Entangled in a lingering lawsuit with Ripple, SEC goes after the NFT creators and NFT marketplace. The US Securities and Exchange Commission, through its legal counsel, has summoned the NFT market developers and some other cryptocurrency exchanges to provide more details about their respective projects.
According to the Commission’s chairman, Gary Gensler, the move is to probe the NFT creators and marketplaces to ascertain if they are breaching security rules and regulations. He added that the investigation would prove if NFT tokens are utilized to raise funds the same way traditional securities are used.
However, the regulator is quite particular about fractional NFTs, non-fungible tokens that are distinctly divided into smaller units and sold out individually to multiple investors.
The Watchdog Keeps an Eye on NFT
Crypto networks have been at crossroads with the US regulators since last year. In 2021, around USD$44 billion in crypto assets were transacted within NFT-linked Ethereum addresses. Given the recent surge in patronage in the NFT marketplace, SEC primarily suspects something must be fishy and hopes to prove that NFTs are not used as securities.
Expectedly, not all NFT projects might be considered as a security by the regulators. Suppose an NFT is connected to a unique single piece of an item or digital art with a blockchain certificate of ownership and authenticity. In that case, such NFT will not be considered a security.
However, suppose an NFT is provided the public with the possibility of liquidation and secondary sale of the same digital item to another issuer, which would increase the value of the NFT. In that case, such NFT is likely to be in a protracted legal battle with the SEC after the regulator must have certified its security status. The above scenario fulfills the requirements to be security which states that any item is security if buyers place money in a particular asset to make profits.
NFTs Must Be Regulated
SEC’s crypto-friendly commissioner, Hester Peirce, expressed worries over the flourishing NFT markets and suggested regulating it. She said, following the length and breadth of the NFT environment, there should be parts that fall within the commission’s jurisdiction. Users ought to think from that perspective because there must be areas where NFTs fall within the range of the securities regulation.
The SEC jurisdiction is not beyond the United States securities market. Thus, for the SEC to take on legal action against the NFT developers and its marketplace, it must present evidence to prove that NFTs in whole or in parts can be categorized as a security. Usually, the Howey test, certified by a 1946 US supreme court decision, is used to determine if an asset can be classified as a security.
BlockFi, a leading crypto exchange network, was fined a record-breaking USD$100 million last month by state regulators for not registering products that offer mouthwatering profits to clients that lend their digital tokens. Thus, SEC’s summon of the NFT developers, and the marketplace is the regulator’s latest attempt to guarantee that the NFT market and cryptocurrency abide by its rules and regulations.