Cannabis and NFTs: Collectible Art or Regulated Ads?

15 May Cannabis and NFTs: Collectible Art or Regulated Ads?

Back in 2015, when I was a regular columnist for Above The Law, I wrote a piece called “Cannabis Advertising: Is Pot Obscene?“. That article focused on general speech issues around cannabis ads. We’ve also written over the years about how various social media platforms broadly prohibit pretty much any speech with the word “marijuana” in it, and sometimes, even CBD. Fast forward to 2021 and we still haven’t seen the Feds take any serious action against advertisers of cannabis and/or cannabis companies, and we probably never will at this point (though the USPS has a thing or two to say about cannabis ads in the mail even though it probably won’t do anything about them). Aside from social media headaches, the biggest commercial speech issue for cannabis companies is constantly having to comply with the huge variety of labeling, marketing, advertising, and promotional laws and regulations created under state legalization regimes. However, a new and fun speech and advertising-related issue is the advent of cannabis NFTs.

NFT stands for Non-Fungible Token. An NFT “is a unit of data stored on a digital ledger, called a blockchain, that certifies a digital asset to be unique and therefore not interchangeable. ^{NFTs can be used to represent items such as photos, videos, audio, and other types of digital files.” Translated,  NFTs are distinct tokens on the blockchain that establish ownership of digital collectibles, like digital art. NFTs are no doubt part of an emerging sub-industry that encompasses blockchain technology. And this year in particular has seen a major uptick in the buying and selling of NFTs (e.g., Jack Dorsey’s first tweet NFT that sold for more than $2.9 million). Certain businesses and ventures in the state-legal cannabis industry have been quick to embrace NFTs to help promote various products, businesses, industry influencers, cannabis culture, and even “strain art“.}

The issue with NFTs from a cannabis business compliance perspective is whether or not they amount to marketing, advertising, or promotional materials that have to adhere to a host of laws and regulations across the patchwork quilt of state-by-state legalization. One point in case is Lava Coin, which is “. . . a bag of cannabis, that exists only online, linked to blockchain technology for ‘authenticity.’” The company Peakz is behind Lava Coin per Forbes. Apparently, when you purchase Lava Coin, according to Forbes, “[y]ou can’t smoke it, but as a bonus, if you do buy the ‘the first digital cannabis strain ever available,’ and if you are based in Oregon or California, you also get some ‘real’ physical marijuana.” To me, as a compliance attorney in the California cannabis space, a concept like Lava Coin may have some interesting issues when it comes to compliance with the California Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”) and its very strict marketing, advertising, and promotional regulations, starting with the NFT concept itself.

In California, a cannabis advertisement includes:

. . . any written or verbal statement, illustration, or depiction which is calculated to induce sales of cannabis or cannabis products, including any written, printed, graphic, or other material, billboard, sign, or other outdoor display, public transit card, other periodical literature, publication, or in a radio or television broadcast, or in any other media.

Seemingly then, an NFT, even if it’s intended to only act as “art”, that is a “depiction which is calculated to induce sales of cannabis or cannabis products” is going to be construed as an advertisement under MAUCRSA, which then means that it has to meet a myriad of other laws regarding its dissemination, consumer audience age, and content (including that it cannot be appealing in any way to minors and the license number of the associated cannabis business has to be on the ad). Further, if purchase of a NFT leads to a give away of adult-use cannabis (which is not allowed in California by a licensed dispensary or unlicensed business) or a discounted sale of cannabis by a licensed cannabis business, it may be additional potential proof that the NFT is indeed advertising, marketing, or promotional material.

While NFTs and cannabis are exploring an interesting marriage, producers of NFTs need to be mindful that their creation could be construed as cannabis advertising subject to comprehensive laws and regulations, especially if the creator is partnering with a cannabis business to ultimately drive consumer sales through NFT purchases. And don’t forget that if there’s any intellectual property license or work-for-hire services agreement involved with a cannabis licensee, depending on control and compensation issues, the NFT creator may actually have to be disclosed to state regulators.

At the same time, a cannabis NFT absolutely could just be a collectible asset that has nothing to do with advertising or promoting a cannabis business or brand–the question is whether the NFT is mainly intended to induce or drive commercial cannabis sales. It will ultimately be up to regulators to decide where the appropriate enforcement line lies here, but NFT creators and the cannabis companies or brands they work with should ensure they know what side of that line they’re on, before diving headfirst into the venture.