- The U.S. SEC is currently investigating NFT projects and market participants.
- The government agency aims to find dirt by issuing subpoenas to the projects.
The United States Securities and Exchange Commission (SEC) is hungry for controversy. The regulator is cracking down on all crypto projects in the country, especially ones that issue and sell NFTs.
A New York-based law firm has shared that the SEC is conducting investigations that could take some NFT projects by surprise. The establishment hopes to uncover potential violations of federal securities laws related to the sale of NFTs, especially after FTX’s empire fell through.
Under a Magnifying Glass
On May 3, 2022, the SEC asserted that it would double down on regulating and penalizing the crypto sector. The federal agency increased the size of the enforcement’s crypto assets and cyber units.
The newly expanded unit actively scrutinized NFT projects to determine whether federal securities law violations occurred. However, despite the SEC’s efforts, contagions like the downfall of crypto exchange FTX and others still occurred.
Now, the SEC is taking things more seriously. The government agency’s enforcement actions targeting crypto-related projects have significantly surged in 2023.
This year, the SEC has targeted numerous stablecoin and staking activities, with the latest target being Paxos, the issuer of Binance’s stablecoin BUSD.
The regulator also adds NFT projects under its magnifying glass, hoping to find dirt on them. Dilendorf, a New York-based law firm, has shared that the SEC has begun enforcement actions related to NFTs.
Failure to Comply Could Lead to Civil or Criminal Penalties
NFTs are still an ambiguous asset for the SEC to regulate. The government agency is facing challenges in classifying NFTs as securities. This is because some NFTs can not be considered securities by regulations in the U.S., and some could.
However, many experts expect the SEC to apply the Howey test to conclude certain NFTs as securities.
The nature of NFTs implies that they’re a one–of–a–kind digital asset. The SEC considers such assets passive investments, so the agency doubles down on NFT projects.
The SEC is now issuing subpoenas to NFT projects, often to its founders and the members involved. In cases where the public identity of the team is unknown, the SEC is serving subpoenas through third-party service providers and social media sites, such as Twitter.
Once a formal order of investigation is issued, the SEC can issue subpoenas requiring witnesses to testify and provide records and other essential documents, such as social media communications on platforms like Discord, Telegram, and more.
NFT projects that receive subpoenas should treat them seriously, as a failure to comply with the federal securities regulation could lead to civil or criminal penalties.
On the Flipside
- The SEC recently investigated Yuga Labs NFT collection Bored Ape Yacht Club (BAYC) and utility token ApeCoin (APE) for potential violations.
- NFTs were at the receiving end of a high-profile trial between MetaBirkins and fashion house Hermes. The NFT collection was still tried for trademark infringement, despite the creator claiming it failed the Howey Test.
Why You Should Care
The SEC is tightening its reins on the crypto industry by doubling down on enforcement. In 2022, the regulator filed 41 lawsuits against crypto exchanges and related firms, the most in a calendar year. With NFT projects in the mix, the government agency wants to break its record.
Read about the SEC suing Paxos over BUSD:
SEC to Sue Paxos Over BUSD, Ordered to Stop Issuance.
Read why Kraken had to pay a $30 million fine:
Kraken Pays $30 Million Fine and Shuts Down Staking Service in SEC Settlement, the Crypto Mom Reacts.