NFT Marketplaces Under Investigation By The United States SEC Over Security Breaches

The US SEC is keen on knowing how some NFT marketplaces operate.

NFT marketplaces are being purportedly investigated for securities breaches by the United States Securities and Exchange Commission (SEC), led by Chairman Gary Gensler, according to Bloomberg’s insight.

According to the report’s unidentified sources, the SEC is looking into whether “some nonfungible tokens… are being used to generate money in the same way traditional securities do.”

Attorneys from the SEC’s enforcement officers have reportedly submitted subpoenas to NFT marketplaces and founders in the previous few months, asking for information on specific NFTs and other token offers, according to the article.

While crypto lending products have been the target of intense regulatory scrutiny in recent months, this study represents a significant step forward in the investigation of the NFT sector. The investigation demonstrates that the SEC is particularly interested in how fractional NFTs are employed. A fractional NFT is one in which a more valued asset is tokenized and subsequently sold in smaller portions.

What To Know To About NFT Marketplaces

This announcement comes as no surprise, as Hester Peirce, widely known as ‘Crypto Mom,’ an SEC Commissioner, stated in March 2021 that selling fractionalized NFTs could be illegal. “You better be careful that you’re not developing an investment product — that’s a security,” she said.
In a December interview with Coindesk, she also hinted that the SEC would be looking at NFTs shortly. “Given the scope of the NFT landscape, certain elements of it may fall under our control,” she said. People should consider where NFTs could potentially run afoul of the securities regulatory environment.”

This is the latest in a series of crackdowns aimed at tightening the grip on the cryptocurrency sector. The SEC has ordered BlockFi, a crypto lending company based in New Jersey, to pay a record fine of $100 million for failing to identify “high-yield loan products as securities.”
However, the company has indicated that it is presently working to register its loan products with the Securities and Exchange Commission.

While Bitcoin and Ethereum have escaped SEC scrutiny because they aren’t considered securities, other digital assets haven’t gotten the same break, most notably Ripple Labs, the parent company of XRP, which has been involved in a legal battle overselling “unregistered securities” since December 2020. Gary Gensler, the chairman of the Securities and Exchange Commission, has previously stated that many crypto tokens are likely securities and should be regulated by the SEC.

According to the SEC’s Howey test, something is considered a security if it involves investors placing money into an asset in the hopes of making a profit.

Despite the current market slump, NFT sales have continued to rise, with the top two NFT marketplaces LooksRare and OpenSea, sharing $10.7 billion in trade volume over the last 30 days.