Some NFT Sales Could Be Illegal: SEC Commissioner Hester Peirce

Authored by Will Gottsegen via Decrypt.co,

In brief

• SEC commissioner Hester Peirce – sometimes known as “Crypto Mom” – said investors should be wary of creating unregistered investment products with NFTs.

• Fractionalized NFTs could potentially be securities, she said.

The hype around NFTs, or non-fungible tokens, refuses to die down, and regulators are taking notice.

SEC commissioner Hester Peirce, affectionately known as “Crypto Mom” within the cryptocurrency industry, warned investors yesterday that some NFTs could be considered unregistered securities under certain circumstances.

“The whole concept of an NFT is [it’s] supposed to be non-fungible, so it’s supposed to be unlike anything else,” Peirce said during a Security Token Summit webinar on Thursday.

“Which means that it’s, I think, in general, less likely to be a security, but people are being very creative in the types of NFTs they’re putting out there. It’s a wonder what some people will pay for. And so I think, given that creativity, as with anything else, you should be asking questions.”

NFTs are cryptographically secured digital assets—essentially just a token attached to an image or video file. They’ve been selling for ridiculous amounts of money (the digital artist Beeple sold a single NFT for $69 million at Christie’s), and have been used to promote music, digital art, tweets, and journalism.

They’ve also posed problems for investors. There are potential copyright issues, as well as ethical concerns around the Ethereum network’s energy consumption; some have suggested that crypto art might make a good vehicle for money laundering (sort of like physical art).

Peirce explained that certain kinds of fundraising efforts tied to NFTs might “raise the same kinds of questions that ICOs have raised.”

“If you’re doing something where you are saying, ‘I’m going to sell you this thing and I’m going to put a lot of effort into building something so that this thing that you’re buying has a lot of value,” those kinds of sales will attract more regulatory scrutiny.

ICOs, or “initial coin offerings,” have been a thorn in the SEC’s side for years; they give early investors in crypto startups the chance to buy into a company’s cryptocurrency, with the promise of return down the line. The issue is that the SEC has taken the position that just about every token ever sold through an ICO is unregistered security, and the Commission has come down hard against these token issuers in lawsuit after lawsuit.

Peirce also suggested fractionalized NFTs (i.e. selling partial interest in a single, expensive NFT) could run the risk of being unregistered securities.

Peirce’s comments add yet another new wrinkle to the NFT gold rush. “You’ve always got to ask those questions,” she said. “As we’ve seen, the definition of a security can be pretty broad.”