The SEC Pursues NFT Creators and Marketplaces for Conducting ICO-Like Sales
According to a Bloomberg article citing unnamed people familiar with the inquiry, the US Securities and Exchange Commission, which has adopted a strong stance against cryptocurrency projects under Chairman Gary Gensler, is investigating NFT inventors and markets for regulatory infractions.
According to the source, the investigation is looking at whether NFTs are being used to raise money in the same way that regular securities are. According to reports, the SEC has issued subpoenas in connection with the inquiry and is especially interested in information on fractional NFTs, which enable several individuals to own (and trade) a piece of an asset.
Securities are tradable financial products that include firm stock, government or corporate bonds, and derivatives on another asset.
Historically, the SEC has not regarded Bitcoin as a security due to its widespread usage as money. Ethereum has been granted an exemption since the project is apparently decentralised to the point where no one entity controls its success. However, the government has been more sceptical of other crypto assets and is now locked in a months-long legal battle with Ripple Labs over the development and distribution of XRP, the sixth biggest cryptocurrency by market capitalization, which the agency considers as unregistered securities.
The government agency has been particularly aggressive in its pursuit of initial coin offerings, or ICOs, a popular method for cryptocurrency firms to raise capital in 2017 and 2018. The main concept was that companies would sell tokens that would have future use on their network; the two biggest ICOs, Telegram and EOS, raised billions of dollars in Bitcoin and Ethereum this way. Both businesses faced SEC legal action, with Telegram eventually being compelled to relinquish its crypto aspirations entirely.
If the SEC’s reporting is correct, the SEC is worried that cryptocurrency initiatives are just inventing new forms of unregistered securities—this time using non-fungible tokens. NFTs are blockchain-based tokens that represent the right to sell or trade an underlying asset, such as a digital collectable or piece of art.
While a probe does not always result in enforcement action, today’s announcement is not entirely unexpected. Hester Peirce, dubbed “Crypto Mom” for her empathetic stance toward the industry, stated in March 2021 that NFTs may “raise the same kinds of concerns that ICOs have.” She continued by cautioning investors that fractionalized NFTs may be treated as unregistered securities.
Industry participants have also been cognizant of the danger. In the run-up to the debut of its NFT marketplace last year, crypto exchange FTX US made it plain that it would not list NFTs that pay royalties to their holders on secondary markets, fearing that the assets would be classified as unregistered securities.
The excitement around non-fungible tokens, or NFTs, continues to grow, and authorities are taking note. Hester Peirce, the SEC commissioner, is popularly known in the cryptocurrency community as “Crypto Mom.”
NFTs have emerged as a significant subsector of the crypto economy during the past year. According to DappRadar, the biggest Ethereum marketplace, OpenSea, has seen over $3.6 billion in trade volume in the last month. This sum hit a record $5 billion in a single month in January. The prominence of NFTs has prompted the emergence of comparable marketplaces on Ethereum rivals such as Solana and Binance Smart Chain.