NFTs are Dead, Long Live PDAs

The year may not be 1422 and the ascension of Charles VII to the French throne may not mean much six hundred years later but a formal transition of power from the “non-fungible token” blockchain throne is finally in order – with “programmable digital assets” – or PDAs, taking the place of NFTs.

Built on the same sort of blockchain technology underlying every Bitcoin ever mined, a non-fungible token is merely a digital reference certificate of ownership containing the provenance and ledger of all activity surrounding a specific digital asset. On November 13, 2018, Christie’s New York became the first auction house to register a high-end art sale on a blockchain platform with its $317,801,250 sale of the Barney A. Ebsworth collection.   In other words, the provenance utility of blockchain as a “secure digital registry” was already proven four years ago.

Because they are recorded on a public blockchain, NFT activities can be viewed by the public and any manipulations of data easily discovered.  Indeed, this ability to discover manipulations caused many to consider blockchain entries a sort of immutable ledger – an overstatement but still a useful analogy.

Despite representing only 10% of the total volume in NFT transactions, fine-art NFT sales remain the most fertile growth area for NFTs going forward.  As astutely pointed out by the owner of a leading fine-art NFT marketplace, “cryptographically provable scarcity provides value, while decentralization provides security and transparency — qualities that make both art and cryptocurrencies valuable. The NFT art movement may be nascent, but it has increased its pace from a crawl to a sprint, and the world is taking notice.”  Where Gemini is wrong, however, is in thinking the “NFT art movement” would go any further than it already has in its present incarnation.

While the term “non-fungible token” is technically accurate, it was always somewhat misleading given the term focuses only on the uniqueness of the asset, which may be a key characteristic but certainly is not the sine qua non of these digital assets.  The technology underlying NFTs offers much more than the ability to represent a unique digital item. NFTs have always been created using smart contracts, which are self-executing contracts with the terms of the agreement between buyer and seller directly written into the code.  In other words, NFTs can be programmed to perform actions or facilitate certain transactions after certain conditions are met.  For example, these digital assets could be programmed to automatically transfer ownership to a new owner when certain conditions are met, such as the passage of time or the payment of a certain amount of money.

This ability to program using smart contracts provides a level of functionality and flexibility that goes well beyond merely representing a unique digital item.  Art sold as an NFT, for example, can for the first time automatically transfer financial support to a charity of the artist’s choosing.  In other words, these unique fine art objects are much better described as programmable digital assets rather than NFTs even though a “programmable digital asset” can technically be fungible.

A nomenclature change is now in order because the term “non-fungible token” never adequately conveyed potential other use cases for NFTs. While NFTs are often associated with collectibles, they have the potential to be used in a wide range of applications, including supply chain management, provenance, and even real estate transactions. By only highlighting the “non-fungible” aspect of these digital tokens, one overlooks other potential uses and applications – characteristics that can make the art component of the token active and subject to change unlike the dominant static art already in existence for millennia.

At its essence, the term “programmable digital assets” more succinctly captures the potential range of capabilities and uses for these digital tokens, and certainly better conveys their unique position as a new type of digital asset, namely one that is programmable. The off-putting term “non-fungible” conveys a single attribute that can easily be part of a broader marketing discussion.

There is no denying the term “non-fungible token” has gained widespread use and recognition – much of it negative in recent months, so it will be difficult to completely shift to any new terminology without having significant marketing dollars thrown at the problem. Nevertheless, with awareness for NFTs evolving in a negative direction – whether Trump or fraud driven, it becomes even more crucial to apply a new product term.  This new term might as well more accurately reflect the full potential of these novel assets. 

Industry advocates would be smart to do whatever it takes so that NFTs relinquish their throne to a new and more progressive named successor no matter what the cost.  In some ways, this change is already under way. On July 7, 2022, Reddit announced it would introduce “Blockchain-Backed Collectible Avatars” – limited-edition digital assets created by artists which provide unique Reddit platform benefits to owners. 

Despite very much being NFTs, the Reddit announcement did not use the term NFT even once. Maybe in the future a company with deep marketing resources will simply try and co-opt the entire market category by using its own “brand worthy” naming convention for “programmable digital assets” .  Until that happens, however, we should help PDAs succeed NFTs.

