There has been much talk in the last year of so-called non-fungible tokens in Canada—what are they, what can they do, what will they become?
The answer, it seems, is still unraveling itself.
Bitcoin launched over a decade ago as a simple, decentralized alternative to fiat currency. Eventually, companies decided to compete in some sense with Bitcoin through their own coins and other related technologies such as the blockchain.
And once companies became sufficiently involved, governments felt compelled to step in.
Now we are entering a stage where everyone’s different definition of “crypto” and “asset” and other loaded terms are beginning to collide.
One ongoing example that could prove precedent-setting involves Vancouver fintech Dapper Labs, which spun out of startup studio Axoim Zen in 2017 and was named to Techcouver’s 10 Homegrown B.C. Startups to Watch in 2021.
The crypto startup soon raised a USD $250 million funding round which valued the digital collectibles unicorn at over $7 billion and set them up for a busy 2022.
Last year Dapper Labs cracked the top 10 of CNBC’s Disruptor 50 list, an annual ranking of companies “growing and innovating through a challenging market and changed world, while inspiring change among incumbent competitors.” They also landed major partners, such as the UFC as well as toy giant Mattel.
2022, however, was not all rosy: more than 150,000 tech workers were laid off globally across nearly 1,000 companies, according to data from aggregator Layoffs.fyi.
Moreover, trading volumes in NFTs—the digital collectibles recorded on blockchains that Dapper has made its name off—tumbled 97%. The fading NFT mania is part of a wider, $2 trillion wipeout in the crypto sector, spurred by a downshifting market and recent regulatory tightenings across Canadaand beyond.
This forced multiple significant waves of layoffs within Dapper Labs.
“The shift we’ve undergone over the past several months has not been easy, but it was necessary to get us in fighting shape for the path ahead,” wrote founder an CEO Roham Gharegozlou. “Our recent sprint has shown what we’re capable of when we prioritize and remain disciplined about both data and execution quality.”
Dapper’s spirit will again be challenged, this time by a lawsuit that alleges Gharegozlou and his company violated federal securities laws by offering NFTs without registering with the U.S. Securities and Exchange Commission.
A motion by Dapper to dismiss the lawsuit was recently dismissed by District Judge Victor Marrero of the Southern District of New York.
In doing so, Marrero noted a few key things, including that purchasers’ fortunes are “tied to the overall success of Dapper Labs” because the company controls the Flow Blockchain and online marketplace where “Moments” NFTs are traded.
The judge also found that “public statements and marketing materials objectively led purchasers to expect profits.”
While Marrero currently considers Dapper’s Moments NFTs to be securities that require registering with the SEC, the company’s lawyers disagree.
“Basketball cards are not securities,” they stated last year. “Pokemon cards are not securities. Baseball cards are not securities.”
Overall, Judge Marrero seemed to agree on that front—he does not presume NFTs to be securities by default.
“Rather, it is the particular scheme by which Dapper Labs offers Moments that creates the sufficient legal relationship between investor and promoter to establish an investment contract, and thus a security, under Howey,” concluded the judge.
“There is a lot of misinformation circulating about the nature of this ruling,” suggested Gharegozlou recently. “All the ruling means is that the case goes to discovery with absolutely no substantive decision on whether NBA Top Shots are securities.”
Gharegozlou says that he is, regardless of legal concerns and current broader economic conditions, “more confident than ever that Web3 will remake digital life for the better for billions of people, over time.”