DraftKings, a daily fantasy sports and sports betting site, must now confront a class action lawsuit alleging that its sports-themed NFTs are unregistered securities, as ruled by a U.S. District Court judge in Massachusetts.
The lawsuit, Dufoe v. DraftKings Inc., filed in March 2023, argues that DraftKings‘ sports-themed NFTs on the Polygon ($MATIC) blockchain fulfill the criteria of the Howey test—a benchmark for identifying securities.
Judge Denise Jefferson Casper has asserted that the plaintiffs plausibly identified three elements of the Howey test which the DraftKings’ NFTs satisfy; “investment of money,” “expectation of profits” and “common enterprise.”
DraftKing claims NFTs are collectible
DraftKings, represented by attorneys from Wilmer Cutler Pickering Hale and Dorr, argues that its NFTs should be treated as collectible items akin to trading cards rather than securities.
DraftKings maintained that the digital nature of NFTs does not change their fundamental nature as collectibles. However, the court found that plaintiffs had plausibly alleged significant distinctions, particularly emphasizing the dependence on DraftKings’ ongoing operation of its marketplace for the NFTs to retain their market value.
In a recent similar case, Dapper Labs settled a $4 million class-action lawsuit centered on its NBA Top Shot NFTs, which were deemed unregistered securities by the court.
What does this mean for the NFT ecosystem?
This trial comes amidst a declining NFT market, which saw a 45% decrease in sales volume in the second quarter of 2024 compared to the preceding three months, according to data from CryptoSlam.
Despite the decline, NFT adoption remains diverse, spanning sports memorabilia, virtual real estate, and high-end fashion collaborations.
Regulatory concerns loom as NFTs potentially resemble securities, posing implications for innovation and market practices. The outcome of the trial will set a precedent for the governance of NFTs, guiding both regulatory approaches and business strategies within the evolving digital asset landscape.
Blockchain evangelist. Content creator & graphic design hobbyist. Loves gaming!