It might be easier to imagine this name change a reality while having a Dunkin’ coffee and trying to envision what an EskimoPie or Uncle Ben’s rice pudding dessert with Aunt Jemima syrup would taste like or what an old Weight Watchers ad might look like if played while watching the Washington Redskins’ 1992 Super Bowl victory. 

World Phone is Allowed to Pursue Meta in Regulatory Proceeding

On December 8, 2022, the High Court of New Delhi ruled that World Phone “may be allowed to participate, both by means of written representation and oral submissions” before the Telecom Regulatory Authority of India (TRAI). Such relief was granted despite opposition by Respondents Facebook and WhatsApp.

In addition, the Court ruled: “Considering the extensive prevalence and use of internet telephony, TRAI would expeditiously conduct this stakeholders’ consultation and give its recommendations accordingly.” In other words, not only must TRAI consider the submissions of World Phone, it must quickly deliberate regarding its recommendations.

On one level, the Court passed the buck on this matter given no substantive ruling was reached regarding the underlying merits of the Petition. On the other hand, there was a stern message set forth in the Order regarding how the Government of India has shifted in its approach to over-the-top services and that it may be the time to reign in Meta before it is too late. World Phone – a company that has been battling Facebook since 2015, will do what is needed to assist in that endeavor.

ChatGPT

On December 7, 2022, ChatGPT was asked “write a 450 word essay on how ChatGPT works and how it can impact Web 3.0 in the future.”

Here’s how it responded:

ChatGPT is a cutting-edge natural language processing (NLP) model developed by OpenAI. It is a variant of the popular GPT-3 model, which is known for its ability to generate human-like text. Unlike GPT-3, however, ChatGPT is specifically designed to handle conversational language, making it a powerful tool for building chatbots and virtual assistants.

ChatGPT works by processing a sequence of words and predicting the next word in the sequence based on the context of the words that came before it. It uses a deep learning algorithm called a Transformer, which allows it to analyze large amounts of text data and learn the patterns and relationships between words in a given language. This allows ChatGPT to generate text that is coherent and relevant to the conversation at hand.

One of the key advantages of ChatGPT is its ability to handle a wide range of conversational scenarios. It can handle simple tasks like answering basic questions or providing information, as well as more complex tasks like carrying on a multi-turn conversation or responding to open-ended prompts. This makes it an ideal tool for building chatbots and virtual assistants that can help users with a variety of tasks.

In the future, ChatGPT and other advanced NLP models like it could have a significant impact on Web 3.0. Web 3.0, also known as the Semantic Web, is the next generation of the internet, where information is organized and interconnected in a way that allows machines to understand and interpret it. With the help of advanced NLP models like ChatGPT, machines will be able to process and understand natural language, allowing them to interact with users in a more natural and intuitive way.

For example, imagine using a virtual assistant to help you plan a trip. With the help of ChatGPT, the assistant could understand your requests and preferences, and provide personalized recommendations for flights, hotels, and activities based on your specific needs. It could even handle complex tasks like booking reservations and making payments, freeing you from the tedious and time-consuming task of doing it yourself.

In addition to making everyday tasks easier and more efficient, ChatGPT and other advanced NLP models could also have a major impact on industries like healthcare, finance, and education. For instance, chatbots powered by ChatGPT could be used to assist doctors in diagnosing and treating patients, or to provide personalized financial advice to investors. In the education sector, chatbots could be used to provide personalized tutoring and support to students.

In conclusion, ChatGPT is a powerful natural language processing model that has the potential to revolutionize the way we interact with machines. With its ability to handle complex conversational scenarios and understand natural language, it could have a major impact on Web 3.0 and a wide range of industries in the future.

++++++

Given the fact ChatGPT obtained over a million users in under a week, it won’t be long before the company that launched this tool is eventually purchased by Microsoft or Google – especially given it is a direct threat to their multiple billion dollar revenue streams.

NFT vs. FTX

Fine art NFTs slowly but surely prop up blockchain technology while also moving the nascent Digital Fine Art movement – like popcorn placed in a Raytheon microwave oven but in a less pedantic manner.  On November 16, 2022, a burning question for NFTs is whether the unfolding FTX disaster advances or hinders their cause.

