Sec nft market token offerings

(Bloomberg) — The U.S. Securities and Exchange Commission is scrutinizing creators of NFTs and the crypto exchanges where they trade to determine if some of the assets run afoul of the agency’s rules, according to people familiar with the matter.

A focus of the probe is on whether certain nonfungible tokens, digital assets that can be used to denote ownership of things like a painting or sports memorabilia, are being utilized to raise money like traditional securities, said the people. Over the past several months, attorneys in the SEC’s enforcement unit have sent subpoenas demanding information about the token offerings.

The inquiry is the latest attempt by the SEC under Chair Gary Gensler to ensure the crypto market adheres to its regulations.

Sec scrutinizes nft market over illegal crypto token offerings

NFT ownership.[11] Data links that are part of NFT records, that for example may point to details about where the associated art is stored, can be affected by link rot.[12]

Copyright

Ownership of an NFT does not inherently grant copyright or intellectual property rights to the digital asset the NFT purports to represent.[13][14] Someone may sell an NFT that represents their work, but the buyer will not necessarily receive copyright to that work, so the seller may create additional NFTs of the same work.[15][16] So an NFT is merely proof of ownership[clarification needed] separate from copyright.[14][17] According to legal scholar Rebecca Tushnet, “In one sense, the purchaser acquires whatever the art world thinks they have acquired.

The U.S. Securities and Exchange Commission is scrutinizing creators of nonfungible tokens and the crypto exchanges where they trade to determine whether some of the assets run afoul of the agency’s rules, according to people familiar with the matter.

A focus of the inquiry is on whether certain NFTs, digital assets that can be used to denote ownership of things such as paintings or sports memorabilia, are being utilized to raise money like traditional securities, the people said. Over the last several months, attorneys in the SEC’s enforcement unit have sent subpoenas demanding information about the token offerings.

The inquiry is the latest attempt by the SEC under Chair Gary Gensler to ensure the crypto market adheres to its regulations.

However, the order finds that after publicly unveiling DMM, the respondents realized that DeFi Money Market could not operate as promised because the price volatility of the digital assets used to purchase the tokens created risk that the income generated through income-generating assets would be insufficient to cover appreciation of investors’ principal. The order finds that rather than notifying investors of this roadblock, the respondents misrepresented how the company was operating, including by falsely claiming that DeFi Money Market had bought car loans that they displayed on DeFi Money Market’s website.
While the respondents controlled another company that owned car loans, DeFi Money Market never acquired an ownership interest in any of those loans.
Rug pulls have become an increasingly common hazard when buying NFTs, with the proceeds of some rug pulls being valued at hundreds of thousands or even millions of dollars.[132] Rug pulls accounted for 37 percent of all crypto-related scam revenue in 2021, according to one analysis.[133]

In popular culture

A comedy sketch on the March 27, 2021, episode of Saturday Night Live featured characters explaining NFTs through rap to US Treasury Secretary Janet Yellen, as played by Kate McKinnon.[134]

The 2021 Paramount+ television film South Park: Post Covid: The Return of Covid featured an adult version of Butters Stotch in his Professor Chaos persona tricking people into purchasing NFTs in 2061.

Gou Wenjun, the director of the Anti-Money Laundering Monitoring and Analysis Centre for the People’s Bank of China, expressed that NFTs could “easily become money-laundering tools.” Gou elaborated that there is increasing unlawful exploitation of various new cryptographic technologies, and that illicit actors often self-identify as innovators of the financial technology sector.[92]

A February 2022 study from the United States Treasury assessed that there was “some evidence of money laundering risk in the high-value art market,” including through “the emerging digital art market, such as the use of non-fungible tokens (NFTs).”[93] The study considered how NFT transactions may be a simpler option for laundering money through art by avoiding the transportation or insurance complications in trading physical art.

As the market has boomed, some NFT marketplaces have taken steps to remove projects that might put them in regulators’ crosshairs, such as those that offer royalties or that involve raising funds for a business.

A key legal question is whether digital assets including NFTs are securities, and therefore subject to the same rules as stocks. Although the SEC has said that many tokens fall under its purview, some crypto enthusiasts argue regulations meant to police the equity markets shouldn’t also apply to virtual currencies.

The SEC applies the so-called Howey test, which comes from a 1946 U.S.

Supreme Court decision, to decide whether something is a security.

NFT projects that year.[23][24] The standard coincided with the launch of several NFT projects, including Curio Cards, CryptoPunks (a project to trade unique cartoon characters, released by the American studio Larva Labs on the Ethereum blockchain),[25][26] and rare Pepe trading cards.[23]

Increased public awareness (2017-present)

  • The 2017 online game CryptoKitties was made profitable by selling tradable cat NFTs, and its success brought public attention to NFTs.[27]
  • The NFT market experienced rapid growth during 2020, with its value tripling to US$250 million.[28] In the first three months of 2021, more than US$200 million were spent on NFTs.[29]
  • In 2020, the U.S Patent and Trademark Office received three trademark applications for NFTs.[30] In 2021, the number of trademark applications jumped to more than 1200.[31] In January 2022, the U.S.

Information requests from the regulator don’t always lead to enforcement actions.

The NFT market exploded last year, drawing attention for multimillion-dollar sales and buy-ins from celebrities, whom some of the assets depict. In addition to serving as representations of physical collectibles, backers of the tokens often tout their value as digital certificates of authenticity that can’t be replicated.

About $44 billion worth of crypto was sent to smart contracts on the Ethereum blockchain tied to NFTs during 2021, up from $106 million the year before, according to data from Chainalysis.

All the trading activities concerning any traditional security are monitored and regulated by the SEC.

Non-fungible tokens, on the other hand, are primarily used for buying digital collectibles such as paintings, music, and in-game items. However, the Bloomberg report claims that the SEC believes that NFTs are also being used as traditional securities for financial gains.

The NFT market is now a billion-dollar industry, and with new developments like fractional NFTs that allow users to buy and sell the tokens as per smart contracts (which might be viewed as profit-sharing agreements in this case), there is reason to suspect that NFTs could fall under the SEC’s classification.

Last year saw a big jump in crypto trade directly related to NFTs.
The market went from $94.9 million in 2020 to a new high of $24.9 billion in 2021.

Characteristics

An NFT is a unit of data, stored on a type of digital ledger called a blockchain, which can be sold and traded.[4] The NFT can be associated with a particular digital or physical asset including but not limited to, art, songs, and sport highlights[5] and a license to use the asset for a specified purpose.[6] An NFT (and, if applicable, the associated license to use, copy, or display the underlying asset) can be traded and sold on digital markets.[7] The extralegal nature of NFT trading usually results in an informal exchange of ownership over the asset that has no legal basis for enforcement,[8] and so often confers little more than use as a status symbol.[9]

NFTs function like cryptographic tokens, but unlike cryptocurrencies such as Bitcoin or Ethereum, NFTs are not mutually interchangeable, and so are not fungible.

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