SEC Becomes Defendant in NFT Classification Case

Law professor and filmmaker Brian Frye and singer-songwriter Jonathon Mann have filed a lawsuit against the U.S. Securities and Exchange Commission.

Lawyers argue that the SEC The regulatory approach threatens the livelihoods of artists and creators experimenting with NFTs.

What the lawsuit says

Second the documentthe appellants want to establish whether NFT falls under the regulator’s jurisdiction. Lawyers have asked the SEC to answer what actions could lead to securities laws being enforced for creating and selling NFTs. The lawsuit also seeks information about whether NFTs must be registered before they can be sold.

“Two recent administrative actions initiated by the SEC suggest that the SEC is getting into the art business by determining when art must be registered with the federal government before it can be sold.”

The authors of the paper likened non-fungible tokens to Taylor Swift concert tickets, which are often resold on the secondary market. Mann and Frye are in exactly the same position in this lawsuit. The lawyers argue that it would be absurd for the SEC to classify such tickets or collectibles as securities:

“They are artists and they want to create and sell their digital art, without the SEC investigating them or suing them.”

SEC’s First Lawsuit Against NFTs

In 2021, media company Impact Theory released the Founder’s Keys NFT collection. The company promoted the project from October to December 2021. The collection included tokens of three different rarity levels.

Accordingly, in August 2023, the SEC accused Impact Theory of promoting securities without registration. The company used NFTs to attract investors, raising about $30 million. This was the first case of the regulator against NFTs.

The SEC believes that the company has positioned the project as an investment in the business. In particular, it has guaranteed holders high profits and promised broad prospects.

Therefore, the regulator considered that the specified NFTs had the characteristics of an investment contract and, accordingly, were classified as securities. By promoting the collection, the company violated federal laws in this area.

Impact Theory agreed to pay a $6.1 million fine without admitting or denying guilt. It also decided to destroy its tokens and mentions of them from websites and social networks.

What is meant by securities according to the SEC

Trading in commodity futures Commission considers cryptocurrency a commodity. The regulator proposes to apply the tax regime developed for assets to cryptocurrency and to consider the actions of issuers as producers of assets. However, no regulation in the United States would require issuers to register tokens as assets.

In assessing the status of cryptocurrencies, the SEC appeals to the Howey test.

The regulator believes that the new financial instrument has security features and considers that cryptocurrency falls within its legislative scope.

According to the SEC, all tokens, in one way or another, fall under several criteria designated by the agency: pre-sale or fundraising, promises to improve the project through ongoing business development and marketing, and the use of social networks to demonstrate the project’s capabilities and benefits.

However, no arbitration body has been able to resolve the dispute between two American regulators, so each agency is acting according to its own view of the situation.

Traders are losing interest in NFTs, but regulators are

Despite regulators’ interest in non-fungible tokens, enthusiasm around NFTs continues to wane. Thus, in July, sales volume in the NFT sector amounted to $395.5 million, according to CryptoSlam. This is a new low since November 2023.

The NFT sector has been in a downward trend for a long time. Sales volume and the number of unique buyers and sellers have been steadily declining since March 2024.

Source: CryptoSlam

Additionally, sales volume decreased by 45% in the second quarter of 2024 compared to the first quarter: $2.2 billion versus $4.1 billion.

The decline in July began in the middle of the month. At the same time, signs of recovery in sales volume were seen in early July after a significant decline in June. At the same time, July became the third largest month in terms of transaction volume in 2023.

There were 9.9 million transactions during this period, compared to 5.7 million in June. However, this cannot be a positive sign, as the average sales price in July reached a new low since September 2023: $39.56.

What Threatens NFTs: SEC or Declining Interest

According to the latest lawsuit against the SEC, the status of non-fungible tokens has yet to be determined. However, the regulator is drawing less interest in this area due to the decline in enthusiasm around NFTs.

In any case, the SEC’s approach to regulation threatens NFTs, which were initially conceived as an element of creativity in the entire blockchain and cryptocurrency industry.

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