Megadeath Gives Life to NFT.

Uncategorized, ,

Headline:  Megadeath has a new NFT

Body:  I have a shocker here, so, brace for impact.    I have always been kind of a geek.   Shocking, I know, sorry.   As such, I was never a fan of Megadeath in High School, College or later, though I knew many who  were.   Unbelievably, a few of these young men turned out to be pastors or other religious leaders.  The point being that Megadeath has always been about its art, not pleasing everybody.  And now, they have their own NFTs for sale.  So, let’s take a look at how they profit, and what the NFTs mean to the community.

The Band Megadeath has their own  NFT.

Like I said earlier, I am no a specialist in this kind of music.  But, Megadeath is apparently a “thrash metal” band and they have  a digital mascot, a Mr. Vic Rattlehead.   The NFTs in question seem to be several different images of Mr. Rattlehead sometimes paired with a special real-world experience with the band.  According to an official webpage,“This isn’t just a fan club; it’s a community owned by YOU.”   Previously, concert tickets were released as NFTs, and these got a great response.  In 2021, the band offered an NFT called the “Megadeath Genesis token” which went for just under $19,000.  So, things appear to be getting quite serious.

Megadeath is not the only heavy-metal band doing this.   Avenged Sevenfold have also done similar things, and create with Megadeath some sort of online mutual appreciation society.  They even joined the metaverse where they purchased a “land” where fans can interact and share related media and original art.  Other similar bands like Slipknot have also joined the NFT craze.

So, is this really a big deal?

Yes, and getting bigger all the time.  For a while now, NFTs have been offered  by sports memorabilia merchandisers, and the combined revenues are over $2.5 Billion.  It is estimated that within 10 years, this total will likely reach over $200 Billion.  This IS a big deal!!!

So, NFT’s, are there good ways to get around the problems?

In researching for this post, I think I happened upon a thought-provoking model.  A gentleman in Vegas got access to an enormous collection of rock and roll photos, both photos of famous shows, and some very candid photos of famous musicians.  They partnered with a business called MADworld, and offer these NFTs as physical slides along with Certificates of Authenticity and most importantly, high quality digital images.   These high-quality images help to control the copying of images because images are difficult to keep crisp, when they are just copied.  (Think of a photocopy here.  The first copy is pretty clear and all the lettering is readable.  But by the time you have taken a copy of a copy, details begin to disappear, and some of the writing is less visible or difficult to discern.  The high-quality digital copy can be compared to the slide, and the very smallest details should be visible on both.)

 The Verdict

As before, it would appear that the verdict has to be that NFTs, despite their failings, are here to stay.    To date, there are even online discussions of how to buy, care for and sell NFTs.  Given that this infrastructure is already in existence, I have little doubt that the NFT craze will continue and probably get even bigger.  Perhaps in the future, some cars will come packaged with their very own NFT that gives the owner the right to visit the factory where their automobile was born, or at least a discount on gas.  The success  of the NFT will really be measured when looking at whether the customers remain brand-loyal with their second purchases and beyond.   I am intrigued to find out.

REFERENCES:

Thrash-metal band Megadeth launches NFT collection and metaverse community (cointelegraph.com)

Megadeth Completes First NFT Sale in Heavy Metal Music (yahoo.com)

A new frontier for collectibles: Preserving music history in NFTs with Legends of Rock (cointelegraph.com)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

I bought the Law, and the Law Won…

Uncategorized,

Headline: Yuga  Labs should get used to being in Court.

Date:

Body:  Have you ever had a REALLY good idea, and then, somebody steals it, and it turns out to be worth millions of dollars?  This has never happened to me, but I did suggest to a bread company that they try making breakfast bars and 6 months later, guess what I saw at Giant?    I hope they enjoy their stolen money.  (The timing seems coincidental, but, could be innocent.)  Well, this might’ve happened for real, to Yuga Labs.    They are the ones who brought the Bored Apes NFTs to the world stage.  It is their claim that several digital artists including Ryder Ripps produced copycat versions of the apes.