Over 230 years ago, Courts recognized that fraud taints everything it touches.  Snyder v. Findlay, 1 N. J. Law (Coxe) 48, 51 (1791).  Notwithstanding the good intentions of respected celebrity endorsers Larry David, Tom Brady and Stephen Curry, the fraudster Sam Bankman-Fried – now derided as “Sam Bankrun-Fraud”, incredibly avoided internal detection by stealing and hiding funds using his own personal backdoor software tool.  By trading client assets, his massive fraud did the exact opposite of what his firm contractually promised clients as a condition of FTX’s custody. 

Fried’s fraud has become a major contagion in the crypto world – some are even posturing FTX as Exhibit “A” in their case against crypto adoption.  Despite the pernicious nature of Fried’s massive fraud, there remains underlying positive news given FTX’s failures shine a light on why NFTs will continue having a long and impactive run and why their decentralized nature will eventually become baked into most financial assets.  Indeed, the term “NFT” will hopefully disappear from our vernacular given the underlying technology’s future ubiquity.  Literally no one cares how “Hypertext Transfer Protocol Secure” works so long as the “https” before a website address gets the job done.  Similarly, few really care about the technology behind a “non-fungible token”.   Owners only care about having transferable digital property self-containing proof of ownership, verifiable uniqueness and programmable contract attributes.

The FTX debacle immediately adversely impacted NFT markets because NFTs are purchased and sold using cryptocurrencies – most of which took a major hit beginning on November 2, 2022, the publication date of Coindesk’s expose on FTXAnd, with Solana’s SOL emerging as this worst-performing crypto asset – losing over 41% in value given FTX was an important backer of the network, several Solana NFT marketplaces, namely Magic Eden and Solanart, felt an even greater FTX sting than other NFT marketplaces.   

Despite the fact NFT sales remain on a slow mass adoption cycle, as of November 16, 2022 OpenSea alone still had nearly $33 billion in total NFT trades.  NFTs are well beyond the proof-of-concept stage but mass adoption will continue a slow journey given the constant press assaults.  For example, in a May 3, 2022 Wall Street Journal hit piece suggesting that it may be “the beginning of the end” for NFTs, Zach Friedman, co-founder and chief operating officer of crypto brokerage Secure Digital Markets, is quoted as saying:  “The ones that continue will be utility-focused for sure.” 

That perspective is both correct – utility is an intrinsic feature of all NFTs, and wrong given it begs the question:  Since when does fine art ever need additional utility for it to gain status as “fine art”?  Utility is always found in great art simply by way of the esthetic utility derived.  As of the same month as the WSJ article – May 2022, collectors sent over $37 billion to NFT marketplaces, putting them on pace to beat the total of $40 billion sent in 2021.  Even though the vast majority of these transactions are not for fine art NFTs, the disrespect shown today for Digital Fine Art remains no different than cubist art in 1910. 

At the 1913 Armory Show in New York City, the most famous collectors of modern art originally shunned what they saw.  Indeed, after the show travelled to Chicago, members of the Art Institute of Chicago – the first museum brave enough to display these works, burned mock-Matisse and Picasso effigies on the museum’s steps. Today, the Art Institute of Chicago proudly hangs over five hundred important works created by Matisse and Picasso.  History will always have an uncanny way of repeating itself.

At an Art Basel panel discussion, Esther Kim Varet, owner of the L.A. and Seoul gallery Various Small Fires, reportedly let the cat out of the bag as to why Digital Fine Art runs against the grain of the fine art world: “There are a lot of barriers and it feels exclusive once you get in. And I fear that the more pricing transparency there is … we’re going to have to invent new ways to create this aura of exclusivity or privilege. Not that those things are things that we should value but it’s just kind of what the art world is built on.”

In other words, pricing opaqueness is positioned as a virtue of the art world community.  Not surprisingly, the pricing transparency and documented provenance inherent in Digital Fine Art in the form of NFTs in some ways runs counter to this view of the art world.   While the actual art in Digital Fine Art provides utility plain and simple, the programmable nature of the smart contracts used in NFTs provides a world of opportunity for collectors and artists. Such underlying contractual rights can create a lifetime relationship between collector and artist – one with ties to direct interactions removed from any centralized control.  More to the point, fine art galleries and dealers can readily join in this new form of relationship.  Ultimately, the only barriers to the heights Digital Fine Art can achieve is driven by a lack of imagination and a fear of the unknown.

