and advertising. The company asserts that these marks extend to virtual products and that Nike intends to expand that use with current trademark applications by transferring them into the virtual market with its own NFTs.

Ultimately, Nike argues that the first sale doctrine does not apply in this case, allowing it to retain its IP rights because they do not transfer with the sale of its shoes. Once the shoes are sold from their stores, Nike has no say as to how they are distributed or resold. However, Nike does have a say as to how its image is used and who can profit from it.

Meanwhile, StockX contends that each of its VaultNFTs is tied to a specific product sold on its marketplace—a product StockX bought second-hand from a rightful owner/consumer. StockX says its right to use Nike branding and imagery falls within the first sale doctrine, so no copyright issues are pertinent. Further, Nike’s IP rights do not entitle Nike to control transactions in the shoes after the first sale. So, StockX can buy the shoes from a retailer or an individual and resell them as it wishes, while using Nike’s branding and imagery of the shoes in a limited way as part of the resale and marketing process. StockX argues that its NFTs are tied to the resale of Nike shoes on its marketplace and they are not original NFTs creating digital versions of Nike’s shoes. Rather, the NFTs offer proof of ownership of these goods that is recorded on the blockchain.

Copyrights can be divisible by contract from an asset or good. This aspect can be recorded on the blockchain so it will be traceable. However, NFTs are considered indivisible assets, meaning they cannot be sliced into fractional shares like cryptocurrency. Perhaps NFTs will evolve similarly to software, where NFT creators will need to obtain licensing rights from IP holders to showcase a copyrighted product. NFT and blockchain-related law is still evolving to deal with these new technologies. As the story unfolds, the Nike v. StockX case is likely to provide new legal insight as to how intellectual property rights will evolve to include NFTs and blockchain-related issues.

Gamma Law is a San Francisco-based firm supporting select clients in cutting-edge business sectors. We provide our clients with the support required to succeed in complex and dynamic business environments, push the boundaries of innovation, and achieve their business objectives, both in the U.S. and internationally. Contact us today to discuss your business needs.

Bored Apes Monkeying with Punks’ Licenses?

1000 648 David Hoppe

On March 12, after weeks of online rumors and speculation, Yuga Labs, the company responsible for the Bored Ape Yacht Club (BAYC) and the Mutant Ape Yacht Club (MAYC) NFT collections announced its acquisition of CryptoPunks and Meebits from the well-known mobile software company Larva Labs. BAYC, a popular collection of 10,000 unique bored NFT apes, has generated more than $1 billion in total sales amid celebrities flocking to the NFT bandwagon. After this acquisition, Yuga Labs now owns 423 CryptoPunks and 1,711 Meebits. In this article we examine the details of the acquisition, what it means for emerging technologies companies, and specific issues related to intellectual property (IP) ownership and rights in NFTs.

IP Ownership

The acquisition shifts the IP ownership from Larva to Yuga; Yuga now owns the brand, the artworks and other IP rights for both collections.  As a result of the change in IP ownership, going forward CryptoPunks and Meebits holders will be granted the same commercial rights as BAYC owners. That means they will be able to commercialize their collectibles through a similar structure. Yuga Labs expects this development to increase the presence of the two collections on the metaverse and other related projects. Nonetheless, Yuga Labs acknowledges that Larva Labs’ projects are historical collections with established communities. It has therefore not adopted the “club” model it used for BAYC.

IP License

There is some confusion about the rights CryptoPunk owners hold with regard to their avatars and the associated licenses. When Larva Labs launched the CryptoPunks NFTs, its website did not discuss licensing terms or provide a content license or permissible use of the artwork or characters. Even their terms and conditions did not include licensing stipulations or touch upon copyrights or commercial usage. In December 2021, several CryptoPunks NFT holders expressed their frustration with the lack of communication and guidance from Larva Labs concerning licensing and IP issues. NFT holders, minters, acquirers, and other stakeholders were left to ponder several questions:

  • What was the scope of the license?
  • Under what circumstance could the license be revoked or terminated?
  • What was the validity of the DMCA provisions?
  • To what extent could license terms be adopted by an NFT minter after NFTs have already been issued?
  • What were the legal implications of product recalls in the NFT context?

The acquisition of CryptoPunks NFT by YugaLabs should help provide clarity on some of these issues.

