Law professor and filmmaker Brian Frye and songwriter Jonathon Mann have filed a lawsuit against the U.S. Securities and Exchange Commission (SEC), arguing that the agency’s regulatory approach threatens the livelihoods of artists and creators experimenting with non-fungible tokens (NFTs).
Plaintiffs Challenge SEC’s Jurisdiction Over NFTs
The lawsuit seeks to clarify whether NFTs fall under the SEC’s regulatory purview. The plaintiffs request the SEC to specify what actions might trigger the application of securities laws to the creation and sale of NFTs and to provide information about the potential need for registering NFTs before their sale.
The document compares NFTs to Taylor Swift concert tickets, which are often resold on the secondary market, arguing it would be absurd for the SEC to classify such tickets or collectibles as securities. Frye and Mann emphasize that they are artists who want to create and sell their digital art without fear of SEC investigation or litigation.
SEC’s First Legal Action Against NFTs
In 2021, the media company Impact Theory released the Founder’s Keys NFT collection, promoting it from October to December. By August 2023, the SEC accused Impact Theory of promoting unregistered securities, as the company used NFTs to attract investors, raising approximately $30 million. The SEC viewed these NFTs as investment contracts, thus classifying them as securities. Impact Theory settled the case by agreeing to pay a $6.1 million fine without admitting or denying guilt and decided to destroy the tokens and remove their mentions from online platforms.
Regulatory Ambiguity and the Howey Test
The Commodity Futures Trading Commission (CFTC) classifies cryptocurrency as a commodity, proposing a tax regime similar to that for goods. However, no U.S. rules require issuers to register tokens as goods. The SEC, using the Howey test, sees many new financial instruments, including NFTs, as securities. This leads to regulatory ambiguity, as there is no arbitration body to resolve the dispute between the CFTC and the SEC, resulting in each agency operating based on its interpretation.
Declining Interest in NFTs Amid Regulatory Scrutiny
Despite the SEC’s interest, excitement around NFTs has declined. In July, NFT sales volume dropped to $395.5 million, a new low since November 2023, according to CryptoSlam. Sales volume and the number of unique buyers and sellers have been steadily falling since March 2024, with a 45% decrease in Q2 2024 compared to Q1.
Future of NFTs: Regulatory Threat or Waning Interest?
The latest lawsuit against the SEC underscores the ongoing uncertainty surrounding the status of NFTs. While regulatory scrutiny poses a threat, the declining interest in NFTs might also contribute to their uncertain future. Initially conceived as a creative element within the blockchain and cryptocurrency space, NFTs now face challenges from both regulatory pressures and decreasing market enthusiasm.
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