SEC investigating NFT market over potential securities violations: Reports

NFT creators and marketplaces have been targeted by the SEC for conducting illegal activity in a new wave of regulatory action against unregistered securities.

The U.S. Securities and Exchange Commission (SEC), led by crypto-skeptical Chairman Gary Gensler, is reportedly investigating NFT creators and marketplaces for securities violations, according to a report from Bloomberg. 

Anonymous sources in the report claim that the SEC is investigating whether: “certain nonfungible tokens… are being utilized to raise money like traditional securities.”

Throughout the last few months, attorneys from the SEC’s enforcement unit have reportedly sent subpoenas demanding information on specific NFTs and other token offerings.

While crypto lending products have been the subject of great regulatory scrutiny over the past year, this report marks a major move into investigating the NFT sector. The inquiry shows the SEC is taking a particular interest in how fractional NFTs are being used. That’s where a more valuable NFT is tokenized into smaller pieces and onsold.

The warning signs have been clear for a while, with Hester Peirce, also known as Crypto Mom, stating back in Mar. 2021 that selling fractionalized NFTs could be breaking the law.

“You better be careful that you’re not creating something that’s an investment product — that is a security”

This investigation is the latest in a wave of clampdowns that seek to govern the cryptocurrency market more firmly. Most recently, the SEC ordered that New Jersey-based crypto lending company BlockFi pay a record fine of $100m for failing to list “high-yield: lending products as securities.

While Bitcoin and Ethereum have been able to avoid scrutiny owing to the fact that they aren’t considered securities by the SEC (at least, not yet), other digital assets have not enjoyed the same reprieve, most notably Ripple Labs the parent company of XRP, which has been embroiled in a legal case over selling “unregistered securities” since late 2020.

Related: SEC unable to locate BitConnect founder convicted in $2.4B fraud case

NFT sales have continued to grow, flouting the current market decline — with the top two NFT exchanges LooksRare and OpenSea sharing $10.7 billion in trading volume over the past 30 days.