UPDATE: December 13, 2022

On December 13, 2022, the SEC filed criminal charges against Bankman-Fried. The complaint alleges he “orchestrated a years-long fraud to conceal from FTX’s investors (1) the undisclosed diversion of FTX customers’ funds to Alameda Research LLC, his privately-held crypto hedge fund; (2) the undisclosed special treatment afforded to Alameda on the FTX platform, including providing Alameda with a virtually unlimited “line of credit” funded by the platform’s customers and exempting Alameda from certain key FTX risk mitigation measures; and (3) undisclosed risk stemming from FTX’s exposure to Alameda’s significant holdings of overvalued, illiquid assets such as FTX-affiliated tokens.”

In parallel actions, the U.S. Attorney’s Office for the Southern District of New York and the Commodity Futures Trading Commission also announced their own charges against Bankman-Fried.

Given that he was about to testify before Congress, the timing of the SEC and CFTC actions are not nearly as important as that of the criminal indictment. In effect, the DOJ has prevented a potential treasure trove of wholly admissible statements from being elicited. Now that he has been indicted and arrested in the Bahamas, lawyers will be the only ones talking for money-runner SBF. That’s too bad.

NFT Trading Volumes Shrink 97% From January Peak.  Now What?

On September 28, 2022, Bloomberg – in pure clickbait fashion, published a blurb article using data from three-year old Unicorn, Dune Analytics, that claims the collectible and digital art market went from a high of $17 billion at the start of the year to $466 million this month.  The author ties this downswing to the “$2 trillion wipeout in the crypto sector as rapidly tightening monetary policy starves speculative assets of investment flows.”  Whether or not Dune’s data is on the money is almost beside the point.

If investors are buying NFTs solely as an investment vehicle, they are not truly art collectors.  It’s that simple.  No collector buys art purely for speculation – unless you manage a fund tasked with doing exactly that.  On the other hand, those who purchase collectible NFTs almost always buy for speculative reasons. 

When it comes to deciding what to do during this significant downswing – if it indeed exists, there is not much thinking that needs to be done.  If you enjoy the digital art you purchased, this blip does not matter because it was never solely about making a profit.  Over time, art has been the most favored non-correlated financial asset for the affluent but it was also always more than just a financial vehicle.  That will not likely change in the future.  In other words, if you don’t want to see it hanging in your home, it probably should not be in your financial portfolio anyway.

IP Rights in NFTs, Part I

On August 31, 2022, VC powerhouse Andreessen Horowitz released a series of license templates focused on helping NFT projects create more certainty in intellectual property matters.  This comes on the heels of an August 19, 2022 report, “A Survey of NFT Licenses: Facts & Fictions” that concludes the “vast majority of NFTs convey zero intellectual property ownership” to their owners. 

Seeking to create certainty where none currently exists, the released licenses provide different approaches for NFT projects:

According to Andreessen’s Horowitz’s General Counsel, these licenses “were inspired by 20-plus years of work by the Creative Commons.”  Working with two law firms and several of their portfolio companies, the licenses have been incorporated into a Github repo so creators can build them directly into the smart contracts used in their NFT projects. And, they have been all released under the Creative Commons Zero open source license.  Andreessen Horowitz also claims that its licenses are “legally irrevocable” and create certainty in the marketplace after the license is deployed. 

All of this is of course wishful thinking. 

No matter how noble its motivations, Andreessen Horowitz cannot unilaterally dictate when licenses will be “legally irrevocable” in the same sense a smart contract deployed on one platform may not be enforceable when a minted NFT using that same smart contract is sold on another platform.  Given the many different NFT platforms deployed, this is just one of many issues that likely more pressing.  As for what a suitable NFT intellectual property framework would actually look like, that really depends on the platform used.

Another Day, Another Phishing Exploit Seeking NFTs

On July 15, 2022, several of DeeKay Kwon’s Twitter followers were the latest victims of scammers feasting in the NFT space.  DeeKay is an animator and part of a growing number of innovative artists developing the Digital Art Movement spurred on by NFTs.  One of DeeKay’s admirers is Calvin Cordozar Broadus Jr. also known as Snoop Dogg also known as Cozomo de’ Medici – who acquired DeeKay’s “Life and Death” for “$1m USD, or 310 ETH.”  According to this very important art collector, “all of this [NFT profile picture] mania is bringing massive attention to NFT. And when they come in for an azuki, punk, bored ape, or their choice of “culture token” . . . But then stumble across an @XCOPYART, a @fewocious, a @deekaymotion . . . That’s when one realizes the true power DIGITAL art can have, beyond any traditional art they have ever seen before.”

