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What about Non-Fungible Tokens (NFTs)?

A digital asset need not be a financial product generally or a cryptocurrency specifically1; it can be a digital collectible—a blockchain-tracked, non-duplicable digital item or image. Digital collectibles are becoming a popular product in an emerging industry; such a product may become a digital asset and also an investment if a secondary market demand for it develops and grows. One such item, the non-fungible token (“NFT”), is a digital collectible, a unique item that remains the only such “object” or token and the blockchain “effectively gives each NFT a unique and non-hackable certificate of authenticity.”2 This is simply a digitized form of the collectible sports card, such as a baseball or football card, with much better record-keeping and tracking. Perhaps not surprisingly, demand for NFTs is growing as it has been for cryptocurrencies: in fact, on February 28, 2021, CNBC reported on the NBA’s “Top Shot” blockchain-based trading card system, which has generated gross revenue of $230 million.    

The emergence of NFTs and similar digital collectibles raises an important question: does or will the SEC equate a digital collectible to a “digital asset” as in the Ripple Complaint and treat NFTs, too, as “investment contracts?” If the answer is “yes,” then one must either distinguish a hard collectible, such as a baseball card made of cardstock, from the digitized version, or treat a baseball card as a security, too. If the answer is “no,” then an NFT and other digital collectibles must be distinguished from digital currency in a way that identifies the peculiarity of the currency. If the differences are insignificant, the question is why hard collectibles are not also securities under the federal securities laws? What makes a coin or paper valuable, whether in hard or digital form, is the same: market demand, both primary and secondary, for that type of “object” and the scarcity of that “object.” This is true for fiat currency as well.    

All items of value are social constructs, including digital tokens, securities, and money, whether private digital money or fiat currency issued by governments. Although not tangible, each “unit” has its own origin and history. Hard collectibles, digital collectibles, and digital currency or digital assets are all investments in the sense that—if a secondary market exists—one may, upon resale, be able to recover one’s purchase price and a profit as part of the total resale price. Also, these items are all usable in the same way as any asset is usable. They may be flipped for a quick gain, held to increase in value, used to secure loans, or traded for other assets of the same class or otherwise.     

Is a token’s identity irrelevant?

The inability to detect or the indifference to the user of a particular token distinguishes the non-collector from the collector. But each token, non-digital or digital, is different in fact or in concept. Every metallic coin, even if “fungible” in the sense of having been created in a certain denomination and time period, is a unique product with its own history of production, transfers, use, and ownership.     

A share of stock is a legal construct: tracing the individual, unique, yet fungible units sold is essential to any legal action that asserts violations of the registration mandates of Sections 5(a) and 5(c) of the Securities Act. A collectible digital token usually has an accompanying image. With respect to securities, the image or concretization of the “object” cannot be material, as old stock certificates, each one unique, is giving way to digitized stock. On a preliminary analysis, one can conclude that tokens of digital collectibles are no different from tokens of digital currency.     

[1] In its Complaint in SEC v. Ripple, the SEC asserted that “[t]he term ‘digital asset’ or ‘digital token’ generally refers to an asset issued and transferred using distributed ledger or blockchain technology, including assets sometimes referred to as ‘cryptocurrencies,’ ‘virtual currencies,’ digital ‘coins,’ and digital ‘tokens.’” Complaint, SEC v Ripple Labs, Inc., Case No. 1:20-cv-10832, ¶ 32 (SDNY Dec. 22, 2020) (“Ripple Complaint”).    

[2] Jabari Young, People have spent more than $230 million buying and trading digital collectibles of NBA highlights, CNBC (Feb. 28, 2021). 

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