Code is Not Law: Case on Who Owns the First NFT Dismissed by Judge

In 2014, Kevin McCoy and Anil Dash invented the NFT at a conference hosted by the digital art non-profit Rhizome. When the NFT boom blasted off in 2021, McCoy was able to sell that historical NFT, titled Quantum, for $1.5 million at a Sotheby’s auction. Six months after that success, Canadian company Free Holdings filed a suit against McCoy, claiming that they were the rightful owners of the NFT.

This week, James Cott, a judge for the U.S. District Court for the Southern District of New York, dismissed the case, saying that the company failed to establish ownership, malice, or damages.

The plaintiff claimed that between 2014 and 2021, McCoy had let his ownership of Quantum lapse. McCoy had minted his novel NFT on a blockchain called Namecoin, which requires users to update their records every 200 to 250 days, if a user fails to do so, others are free to claim the “blocks” in the blockchain that contain records of ownership. Free Holdings claimed that in 2015, McCoy failed to update his records and, in the spring of 2021, as the NFT market was heating up, Free Holdings claimed the Quantum blockchain record on Namecoin.

As part of preparing for the sale, McCoy and Sotheby’s minted Quantum on the Ethereum blockchain, saying that the record for the original had been “burned” or destroyed when the registration lapsed. McCoy preserved the on-chain data once held on Namecoin to the Ethereum blockchain, which represents a more modern standard.

The case brought a central tenant of Web3 before the legal system: that code is law. For those invested in the ideological project of crypto, ownership is a simple matter of possession. If you have crypto or NFTs in your wallet, it’s yours. No insurer, bank, government agency or other third party should interfere. Running the risk of being stolen from or cheated in some way is the price of freedom from outside meddling.

But, as Kevin McCoy told ARTnews, “When you take a matter to federal court it’s the opposite of code is law—law is law.”

This isn’t to say that the court didn’t take into account the nuances of digital ownership. In the Opinion and Order handed down this week, the judge took into consideration different, existing interpretations of ownership within the context of Namecoin blockchain.

Namecoin functions by assigning a token a “Name” that is associated with a public key, or a string of numbers, that assigns ownership of the token. Similarly, as with NFTs minted on Ethereum, which consist of the representation and the receipt (or smart contract) which contains records of ownership, there is a vital split in the digital asset.

Because of this split, there are different interpretations of what constitutes the actual asset. One interpretation is that the token —the representation— is the asset, and that re-registering the asset to a different public key, once the previous one has lapsed, is just the creation of a new receipt, not a new work.

But there are others who believe that the NFT is the public key, and that when an NFT on Namecoin is re-registered, a new work has been created.

The third interpretation is that the creation of a new registry marks the creation of a new NFT that nonetheless retains the history, or provenance, of the public key that came before it.

The judge appeared to lean on the second interpretation in their Opinion, arguing that Free Holdings failed to make a convincing argument as to why they were entitled to Quantum, as it existed on the Ethereum blockchain, vis-a-vis their ownership of a re-registered receipt, which represents a wholly different NFT.

“Free Holdings has demonstrated nothing more than an attempt to exploit open questions of ownership in the still-developing NFT field to lay claim to the profits of a legitimate artist,” Judge Cott said in his dismissal.

The case represents an interesting meeting of Web3 and the law, with the boundaries of digital ownership more clearly defined, but not totally in view.

The lawyers representing Free Holdings did not respond to a request for comment, though they did tell the New York Times that the team was “evaluating its options.”