NFT or Security? OpenSea hesitation halts sales
Updated: Oct 25, 2021
NFTs have had quite the year. From relatively nascent tokens to growing a market cap of over USD$10 billion the increased interest in NFTs is marked. We are also seeing NFT creators experimenting with the rights attached to their NFTs from being able to redeem an experience to redeeming unique artwork. Increasingly NFT marketplaces such as NFTs are asking the question - what features make a NFT a security?
This question has been gaining significant attention after OpenSea, one of the worlds largest NFT marketplaces, put a freeze on trading for a project called DAO Turtles. DAO Turtles queried the freeze with OpenSea who stated that the project breached OpenSea's terms by either - but without specifying:
Us[ing] the Service to carry out any financial activities subject to registration or licensing, including but not limited to creating, listing, or buying securities, commodities, options, real estate, or debt instruments; or
Us[ing] the Service to participate in fundraising for a business, protocol, or platform, including but not limited to creating, listing, or buying assets that are redeemable for financial instruments, assets that give owners rights to participate in an ICO or any securities offering, or assets that entitle owners to financial rewards, including but not limited to, DeFi yield bonuses, staking bonuses, and burn discounts.
The DAO Turtles project advertises that users will passively generate utility tokens but also said that these tokens would be used within a game that was being developed. DAO Turtles engaged in whataboutism, that if this was seen as a high risk feature, existing NFTs listed on OpenSea such as Axie Infinity or Mutant Cats may also be caught by the terms.
FTX, a digital currency exchange, is looking to branch into an NFT marketplace but has said:-
we will reject any NFT from a collection/project that distributes or advertises the distribution of royalties to NFT holders
FTX also added:-
A token which guarantees you a percentage income stream from the sales of a pool of assets starts to look like a security
While NFTs involving linked art alone are more akin to a collectable, the rights which attach to a NFT can mean that it takes on attributes of a financial product in Australia or an investment contract in the US. This is an important reminder that those who deal in financial products require an Australian Financial Services Licence. We caution those launching NFTs to carefully consider what rights will attach to the NFTs, what this will enable users to do, what this will allow NFT holders to access.