Structure and Model

Historically, there is a stark difference between the way Yuga Labs and Larva Labs have handled IP rights. Larva Labs initially retained the IP rights to its creations, while Yuga Labs granted commercial rights to NFT owners. According to Yuga, the acquisition bestowed upon CryptoPunks and Meebits owners “the same commercial rights that BAYC and MAYC owners enjoy.” The deal suggests that there are several ways to structure the sale of these NFTs. They can be sold on a standalone basis or combined with other offerings. An attorney experienced in digital technology, licensing, and transactions can provide valuable counsel for parties contemplating a similar transfer of assets.

DMCA Takedown Notices

The absence of clearly written legal terms and a bug in the purchase payment protocol prompted Larva Labs to issue a Digital Millennium Copyright Act (DMCA) takedown notice to the OpenSea NFT marketplace for the original CryptoPunks issue. OpenSea complied, delisting Version 1, which Larva had replaced with identical V2 avatars after correcting the bug. V1 CryptoPunks owners responded with a DMCA counter-notification challenging the legitimacy of the take-down notice and seeking reinstatement by OpenSea. V1 CryptoPunks were eventually reinstated, but it remains to be seen how Yuga will handle the issue moving forward. Will it allow CryptoPunk NFT owners to submit a counter-notification to an NFT marketplace in response to the minter’s takedown or will there be some other mechanism in place?


The acquisition of Cryptopunks by Yuga Labs has exposed serious loopholes related to copyright ownership and licensing with regards to NFTs. It has highlighted the importance of having well-defined licensing terms, as the ultimate financial potential of an NFT lies within the scope of commercialization terms in the relevant grant of license. As a rule of thumb, licensing deals are likely to favor well-established brands over new and generative business models looking to cash in on the NFT gold rush. Incumbents and new entrants to the NFT space should be cautious before entering into any licensing deal related to NFTs and be sure to consult an attorney with current expertise in NFTs, intellectual property, licensing, and their broader legal implications.

Gamma Law is a San Francisco-based firm supporting select clients in cutting-edge business sectors. We provide our clients with the support required to succeed in complex and dynamic business environments, push the boundaries of innovation, and achieve their business objectives, both in the U.S. and internationally. Contact us today to discuss your business needs.

Whose Eyes Are In Your (Crypto)Wallet?

1000 648 David Hoppe

How much privacy should individuals be granted when it comes to financial transactions involving cryptocurrencies and wallets? Should that expectation of confidentiality change if the government believes disclosure of all or part of an individual’s cryptowallet information could help uncover crimes such as money laundering or financing for terrorist attacks? How should these concerns be balanced against the right of privacy?

Government regulators, crypto enthusiasts, criminal defense attorneys, and civil rights activists can be expected to weigh in on these issues as the Financial Crimes Enforcement Network (FinCEN) a division of the US Treasury Department, considers “Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets (the “proposed rule”) 

Like the existing Currency Transaction Reporting (CTR), the proposed rule would require that banks, money services businesses (MSBs), and virtual asset service providers (VASPs) maintain records, verify information, and file reports with FinCEN. The proposed rules would apply to every convertible virtual currency (CVC) or digital asset with legal tender status (LTDA) transaction exceeding $10,000 involving an unhosted wallet or an “otherwise covered wallet”. Financial institutions would be required to record the CVCs and LTDAs of customers and their counterparties. In addition, banks and MSBs would have to identify their customer’s counterparty if the transaction exceeded $3,000, and the wallet was unhosted or otherwise covered

Banks and MSBs would be required to collect and report more accurately under these proposed rules, which could aid government investigators by hindering money laundering and the financing of illicit businesses.

The Rocky Road to… Here

Championed by former Treasury Secretary Steve Mnuchin and introduced during the lame-duck portion of President Trump’s tenure to address “substantial national security concerns”, the proposed rule was viewed by opponents as an attempt to ramrod the regulation through without proper vetting by the industry.

Overview of a Bungled Rule Change

    • Mnuchin’s FinCEN issues a notice of proposed rulemaking (NPRM) for the wallet rules with an unprecedented 15-day consultation. Backlash ensues immediately. Most FinCEN rule considerations include 30 to 90-day comment periods and some are as long as 120 days.
    • The initial 15-day consultation ended on January 2, 2021.
    • Under fire, FinCEN extended the crypto wallet rule comment period by 45 days on January 14, 2021.
    • On January 21, 2021, President Biden froze all Treasury Department rule-making pending a review for 60 days.
    • FinCEN’s regulatory freeze ended on March 22, 2021

The proposed rule’s resurrection by the Biden administration focuses on crypto’s potential use by criminals and those who could threaten America’s national security. While a decision could come as early as September, the thousands of comments generated by the original rule could lead the government to reopen comments to ensure that the concerns of the public are adequately addressed.

