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NFTs and Alcoholic Beverages

Last year non-fungible tokens, known popularly as NFTs, exploded onto the marketplace.  NFT sales volume totaled $24.9 billion in 2021.  To some, NFTs are mere JPEGs or other digital images that people purchase for bragging rights or passing fun.

The “token” in an NFT is a block of data stored on a digital, public ledger called a blockchain.  This block of data is authenticated and secured in different ways and acts as a unique signature.  Once the token is entered on the blockchain, interested parties can tell exactly who owns the token at any time.  NFTs can be swapped for money or other tokens on digital marketplaces much like trading cards or stocks.

Recently, there has been a surfeit of articles about the use of NFTs as proof of ownership of high-end alcoholic beverages.  Although the exact terms vary, in general the owners of each NFT becomes the owner of a rare bottle. These owners can redeem their NFTs for physical possession of those bottles.  Or, like any other NFT, they may trade them to someone else.  These NFTs serve both the purpose of a certificate of authenticity, a certificate of title and may act as an additional item of value included with the sale of an alcoholic beverage.

Should the New York Alcoholic Beverage Control Law (“ABCL”) be a concern for these traders?  Trying to understand how the ABCL might treat NFTs connected to alcoholic beverages is like trying to interpret provisions of the U.S. Constitution, written and adopted in the 18th century, as it relates to electronic eavesdropping, the right to carry modern weaponry, or privacy rights in the digital age.  Most of the ABCL was written in 1934, long before the advent of modern computers, online marketing and NFTs.  Attorneys must find ways to shoehorn innovative technologies into an almost stagnant statutory scheme.  Consequently, readers are warned that to date, the New York State Liquor Authority (“SLA”) has not addressed the issue of NFTs and the concepts outlined in this article are purely the opinion of the authors. 

To analyze the legal issues related to an NFT, one must first identify what the particular NFT is and who is selling or giving it to whom.  If the NFT is simply a certificate of authenticity, which somehow travels with the beverage, it likely does not raise any additional issues under the ABCL.

But if the NFT is an electronic document that stands in the place of an alcoholic beverage, so that it can be transferred from one person to another and the holder has the right to delivery of the beverage, the NFT is an alcoholic beverage.   Section 3 of the ABCL defines an alcoholic beverage to “mean and include alcohol, spirits, liquor, wine, beer, cider and every liquid, solid, powder or crystal, patented or not, containing alcohol, spirits, wine or beer and capable of being consumed by a human being, and any warehouse receipt, certificate, contract or other document pertaining thereto…” (emphasis added).  Here, warehouse receipts are documents establishing proof of ownership over alcoholic beverages.

Thus, an NFT held by a person located in New York that carries with it the right to possession of an alcoholic beverage is subject to all the laws, rules and regulations of the ABCL and the SLA.  Since such an NFT appears to be a warehouse receipt, its form must be approved by the SLA and an appropriate license or permit is required before it may be sold or transferred.  (See Rules 64 et seq.) unless it can be said to fall under the rules governing the sale of alcohol from a private collection.  In fact, the holder’s legal rights under an NFT that is a warehouse receipt may be unenforceable if the transactions violate the ABCL. (See Annotations under ¶90 New York Liquor Control Lw Reporter .25 New York Warehouse receipts agreement.)

Even if one is dealing with an NFT that is connected to alcoholic beverages but is not a warehouse receipt, the ABCL must be considered.  A retailer who sells an NFT with a bottle of wine may be in violation of Section 63 of the ABCL, which forbids a package store from engaging in any other business on the licensed premise. A supplier or wholesaler who includes an NFT with a bottle of wine or spirits may be in violation of Section 101-b 3(a) and (b), which limits the merchandise that may be included with a price-posted item to “merchandise reasonably used in connection with the preparation, storage or service of liquor, wine or wine products provided that such other merchandise shall not be potable or edible.”  In addition, if a supplier or wholesaler gives an NFT to a retailer, there is a risk that the SLA will bring charges based upon an unlawful gift or service. 

America is a land of innovation, but each new idea comes with its own set of issues and problems.  People dealing with alcoholic beverages constantly must think about how each new idea will fit into the old regulatory scheme.  NFT minters and traders are no exception.

This article is not intended to give specific legal advice.  Before taking any action, the reader should consult with an attorney familiar with the relevant facts and circumstances.

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