The SEC Launches Investigation Into NFTs to Establish a Basis for Regulation

The US Securities Exchange Commission is launching an investigation into non-fungible tokens (NFTs) to establish which ones can be treated as securities.
Image source: Aljazeera

Quick take:

  • The Securities and Exchange Commission is looking into NFTs to establish a clear basis for regulation.
  • The SEC is specifically investigating whether fractionalised NFTs to see if they can be treated as securities.
  • Reports indicate that SEC authorities have sent subpoenas to NFT creators over the last few months.

The non-fungible token (NFT) craze is finally catching the attention of relevant authorities. Several governments around the world have released statements that recognise them as securities. With Israel among the latest, following India’s NFT taxation announcement.

There is no bigger capital markets regulator in the world than the US Securities and Exchange Commission (SEC). The stock market watchdog is launching an investigation into NFTs to establish a clear basis for regulation.

The SEC is especially interested in fractionalized NFTs, which allow traders to buy and sell like other fungible tokens. According to reports, the organization has sent subpoenas related to the investigation to NFT creators. 

The commission wants to establish whether NFTs are being used to raise money like traditional securities. 

Fractionalization is a concept used to split a single NFT into several parts, allowing traders to hold and trade a portion of the asset.

The commission also wants to look into scenarios where NFTs grant a right to a revenue stream, like selling tokenized music to receive royalties over time.

And finally, the SEC is also concerned about the presale of NFTs, including in-game NFTs, which have no current use, and the game developer uses the funds raised to create the blockchain game.

In December, SEC Commissioner Hester Peirce, known in the crypto world as “Crypto Mom” told CoinDesk that the SEC may be taking a closer look into NFTs. “Given the breadth of the NFT landscape, certain pieces of it might fall within our jurisdiction,” Peirce said, adding that people need to be wary of the circumstances where NFTs may fall under the SEC rules.

Although the SEC is currently looking to the potential cases where NFTs may fall under its rules, the industry has been the subject of several lawsuits with real-life brands suing digital creators for trademark infringements.

Nike has taken on StockX after the sneaker retailer launched digital versions of sneakers in the metaverse. On the other hand, Hermes sued MetaBirkins NFT collection creators for creating a collection based on its brand.

Since then, several organizations have filed trademark applications with the US patents and trademarks office to protect their brands from infringements in the digital world.

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