Privacy Concerns

The proposed rule would entail high administrative costs. It would also defeat much of the anonymity sought by parties conducting financial transactions using crypto and administering contracts on the blockchain, a fundamental pillar that attracts investors and technology companies. Privacy is a particular concern here because crypto wallets include the owner’s complete transaction history, information that can easily be used for overall surveillance and profiling purposes.

Furthermore, with the pending explosion of the Metaverse, we are about to witness the spread of thousands of pieces of personally identifiable information. The legal framework for handling this information raises basic issues of individual privacy. For example, the federal government could easily track an individual’s digital activity if exchanges are required to provide the government with blockchain addresses, physical addresses, and names. In contrast, when a person exits a bank with physical currency, the bank can report that event, but the currency cannot be used to track that person’s location or prior transaction history.

Finally, and perhaps counterintuitively, the proposed rules could impede FinCEN’s mission of tracking malicious actors: even if the new reporting requirements drive bad actors away from U.S. exchanges, they are likely to move to offshore platforms outside of FinCEN’s jurisdiction

Implications for DeFi Platforms

The proposed rules would have to be implemented among exchanges, brokers, and other financial custodians. To ensure that funds are not sent to wallets without personal information, exchanges might have to authorize individual wallet addresses. This would almost certainly negatively impact the crypto user experience by increasing the time and effort required to complete transactions, in addition to raising the privacy concerns discussed above. 

Furthermore, it is unclear how the FinCEN proposal could be practically implemented by DeFi platforms, exchanges, brokers, and other custodians. Smart contracts lack a name or a physical address, so they cannot interact with U.S. financial systems. For a business to send a large payment using crypto, it must know the counterparty’s name and address. 

The vagueness of the proposed rule makes it unclear whether funds used in DeFi would or could be accepted by a ‘hosted’ wallet. If the proposed rules are passed, current DeFi would be unusable in the United States. Without a strategy to address the issues raised in this section, the U.S. may be significantly disadvantaged compared to other countries that adopt effective policies to encourage innovation and development in this area.

The Response

Opponents forced the approval process into abeyance shortly after the proposed rule was promulgated, with many echoing Washington, D.C.-based Chamber of Digital Commerce President Perianne Boring’s assessment of the proposed rule as “a huge overstep in privacy.”

“As anybody knows, in the crypto or the blockchain space, once you have a wallet address, you don’t only have the history of that one transaction that applies to that regulated institution, you have that person’s entire transaction history going backward and going forward,” Boring said. “That is what is an overstep and potentially would create, what I would argue, a surveillance state, which is absolutely not appropriate.”

Groups and companies such as Coinbase have already begun drafting comments in response to FinCEN’s proposal. Coin Center has set up a module for the general public to streamline the process

Compliance with Applicable Laws and Regulations

FinCEN should appreciate the magnitude of the comment period on this regulation as opposed to those for previous regulations. The Treasury Department, under a new administration, should continue completing these proposed rules incorporating changes based on feedback received during the comment period. 

The public should take advantage of this unique opportunity to provide feedback, which may be aided by input from counsel well-versed in the matter, to guarantee that perspectives from all categories of market participants are reflected as new rules are developed.

Consulting an experienced crypto attorney can help platforms, creators, and others in the convertible virtual currency space comply with all applicable laws and navigate the complex and constantly evolving legal and regulatory landscape.

Gamma Law is a San Francisco-based firm supporting select clients in cutting-edge business sectors. We provide our clients with the support required to succeed in complex and dynamic business environments, push the boundaries of innovation, and achieve their business objectives, both in the U.S. and internationally. Contact us today to discuss your business needs.

The Royalty Treatment: Does the Resale Right Apply to NFTs?

1000 648 David Hoppe

An artist resale royalty, or droit de suite as it is often called in Europe, provides artists with an opportunity to benefit from the increased value of their works over time by granting them a percentage of the proceeds from the resale of their original works of art.

