Key Emerging Legal Trends in the Digital Assets Space

By Melissa Morrison | Practice Area Expert

Digital assets crossed a number of important milestones in 2021 in their continuing march to prominence as an asset class. As reported by CNBC.com, the virtual currency market reached a combined $2 trillion in value, the first major crypto company went public with the IPO of Coinbase, major Wall Street banks such as Goldman Sachs stepped up their participation across various digital assets, and Non-Fungible Tokens (NFTs) exploded onto the scene with the backing of high-profile athletes and celebrities.

This significant acceleration in the pace of innovation and growth in the digital assets space is expected to continue in 2022. “Between the popularity of certain (crypto) coins and the interest in NFTs, we’re looking at a potentially groundbreaking 2022,” said investor Kevin O’Leary to Kiplinger.

At the same time, these pioneering technologies are creating a host of new legal issues, requiring traditional paradigms of regulation to be re-evaluated. These considerations include regulation of cryptocurrency and financial technology, securities issues and private litigation trends, and intellectual property guidance related to NFTs.

LexisNexis recently hosted a webinar regarding emerging legal issues in the digital assets space, featuring three partners from Skadden: Alexander Drylewski; Peter Morrison; and Stuart Levi. Based on the presentations from these experts, here are three key areas that legal professionals should be monitoring in the year ahead:

SEC Regulation of Digital Assets

Mr. Drylewski noted that newly appointed SEC Chairman Gary Gensler has made it clear that he believes the SEC should be the primary regulator of the cryptocurrency industry as his view is that digital currencies fall within the definition of a security. Moreover, Mr. Drylewski pointed to public comments from SEC Commissioner Caroline Crenshaw, who has expressed concern that a lack of comprehensive regulation in the decentralized finance space could pose substantial risks to investors. He walked through a number of recent examples of how regulatory focus on companies in the digital assets space has intensified.

Indeed, the day following the LexisNexis webinar, Mr. Drylewski’s comments proved prescient. The SEC may be under some pressure to implement a more aggressive enforcement agenda in 2022, while Democrats are in control of Congress, according to a January 20, 2022 report in the Wall Street Journal.

Private Litigation Involving Cryptocurrency

Mr. Morrison provided an update on recent developments with respect to private securities and civil lawsuits involving various types of digital assets. The breadth in the cases reviewed illustrate the wide range of potential disputes that legal professionals need to monitor in the year ahead.

Mr. Morrison described recent and/or current private litigation involving:

• Investors alleging fraud and other malfeasance in Initial Coin Offerings and other digital token offerings;
• A putative class action lawsuit against celebrities and others who promoted EthereumMax tokens, alleging false and misleading statements;
• Buyers of NFTs who are seeking damages from creators of NBA Top Shots for not allowing them to cash out their NFTs fast enough;
• A putative class action litigation targeting a crypto mining firm that alleges securities fraud; and
• A complaint involving nearly 1,000 crypto traders who are seeking damages from online exchange Binance, for violations of federal and state securities laws.

Mr. Morrison noted that almost all types of digital asset market participants have now been drawn into some sort of private litigation action, a trend that is likely to accelerate in 2022.

NFTs and IP Law

NFTs soared in popularity over the past year. Total NFT volume traded in 2021 stood at $8.8 billion, according to a research report from The Block, with 60% coming from trading Art and Collectibles and the remaining 40% from gaming NFTs.

On January 20^th, the investment bank Jeffries raised its 2022 NFT market-cap forecast to more than $35 billion this year and project that it will reach $80 billion by 2025. The bank’s researchers pointed to “the convergence of the digital and physical worlds” in its analyst note and noted that “NFTs allow brands to expand their reach into digitally enabled experiential tie-ins.”

In his webinar presentation, Mr. Levi introduced NFTs as unique tokens stored on a blockchain that are able to be certified as an original digital work. He challenged legal professionals to think about some of the crucial IP questions that need to be sorted out as this burgeoning market takes off, such as:

1. Who has the right to mint NFTs? This is a complicated IP question that raises issues of determining ownership rights, trademarks, and Names, Images & Likeness (NIL) considerations.
2. What rights are acquired in an NFT transaction? There are important terms established in the marketplace where an NFT is acquired. Mr. Levi explained that many market participants are surprised to learn that IP rights are typically not assigned in these transactions.
3. Where is the NFT work stored? Most NFT sales will generally point to an independent storage system where the digital work resides, which raises risks of the original file being deleted, changed or no longer supported.
4. How are ownership rights enforced? If an unauthorized NFT is created, the owner of the certified original work can assert certain enforcement rights under the Digital Millennium Copyright Act (DMCA). Mr. Levi noted that the actual technical process to take down the unauthorized work may require that NFT owners take some legal precautions.

For more information and practical guidance on these legal issues, review the LexisNexis Virtual Currency, Bitcoin and Cryptocurrency Resource Kit. 

Watch a recorded playback of the LexisNexis webinar, “Emerging Legal Issues in the Digital Assets Space,” to learn more about key legal developments in SEC regulation, private securities litigation and IP considerations related to digital assets.