Autopsy of a JPEG: What Happened to NFTs?

When was the last time you heard someone talk about NFTs? Was it when Paris Hilton and Jimmy Fallon showed off their Bored Apes on national television back in January of 2022? Or perhaps it was when Donald Trump unveiled his line of NFTs in December 2022. Or maybe, just maybe, you have that one friend who still insists, daily and with unwavering conviction, that NFTs are poised for a triumphant comeback, that the future of art is non-fungible, and that you’re a fool for not mortgaging your home to buy a JPEG of a doge meme. For the rest of us, though, the hype surrounding non-fungible tokens (NFTs) is all but dead, leaving behind a digital wasteland littered with abandoned marketplaces and steeply discounted apes.

The Rise and Fall of NFTs

So, why exactly did so many people spend so much money on JPEGs of apes? In most cases, it’s because they believed them to be a worthwhile investment whose increase of value was guaranteed by the Web3 revolution and the rise of “digital scarcity”. Digital scarcity is the idea that something can be made rare or exclusive in the digital world, where everything is theoretically copyable without limit. In the real world, scarcity is pretty straightforward—there’s only a limited number of rare Pokémon cards. But on the internet, anything digital can be copied endlessly, making it harder to assign value to any one thing. Enter blockchain technology. With NFTs, digital scarcity is made possible by making a record on the blockchain (a public, unchangeable ledger), effectively saying, “there’s only one of these, and I own it.” Of course, this doesn’t stop people from screenshotting or downloading digital files. But the idea of scarcity, backed by the blockchain, is what makes owning the original special — or at least, that’s the pitch. It’s like owning the signed first edition of a book, except the book is infinitely reproducible and the “signature” is a line of code.

If this all sounds absurd, it’s because it is. Despite this, people spent huge sums of money on NFTs during the peak of their popularity between August 2021 to May 2022 (over $34 billion USD during this period). During this time, the market was flooded with speculative investors, excited by the fortunes to be made from NFTs. While some cashed out and made their fortunes, those who held on to their digital assets past their prime are likely sitting on worthless investments. An NFT of the first ever tweet from former Twitter CEO Jack Dorsey sold for $2.9 USD million in 2021, is now worth around $2,500 USD. A 2024 study by dappGambl that analyzed over 73,000 NFT collections found that 69,795 of them now have a market cap of 0 Ether. This means that statistically, around 95% of NFT holders are currently clutching onto assets that are essentially worthless (if they ever had any worth at all). So, now that the dust has settled after the fall of the NFT craze, what are these investors left with?

What is an NFT, really?

There is and has always been a lot of uncertainty from marketplace participants surrounding what a buyer actually receives when they buy an NFT. Buyers may mistakenly believe that the purchase of an NFT confers ownership over, and copyright to, the underlying asset. This is not always the case. While NFTs are typically tied to digital files like images, videos, or music, they are more like certificates of authenticity. As summarized by Barry Sookman: “the NFT itself does not establish that the asset exists, that any rights are capable of existing in the underlying work, the ownership of the copy, or who owns the intellectual property rights or copyrights in the work. NFTs also don’t prevent multiple NFTs for the same work from being minted or stop non-NFT copies from being made available”. Unless the buyer is provided with such ownership rights through contract or licencing agreement then, buyers are left with the very limited rights conferred by NFTs.

Initially, the confusion over copyright led to a wave of legal conflict. One infamous case involved a Jean-Michel Basquiat sketch that was slated to be minted and sold as an NFT by an art collective who owned the original artwork. In their announcement, they claimed that the NFT buyer would have the right to destroy the original artwork—an assertion that was as misguided as it was baffling, given that the collective wasn’t the copyright holder. While statements from Basquiat’s estate prompted its removal from sale, many other copyright holders struggled to keep up with the sheer volume of infringement found on NFT marketplaces like OpenSea. Indeed, creators often find their work being minted and sold as an asset tied to an NFT without their permission. Consider the case of the young coder who minted a series of pixelated whales that turned out to be a direct rip-off of an existing project. Whether or not this was an accident, minting a copyrighted work and selling it might constitute a violation of any one of a copyright holder’s exclusive rights.

Some have argued that minting an NFT should be considered a digital artistic performance qualifying as a unique artwork in need of copyright protection, insisting that NFTs be added to the copyright regime. But this is like arguing that a new copyright should be awarded to the person who scans a copy of a book… you see the problem. The promotion of innovation, which is the underlying purpose of intellectual property law, would not be achieved by conferring copyright onto NFTs. With the dream of copyright dead in the water and most famous lawsuits involving the copyright implications of NFTs quietly being settled out of court or summarily judged, what are the ongoing legal implications of NFTs?

It seems that many of the ongoing lawsuits involving NFTs are in the realm of securities law, anti-money laundering, and fraud. As recent as August 2024, a judge partially denied a motion to dismiss a lawsuit accusing Shaquille O’Neal of abandoning an NFT collection after the 2022 collapse of FTX, reasoning that NFTs could count as investment contracts subject to securities law. This decision underscores the potential liability for celebrities or others who endorsed such products without adequate disclosures or compliance measures during the crypto market frenzy. This scrutiny is not limited to celebrity endorsements. Several class action lawsuits have targeted NFT projects for failing to register as securities or for deceptive practices, including false promises about future profitability. The ongoing and serious nature of these cases should be enough to demonstrate that there is a need for governments to do better in the future. The downfall of NFTs does not mean that the problem has solved itself. The dynamic nature of technology in the Web3 era should call for an equally proactive regulatory regime.

The downfall of NFTs isn’t just a lesson in how quickly trends can fade; it’s a wake-up call for regulators. If governments don’t step in with clear rules and public education, the cycle of hype, confusion, fraud, and lawsuits will just repeat with the next wave of digital innovation.

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