The royalty originated in France in the 1920s and is in general practice throughout Europe, but is not part of United States copyright law. Instead, under the first sale doctrine, 17 U.S.C. § 109, the lawful owner of a copyrighted work may “sell or otherwise dispose of the possession of that copy” and “display that copy publicly . . .” all without the author’s permission., Thus, a purchased painting, sculpture, or another piece of art may be treated like a house, car, or any other possession.

Much of the value of NFT art for minters and artists who digitize and list their works lies in proceeds from resales as values rise. Determining whether the resale right, the first sale doctrine, a combination of the two, or some other legal concept should apply will have a significant effect on the industry’s economic vitality. This article will examine the place of the resale right and first sale doctrine with regards to NFT artwork and the use of tokens in video game development.

A Deeper Dive into Resale Rights and NFTs

The resale right affords artists protection against their works being sold too cheaply. It works by giving the creator a slice of the proceeds each time the work is resold and allowing them to participate along with collectors and speculators in the items’ appreciation. , The right of resale originated during the explosion of cultural creativity known as the années folles (crazy times) that engulfed France in the 1920s, and it is established policy throughout Europe. Current US copyright law, however, does not recognize the resale right, although numerous attempts have been made to incorporate it into federal legislation. When artists sell NFTs of their work, a typical sales agreement would include a mechanism that allows them to receive royalties not only on the original sale but also on ensuing resales. Blockchain smart contracts track payment transactions and distribute royalties to the artists. 

The resale right comes into play in video game companies because NFTs are increasingly used as in-game assets that players can earn through gameplay, trades, and third-party sales. Common practice is for game companies to create NFT assets as work-for-hire or work products and retain the resale rights for themselves, earning ongoing revenues for rare and high-utility items. However, game companies that purchase rights to creative assets can arrange for the artists to receive passive income as players sell the related skins, weapons, virtual real estate, and collector’s cards over the course of gameplay or trade on secondary markets. However, since the US copyright law does not recognize resale rights, it is unclear whether any provision regarding royalties under the smart contract would apply to video game companies operating in the US.

A Second Look at First Sale

US copyright law does not recognize resale rights but instead stipulates that once an original copyright-protected work of authorship is sold, the buyer and all subsequent purchasers are free to resell that work without compensating the original artist or author. This first sale principle is the exact opposite of the resale right. However, successive judicial decisions have held that the first sale doctrine does not apply to digital works. For example, in Capitol Records LLC v. ReDigi Inc., the US Court of Appeals for the Second Circuit held that the first sale doctrine does not apply to digital music files because the resale would require making an unauthorized copy of the digital music file which would infringe upon the copyright owner’s reproduction right. Similarly, in Disney Enterprises Inc. v. Redbox Automated Retail LLC, the US District Court for Central California held that the first sale doctrine did not apply to digital download codes because the sale of movie download codes essentially granted the ability to create physical copies at some point in the future rather than a particular, fixed copy of a copyrighted work.

Based on the existing precedent, it would seem that the first sale doctrine does not apply to NFTs which are tied to digital objects such as audio files and digital images. In other words, the right to sell or distribute the digital version of a work, be it a drawing, digital music file, or photograph, belongs exclusively to the copyright owner. However, it is generally in the copyright owner’s interest to allow the resale because a limited form of contracting might be possible: while US copyright law does not recognize the resale right, the NFT sales agreement can be written such that the seller is obligated to pay royalties to the copyright owner if the in-game asset is sold to a third party. Moreover, these provisions can be executed by smart contracts to ensure they are accurately and consistently applied every time that a real occurs. In these cases, it is in the copyright owners’ interest to allow resales, as they will receive resale royalties under the terms of the NFT sales agreement. 

Further, it is unlikely that the first sale doctrine will apply to cases where a lawful digital artwork owner attempts the unauthorized minting of an in-game digital asset or NFT. Since “ownership” of digital artwork is more akin to possessing a license to access the work than actual ownership of a particular copy, the right to convert the artwork into an NFT resides solely with the copyright owner. In cases where the lawful owner of a physical artwork attempts to mint an NFT without the consent of the copyright owner, the outcome will likely be the same.


