Up until now, the SEC has left the classification of non-fungible tokens ambiguous, and NFT marketplaces have largely interpreted this to mean that NFTs are not technically defined as financial assets covered by the SEC’s purview
Prominent NFT marketplace OpenSea has received a warning from the U.S. SEC about a potential lawsuit, after the regulator hinted that it might go after the company for allegedly breaching securities laws.
The news evoked outcry from the crypto community as well as Democratic congressman Wiley Nickel, who decried the SEC’s “blatant abuse of power” by once again attempting to regulate by enforcement.
Up until now, the Securities and Exchange Commission has left the classification of non-fungible tokens ambiguous, and NFT marketplaces have largely interpreted this to mean that non-fungible tokens are not technically defined as financial assets covered by the SEC’s purview. However, in going after OpenSea, the Securities and Exchange Commission is attempting to keep non-fungible tokens under the agency’s watch, potentially throwing a major wrench in the business of many firms formed around digital collectibles.
OpenSea Chief Executive Officer Devin Finzer announced the SEC’s decision to issue a Wells Notice – a warning to firms about potential enforcement actions on the horizon – on social media. His post garnered support from the crypto industry, which believes the Securities and Exchange Commission has been engaged in bad-faith efforts to crack down on a beleaguered industry.
Critics, moreover, point out that the SEC’s decision to potentially label non-fungible tokens as securities is tantamount to labelling physical artworks as the same, which would conflict with existing legal understandings.
The NFT market is identical to the art market, which existed long before the SEC was created and which the SEC has never regulated, Brian Frye, an NFT and securities law expert at the University of Kentucky, told Decrypt. If the SEC thinks the art market is a securities market, it should say so and try to regulate it. If not, it should leave OpenSea alone.
For its part, OpenSea vowed to fight the Securities and Exchange Commission’s classification, and even offered $5 million to cover independent artists, creators, and developers who may be mired in legal battles as a result of the SEC’s classification.
