NFT Sector in US Being Investigated for Illegal Crypto Token Offers

SEC attorneys, in recent months, have sent subpoenas demanding information about crypto token offerings.

By Shomik Sen Bhattacharjee | Updated: 3 March 2022 15:17 IST

NFT Sector in US Being Investigated for Illegal Crypto Token Offers

Photo Credit: Reuters

The US SEC is homing in on creators of certain NFTs and crypto exchanges

Highlights

US’ SEC is particularly interested in investigating fractional NFTs
NFTs would be considered securities if they passed the Howey test
SEC commissioner Hester Pierce warned about fractional NFTs in the past

The US Securities and Exchange Commission (SEC), led by Chairman Gary Gensler, is reportedly investigating non-fungible token (NFT) creators and marketplaces for securities violations. SEC attorneys have reportedly summoned a number of stakeholders over the past few months to demand information on potentially illegal token offerings, with a focus on 'fractional NFTs'. As per the SEC's rulebook, NFTs or any other crypto asset for that matter will be considered securities if they passed a standard known as the Howey test used by the US securities watchdog to determine if there is an “investment contract" involved in a transaction.

According to a report from Bloomberg, sources familiar with the matter claim that the SEC is investigating whether, "certain non-fungible tokens… are being utilised to raise money like traditional securities." The report also mentions that in the last few months, attorneys from the SEC's enforcement unit have reportedly sent subpoenas to NFT creators, demanding information on specific NFTs and other token offerings.

While crypto-lending products have been subjected to greater regulatory scrutiny over the past year, this report marks a major move into investigating the NFT sector. The inquiry shows the SEC is taking a particular interest in how fractional NFTs are being used. In case you're wondering what that means, an NFT is considered a 'fractional NFT' when a more valuable NFT is tokenised into smaller pieces and then sold.

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That said, the SEC's interest in looking deeper at NFTs comes as no surprise as Hester Peirce, a Commissioner at the SEC, also known as ‘Crypto Mom', had said in an interview with Coindesk in December that the SEC might soon be taking a closer look at NFTs. She had stated: “Given the breadth of the NFT landscape, certain pieces of it might fall within our jurisdiction. People need to be thinking about potential places where NFTs might run into the securities regulatory regime.”

This investigation is the latest in a wave of clampdowns that seek to govern the cryptocurrency market more firmly in the US. Most recently, the SEC ordered that New Jersey-based crypto lending company BlockFi pay a record fine of $100 million (roughly Rs. 755 crore) for failing to list “high-yield lending products as securities.” However, the firm has stated it is now moving to register its lending products with the SEC.

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