US Securities and Exchange Commission headquarters
According to a Bloomberg report citing anonymous sources familiar with the investigation, the Securities and Exchange Commission, which has taken a tough stance toward cryptocurrency projects under Chairman Gary Gensler, is investigating NFT creators and marketplaces for regulatory violations. According to the report, the investigation is looking into whether NFTs are "being used to raise money in the same way that traditional securities are." According to reports, the SEC has issued subpoenas in connection with the investigation and is particularly interested in information about fractional NFTs, which allow multiple people to hold (and trade) a share of an asset. Securities are tradable financial instruments such as company stock, government or corporate bonds, and derivatives based on another asset.
Because Bitcoin is frequently used as currency, the SEC has traditionally not regarded it as a security. Ethereum has been given a pass because the project has been ostensibly decentralized to the point where no single group controls its success. However, the agency has been more skeptical of other crypto assets, and is currently embroiled in a months-long legal battle with Ripple Labs over the creation and distribution of XRP, the sixth largest crypto asset by market cap, which it regards as an unregistered security. Back in 2017 and 2018, the federal agency went after initial coin offerings, or ICOs, which were a popular way for cryptocurrency startups to fundraise. The basic idea was for projects to sell tokens that would provide some sort of future utility on their network; the largest ICOs, Telegram and EOS, raised billions of dollars in Bitcoin and Ethereum this way. The SEC took enforcement action against both companies, forcing Telegram to abandon its crypto ambitions entirely.
If the reporting is correct, the SEC is concerned that cryptocurrency projects are simply inventing new forms of unregistered securities, this time with non-fungible tokens. NFTs are blockchain-based tokens that represent the right to sell or trade a supplementary asset, such as a digital collectible or artwork. Though an investigation does not always result in enforcement action, today's news isn't exactly out of left field. Hester Peirce, dubbed "Crypto Mom" for her positive attitude toward the industry, predicted in March 2021 that NFTs would "raise the same kinds of questions that ICOs have raised." She went on to warn investors that fractionalized NFTs may be treated as unregistered securities.
The risk has also been recognized by industry participants. In the run-up to the launch of its NFT marketplace last year, crypto exchange FTX US made it clear that it would not list NFTs that pay royalties to their holders on secondary markets for fear of the assets being classified as unregistered securities. Over the last year, NFTs have grown to be a significant sub-sector of the crypto economy. According to DappRadar, the top Ethereum marketplace, OpenSea, has seen over $3.6 billion in trading volume in the last month. This figure reached a new high of $5 billion in a single month in January. Because of the popularity of NFTs, similar markets have emerged on Ethereum competitors such as Solana and Binance Smart Chain.
Jean Dubreil