Shifts remaking our world. The breakdown is produced and distributed by coindesk. What's going on guys? It is Friday, February 24th and today we are talking about whether NFTs are securities about SPF getting more charges, it is a Friday extravaganza and I am excited to have you here. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review or if you want to dive deeper into the conversation. Come join us on the breakers Discord. You can find a link in the show notes or go to bit dot LY slash breakdown pod. I'll write Friends, happy Friday. Today we are catching up with some interesting legal developments to close out our week here. We're going to start with dapper labs and for those unfamiliar dapper were the creators of crypto kitties and then later NBA top shot. In many ways, NBA top shot was the first mainstream breakout of the NFT bull market that brought a huge number of new people into the space around 2020, 2021. While recently dapper has been facing a class action lawsuit, which is predicated on the idea that top shots are unregistered securities. Now, it's important to note here that this is a group of plaintiffs making this argument not the SEC. Now, because of this, dapper lawyers have tried to get the case thrown out on the basis of top shots, clearly, and obviously not being securities. On Wednesday, a number of headlines were shared on Twitter that were somewhere between intentionally and unintentionally misleading, and which were in either case clickbaity and not exactly accurate. Those headlines all read some version of judge declares NBA top shots to be a security, but that wasn't exactly true. What actually happened was that the judge hearing the case in the southern district of New York dismissed dapper's application to dismiss the case. That judge found that there are reasonable arguments that the NFTs in this specific case could satisfy the howey tests. To how he tested, of course, the legal threshold for whether an asset can be deemed an investment contract with the implication that securities laws apply to it. The legal argument in this case is a little more in depth than simply the idea that dapper's digital basketball cards are securities. The judge accepted the plaintiff's arguments that the underlying protocols tokens create value across the NFT ecosystem. Quote, plaintiffs have alleged that, without flow tokens, no transactions on the float blockchain can be validated. Indeed, the proof of stake mechanism employed by the flow blockchain requires flow to power it, and incentivize miners to validate transactions. In that respect flows utility creates value for moments through the network's consensus as to ownership in the price of each transaction. Now I'm not trying to get into the details here only to point out that this is a specific decision about the specifics of this case and it involves a company that has their own blockchain and that is working with their own blockchain. And so that should color the extent to which we think there are other precedents here that might be more concerning. Still, lawyers for dapper labs reiterated their rather clear legal argument. They said basketball cards are not securities. Pokémon cards are not securities. Baseball cards are not securities. Common sense says so, the law says so, and courts say so however, this judge said it's not that clear, particularly the judge noted that unlike cardboard collectibles, the value of dapper's digital trading cards, hinges on dapper's continuous operation of the flow blockchain, and the existence of a secondary market operated by the company. Quote, the allegations that dapper labs created and maintains a private blockchain is fundamental to the court's conclusion. By privatizing the blockchain on which the moment's value depends and restricting the trade of moments to only the flow blockchain, purchasers must rely on dapper lab's expertise in managerial efforts, as well as its continued success in existence. The judge also noted that dapper's marketing materials implied the expectation of profit, which is something we'll come back to in just a minute. The judge also highlighted that his interpretation was very narrow and does not imply that all NFTs are securities. Quote, it is the particular scheme by which dapper labs offers moments that creates a sufficient legal relationship between investor and promoter to establish an investment contract and thus a security under howey. In some plaintiffs adequately alleged that dapper labs offer of the NFT moments was an offer of an investment contract and therefore a security required to be registered with the SEC. Still, the really important thing here and the thing that was lost in the initial discussion was that this was simply a hearing about whether the case would be thrown out without a hearing. Essentially, the judge was only asked to decide whether the argument raised by the plaintiffs was plausible, not whether it was correct. So when the judge was talking about that private blockchain and what it meant, he wasn't saying that ultimately he agreed with the plaintiffs that that meant that top shots were a security, but only that it was a plausible argument. The case will now go ahead and arguments will be formally heard on whether or not top shots was offering a security. Dapper labs tweeted today's order which the court has described as a close call only denied our motion to dismiss the complaint of the case's pleading stage. The judge did not conclude that the plaintiffs were right, and it's not a final ruling on the case's merits. Courts have repeatedly held the consumer goods, including art and collectibles like basketball cards, are not securities under federal law. We're confident the same claim holds true for moments in other collectibles digital or otherwise. As we argued to the court, moments are simply modernized trading cards, not financial instruments. Unlike securities, moments are unique in nature, non fungible, and don't contain rights to any underlying financial asset. We look forward to vigorously defending our position in court as the case continues. While Twitter was initially flooded with the incorrect headlines it didn't take long for a more thoughtful set to do some correcting. Jake stravinsky writes the judge didn't decide anything. He allowed the case to proceed past a motion to dismiss because the securities claims were at least plausible, an extremely low bar and not a final ruling at all. Do I really have to say basketball cards are not securities? Now Evan Cohen, the founder at invest with Vincent responded and said, frankly, the private blockchain argument is interesting. And I look forward to the actual hearing. To which Jake again responded, this dispute aside, it would be absurd if all valuable digital assets stored on centralized databases were securities. This would turn every major video game developer every event ticketing platform travel rewards program, et cetera, into a public reporting company regulated by the SEC. James Murphy at metal lawman also discussed whether it had relevance to another big securities related trial in ripple versus the SEC. He writes, a federal judge in New York has ruled that a complaint plausibly alleges that dapper lab's initial sale of NBA top shot NFTs qualifies as a security under the howey test. I don't believe this ruling should impact the analysis in the ripple case and here's why. The top shot decision does not address secondary market sales of the top shot NFTs. And the judge emphasized it his opinion that the underlying facts matter because, quote, not all NFTs offered or sold by any company will constitute a security. The judge cited the fact that top shots trade on a private blockchain run by the issuer as a key factor in his ruling. XRP trades on a public blockchain. For this reason, the top shot opinion could be considered net positive for ripple. Not a legal opinion just a tweet. Now obviously this is still not great for dapper as they have to go have this fight now. And in fact, the block obtained an email sent to investors on Wednesday that informed them of a further 20% reduction in headcount at dapper labs, which follows layoffs amounting to 22% of their staff last November. Lastly, one part of the ruling that should give social media professionals pause, the federal court judge alleged that emojis like the rocket ship emoji, the up chart emoji, and the bag of money emoji, objectively mean a financial return on investment. And so have legal consequences. Join coin desks consensus 2023. The most important conversation in crypto and web three. Happening April 26th through 28th in Austin, Texas. Consensus is the industry's only event bringing together all sides of crypto web three and the metaverse. Immerse yourself in all that blockchain technology has to offer creators, builders, founders, brand leaders, entrepreneurs, and more. Use code breakdown to get 15% off your pass. Visit consensus that coin desk dot com or check the link in the show notes. Speaking of legal consequences, let's do an update on SPF. An updated indictment against Sam bankman freed was unsealed on Thursday, adding four additional fraud and campaign finance charges to his criminal case, which is currently scheduled to go to trial in October. The document also adds significant additional background material on what went on at FTX. Adding to the existing fraud charges, the DoJ alleges that Sam quote falsely represented to a financial institution that the account would be used for trading and market making. The indictment claims that Sam opened a company with the deliberately misleading name of north dimension, with the aim of telling a false story to an unnamed bank that had previously been reluctant to service FTX companies. Still, the bulk of the additions relate to campaign finance violations.