Article: The Nonfungible Token

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The Nonfungible Token

Scott H. Kimpel, 06 April 2021

A recent Bloomberg article reported that average prices for nonfungible tokens, or NFTs, are down approximately 70 percent from recent highs. NFTs are the latest innovation in digital assets and encompass digital representations of unique works of art, music, or other goods and experiences stored on blockchain. Unlike other digital assets such as bitcoin, in which each bitcoin is the same as every other one (and thus “fungible”), each NFT is theoretically unique and different from every other one (and thus “nonfungible”). A wide range of NFTs have begun to enter the marketplace over the past several months. A digital work of art represented by an NFT recently sold at auction for over $69 million, and even a professional sports league has begun to issue NFTs. A fascinating debate about the social and economic utility of NFTs has emerged, but what are some of the legal issues associated with this new digital asset class?

As with any digital asset, the analysis begins with the Howey test and the various factors the SEC considers in applying the test. Surprisingly, to date the SEC and its staff have said almost nothing publicly about the proliferation of NFTs and the agency’s position, but there are a number of similarities between the recent NFT proliferation and the past ICO craze, and it is probably only a matter of time before the agency brings its first enforcement case against an issuer of an NFT. As is always the case in applying Howey to a novel digital asset, the outcome is heavily dependent on the facts and circumstances surrounding its issuance and the intended use by the resulting digital ecosystem.

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