Binance is the latest major crypto industry player to be sued by a U.S. regulator.  On March 27, 2023, the CFTC announced that it had filed a civil enforcement action against Binance Holdings Limited (and related legal entities) (collectively, “Binance”), its CEO, Changpeng Zhao (“Zhao”), and its former chief compliance officer, Samuel Lim (“Lim”), for violating the Commodity Exchange Act and CFTC regulations. (CFTC v. Zhao, No. 23-01887 (N.D. Ill. Filed Mar. 27, 2023)).  The CFTC, among other things, alleges that Binance allowed U.S. customers to make use of their centralized digital asset trading platform without Binance first properly registering with the CFTC and also allegedly failed to implement an effective anti-money laundering (“AML”) program as required under applicable law. The complaint states that Binance has “never been registered with the CFTC in any capacity.” The CFTC is seeking disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the Commodity Exchange Act and CFTC regulations.

As discussed in Part I of this series, Ordinals are a pioneering new method of utilizing the Bitcoin blockchain that will usher in new and innovative use cases on Bitcoin. As promised, in Part II we will discuss the implications for creators and owners.

Implications of Ordinal NFTs for Creators and Owners

As with most crypto innovation, capable users quickly flocked to the shiny new object. Copies of popular Ethereum NFT projects began appearing on the Bitcoin blockchain after the Ordinals launch. For example, a clone of CryptoPunks, named Ordinal Punks, popped up and is reportedly gaining traction. Further, the owner of Bored Ape Yacht Club (“BAYC”) #1626 permanently removed the NFT from its spot as one of the most valuable in the space by “burning” it, then inscribing the NFT on Bitcoin using Ordinals.  While the owner of BAYC #1626 effectively deleted – or symbolically transferred – the NFT, it appears that some NFT creators are not purists and are willing to experiment on Bitcoin. For example, Yuga Labs, the creator behind the Bored Ape Yacht Club Ethereum-based NFT phenomenon, announced that it would release a NFT project called TwelveFold on the Bitcoin blockchain.

In our December article we asked: what do hard forks mean for my NFTs? In this article we ask a similar question: how does a copy of an NFT on completely different chain (Bitcoin, not Ethereum), affect value and licenses?

A number of questions arise. Does the holder of the copycat Ordinal on Bitcoin require a license corresponding to the Ethereum NFT? What happens to the Ethereum NFT purchaser’s rights granted to it under the license, which may or may not include a commercial right to exploit and sublicense? Does an Ordinal inscription of an Ethereum NFT fall under a purchaser’s general non-commercial use and public display rights that are generally given to purchasers on NFT marketplaces? Does the original Ethereum NFT holder hold one set of rights and the holder of the copycat on Ordinals possess any rights that may be in conflict with the original NFT holder’s? Generally speaking, would the value of the NFT be affected if two identical copies exist on two different blockchains? Does the NFT owner or project have a say in which blockchain to recognize? Has any IP infringement occurred?

The NFT community has been humming in 2023 after the recent rise in Bitcoin NFT mints. Ordinals, a non-fungible token (“NFT”) protocol, sent the community buzzing in January 2023 when it launched on the Bitcoin blockchain (as updated by soft forks in the protocol in 2017 and 2021, which among other things, added new features to the blockchain and increased the block size from 1MB to 4MB and allowed for the inscription of data). Bitcoin evangelists – true believers in Bitcoin as hard money – appreciate that the Bitcoin blockchain’s development is optimized for non-censorable, decentralized money but not file storage and consider Ordinals as immutable JPEG garbage that will only create network congestion, thereby increasing fees, and should be viewed as beneath the original peer-to-peer mission. Conversely, NFT enthusiasts and the blockchain curious are celebrating Bitcoin’s NFT scene as an innovative use of the chain: unlike traditional Ethereum-based NFTs (where the original underlying asset generally resides on a centralized server or the IPFS), Ordinals reside on-chain.  Needless to say, the rise of NFTs on the original blockchain is not without questions.

This article is Part I of a two-part article on Ordinals. In this part, we will break down Ordinals, explaining Ordinal Theory, ins-and-outs and functions. In Part II, we will dive into the implications of having NFTs on two separate blockchains.