SEC to Investigate NFT Market Over Alleged Securities Violations

United States Securities and Exchanges Commission (SEC) chairman Gary Gensler has announced a series of crackdowns on non-fungible token (NFT) creators and marketplaces.

According to Bloomberg, the SEC is investigating whether certain NFTs are being used to raise money like traditional securities.

The agency has sent subpoenas in the past couple of months asking for clear information about token offerings. 

The information was provided by someone who, according to Bloomberg, is familiar with the matter but spoke on condition of anonymity. The SEC has made no comment so far.

According to the report, the SEC is reviewing fractional NFTs, which are divided into pieces, allowing investors to buy a piece of the digital assets that may otherwise be unaffordable. 

“As the market has boomed, some NFT marketplaces have taken steps to remove projects that might put them in regulators’ crosshairs, such as those that offer royalties or that involve raising funds for a business,” the report says.

SEC asks: Are digital assets securities?

The agency uses a 1946 Supreme Court decision, called the Howey Test, in establishing what a security is.

Under the test, an investment contract exists if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

Jay Clayton, the former SEC chairman, clarified what constitutes a security in an interview with CNBC in 2018. 

“A token, a digital asset, where I give you my money and you go off and make a venture, and in return for giving you my money I say ‘you can get a return’ … that is a security, and we regulate that,” he said. 

“We regulate the offering of that security and regulate the trading of that security.

“Cryptocurrencies are replacements for sovereign currencies…[they] replace the yen, the dollar, the euro with bitcoin. That type of currency is not a security,” Clayton clarified.

The NFT market has exploded over the last year, hitting sales of $25bn. 

Everydays: The First 5000 Days, by American artist Beeple, sold for nearly $70m at Christie’s last March – putting him in the top three most valuable living artists.