- L Misthos and M Bacina
US SEC investigating NFTs
The United States Securities and Exchange Commission (SEC) has once again put the crypto space in its cross-hairs by reportedly planning to launch an investigation into non-fungible tokens (NFTs). Led by Gary Gensler, who has crusaded for tighter regulation in the past, the scrutiny by the SEC is now geared towards NFT creators and marketplaces.
Much like his previous approaches to the crypto industry, Gensler and the SEC are investigating whether NFT creators and marketplaces are breaching regulations by providing securities in the form of NFTs.
In particular, the inquiry will focus on fractional NFTs, where a whole NFT is divided into smaller fractions, allowing numerous people to claim ownership of a part of the NFT (and potentially vote on its disposal). Fractional NFT projects do raise legitimate concerns about how closely they resemble company / unit trusts or other investments which seek to acquire an asset by investors pooling resources.
NFT platforms and creators have experimented with NFTs offering a share in future sales or royalties to holders towards more traditional reward program style offerings. SEC Commissioner Hester Pierce said:
Given the breadth of the NFT landscape, certain pieces of it might fall within our jurisdiction...people need to be thinking about potential places where NFTs might run into the securities regulatory regime.
Given that NFTs are a far more understandable digital object (despite the "Right-Click Save" jokes) creators, marketplaces and consumers in general have considered them further away from regulatory risk compared to utility tokens, for example. The Chainalysis 2021 NFT Market Report reported that USD$44.2 billion of cryptocurrency was sent to NFT marketplaces in 2021 up from USD$106 million in 2020.
The strategy if the SEC remains unclear and the sale of a digital good in the form of an NFT, or a ticket for a show / game or pre-sale of a physical item represented by an NFT seem quite clearly outside the SEC's jurisdiction absent there being other promises or representations being made as to investment. Some of the edge case NFT projects experimenting in how they could share their success with token holders, however, might find themselves under increasing scrutiny.