US regulator probing if NFTs are securities: report

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The U.S. securities watchdog is scrutinizing non-fungible tokens (NFTs) to determine if they qualify as securities, bringing them under its purview. According to sources from within the Securities and Exchange Commission (SEC), the regulator has been talking to NFT creators and the entities on which they are sold.

As the NFTs market surged to become one of the most active in the digital assets space, regulators globally took an interest, with some like South Korea saying that NFTs don’t qualify for the regulatory regime that polices Bitcoin and other digital currencies.

However, the SEC believes that NFTs might be used to raise money like traditional securities, giving it jurisdiction over the sector. 

Sources from within the regulator told Bloomberg that attorneys in the SEC’s enforcement unit had sent subpoenas demanding information about NFT sales and offerings over the past several months.

One of the biggest interests for the SEC attorneys is on fractional NFTs, in which an NFT is broken down and sold to several investors. This would interest the SEC, given that one of the parameters of the Howey test, which it uses to gauge what assets are securities, involves “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

The SEC declined to comment on the probe, which the sources said has not been disclosed publicly. However, a probe by the regulator doesn’t always lead to enforcement actions.

While this is the first time that the SEC has been revealed to be looking into the NFT market, the regulator has previously indicated that NFT issuers and buyers should ensure that they are not violating securities regulations when buying digital tokens.

SEC Commissioner and “Crypto Mom” Hester Peirce warned last year that NFT issuers should take care not to ‘accidentally create investment products.’

“Given the breadth of the NFT landscape, certain pieces of it might fall within our jurisdiction,” she warned.

“You better be careful that you’re not creating something that’s an investment product, that’s a security. The definition of ‘security’ can be pretty broad,” Peirce said.

Watch: CoinGeek New York panel, Licensing IP for NFTs: Graphic Novels, Comic Books & Brands