The surge in popularity and usage of digital assets such as NFTs and murkiness surrounding the application of the first sale doctrine may force courts to draft a first sale doctrine that specifically addresses these use cases. In the meantime, the first sale doctrine is unlikely to be applicable to the sale of NFTs. This is because when a buyer purchases an in-game NFT, they would acquire a link to a digital version of the asset the NFT represents. This acts as an option to create a copy of the digital work, and US courts currently do not acknowledge a first sale doctrine for digital works. Nevertheless, a limited form of contracting of royalty provisions in the NFT sales agreement might be possible. It is best to consult an attorney specializing in copyright, contracts, and NFTs for guidance on this complex issue.

Gamma Law is a San Francisco-based firm supporting select clients in cutting-edge business sectors. We provide our clients with the support required to succeed in complex and dynamic business environments, push the boundaries of innovation, and achieve their business objectives, both in the U.S. and internationally. Contact us today to discuss your business needs.

WY Not? DAO’s Saddle Up in Wyoming

1000 648 David Hoppe

In recent years, investors and organizations have increasingly embraced blockchain technology for a range of business interests from tracking music royalties to supporting supply chain logistics. Now, in a reversal of that situation, an application of blockchain technology is being used to harness the collective power of investors and form organizations. 

Decentralized autonomous organizations (DAOs) are the latest blockchain use case for organization and collaboration. The blockchain eliminates the need for a central governing authority and provides participants with greater access, input, and transparency into the organization’s operation, marking another digital step away from traditional transactions and institutional norms.

DAOs Defined 

Essentially, a DAO is a business that uses an interconnected web of smart contracts to automate all of its essential and non-essential processes. DAOs offer open-source, automated, and streamlined operations through the use of digital ledgers. The structures of DAOs may vary, but they are all transparent and verifiable. The majority of today’s DAOs run on the world’s second-largest blockchain, the Ethereum network. 

Since their inception less than a decade ago, DAOs and blockchains have been used to raise funds and collectively make decisions online without the need for centralized control. DAOs are powered by their communities and attempt to create more equitable and democratic organizational structures in which all participants—not just those at the top—can make decisions, allocate resources, and receive financial returns.

Wyoming Sets the Pace

As speculative and investment capital continues to flood into cryptocurrencies and DAOs, it is essential to understand what the future might hold for these new, decentralized institutions. So far Wyoming is the only US state that has legalized DAOs, and this has put the Cowboy State in the spotlight for blockchain investors and quickly earned it a reputation as the most “crypto-friendly” jurisdiction. The other 49 states do not recognize DAOs as legal entities but this will likely change as the cryptocurrency space continues to gain in scale and momentum and more states seek to benefit from the varied and tremendous potential offered by DAOs.

Wyoming’s DAO law came into effect on July 1, 2021, and permits the use of DAOS in LLCs (limited liability companies) as long as they maintain a registered agent within the state and meet the other requirements for LLC status. A DAO’s articles of organization may define it as either member-managed or algorithmically managed. When the articles do not specify, Wyoming considers a DAO to be a member-managed organization. For algorithmically-managed DAOs, the underlying smart contracts must be updatable, modifiable, and upgradable. Every time an underlying smart contract is updated, the articles must also be updated to reflect the new agreement.

Per Wyoming’s law, voting rights within a member-managed DAO are based on the organization’s membership interests, calculated by dividing each member’s contribution of digital assets to the DAO by the total value of digital assets held by the DAO at the time of a vote—similar to voting stock in a traditional public company. If a contribution of digital assets to the DAO is not a prerequisite for becoming a member, each member gets one vote. The current law does not cover dispute resolution, an omission that some lawmakers hope to address soon. An upcoming amendment might require that the DAOs’ articles of organization or smart contracts include a process for settling disputes among members. This revision would encourage founders to consider the best ways to deal with disagreements when they form the organization, rather than after a dispute arises. 

The same day Wyoming’s DAO law went into effect, the state recognized American CryptoFed DAO as its first legal DAO. Established by MShift Inc., American CryptoFed DAO is a public DAO and the first in the world that aims to create and maintain a monetary system with zero inflation, zero deflation, and no transaction costs. MShift’s powers and rights were delegated to American CryptoFed DAO upon a successful U.S. Securities and Exchange Commission (SEC) filing for its tokens. 