Their contention is that each celebrity who purchased an ape did so as part of their individual identities; essentially their digital selves.  So, when there are look-alike NFT’s, they suffer something akin to brand dilution.  They are seeking damages and attorneys’ fees.  But, as all apes have a tail, this has a tale attached too.  Originally, the artist was served with a DMCA takedown “strike” from Yuga Labs, but Yuga rescinded it later.   This suggests to some that Yuga was admitting they had a weak case.  At issue seems to be a question of what rights convey each time a Bored Ape is sold.

On the other hand, there is a class-action suit  being pursued AGAINST Yuga Labs too.

The idea here is that Yuga Labs started their own currency NFT and made promises about its definite probability to increase in value  Unfortunately, the NFTs have lost a lot of value, since it was started.  Currently, the law firm is looking for people who have been injured by  this issue.  Key to recovery from Yuga is the class proving that the NFTs were actually securities.  Some securities lawyers seemed  to indicate that this finding would not be made.

Normally, this determination would be made by the Howey test.  But many believe that it will not even come to this.“You know when something is a security? When the SEC decides it wants to regulate it—then it becomes a security,” said Fyre. “The real question is, does the SEC want to regulate this particular market? And the reality is, the SEC does not want to regulate the art market.”  But, Yuga Labs also  started their own digital currency, ApeCoin, and this could be more of an issue for them, as it might appear more like a share in a company.

The Verdict

One particularly infamous bank robber was asked why he chose to rob banks.   He looked at the detective and said, “That’s where the money is.”  Yuga Labs serves as an interesting case.   They created a tremendously valued product.  As a result, there were people who tried to make a look-alike product, and Yuga Labs has to defend against this.  But there is also some question about the valuation of that product, and Yuga has to respond to these parties as well. 

I bring all of this up because I seriously doubt if Yuga Labs will be the only company forced to both pre-emptively enforce their brand, and also defend against people who might feel cheated.  Right now, most of the NFTs are visual in nature, either images or video clips.   But, in the future, the definition could become much, much broader.  When there are NFTs that go into the would of sounds, maybe even smells, we’re going to have some pretty interesting legal ground to break.

REFERENCES

https://blockchain.news/news/yuga-labs-files-lawsuit-against-artist-producing-bayc-copycat-collection

https://www.theblock.co/linked/154206/yuga-labs-sues-artist-in-bored-ape-yacht-club-nft-case

https://decrypt.co/105871/yuga-labs-threatened-with-possible-class-action-lawsuit

https://futurism.com/the-byte/yuga-labs-lawsuit-copies-bored-apes

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

Are NFTs Nifty or Knot?

Uncategorized,

Headline: How are NFTs and AI being used in Fine Art?

Body: We’ve spoken before about NFTs.   As you might remember, some examples of these include user-designed weapons and armor for use in a game environment, and others include dressed up apes or moments in sports history on video.  But, there is one large area that I forgot to mention because it didn’t occur to me that “real” artists would do this; The fine arts market for NFTs is large and thriving.   I thought a shallow dive into this already deep pool was in order.  The questions that occurred to me are many.    Can people really create money for themselves doing this?  What protections are there for the artists?  There are several others too, so, let’s sketch out a primer, together.

Why might an artist want to create fine art NFTs?

Well, the first reason is easy; money.  These sketches and pictures can garner quite a hefty price tag, and this can fund an artist’s journey into other avenues of art.   Perhaps they are happy creating NFTs and they can go on to create more.    Remember; The pictures of apes are pretty rudimentary and sell for hundreds of thousands of dollars.   So  much to say that this is not monkey business.   The other financial arrangement that is interesting is that each time an NFT is sold, (even on a secondary market) the original artist gets at least a small amount of money in the form of royalties.  This is an important distinction when compared to the selling of other forms of art.  In a related vein, the NFT allows artists to sell their work directly to an excited buyer, cutting out the middleman of gallery or auction house.    The lack of commissions makes things more approachable for the artist, and the sale is consummated in minutes, not weeks.

