In our last article we discussed how NFTs associated with alcoholic beverages may be treated under New York’s Alcoholic Beverage Control Law (“ABCL”).  To recap, NFT stands for “Non-Fungible Token.”  An NFT is a unique unit of data stored on a blockchain, which is a digital and distributed ledger.  NFTs come in many forms of digital media, including photographs, GIFs, video, and audio files, or combinations thereof.  In this form, an NFT may be traded directly between two parties, the transaction of which is recorded indelibly on the publicly viewable blockchain.  In this article, we expand on the application of the ABCL to this innovative technology.

Without getting too technical, the creation and trading of NFTs are governed by “smart contracts,” which are programs that run on a blockchain.  Through programming codes, smart contracts set the parameters of each NFT, such as how the NFT is made, terms of trading the NFT, and any other information associated with it.  When someone acquires an NFT through a trade, that person executes functions defined in that NFT’s smart contract.  Like other transactions on the blockchain, these interactions cannot be reversed, and the smart contract cannot be deleted.

A smart contract can also be used to permanently associate an NFT with a standard legal contract.  This is becoming a common feature for NFTs that are linked to tangible assets, including alcoholic beverages.  As more and more industry members seek to cash in on the NFT craze, it is important to consider how this new technology fits with laws written in the 1930s.

Lately, forward-thinking entrepreneurs have been exploring how NFTs can be incorporated into the business of restaurants or bars.  One group of such proposals ties NFTs to a social-club membership or exclusive access to an establishment. Essentially, prospective consumers may purchase an NFT directly from the organizers.  Ownership of this NFT would entitle its holder to, for example, unlimited access to private dining rooms, a cocktail lounge, outdoor areas, or special events.  Like any NFT, it may be transferable, so if membership becomes a sought-after commodity, the holder will benefit from the NFT’s appreciation in value.

Though inviting, how well does this proposal fit into New York’s regulatory regime?  There is no real answer, unless and until the New York State Liquor Authority (“SLA”) expresses its position. However, under the ABCL, a restaurant must be open to the general public.  

The SLA may cancel a restaurant’s liquor license if it finds it is not open to the general public.  The SLA did that in a case where the licensee had adopted a restrictive policy for admitting patrons. In that case, before 7:00 p.m. the restaurant accepted reservations only from members; between 7:00 p.m. and 10:30 p.m. the restaurant gave preference to club members, but nonmembers would be seated if space was available; after 10:30 p.m. all patrons were admitted on a first-come-first-served basis.  New York Court of Appeals upheld the cancellation. 330 Restaurant Corp. v. State Liquor Authority, 26 N.Y.2d 375 (1970).

If the SLA finds that a NFT restaurant is not open to the general public, can it obtain a private club license? Yes, if it qualifies. But ABCL § 106(8) requires that a private club only be open to its members and their accompanied guests.  Moreover, by definition, a private club must be “an organization . . . incorporated pursuant to the provisions of the not-for-profit corporation law . . . which is the owner, lessee or occupant of a building used exclusively for club purposes, and which does not traffic in alcoholic beverages for profit and is operated solely for a recreational, social, patriotic, political, benevolent or athletic purpose but not for pecuniary gain…”         ABCL § 3

Consequently, it is likely the SLA will find that the sale of an NFT that carries with it exclusive rights to dine in a restaurant violates the legal requirement that the restaurant be open to the general public.  If it does, the entity will not qualify as a restaurant and will have to seek its license as a private club.  As a private club, however, it may not be operated for pecuniary gain and may only be open to its members and their accompanied guests.

The point of this article is not to criticize the plan to open an NFT restaurant.  This is one proposal of many involving NFTs and the sale of alcohol that we have seen.  Compliance with the ABCL, federal beverage-alcohol laws, and other state beverage-alcohol laws will become an increasingly important feature of NFTs as industry members and non-licensees incorporate them into their methods of operation.  Some of this compliance can be effectuated through smart contracts, some through traditional legal safeguards, some through business flexibility, and some through adequate licensing.

NFT minters and traders seeking to associate their products with alcoholic beverages must consider the regulatory implications.  With apologies to Robert Burns, we wish to emphasize that when beverage alcohol is involved, the best laid schemes o’ mice an’ men will gang aft a-gley, if careful attention is not paid to the Alcoholic Beverage Control Law.