The Securities and Exchange Commission (SEC) is investigating NFT creators and the crypto exchanges where they trade, to determine whether certain tokens qualify as securities and thus should be regulated, according to a report from Bloomberg.
In Brief:
- The probe is led by Agency Executive Chairman Gary Gensler to ensure the obeyance of regulations.
- The SEC is investigating whether some crypto assets, particularly NFTs, are securities.
- Enforcement lawyers have sent queries and subpoenas to NFT creators and NFT marketplaces.
The investigation is primarily concerned with whether certain NFTs or digital assets (that can be used to denote ownership of things) are being used to raise funds in the same way that traditional securities are.
The probe is also, particularly into fractional NFTs, which are simply whole NFTs that have been divided into smaller fractions, allowing a different number of people to claim ownership of the same NFT.
These are the two standpoints to the main issue that the SEC is trying to figure out. And that is, whether digital assets, including NFTs, are securities subject to the same rules as stocks.
To determine whether something is a security or an investment contract, the SEC employs the so-called Howey test, which stems from a 1946 U.S. Supreme Court decision. Certain cryptocurrencies and initial coin offerings (ICOs) may be found to meet the Howey Test’s definition of an “investment contract” or “security”.
Most of the time, whether a digital asset qualifies as security is determined by whether there is an “expectation of profit to be derived from the efforts of others.”
While the SEC has stated that many tokens fall under its jurisdiction, some cryptocurrency enthusiasts argue that regulations designed to control the equity markets should not also apply to virtual currencies.
For the above purpose, attorneys in the SEC’s enforcement unit have issued subpoenas (summons) to NFT creators and various crypto exchanges demanding information about token offerings for several months.
This investigation is the SEC’s latest attempt, led by Agency Executive Chairman Gary Gensler, to ensure that the cryptocurrency market abides by its regulations.
SEC Commissioner Hester Peirce, affectionately known as “Crypto Mom” for her pro-crypto stance, stated that the SEC may soon take a closer look at NFTs.
“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,” said Peirce.
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