US Securities and Exchange Commission Scrutinizes NFT Market – Regulation Ahead?

• SEC appears to be examining jurisdiction over NFT market
• Fractional NFTs targeted by stock exchange regulators
• Will Ripple become the blueprint?

Non-fungible tokens, so-called NFTs, are among the newer trends in the crypto market. In 2021, trading in virtual goods picked up speed, and in 2022 the demand for NFTs on the market seems to be unbroken. This has recently brought the US stock exchange watchdog from the United States Securities and Exchange Commission (SEC) onto the scene, which wants to take a close look at the NFT market.

NFTs: Extensive investigation planned

As the news portal “Bloomberg” reports, the US Securities and Exchange Commission wants to launch a comprehensive investigation of the NFT market. The investigation, which covers both NFT creators and crypto exchanges, will focus on whether some of the assets violate SEC crypto regulations, according to people familiar with the matter.

Accordingly, it should specifically be about whether certain NFTs, i.e. digital assets, “are used to raise money for traditional securities,” writes “Bloomberg” further. For example, the authority has requested some information about certain token offerings in recent months.

Fractional tokens in focus

What specifically caught the eye of the stock exchange watchdogs was the field of fractional NFTs (fractional tokens), which are broken down into smaller units and can therefore be bought and sold more easily, the media report continues.

Hester Pierce, a crypto-friendly SEC commissioner, had already made it clear a few months ago why US securities regulators might be interested in the NFT market. In an interview with “CoinDesk TV” she had emphasized: “Given the breadth of the NFT landscape, certain parts of it could fall within our competence”. One has to think about where “NFTs could fall under the securities regulation”.

Are NFTs securities or not?

The question of whether non-fungible tokens are securities in the actual sense, the regulation of which would therefore fall within the remit of the US Securities and Exchange Commission, has been on investors’ minds for some time.

While many NFT fans see the digital certificates of authenticity as assets that can be traded but are different from securities such as stocks, critics often argue that the tradability of NFTs in particular would classify them as securities in the true sense. The SEC wants to examine such a possible classification, particularly in the case of fractional NFTs.

But unlike asset classes such as shares, NFTs are not traded daily and regularly in a liquid market – but only when the owner initiates a sale and a price determination takes place in this context.

To determine without a doubt whether an asset is a security, the US Securities and Exchange Commission uses the so-called Howey test. This classifies assets as securities – and thus under the jurisdiction of the SEC – when investors invest money in a company to benefit from the decisions of the company’s management. NFTs as a whole should probably not be classified as securities in the context of the test, but the exchange supervisory authority could come to a different conclusion for certain NFTs.

Does Ripple’s rating point the way?

For some time now, the SEC has been wrestling with possible responsibilities in the crypto sector. There is also the question of whether cryptocurrencies are securities that need to be regulated by the SEC. The stock exchange supervisory authority has been involved in a legal dispute with Ripple for around a year. Specifically, the Securities and Exchange Commission has sued the crypto company because, in its view, its cryptocurrency is a security and a sale of the Ripple token (XRP) by executives should therefore first have been approved. Ripple defends itself against this argument and emphasizes that XRP does not fall under the securities laws because other cryptocurrencies such as Bitcoin can also be traded as commodities and therefore do not fall under the jurisdiction of the SEC. In this case, however, the Howey test would speak for the stock exchange supervisors, because the Ripple token was created by the company itself and used to finance its own business – this in turn would be tantamount to a corporate investment. A verdict in this case is expected in April, which could possibly also point the way for the classification of NFTs.

Editorial office finanzen.net

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