This week, Sotheby’s has been taken to court in New York over a non-fungible token (NFT) sold for almost $1.5 million via the auction house. Artist Kevin McCoy’s ‘Quantum’ NFT is perceived as valuable because it’s one of the first NFTs, harking back to 2014. That was before Ethereum launched or the term NFT was introduced. So owning Quantum could have a similar or greater cachet to owning a CryptoPunk NFT. This isn’t a typical NFT copyright or trademark infringement lawsuit. It’s about moving content between different blockchains.
Nowadays, if you’re selling an NFT, ideally, it should be on one of the better known blockchains to make it easily transferable. So last year, McCoy re-minted the NFT on Ethereum, but as a representation of the original one and transferring the rights to that original. And that’s where the legal question arises.
NFT languishes on an old blockchain
The original NFT was minted on NameCoin, a blockchain derived from Bitcoin’s code with a few tweaks to make it work similarly to domain names. You have to renew domain names at least annually. NameCoins also need to be renewed roughly every 200 to 250 days. And after creating his NFT, McCoy did not update his registration in 2015. If you don’t renew domain names, someone else can claim them, and NameCoin appears to work in a similar way. But for six years, nobody claimed the name that McCoy created in 2014.
In March 2021, McCoy started talking about his early NFT, and Quantum was featured in an article on Axios, presumably to drum up interest. The piece discussed the Quantum NFT’s historical importance, including the Axios statement that “Quantum is for sale” and “could fetch as much as $7 million”.
Given the NameCoin entry had remained dormant since 2015, it’s probably no coincidence that someone going by the Twitter handle @EarlyNFT happened to re-register that “name” on April 5, 2021, shortly after the Axios article.
This pseudonymous EarlyNFT is using Canadian company Free Holdings to sue Kevin McCoy, Sotheby’s and NFT startup Nameless, responsible for the ‘condition report’ on the Sotheby’s website. Free Holdings asserts ownership of the original NFT. EarlyNFT claims he attempted to contact McCoy just one day after registering his NameCoin in 2021 and several times subsequently.
On the face of it, the contents of the 2014 blockchain entry seem bad news for the original artist. It includes the statement, “I assert title to the file at the URL http://static.mccoyspace.com/gifs/quantum.gif.” And “Title transfers to whoever controls this blockchain entry.”
One conclusion is EarlyNFT is trying to pull a fast one, but perhaps he has some legal rights here.
So there could be more to it.
Who has the rights?
If you look at the blockchain entries, when EarlyNFT registered the name in 2021, it counted as a ‘new’ name. He subsequently updated the entry contents (the metadata) to copy the exact text as the original entry, which points to the McCoy art.
Compare this to acquiring a domain name. If a domain name lapses, someone else can claim it. But they can’t claim the contents of the old website because the domain and the website are not the same things.
EarlyNFT currently owns the NameCoin ‘name’. It’s not-very-user-friendly: “d41b8540cbacdf1467cdc5d17316dcb672c8b43235fa16cde98e79825b68709a”.
But the question is whether he has rights to the original metadata associated when the ‘name’ was first registered.
Blockchain startup Nameless said in the Sotheby’s condition report that the “specific Namecoin entry was removed from the system after not being renewed, and was effectively burned from the chain.” EarlyNFT says burning is an incorrect description.
The flipside argument in EarlyNFT’s favor is the original entry stated that “Title transfers to whoever controls this blockchain entry.”
Then it boils down to how you define the “blockchain entry”. If it’s the name, then that could favor EarlyNFT. If it’s the 2014 block or transaction entry, then it’s unclear whether anyone ‘controls’ that?
A strange message
On June 7, 2021, when the Sotheby’s auction was in full swing, the NameCoin ‘name’ was updated by EarlyNFT with the notice “**An authorized print of this original NFT, entitled “Quantum” by Kevin McCoy, is currently being auctioned off by Sotheby’s. Good Luck to all the bidders.**”
After the auction ended on June 10 with the $1.47 million winning bid, EarlyNFT claims he contacted Sotheby’s SVP, Caroline Moustakis. He requested that the company update the item details to say it’s an authorized print. Notably, he did this after the auction ended.
One question is whether the buyer was informed of these shenanigans before the transfer of the Ethereum token was executed two months later in August. It could explain the delay. We’ve asked Sotheby’s but didn’t get a response in time for publication.
A lawsuit like this could bring significantly more attention to the Quantum NFT. That might favor both the buyer and Kevin McCoy, who gets a cut on all future transfers of the Ethereum NFT.
What’s the takeaway?
Detractors will point to this being further evidence that the blockchain space is the wild west and that NFTs are in a crazy bubble. Unbridled greed might be a fair description. But this particular case has strong parallels with domain names and possibly cybersquatting.
On the one hand, this is a quirky case because NameCoin has some unconventional features. But on the other hand, it highlights potential issues of moving NFTs between blockchains.
The lawsuit is here.
The author is not a lawyer and this is not legal advice.