The other reason is that people might get exposure that they might otherwise not receive.  Just to take one example.    Let’s say that an artist developed a really cool design, he or she might  consign it to the owner of a piece of digital real estate in a metaverse like Decentraland.  People “walk” by the  “windows”  where their art resides, and the people might then go to the artist’s website and order other works for sale there.  But for the NFT, this sale would not have happened, so exposure is very important.  (In point of fact, the artist’s website I cited down below explains that NFTs can be seen as yet another potential revenue stream for the artist.)  In a related manner, the NFT minting process can help foster a more direct and bi-directional conversation between artist and audience.

Back to basics: what IS an NFT?

An NFT is essentially a receipt on the blockchain, proving that a particular person owns or has licensed a work of intellectual property.  So, what trips many people up is the unfamiliar “non-fungible.”   Think of oil.   Billy, Bob & Joe (all from Texas, and not one person) each have some oil, and store it all in one tank.  Is Billy’s oil any different from Joe’s oil?   No, they are identical, they differ only in regard to what proportion belongs to who.  Thus, the oil is fungible because your Honda or Cadillac will run identically  with any oil that you pull from this containment.  Now, let’s say they each held paintings in the same secured warehouse.   Are the paintings identical and interchangeable for one another?   No, each one is unique and has qualities that are unique, thus these are fungible.  Just a weird word for a very understandable concept.

OK, so down to business, where can I do business?

There is one very important distinction to draw between  Open platforms and curated platforms.  Open platforms ( such as Opensea or Rarible) are permissionless, and allow anybody to mint an NFT there.  So, anybody can mint an NFT, and that is good.   But, anybody can mint an NFT, and sometimes copied works are used by nefarious actors.   Buyer beware.  The other platform is the curated one.  To get into the curated platform, a certain artist must be invited.  (Examples include SuperRare and NiftyGateway.)  With these sites and ones like them, the potential buyer can feel slightly more secure of their rights in an NFT after purchase.  (Think of other visual art.  Somebody might put up their art at Starbuck’s and another artist walks by and sees their work and is impressed.  They can then find the artist and offer them a spot in an upcoming show, somewhere  in  the real world.)  This is essentially the same process for a curated platform.

It should also be noted, that some of these platforms offer art that is both Physical and digital, or “Phygital.”   In this type of art, an NFT is purchased and may include a map or set of directions to follow.  When they do follow these  directions, they also get a physical work of art that may or may not be subject-related.  It is important to note that the link between the NFT and physical item weakens quickly in this type of art.  There is even a Professional Artist’s Accelerator program, to help artists understand the NFT market quickly, and soon begin to mint their own works.

The Verdict

The usefulness of employing blockchain in sales of art is manifold and I think  helps to solve what might seem to be mutually exclusive problems.  First, by  utilizing a blockchain, forgeries will be much more difficult to pass off as originals.   Through the blockchain, the truth of digital scarcity can be observed directly.  Using blockchain also serves to democratize the process of selling art.  The price walls are coming down, and people who were on the fence to become artists are, and the works that unfold will be quite diverse.   This seems very good to me.

The only reason I would not own an NFT is that it is that the law has not caught up with the technology yet.   First, when somebody makes payment for an NFT, are they buying the concept, outright?   Or, are they leasing the rights to the work of art for a definite term, as an equivalent to licensing?   Do they now have the right to use the image to sell as merchandise?   In preparing for this discussion, I have read a variety of sources on this topic, and the only consistency is inconsistency.    So, tread lightly, friends.  

REFERENCES

NFTs: The Ultimate Guide for Painters, Sculptors & Fine Art Photographers

https://www.coindesk.com/layer2/2022/11/17/nfts-web3-fine-art/

How Do NFTs Fit with Fine Art’s Traditional Gatekeepers?

https://www.gemini.com/cryptopedia/fine-art-on-the-blockchain-nft-crypto

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

Is it Possible for Insider Trading to Affect NFTs?