American CryptoFed DAO uses governance tokens pursuant to the Token Safe Harbor Proposal 2.0 as outlined by SEC Commissioner Hester Peirce. Using tokens called Locke (governance) and Ducat (stable) tokens, American CryptoFed DAO registered the governance tokens with the SEC. Governance token holders set the rules for the organization and they must vote to make rule changes. Transaction records are stored on the EOS blockchain platform. While Wyoming’s DAO law is innovative and exciting for DAO proponents, before creating a DAO interested parties should familiarize themselves with the benefits and disadvantages of DAOs under Wyoming law.

DAO Pros and Cons

There are many benefits to forming a DAO. 

First is overall democratization, as an organization’s creators wield no more power or votes than its newest members. A majority consensus based on voting shares is required to make changes to the organization, its strategy, or its business objectives. The organization’s mission is predetermined and goals are clearly written into the smart code. This means that anyone interested in investing in a DAO must agree to its written terms in advance. It also protects members from conflicts of interest and prevents executives and committees from making decisions that benefit themselves at the expense of the organization as a whole. 

There are also drawbacks to forming a DAO. 

Specifically, because DAOs are new, they have met with criticism, misinformation, and fraud allegations. Often, language in the DAO code does not provide these organizations with many of the real-world protections and legal benefits commonly associated with traditional business structures. 

DAO code may also contain potential security flaws and technical vulnerabilities that would allow voting manipulation. 

Finally, any DAO designated as a “for-profit organization” must comply with relevant federal and state regulations. Many observers remain skeptical of the hype DAOs are generating and believe them to be little more than a fad. Others express apprehension over how DAOs can be effectively regulated, as there is little legal precedent applicable to their blockchain foundations, and there is no established legal framework for resolving DAO-related conflicts.

Why You Should Consult an Attorney Before Forming DAOs in the United States

DAOs are innovative, novel, and can pose complex issues. Accordingly, there are many dangers and potential pitfalls for individuals and organizations seeking to avail themselves of their benefits and potential.  Anyone seeking to utilize a DAO, whether blockchain newcomer or crypto-savvy, should consult with attorneys who specialize in the burgeoning area of law regarding formation, funding, decentralized trading, and other DAO issues to help ensure that appropriate compliance and protection measures are in place and maintained. .

Gamma Law is a San Francisco-based firm supporting select clients in cutting-edge business sectors. We provide our clients with the support required to succeed in complex and dynamic business environments, push the boundaries of innovation, and achieve their business objectives, both in the U.S. and internationally. Contact us today to discuss your business needs.

Starving Artists No More: NFTs Are Changing the Score in the Music Industry

1000 648 David Hoppe

Take note! Non-fungible Tokens (NFTs) have officially entered the music scene and are already moving beyond provable ownership of audio files: the latest development is NFTs that are created to be virtual celebrities. These NFTs will even appear across multiple media types and platforms, including music videos and video games. Interest surrounding avatar-based NFTs is growing rapidly and even mega-celebrities are minting and investing in NFTs, from Paris Hilton to Jimmy Fallon to Steph Curry to Eminem (just don’t ask Ye, aka Kanye West). Sales of NFTs are staggering, increasing from $95 million in 2020 to $25 billion in 2021.

Creating Digital Music With NFT Avatars – Uncovering America’s Next Rockstar?

NFTs are being created based on songs, albums, music, lyrics, and soundbites and they are also being combined with music and digital art as .gifs and .jpgs to create unique, multimedia packages. Some NFTs even append PDFs to include additional content, such as lyrics or a message from the artist.

The music band Kings of Leon released the first NFT-based music album in 2021. Well-known NFT creator Jace Kay created a virtual band called “The NFTs” and even created a song, “I’ve Got a Cool Cat Too” celebrating the popular Cool Cats collection of NFT felines. The NFTs plan to release their own music video along with the song as NFTs in the near future. The NFTs consist of four virtual band members, backed by real-life people: three sporting characters from the StereoheadZ NFT collection and a manager – none other than legendary Bored Ape Yacht Club’s Captain Trippy. Their music is hosted on Spotify and Apple Music. The value of the NFTs value will be tied to the “celebrity’s” popularity rather than the value of the token itself. As music NFTs become more popular, there are plans to collaborate with other artists through these tokens.

In order to purchase one of these music NFTs, potential buyers must be members of the StereoheadZ Music Club. Owners of these music NFTs receive full rights to create derivatives and use their characters in media, stories, other digital platforms, and manage their social media. Additionally, the StereoheadZ will host a “Battle of the Bandz” competition to discover and promote music groups within their community. Their own music label, SZMC Music, will support the discovery, recording, management, and promotion of new bands.

