A court in the Southern District of New York has reached a ruling on claims made in one of the first cases in the US to deal with non-fungible tokens (NFTs) and the blockchain technology behind them.
‘Who owns the world’s first NFT?’ was a central proposition in the Free Holdings Inc. v. Kevin McCoy and Sotheby’s, Inc case being heard in an ongoing battle taking place in a New York courtroom. Yet this week, judge James Cott ruled in favour of the defending party, affirming that the plaintiff had failed to demonstrate true ownership of the digital artwork.
To understand why this decision was reached, we must cast our minds back nine years, to when Kevin McCoy and Anil Dash created what is considered to be the world’s very first NFT at a conference in 2014.
The created NFT, which is titled Quantum, was minted on an early blockchain called Namecoin, which uses ‘names’, or a series of numbers and letters, to authenticate the creation. However, this specific blockchain requires users to update their records every 200 to 250 days, otherwise the blocks of ownership can be claimed by other users.
When the market for NFTs began to heat up in 2021, McCoy prepared to sell the artwork through the auction house Sotheby’s, minting the NFT and its metadata on the more modern blockchain Ethereum in the process.
This was then followed by the sale of the digital artwork for $1.47million in 2021.
Shortly prior to that sale however, Canadian holding company Free Holdings created a new NFT on the Namecoin blockchain, using the same namespace that McCoy had used seven years earlier and duplicating McCoy’s original metadata. It was able to do this under the assumption that McCoy had let his records on the blockchain lapse.
Free Holdings then alleged that it was actually the owner of the ‘first-ever NFT’, which if true, would make its 2021 sale through Sotheby’s invalid.
The case, Free Holdings Inc. v. Kevin McCoy and Sotheby’s, Inc., is one of the first in the US to deal with blockchain technology behind NFTs. While acknowledging the ‘novel’ issues presented by such technology, the court, in a detailed, 43-page decision, agreed with Pryor Cashman’s (McCoy’s representative) arguments and held that traditional legal principles govern the ownership of NFTs.
The court rejected that position and awarded judgment to McCoy and co-defendant Sotheby’s. In particular, the court agreed that Free Holdings had not identified, and could not identify, any harm to its separately created NFT based upon McCoy’s sale of Quantum and its associated Ethereum token.
The court also agreed that Free Holdings’ claims, which included claims of false advertising, slander of title, deceptive business practices, and unjust enrichment, were all invalid as a matter of law.
In a decision that carefully analyzes the relevant technology and issues, the court found, among other things, that Free Holdings “demonstrated nothing more than an attempt to exploit open questions of ownership in the still-developing NFT field to lay claim to the profits of a legitimate artist and creator. It does not allege that it took any part in the creation of Quantum or the blockchains used to record it.”