Uncategorized,

Headline:  What’s happening with the Ex-manager of Opensea who has been convicted of NFT Insider Trading?

Body:  OK, let’s take a hypothetical.  There is a youngish woman (let’s make her a blonde), who had a pretty good career on Wall Street, but then wanted to do something else fulltime.  For the sake of this hypo, let’s say that she decided to start her own brand of home accents and cooking apparatus.  At the same time, she enjoyed managing her own portfolio of stocks and bonds, and maintained some relationships built up during her days on Wall Street.  One high-flying tech stock drew her eye, and she purchased a few shares.  Some time later, her friend at that company warned her of some very disappointing news about to be released.  She quickly opens her stock-trading app and sells her entire inventory of that stock.   The bad news breaks the next day, and that stock tanks 30%.   Great for her, she protected a bunch of money.   Not so great, she might’ve engaged in insider trading.

This fact pattern might be repeating itself with NFTs.   This is the crux of many of the articles I have read.   But, prosecution of insider trading on the stock market, seems to me, to be trying to provide a more even flow of information amongst potential investors.  NFTs on the other hand, (think of the bored ape yacht club) seems by its very nature to be unknowable.   Just think, you might know the date of the offering, and the price, but there is so much that you don’t know.   In the bored apes, you don’t know what eyes to expect, you don’t know what pose to expect, you don’t even know to expect the facial expression.  Further, you can’t know which combination of these and other traits will in the future bring  the highest price.  This is all a long-winded way of saying, that I don’t believe that traditional understandings of  insider trading can apply.  (In point of fact, the jury was warned that this wouldn’t look like a regular insider trading case at all.)  So, we shall see together.

So, what exactly happened?

Allegedly, a manager at OpenSea, Nathaniel Chastain, found out ahead of time which NFTs were to be featured, and purchased many of them on the theory that when they were featured, their prices would naturally rise a lot.   At that point, he would sell his at the now inflated price, and make a tidy profit.  Using this system, he made more than $50,000 in only 4 months, in 2021.  He is being charged with insider trading and wire fraud.   (Per a Special Agent I personally know, “wire fraud” is often a catch-all term used by the Federal Government for any illicit use of the Internet.)

“Nathanial Chastain exploited his advanced knowledge of which NFTs would be featured on OpenSea’s website to make profitable trades for himself,” U.S. Attorney Damian Williams said in a statement. “Although this case involved novel trades in crypto assets, there was nothing particularly innovative about his conduct – it was fraud.”

After 3 days of deliberation, the jury found him guilty on both counts.   He faces up to 40 years in prison.

OK, so why is the US government so interested?

Let’s get just a bit more exact with our diction.   The SEC is VERY interested in this topic, and we are asking why THEY are so interested in fighting in this arena.   The long and short of it is, I don’t know.   What I DO know is there is a proposed law called the Digital Commodity Exchange Act of 2022.   If this law passes, the lion’s share of regulation of cryptocurrency industry activities will fall under the purview of the Commodity Futures Trading Commission.  If this happens, the SEC misses out on the increasing budgetary sausage allocated to regulation of cryptocurrency.  But, if they can prove how incredibly “successful” they are in prosecution of novel cases, lawmakers might think twice before passing this law.  I’m not saying that this is the only consideration, but, the facts seem coincidental.  I leave it to you to use your own judgement.

The Verdict

The SEC took on  a difficult assignment here, no doubt about it.  To prove a new application of insider trading is really risky, and they did it.  So, we are left to interpret whether the outcome was good or bad.  I was not a member of the jury, but I do have a few thoughts.   First, when the prosecutor told them to focus on the wire fraud, I became instantly distrustful that the government had a good case for insider trading.  Second, something about OpenSea doesn’t make sense to me in this context.  Assuming that he was guilty of insider trading, one would be forced to presume that OpenSea holds enough of the cards (on a very opaque market) that a manager of the site is able to see what will be placed in the “featured” category AND the discernment needed to understand which examples will become valuable based upon consumer whim.  I don’t buy it.  What do you think?