DeeKay reported his Twitter account was hacked and “and the hacker has been tweeting a fake mint site.  I reacted to it ASAP and spread the word but could not stop the damage in time.”  An unknown number of DeeKay’s over 179,000 followers clicked on a phishing link found in the below fake Tweet – a Tweet that purportedly brought them to a new collection from the artist:

According to Deekay, “[t]he fake mint site was made two weeks prior, 100% copied my original website. I assumed he studied my time when I am inactive too.”   While trying to claim the purported free NFTs on the fake site, victims instead approved transactions granting the scammer access to their wallets and allowing the removal of various digital assets. It is not yet fully known how many NFTs or other crypto assets were stolen from Deekay’s Twitter followers.  Most reports currently peg the number at $150,000 worth of digital assets. 

DeeKay has been trying to “work something out” with those have been scammed.  For example, one victim was gifted “something special” by DeeKay to “help ease” his loss.  Interestingly, DeeKay recognizes the problem with reimbursing victims given that it “also encourages hackers to keep doing their thing since I am the one covering the mess. Part of me says reimbursement should not be a standard way to react, and another part of me says I should still find a way to compensate and find a balance.”  This is no different than the problem caused by insurers who continually reimburse ransomware victims and why ransomware payments should be self-insured.

DeeKay’s Twitter phishing scam comes on the heels of another phishing exploit days earlier targeting Uniswap liquidity providers that used a similar scheme but obtained a much larger $8.6 million in crypto assets.  As reported in Crypto Briefing, the Uniswap fake site “instructed the victims to claim the malicious UNI tokens as a reward for providing liquidity on the exchange, but when the victims agreed to the claim, they inadvertently approved a transaction that granted the attacker access to their wallets. From there, the attacker could make token transfers to drain their wallets.”

The phishing technique used in these scams is relatively easy to pull off given most folks still click on links without really thinking and many users of crypto wallets such as MetaMask have no clue as to what they are really providing consent for when clicking on the consent button.  After going to what appears to be a genuine site, they just assume they are obtaining what they are pitched as the reason for going to the site in the first place, namely freebies of some sort.  In a similar way an email address can be spoofed in a phishing exploit, consents can say whatever a scammer wants it to say. 

Whether it’s DeeKay’s Twitter followers or Uniswap’s liquidity providers, these pools of potential victims are publicly known and easily reached by scammers.  One way of getting away from this vulnerable crowd is by using multiple wallets and intermediaries such as fine art galleries that can work with collectors to improve their security hygiene.  More to the point, until art galleries become a mainstay part of the Digital Art Movement, these sort of scams will continue to proliferate.

UPDATE: July 20, 2022

On July 19, 2022, DeeKay let everyone know he was targeted again – likely by way of another phishing exploit. He suggested that his collectors be aware that he would “NEVER do a free mint.”

Phishing for Green Apes

On May 17, 2022, actor Seth Green announced to the world that he got “phished and had 4NFT stolen”. Apparently, he clicked on a link that led him to a website that requested and obtained access to his wallet – a wallet containing four high-profile collectible NFTs. After he provided the necessary consent, a scammer promptly emptied his wallet of these four expensive collectible NFTs.

Green purportedly knows how to navigate Web 3.0 but does a really bad job of justifying his lack of security hygiene:  “Scam GutterCats clone site. I’m crazy careful with separate wallets and security but still got got. Luckily it’s art not crypto so they can be traced. For anyone that bought them, we can work something out.”

Disregarding whether what was lost was actually “art” in the sense of fine art – they are likely more properly described as innovative collectible NFTs with significant speculative value based on community growth, utility, endorphins, and numerous other intangible measures, Green’s loss presents a valuable security lesson for all NFT collectors and raises issues that will not go away anytime soon. All of this is now ripe for discussion.

Green asked OpenSea not to allow trades in his four missing collectibles.  It is doubtful any marketplace will affirmatively identify, tag, and refuse to trade in Green’s four NFTs. As it stands, there are huge numbers of fake collectible NFTs sold on marketplaces – especially on OpenSea. Despite recent OpenSea changes aimed at addressing “copymints” – fake listings using copies of actual collectibles, the collectible fraud problem will not subside any time soon given this sort of fakery does not require much effort and can be very lucrative for scammers – as well as the marketplaces that thrive on trading fees.  More to the point, even the upgraded OpenSea controls do little to address the core issue of compliance.

