Ownership Claims over Auction of “The First NFT” Previously Dismissed by a New York Court Now on Appeal | Proskauer – Blockchain and the Law
In 2014, artist Kevin McCoy created a digital artwork called Quantum and recorded its provenance on the Namecoin blockchain, making it the first-ever non-fungible token (NFT). Little did McCoy know that this act would lead to a legal dispute over ownership rights several years later.
Namecoin, a blockchain system that allows users to claim and trade unique combinations of numbers and letters, was used to record the ownership of Quantum. Each registered name on Namecoin is associated with a token that grants the user control over the domain name and its settings. McCoy’s Namecoin token expired in 2015 and remained unclaimed for six years.
In 2021, McCoy minted a new NFT of Quantum on the Ethereum blockchain, preserving all the original on-chain information. Sotheby’s auctioned off this NFT for $1.5 million. However, prior to the auction, a company called Free Holdings re-registered McCoy’s expired Namecoin token and claimed ownership of the Namecoin-Quantum. They attempted to contact McCoy but were ignored.
Free Holdings sued McCoy and Sotheby’s, alleging that they misrepresented the status of the Namecoin-Quantum and deprived Free Holdings of an opportunity to profit. They claimed that the original Namecoin record associated with Quantum was not burned or removed, as the defendants claimed. They sought a declaration that they were the rightful owners of the Namecoin-Quantum and other damages.
The court dismissed Free Holdings’ complaint, ruling that they lacked standing and failed to state a claim. The court rejected Free Holdings’ argument that re-registering the expired Namecoin token conferred a property interest in Quantum. The court also found no evidence of actual or imminent harm to the value of the Namecoin-Quantum due to the defendants’ actions or statements.
This case raises interesting issues surrounding NFTs. One question is whether the value of an NFT is affected if identical copies exist on different blockchains. In this case, the original NFT was recorded on Namecoin, but a copy was minted on Ethereum. The court determined that the defendants’ description of the Ethereum-Quantum was not false and simply provided one interpretation of what happened when the Namecoin registration expired.
Overall, this dispute highlights the complexities and uncertainties surrounding ownership rights in the evolving NFT market. How ownership is established and maintained, particularly with expired or re-registered tokens, remains a contentious issue. As the NFT space continues to grow, it will be important to address these legal and regulatory challenges to ensure clarity and fairness for all parties involved.
