The United States’ Securities and Exchange Commission (SEC), led by Chairman Gary Gensler, is reportedly investigating Non-Fungible Token (NFT) creators and marketplaces for securities violations, according to a report from Bloomberg, citing sources familiar with the matter.
The anonymous sources in the report claim that the SEC is investigating whether, “certain nonfungible tokens… are being utilized to raise money like traditional securities.” The report also mentions that in the last few months, attorneys from the SEC’s enforcement unit have reportedly sent subpoenas to NFT creators, demanding information on specific NFTs and other token offerings.
While crypto lending products have been the subject of great regulatory scrutiny over the past year, this report marks a major move into investigating the NFT sector. The inquiry shows the SEC is taking a particular interest in how fractional NFTs are being used. Fractional NFTs is where a more valuable NFT is tokenized into smaller pieces and then sold.
This news comes as no surprise as Hester Peirce, a Commissioner at the SEC, also known as ‘Crypto Mom’, stated back in March 2021 that selling fractionalized NFTs could be breaking the law. She stated, “You better be careful that you’re not creating something that’s an investment product — that is a security.”
She also mentioned in an interview with Coindesk in December that the SEC might soon be taking a closer look at NFTs. She stated, “Given the breadth of the NFT landscape, certain pieces of it might fall within our jurisdiction. People need to be thinking about potential places where NFTs might run into the securities regulatory regime.”
This investigation is the latest in a wave of clampdowns that seek to govern the cryptocurrency market more firmly. Most recently, the SEC ordered that New Jersey-based crypto lending company BlockFi pay a record fine of $100m for failing to list “high-yield lending products as securities.” However, the firm has stated it is now moving to register its lending products with the SEC.
While Bitcoin and Ethereum have been able to avoid scrutiny owing to the fact that they aren’t considered securities by the SEC, other digital assets have not enjoyed the same reprieve, most notably Ripple Labs the parent company of XRP, which has been embroiled in a legal case over selling “unregistered securities” since December 2020.
SEC chief Gary Gensler has previously said that he believes many crypto tokens are likely securities that should fall under the purview of the SEC. The SEC’s Howey test considers something a security if it involves investors putting money into an asset with the intention of making a profit.