REFERENCES

https://finance.yahoo.com/news/ex-opensea-exec-convicted-wire-211531049.html

https://www.binance.com/en/feed/post/486540

https://cointelegraph.com/news/sec-reportedly-launches-investigation-into-insider-trading-on-exchanges

https://today.westlaw.com/Document/I1939d37ce68d11ec9f24ec7b211d8087/View/FullText.html?contextData=(sc.Default)&transitionType=Default&firstPage=true

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Is the SEC up to Monkey Business?

Uncategorized, ,

Headline: Why is there a class action suit against Yuga Labs?

Date:

Body:  Oh boy, oh boy, oh boy, lawyers everywhere are about to go, well…er…um… APESPIT!!!  Here’s why.

In a nutshell…

In a nutshell, there are a whole lot of people who are, as a class, suing Yuga Labs for having “inappropriately induced” this group into buying their Bored Ape NFTs and the associated ApeCoin token.  Their claim is that Yuga Labs used famous promoters to artificially inflate the value of both the NFTs and the APE coin.  A further claim is made that Yuga Labs waved the prospect of huge returns in front of “unsuspecting investors” claiming a loss of more than 87% since the end of April 2022.  In an interesting twist, one community member brought p the point that Yuga didn’t create APE coin.   Rather, APE coin was started by a DAO, which was then adopted by Yuga Labs.  It will certainly be interesting to see the outcome of this fight.  When in court, the class will have to prove that Yuga Labs engaged in a “pump and dump” scheme where they artificially inflated prices.    This is often quite difficult to do.

Making their case even trickier, the class might  have to convince the jury that both product lines were sold as investment contracts which constitute unregistered securities.  These have to be registered with the SEC, in most cases.  For now, though, Scott & Scott face the arduous task of finding the entire list of potential plaintiffs.

Well, at least they all seem to agree…

Nope, not really.   The class is small when compared to the number of people who have purchased Bored Apes.  Many within the broader community feel that the class suing Yuga are essentially whining because they made their own bad financial decision.   One of these is Kevin Wu.    “Extremely ridiculous! Take responsibility for your own actions, people.”

Is this really a big deal, worthy of interest by the SEC?

It conceivably might be.   Even on the individual level, this might be worth considering.   Just one year ago, a Bored Ape sold for $3.4 Million USD.  Even now, the average price of a Bored Ape is over $115,000. “I see very, very, very little likelihood that the SEC is going to want to step in there and… characterize that [Bored Ape NFT collection] as a security,” said professor of law at the University of Kentucky Brian Fyre.

The Verdict

Once the case is filed, the court’s determination on whether NFTs are securities and their similarities to a company share would be a key factor to winning.  We have hit upon this topic in a previous blog post, but really, this is a very important question.  On one hand, because the different agencies of the Federal Government vie for larger portfolios (and budgetary allocations), I could see why the SEC would take the stance that  these are investment contracts.  As such, they need to be registered, and there are dozens of required disclosures that they have to tender to potential investors.   On the other hand, Law Professor Brian Frye opined differently.  “I see very, very, very little likelihood that the SEC is going to want to step in there and… characterize that [Bored Ape NFT collection] as a security,” said the professor.  He felt that if the NFTs were considered securities, then the SEC would be forced to regulate a lot of things that they don’t want to regulate. I think this makes sense.

 REFERENCES

https://cointelegraph.com/news/yuga-labs-inappropriately-induced-bayc-investors-class-action

Yuga Labs faces massive class action lawsuit from aggrieved investors

https://cryptonews.com/news/law-firm-trying-organize-class-action-lawsuit-against-yuga-labs.htm

Yuga Labs Faces Potential Class Action Lawsuit

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.