Case over who owns first NFT rejected by judge – ARTnews.com

Tristan Fewings/Getty Images for Sotheby’s

In 2014, Kevin McCoy and Anil Dash invented NFT at a conference hosted by the digital arts nonprofit Rhizome. When the NFT boom exploded in 2021, McCoy was able to sell the historic NFT, titled Quantum, for $1.5 million at a Sotheby’s auction. Six months after that success, the Canadian company Free Holdings filed a lawsuit against McCoy, claiming they were the rightful owners of NFT.

This week, James Cott, a judge for the US District Court for the Southern District of New York, dismissed the case, saying the company failed to establish ownership, malice or damages.

The plaintiff claimed that between 2014 and 2021, McCoy had let his ownership to Quantum lapse. McCoy had minted his novel NFT on a blockchain called Namecoin, which requires users to update their records every 200 to 250 days, if a user doesn’t, others are free to claim the “blocks” of the blockchain that contain records of ownership . Free Holdings claimed that in 2015 McCoy failed to update his records, and in the spring of 2021, as the NFT market heated up, Free Holdings claimed that Quantum blockchain record on Namecoin.

As part of the preparations for the sale, McCoy and Sotheby’s minted Quantum on the Ethereum blockchain, saying the record for the original had been “burned” or destroyed when the registration expired. McCoy preserved the on-chain data once held on Namecoin to the Ethereum blockchain, which represents a more modern standard.

The case brought a central tenant of Web3 to the legal system: that the code is law. For those invested in the ideological project of crypto, ownership is a simple matter of possession. If you have crypto or NFTs in your wallet, it’s yours. No insurance companies, banks, public bodies or other third parties shall interfere. Risking being stolen from or cheated in some way is the price of freedom from outside interference.

But, as Kevin McCoy told ART news“When you take a case to federal court, the opposite of code is law — law is law.”

This is not to say that the court did not take into account the nuances of digital ownership. In the Opinion and Order issued this week, the judge took into account various existing interpretations of ownership in the context of the Namecoin blockchain.

Namecoin works by assigning a token a “name” that is associated with a public key, or a series of numbers, that assigns ownership of the token. Likewise, as with NFTs minted on Ethereum, which consist of the representation and receipt (or smart contract) containing records of ownership, there is an important split in the digital asset.

Because of this division, there are different interpretations of what constitutes the actual asset. One interpretation is that the token — the representation — is the asset, and that re-registering the asset to another public key, when the previous one has expired, is just creating a new receipt, not a new work.

But there are others who believe that NFT is the public key, and that when an NFT on Namecoin is re-registered, a new work has been created.

The third interpretation is that the creation of a new registry marks the creation of a new NFT that nevertheless retains the history, or origin, of the public key that came before it.

The judge appeared to rely on the second interpretation in his opinion, arguing that Free Holdings failed to make a convincing case as to why they were entitled to Quantumas it existed on the Ethereum blockchain, vis-a-vis their ownership of a re-registered receipt, which represents a completely different NFT.

“Free Holdings has demonstrated nothing more than an attempt to exploit open questions of ownership in the ever-evolving NFT field to claim the profits of a legitimate artist,” Judge Cott said in his dismissal.

The case represents an interesting encounter between Web3 and the law, with the boundaries of digital ownership more clearly defined, but not quite in sight.

The lawyers representing Free Holdings did not respond to a request for comment, although they said so New York Times that the team was “evaluating its options”.