Intangible Possessions, Tangible Fraud: Plagiarism and NFTs

How much is a tweet worth? How about Twitter CEO Jack Dorsey’s first tweet, a 2008 post reading, “just setting up my Twitter”? For Sina Estavi, the man who now owns the tweet, the digital post is worth upwards of $2 million. This ability to purchase digital content – non-fungible tokens (NFT) – is relatively new. According to CNN, an NFT is defined as a “[piece] of digital content linked to the blockchain.” Unlike cryptocurrencies, which are also linked to the blockchain, NFTs are unique and noninterchangeable; they are not equivalent to each other. In fact, NFTs can represent anything, ranging from a tweet to a digital art print. While some, like Dorsey’s tweet, can be traced to an individual, other NFTs – such as a painting, photograph, or video – are much harder to attribute to one person. This conundrum has led to a massive rise in NFT fraud, in which people sell digital content that they do not own.

Considerations NFT Exchanges Must Make in the Face of Fraud & Plagiarism

OpenSea, the largest NFT exchange, is just one of many online marketplaces struggling with this issue. For example, the company has a “free minting tool” that allows creators to create and publicize an NFT for free on the platform. On January 27th, OpenSea tweeted that “over 80% of the items created with this tool were plagiarized works, fake collections, and spam.” On one hand, OpenSea benefits from the large volume of transactions on its website, as it collects a 2.5% commission on each transaction. Yet the increase in fraudulent conduct also dissuades legitimate creators from using the platform. As a solution, OpenSea imposed minting limits per creator to reduce the likelihood of fraud. The limits, however, led to massive backlash from creators, many of whom found the policy restrictive. This brings us to the heart of the problem.

One of the key benefits of NFTs – and of decentralization in general – is increased accessibility. Low barriers of entry allow independent creators to share their work and generate revenue. By raising these barriers – either by limiting the amount of output creators can publish, or by raising the cost of doing so – OpenSea risks becoming the rigid, technological space it proclaims to offer an escape from. Yet, as mentioned – and as the company recognizes – there is a cost to inaction. Artists are angry that their work is being plagiarized, and generating revenue that doesn’t profit them. For example, artist Aja Trier found 87,000 copies of her own art being sold as NFTs on OpenSea. As she told The Guardian, “[OpenSea] has a $13bn valuation and they’re trying to go public. How much of their valuation is from stolen art?”

NFTs and Fraud Enforcement

Enforcement is equally challenging. Like cryptocurrencies, NFTs are hard to categorize into existing classifications. The number of overlapping issues – fraud, valuation, digital misconduct – makes it difficult for any one agency to claim sole authority over NFTs. Recently, Ryan Korner, a Special Agent in Charge from the IRS’ Criminal Investigation’s Los Angeles office, spoke about the issue at the University of Southern California’s Gould School of Law. Korner emphasized that [the IRS] is “just seeing mountains and mountains of fraud in this area.” He added that the agency has worked with “other federal agencies, including the Justice Department, to ‘make sure everyone is on the same page’.” Clearly, the IRS is not the only agency with enforcement authority. Depending on the context, the Consumer Financial Protection Bureau (CFPB) may also have regulatory purview in this area.

Are NFTs Classified As Securities?

The Securities and Exchange Commission (SEC) may also become involved if buyers start using digital content as investments rather than possessions. The United States District Court in the Southern District of New York is currently hearing Friel v. Dapper Labs, a class action in which the plaintiffs allege that Dapper Labs sold NFTs as securities without authorization and that Dapper Labs’ NFTs – highlight reels called “NBA Top Shots” – meet the criteria of the Howey Test, and thus should be classified as securities. Plaintiffs also emphasize that Dapper Labs meant for the NFTs to be traded and acquired for profit, a practice they allege violates several sections of the Securities Act. The court’s ruling may provide more clarity on whether NFTs are classified as securities – and on the role the SEC will play in enforcing against fraud.

Whistleblower Protection Programs in the Workplace

While the question of regulatory authority remains unclear, many federal agencies do have whistleblower programs that allow employees to speak up about wrongdoing. The SEC, CFTC and DOJ – all of whom have expressed concern about cryptocurrency fraud – have established programs that reward insiders for speaking up, sometimes allowing them to maintain anonymity while doing so. Congress is exploring similar programs for the FTC and CFPB as well. Suffice to say, employees have options.

Sanford Heisler Sharp is experienced in representing whistleblowers, and is committed to fighting fraud, through whichever avenues are appropriate. If you have reason to believe that you have a whistleblower case, don’t wait to get the legal help you need. Call 646-681-7373 or contact us online for a case consultation.

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