US SEC scrutinises NFT market over illegal crypto token offerings used to raise money like securities
- The US Securities and Exchange Commission is seeking to determine whether certain non-fungible tokens are being used to raise money like traditional securities
- The NFT market exploded to US$44 billion in 2021 from US$106 million the previous year, and the SEC has said many tokens fall under its purview
The US Securities and Exchange Commission is scrutinising 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 non-fungible tokens, digital assets that can be used to denote ownership of things like a painting or sports memorabilia, are being utilised 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. In February, the commission and state regulators levied a record US$100 million fine against BlockFi, a popular virtual-currency exchange, for failing to register products that pay customers high interest rates to lend out their digital tokens.
As part of its review, the SEC is seeking information on so-called fractional NFTs, which involve breaking down the assets into units that can be easily bought and sold, said the people, who asked not to be named as the probe hasn’t been disclosed publicly.
The SEC declined to comment. 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-in 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 US$44 billion worth of crypto was sent to smart contracts on the Ethereum blockchain tied to NFTs during 2021, up from US$106 million the year before, according to data from Chainalysis. 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.