In the past few months, the NFT sector has been exploding. It grew from a small subsector of the crypto world to a market valued at billions of dollars and growing. This growth has not escaped the attention of the SEC. According to a recent Bloomberg report, the SEC has been investigating this sector for months now.
Details of the SEC Investigation
According to the Bloomberg report, the SEC has issued subpoenas to several crypto exchanges, NFT marketplaces, and NFT creators. According to the report, these subpoenas have mainly requested more information regarding how NFTs are traded. It would appear the SEC has been particularly interested in fractional NFTs. These types of NFTs allow different traders to hold fractional shares in a single NFT. The primary goal of these investigations appears to be to determine whether some NFTs can be considered as securities for legal purposes.
For the SEC to regulate the NFT market, it would first need to establish that they are securities. To do this, it would need to apply the Howey test, which was first used in a 1946 decision by the Supreme Court. Thus far, the SEC has used this test quite many times when it comes to the crypto space. For instance, it forced Telegram to shut down its crypto ambitions after it deemed that they violated securities rules.
Even Hester Peirce, who is considered the most crypto-friendly commissioner at the SEC, has expressed concerns over NFTs. According to Peirce, given the breadth of the NFT sector, some aspects of it might fall within their jurisdiction. The commissioner added that people need to think about potential areas where NFT might run afoul of securities laws.
The State of the NFT Market
NFTs came to the fore in 2021. They grew into an industry worth over $44 billion from one worth around $106 million in 2020. Currently, many artists, celebs, and sports stars are launching NFTs. Even major sports clubs like FC Barcelona plan to enter the NFT space. Everyone can sense the huge potential, and the rising demand and they want to be part of it.
Marketplaces Taking Actions to Protect Themselves
A majority of the NFT marketplace does not fall under the purview of the SEC. However, some of the NFTs might fall into this category. For instance, some artists have been launching NFTs for their art pieces and earning lifetime royalties from them. In such an instance, they could be suspected of trading in unregistered securities. To avoid any legal issues, some platforms have already begun taking measures to avoid such NFTs.
For instance, in early February, a Reuters report revealed that most NFT marketplaces had suspended a majority of the NFTs traded there. It noted that some of those suspended were suspected to be securities, according to the SEC’s rules.
Summary
Thus far, the SEC has not announced any measures against NFTs deemed to be securities. However, in the past, the commission has received a request to provide clarity regarding the NFT sector.
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