Non-fungible tokens (NFTs) have become a real fever in recent months, moving billions of dollars. But now, they are in the crosshairs of the US Securities and Exchange Commission, the SEC.
According to a Bloomberg report, the SEC is investigating creators of NFTs and the cryptocurrency exchanges where tokens are traded for alleged violations of the agency’s rules.
SEC investigates NFT creators and platforms
Sources familiar with the matter told the report that the focus of the investigation is whether certain NFTs are being used to raise money like traditional securities. Securities are negotiable financial instruments, such as company stocks or government or company bonds.
In recent months, lawyers from the SEC’s enforcement unit have filed subpoenas demanding information about token offerings.
Notably, the SEC, under chairman Gary Gensler, has taken a hard line on cryptocurrencies. Its purpose is to ensure that the industry complies with its regulations.
In the case of NFTs in particular, the regulator is seeking information on so-called fractional NFTs. These assets consist of tokens that are divided into smaller units that can be traded on the market.
The SEC denied Bloomberg’s request for comment.
Boom of NFTs
NFTs are not exactly a new technology. However, they became very popular in 2021. According to The Block Research, trading volume involving non-fungible tokens exceeded $13 billion in 2021. This is a 42,988% increase compared to the NFT trading volumes of 2020 Last year, NFTs had a turnover of just over $33 million.
This growth was due to the adoption of NFTs by celebrities, sports entities, games, companies, among others.
To decide whether or not an asset is a security, the SEC applies the so-called Howey test. In general, an asset falls under the agency’s purview when it involves people investing money to finance a company in order to profit from the efforts of the organization’s leadership.
As far as NFTs go, even cryptocurrency-friendly Hester Peirce pointed out that some tokens could meet this standard. Speaking to CoinDesk TV’s “First Mover” in December, she stated:
“Given the breadth of the NFT landscape, certain parts of it may fall within our jurisdiction. People need to think about possible places where NFTs could enter the securities regulatory regime.”