Regulation
SEC’s Approach to NFT Regulation Faces Legal Challenge
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Law professor and filmmaker Brian Frye and songwriter Jonathon Mann have taken the unprecedented step of filing a lawsuit against the U.S. Securities and Exchange Commission (SEC). They argue that the SEC’s regulatory stance is jeopardizing the livelihoods of artists and creators who are venturing into the world of non-fungible tokens (NFTs).
Frye and Mann’s lawsuit seeks to clarify whether NFTs fall under the SEC’s jurisdiction. The plaintiffs are asking the SEC to clarify what actions can trigger securities laws when creating and selling NFTs. They are also seeking clarification on whether NFTs must be registered before they can be sold. The lawsuit highlights recent actions by the SEC that suggest the regulator is encroaching on the art world by dictating when artwork must be registered with the federal government before being sold. The plaintiffs compare NFTs to concert tickets, such as Taylor Swift’s, which are often resold on secondary markets. They argue that it would be absurd for the SEC to classify such tickets or collectibles as securities.
In 2021, media company Impact Theory launched the Founder’s Keys NFT collection, which included tokens of varying rarity levels. The SEC charged the company with promoting unregistered securities in August 2023, marking the regulator’s first case against NFTs. Impact Theory raised about $30 million from investors through the collection, attracting the SEC’s attention.
The Commodity Futures Trading Commission (CFTC) considers cryptocurrencies to be commodities and proposes to apply a property tax regime to them. In contrast, the SEC uses the Howey test to evaluate cryptocurrencies, viewing them as financial instruments with characteristics similar to those of securities. According to the SEC, tokens often meet criteria such as raising funds before the sale, promises to improve the project through sales and marketing efforts, and using social media to promote the project’s capabilities. Despite these classifications, no arbitration body has definitively resolved the regulatory divide between the SEC and CFTC, leading each agency to act based on its own interpretation of the situation.
While regulatory interest in NFTs remains high, market enthusiasm has waned significantly. In July, NFT sales volume fell to $395.5 million, marking a new low since November 2023, according to CryptoSlam. This decline continues a downward trend seen since March 2024, with sales volume down 45% from Q1 to Q2 2024, from $4.1 billion to $2.2 billion. Despite an initial recovery in early July, sales volume fell again by the middle of the month. Although July was the third-highest month for transaction volume for 2023, with 9.9 million transactions compared to 5.7 million in June, the average sale price hit a new low of $39.56, the lowest since September 2023.
The future of NFTs hangs in the balance, threatened by both regulatory oversight and a declining market. Frye and Mann’s lawsuit highlights the need for clarity on how NFTs are regulated, arguing that overregulation could stifle creativity and innovation in blockchain and cryptocurrencies. However, declining market interest could pose an even greater challenge. Ultimately, the resolution of this lawsuit could have profound implications for the NFT market. As the legal battle unfolds, it remains to be seen whether the SEC will adjust its approach or whether the declining market will overshadow regulatory concerns.