To its credit, there are no current OpenSea listings tied to Green’s collectible NFTs but that might change at any time given at least one marketplace has them listed.  As of May 19, 2022, Rarible has MAYC # 19182 listed by public wallet address # 0xae7f30d77b367afe64f04dfd94e95f71f8e4ae66.

And, Rarible apparently also has BAYC # 8398 listed by public wallet address # 0xaf20e2e1dca5dffd0efa1a8055099a947beec8be.

These are not Green’s collectible NFTs simply because they reference the correct collections, point to the right image files, describe the correct collectible rarity properties, and use the right numbering scheme.  On the other hand, both have sold – perhaps in wash trades or maybe not, for significant amounts – 106.5 ETH on May 8, 2022 or $268,912 for BAYC # 8398 right around the time it was purportedly removed from Green’s wallet and 31.5 ETH on March 17, 2022 or $87,129 for MAYC # 19182.  Without a way to provide a universal and easily accepted means of verifying the authenticity of these collectibles, collectors will need to be part detective and part forensic investigator and use ETH explorers to track the relevant wallet addresses. 

Assuming someone did the legwork to confirm these are the actual pilfered collectibles, Mr. Green has several options.  He can continue pressuring marketplaces to refrain from listing them.  That would not get them back, but it might prevent further monetization and may cause the current owners to cut a deal with Green for their return given this lack of monetization.

As with many film actors, Seth Green lives in California where knowingly receiving actual stolen property is a criminal offense punishable for up to a year in prison.  See Cal. Penal Code § 496(a) (“Every person who buys or receives any property that has been stolen or that has been obtained in any manner constituting theft or extortion, knowing the property to be so stolen or obtained, or who conceals, sells, withholds, or aids in concealing, selling, or withholding any property from the owner, knowing the property to be so stolen or obtained, shall be punished by imprisonment in a county jail for not more than one year, or imprisonment pursuant to subdivision (h) of Section 1170.”).  Almost all NFT marketplaces are non-custodial – which means this statute would not really apply to them under any reading of the law.

Given this lack of custody, a marketplace would also not likely be liable for conversion. “The tort of conversion is established when one who owns and has the right to possession of personal property proves that the property is in the unauthorized possession of another who has acted to exclude the rights of the owner.” Angiolillo v. Christie’s, Inc., 103 N.Y.S.3d 244, 260-61 (N.Y. Sup. Ct. 2019).  Similarly, a cause of action of replevin requires that the defendant actually possess the property in question before its return can be obtained in court.  All of this assumes ownership of the constituent parts of an NFT, namely private keys, smart contract software code, IPFS content, etc., constitutes personal property in the first place.

Green’s likely best avenue for redress would be going after current holders of his lost NFTs who might be considered bona fide purchasers or good faith purchasers for value not having knowledge of the tainted title. Mr. Green lives in California and the “stolen” property could be in wallets belonging to persons anywhere in the world.  Assuming he knows the public wallet addresses of the current owners, Green would still not know the country of origin let alone name and address.  If the purchaser is identified, however, negotiating a deal or filing suit will be viable options.

Knowing the applicable law for a claim is significant given in some jurisdictions such as New York the law favors rightful owners seeking their stolen personal property.  See e.g., Solomon R. Guggenheim Found. v. Lubell, 77 N.Y.2d 311, 320, 567 N.Y.S.2d 623 (1991) (“To place the burden of locating stolen artwork on the true owner and to foreclose the rights of that owner to recover its property if the burden is not met would, we believe, encourage illicit trafficking in stolen art.”); Barnard v Campbell, 55 N.Y. 456, 461 (1874) (“The general rule of law is undoubted that no one can transfer a better title than he himself possesses.”); DeWeerth v Baldinger, 38 F3d 1266, 1278 (2d Cir. 1994) (“New York case law has long protected the right of the owner whose property has been stolen to recover that property, even if it is in the possession of a good-faith purchaser for value.”).

In some states and countries, however, it is quite different.  For example, under Swiss law, a bona fide purchaser becomes the owner even if the chattel was stolen or otherwise transferred without the authorization of its owner.

