ERC-721 and ERC-1155 Smart Contracts

Last Updated on: 16th March 2025, 06:22 pm

ERC-721 AND ERC-1155 SMART CONTRACTS: WHAT YOU NEED TO KNOW

Two major NFT standards, two big questions. ERC-721 and ERC-1155 are both Ethereum-based protocols that govern how non-fungible tokens (NFTs) work. People who create NFTs want to ensure their artwork or digital items can be sold, traded, or displayed in a secure way. Fans of gaming or digital collectibles want tokens that are easy to manage and verifiable on the blockchain. But does everyone understand the legal risks? Probably not especially the people making them. I’m here to tell you how these smart contracts actually function, where the pitfalls might be, and why you should consider how laws, including federal laws, might apply to your project.

We are Spodek Law Group, a nationwide federal defense law firm created by Todd Spodek. Our criminal lawyers have handled complex matters involving federal agencies like the Securities and Exchange Commission, Department of Justice, and others. If your NFT project generates questions about fraud, securities violations, or money laundering, you could end up in a situation that demands immediate legal help. Let’s discuss how these token standards work, the potential criminal or civil consequences of NFT issues, and how you can protect yourself while experimenting with blockchain technology.

ERC-721: THE ORIGINAL NFT STANDARD

ERC-721 is widely viewed as the first official standard for non-fungible tokens on Ethereum. A token that was created under ERC-721 is unique. Each token has its own value and identity. This structure is perfect for digital art or collectible items. If you own a single ERC-721 token, you hold something that cannot be easily duplicated.

Here is why that matters: an ERC-721 token that is properly minted becomes permanent on the Ethereum blockchain. The contract code, which defines the token’s properties, is transparent. Anyone can check it. On the positive side, holders enjoy proof of ownership. On the negative side, if you push out a collection that has misleading marketing claims, you can create legal trouble. For example, if you claim your NFTs will double in value due to some guaranteed “buyback,” the SEC might interpret it as an unregistered security offering. If that happens, you may face civil penalties or even criminal charges. A felony conviction that results from securities fraud can lead to prison, devastating fines, and a damaged reputation.

Token creators who rely on hype, speculation, or questionable marketing will likely face investigations by agencies that suspect fraud. Law enforcement officers who are assigned to financial crimes do not care if your project is a fancy piece of art or a limited-edition collectible. If they see potential wrongdoing, they may file charges – and there are MANY agencies working on dealing with this issue. Our law firm, which has over 50 years of combined experience handling complex federal matters, strongly advises NFT creators to check their disclosures and consult legal counsel before launching any large-scale NFT collection.

ERC-1155: A MULTI-TOKEN REVOLUTION

The ERC-1155 standard that was introduced later supports both fungible and non-fungible tokens under one contract. That flexibility is huge. Imagine a game that has rare items (NFTs) and common currency tokens (fungible assets) all existing in a single contract. That is precisely what ERC-1155 allows you to do. It reduces overhead and simplifies management of these assets.

However, there’s a catch: a single contract that includes many item types might trigger extra attention from government regulators if the government suspects some tokens are sold as investments. A legal issue comes up when people promise returns or create a scenario where token buyers expect profits solely from the team’s efforts. This can mirror the Howey Test, a standard that the SEC uses to identify unregistered securities (sec.gov). If the agency that was watching your NFT sale decides you crossed the line, your entire NFT project can be labeled as an illegal securities offering, potentially leading to lawsuits or prosecutions.

People who sell or trade ERC-1155 tokens without a legal strategy are blindsided by questions about compliance, etc. If prosecutors suspect you tried to hide certain transactions or launder money through your token, they will bring charges under federal statutes. We have seen it happen. Defending against these allegations takes a legal approach, you are now dealing with the government. You must gather evidence that was recorded on the blockchain to show good-faith intentions, honest marketing, and compliance with relevant regulations.

CREATORS VS. INVESTORS

Some NFT creators claim that their tokens are “just collectibles” and hold no official promise of profit. Many buyers, on the other hand, treat NFTs like assets which are going to go up in value. That difference in viewpoint can lead to misunderstandings. If creators do not clarify that tokens represent digital art only, or if they let the hype run wild, the risk of a securities investigation grows and investigators are closely watching for this. Investors who lose money might allege fraud, claiming they were misled into thinking the token had guaranteed returns. This conflict can lead to lawsuits and government investigations by multiple agencies. The best approach is to keep your promotional statements accurate and transparent. Instead of bragging about “massive returns,” focus on the collectible value or the unique digital utility.

LEGAL PENALTIES AND CRIMINAL CHARGES

Misrepresentations cost you dearly: If an NFT project that was launched by you includes false marketing, you could face fraud charges. Federal fraud statutes carry potential prison time, sometimes up to 20 years for wire fraud convictions. If your project got big enough that it crossed state lines or international borders, federal jurisdiction probably applies. A guilty verdict that comes from a federal court might involve large fines. The judge may also order restitution, meaning you pay back harmed investors. This can easily bankrupt small projects or individuals who put everything on the line to create an NFT drop.

Another major risk is money laundering allegations. Criminal enterprises sometimes turn to NFTs to obscure illegal funds by purchasing unique tokens that are later resold. If the government thinks you designed your platform to help criminals, you might be charged with conspiracy to commit money laundering. Conspiracy charges that are filed at the federal level can lead to very long prison sentences.

HOW SPODEK LAW GROUP DEFENDS YOU

As a nationwide federal defense law firm, we know how to respond if you are accused of crimes related to ERC-721 or ERC-1155 tokens. Our legal strategy when helping NFT creators begins with a detailed investigation. We analyze your smart contracts, your promotional materials, and your blockchain transactions. If there is evidence that was improperly seized, we move to suppress the evidence, so it cannot be used against you in court. If there are contradictory claims by prosecutors, we highlight the inconsistencies and aim to get the evidence thrown out.

Sometimes, the best solution is to early before anything legally has started, and reduce the charges before an indictment. Other times, we fight aggressively in federal court. For example, if the SEC classifies your token sale as an unregistered security, we build a defense around the unique nature of NFTs or the disclaimers you provided which were meant to signal your intent that is is a collectible, not a security. Our attorneys argue that the project was about art, access, or some other utility, rather than pure speculation. That distinction can make or break your case. We might also call upon expert witnesses who can explain how your tokens function, how your marketing was used, and why your conduct did not violate the law.

COMPARING ERC-721 VS. ERC-1155

Notice that the standard you pick influences your project’s structure, but does not eliminate legal obligations. If you create a single contract with multiple token types, you might face more complex compliance issues. Fewer contracts does not mean fewer rules.

AVOIDING COMMON PITFALLS

Creators who do not plan for future regulatory changes might find themselves scrambling when the law catches up. Right now, the NFT space has many gray areas. Because of that uncertainty, the best practice is to assume regulators will eventually pay attention. Keep detailed records of your sales, your marketing claims, and the real utility of your tokens. If investors ask for clarifications, respond clearly. If you set up private discords or communities, moderate them carefully to avoid rampant speculation or unverified “guarantees” from excited fans. That speculation that is out of your control might still come back to haunt you if the government believes you allowed or encouraged it.

What about code vulnerabilities? If your smart contract that was deployed has a flaw that leads to hacking or lost funds, you might see civil lawsuits from buyers or from individuals who are impacted. They may claim you were negligent because you did not audit your contract. Damages in these types of lawsuits can be substantial if people lost a lot of money. This is just another reason to be thorough. Get audits, double-check your token logic, and communicate your disclaimers.

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