Law professor and filmmaker Bryan Frye and songwriter Jonathan Mann have filed a lawsuit against the U.S. Securities and Exchange Commission.
Advocates say the SEC’s approach to regulation threatens the livelihoods of artists and creators who experiment with NFTs.
What does the lawsuit say?
according to the documentThe plaintiffs want to determine whether NFTs are subject to regulatory jurisdiction. The attorneys asked the SEC to answer what actions might trigger securities laws to create and sell NFTs. The lawsuit also seeks information about registering NFTs before they are sold.
“The SEC’s recent administrative actions indicate that the agency is getting into the art business, determining when artworks must be registered with the federal government before they can be sold.”
The authors of the document compared NFTs to Taylor Swift concert tickets, which are often resold on the secondary market. Mann and Frye are in exactly the same situation in this lawsuit. The lawyers argue that it is absurd for the SEC to classify such tickets or collectibles as securities:
“They are artists, and they want to create and sell their digital artwork, without the SEC investigating them or filing a lawsuit.”
The 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 with three different rarity levels.
As a result, in August 2023, the SEC charged Impact Theory with promoting securities without registration. The company used NFTs to attract investors, raising about $30 million. This was the first case brought by the regulator against NFTs.
The SEC believes that the company positioned the project as a commercial investment. In particular, it guaranteed high profits to its holders and promised broad prospects.
Therefore, the regulatory body considered that the identified NFTs had the characteristics of an investment contract, and as a result, they were classified as securities. By promoting the collection, the company violated federal laws in this industry.
Impact Theory agreed to pay a $6.1 million fine without admitting or denying any wrongdoing. Additionally, the company decided to destroy the tokens and references to them from its websites and social media networks.
What securities are considered securities according to the SEC?
The Commodity Futures Trading Commission considers cryptocurrencies to be commodities. The regulator proposes to apply the tax system developed for commodities to cryptocurrencies and consider the actions of issuers as producers of commodities. However, there are no rules in the United States requiring issuers to register tokens as commodities.
When evaluating the status of cryptocurrencies, the SEC uses the Howey Test.
The regulator believes that the new financial instrument has security features and believes that the cryptocurrency falls within its legislative scope.
According to the SEC, all tokens, in one way or another, fall under several criteria set by the authority: pre-sale or fundraising, promises to improve the project through ongoing commercial and marketing development, and the use of social networks to showcase the project’s capabilities and benefits.
But no arbitration panel has been able to resolve the dispute between two US regulators, so each body is acting on its own view of the situation.
Traders are losing interest in NFTs, unlike regulators
Despite regulatory interest in non-fungible tokens, excitement around NFTs continues to wane. Thus, in July, sales in the NFT sector reached $395.5 million, according to CryptoSlam. This is a new low since November 2023.
The NFT sector has been on a downward trend for a long time. Sales volume and the number of unique buyers and sellers have been steadily declining since March 2024.
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. Meanwhile, in early July, there were signs of a recovery in sales volume after a significant decline in June. At the same time, July became the third-largest month in terms of transaction volume in 2023.
During this period, 9.9 million transactions were recorded, compared to 5.7 million in June. However, this cannot be considered a positive sign as the average selling price in July reached its lowest level since September 2023 – $39.56.
What Threatens NFTs: SEC or Declining Interest?
According to the latest SEC lawsuit, the status of NFTs remains to be determined. However, the regulatory body is attracting less attention in this area due to the waning excitement around NFTs.
In any case, the SEC’s approach to regulation threatens NFTs, which were initially envisioned as an element of innovation in the entire blockchain and cryptocurrency space.