On the other hand, even New York law distinguishes between fraud and theft because the owner who is defrauded acted affirmatively and could have protected herself by due diligence, “whereas the owner from whom property is stolen has not acted affirmatively, and, in many instances, could not have protected herself. The [bona fide purchaser] may be equally innocent in both cases, but the original owner from whom property is obtained by fraud is more blameworthy than the original owner from whom property is stolen, and the former is entitled to less legal protection than the latter.”  Shubert Org., Inc. v. Partridge, 2020 NY Slip Op 32748 (N.Y. Sup. Ct. 2020).

This legal distinction raises an interesting point regarding Green’s “stolen” NFTs.  After all, Mr. Green was led to a website by way of a fraudulent email in the hope of minting himself some Gutter Cat Gang NFTs but instead connected his wallet to an imposter website.  All the while, he would have consented to everything done, including his wallet connection and any subsequent activity.  In other words, he was defrauded.  No one went to his home or computer, stole his private key, went into his wallet, and transferred his collectibles to another wallet.  If Green could bring to court a bona fide purchaser of his quartet of valuable NFT collectibles such a buyer could certainly raise all of this as a defense.

Beyond the security hygiene lessons and potential difficulties in retrieving lost collectibles, Green’s mishap also shines a light on the need for due diligence when using a marketplace.  In sharp contrast to collectible NFTs such as BAYC NFTs, purchasing fine art NFTs from a reliable source such as an established art gallery provides justifiable trading confidence.

UPDATE: June 7, 2022

On May 30, 2022, Seth Green announced he had struck a deal with the buyer of his Bored Ape #8398.

He also mentioned he was “working together to prosecute the original thieves” so presumably law enforcement is involved. The following day, Green made a somewhat cryptic statement: “Had to track the NFT to the current holders & make a deal between us to get them back- although we get to prove the friendship & community we all are building around these artists & collections. Plus now we work together to prosecute the original thief who scammed us both”.

In other words, Green was able to convince the buyer to send Green’s Ape back home for an unknown price. For all we know, it may be what the buyer paid or even a premium on that price. What will be of most interest to the ending of this story is what sort of prosecution takes place against Green’s scammers.

UK Royal Mint Wants to Mint an NFT

On April 4, 2022, the UK Royal Mint was asked to mint an NFT.  As with many announcements today, the Royal Mint’s announcement came in a tweet.

Either the above announcement demonstrates supreme ignorance or utter brilliance.  Offering for sale non-fungible representations of currency – the most fungible of assets, certainly seems on its face nonsensical.  Disregarding the typo, however, it may have been a brilliant marketing gambit – with the Chancellor’s goal of placing the UK on the crypto map furthered.  What happens this summer might be a major step in that direction.  Who knows?  There may even be a Royal Mint NFT drop at NFT.NYC in June.

Axie Infinity’s Sidechain Suffers Massive DeFi Exploit

On March 29, 2022, the developers behind the Ronin Network – an Ethereum sidechain used to support the decentralized game Axie Infinity, announced a major exploit.  The developers revealed that an attacker used hacked private keys from four Ronin Validators and a third-party validator run by Axie DAO – out of a total of nine, to forge withdrawals of 173,600 ETH and 25.5M USDC – valued at over $625 million. 

This sort of 51% consensus attack plagued the proof of work crypto community since its early days but largely fizzled out as a threat as the major blockchains grew more complex and the number of mining nodes grew into the thousands.  The fact that the Ronin sidechain only had nine validators for its exit bridge – with a majority being a mere five of the nine, was a security failing by most vantage points.  Not surprisingly, to “prevent further short term damage”, the Ronin Network immediately “increased the validator threshold from five to eight.” And, more importantly, the network “will be expanding the validator set over time, on an expedited timeline.” 

The race to mass adoption of new networks has caused many DeFi platforms to forego a security-first design.  Rather than viewing such an approach as time-consuming or stifling growth, new networks competing with Bitcoin and Ethereum and underlying many new DeFi platforms, must recognize that only with trust will this community ever grow beyond its current early adopters.

UPDATE: March 30, 2022

According to a text message sent to Bloomberg by Aleksander Leonard Larsen, chief operating officer of the developer behind the Ronin Network, Sky Mavis: “We are fully committed to reimbursing our players as soon as possible. . . We’re still working on a solution, that is an ongoing discussion.”

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