Major music labels, studios, and promoters are getting involved as well. Earlier this year, Warner Music Group, which includes the iconic labels Atlantic and Warner Records and a number of famous musicians like Ed Sheeran, Lizzo, and Dua Lipa, announced that it will create exclusive NFTs for a range of artists in conjunction with OneOf, a “green” Web3 company, and Blockparty, a decentralized exchange (DEX) for NFTs. They are offering a range of NFTs from collectible and generative profile pics (PFPs) to music royalties and experiences. The collaboration is producing NFTs that will effectively live like real celebrities by earning income through music videos, animations, music shows, and even as tickets for events such as Coachella. Moreover, these collaborations cut out middlemen so artists can connect directly with their fans and control their art mediums like never before.

Owners of NFTs can even send them to “auditions” for music videos and more. Jace Kay created the AvaCast platform to cast other NFTs, such as Bored Apes, Cool Cats, and StereoheadZ, in music videos. NFTs can have their own music careers, whether it is recording songs or making music videos. Of course, the NFTs will be managed by their owners. Warner Music Group will announce its own “casting calls” for NFTs.           

Music NFTs can also be used to raise money for charitable causes. NFTs can even be designed to sell existing works of music, whether for profit or for charity. The StereoheadZ Music Community will donate a portion of the NFT sales towards the SZMC Community Fund, which will help foster the creativity and collaboration of the club’s members.

Late last year, a previously unreleased Whitney Houston recording she made when she was 17 was minted as an NFT. Placed on the OneOf NFT auction platform, it sold for $1 million, the highest-priced NFT on the Tezos (XTZ) blockchain. While the new NFT owner can access the full version of the song, the NFT contract did not include rights to the recording itself or to publish it elsewhere to reveal the song. Proceeds from the sale went to the Whitney E. Houston Legacy Foundation which supports other budding music artists.

Music NFTs and Smart Contracts – Legal Issues

While music NFTs provide enormous potential for artists to control their own works and careers, there are legal issues to be considered. In the past, it was not unusual for artists to receive compensation for their work, but forfeit the rights to their intellectual property. Further benefits of utilizing NFTs in music are that artists can receive ongoing and accurate royalty payments for their work and also have more say over the content of their music. Blockchain and NFTs readily enable primary and secondary resell rights, so artists can create contracts that both record and execute their right to receive royalties for the future use and resale of their works. Whereas previously music studios would typically control what an artist could do and largely dictate how much they would make in their contracts, NFTs allow artists far greater control over their intellectual property and royalty structures.

Since each NFT is unique, the smart contract is recorded on the blockchain with the terms the artists want, without having to negotiate with other parties. Additionally, these smart contracts can account for equity crowdfunding initiatives, so each contributor can be included in whatever compensation scheme is appropriate, such as a percentage of revenues or lifetime tickets. NFTs enable smart contracts to be written so artists are directly compensated, and any crowdfund contributors get their fair share when music NFTs are bought and sold.

Furthermore, music NFTs can be configured in their smart contacts to be “upgradeable”, which means it is a non-static digital asset. An upgradeable NFT will respond to some event or trigger that occurs either on or off a blockchain, such as a ticket sale for a concert going ahead. This also enables original creators and future collaborators to all receive credit or permission to transform the content. Typically, making a remix of an already published song would involve first obtaining permission from the original artist and any other copyright holders to avoid copyright violations and/or obtaining a license for performance rights.  With an upgradeable NFT, the original creator maintains these their intellectual property rights but can provide for downstream owners of the NFT to remix the content and make it their own derivative works.

Music NFTs have the potential to transform the music industry, from artists’ control over their works to receiving accurate or better compensation, to raising money for good causes, to cutting out middle-people, to enhancing the consumer experience through closer one-to-one contact between artists and fans. The possibilities are endless. Thanks to blockchain and smart contracts, NFTs can enable artists and creators to take greater control over their destinies than ever before.

Gamma Law is a San Francisco-based firm supporting select clients in cutting-edge business sectors. We provide our clients with the support required to succeed in complex and dynamic business environments, push the boundaries of innovation, and achieve their business objectives, both in the U.S. and internationally. Contact us today to discuss your business needs.

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