Author : Mark

Date : Dec 29,2022

SEC decision that non-fungible tokens (NFTs) are securities and will begin regulating them

The US Securities and Exchange Commission's (SEC) decision that non-fungible tokens (NFTs) are securities and will begin regulating them is the largest worry shared by everyone in the NFT sector. They ought to move past it. Of course, NFTs are a kind of security. They are therefore extremely strong and full of potential.

The NFT industry should accept this designation rather than attempting to dodge SEC regulation. It will occur and is a good thing, particularly given that the SEC is probably going to regulate laxly once it has more knowledge of how the NFT market operates.

Professor of law at the University of Kentucky and conceptual NFT artist, Brian Frye, works with ideas. The year 2023 is used in this article.

Because there were constantly obstacles in the way, we were unable to see that the art market was also a securities market. The market for art as an investment is known as the art market. Most people believe that when you purchase art, you are also purchasing another item. Wrong. You're actually paying for a spot in the artist's catalogue raisonné, which is a list of all the works that the public believes to be theirs.

A physical token that corresponds with the ledger entry is frequently utilized, such as a soiled piece of canvas or a large lock. Given that the ledger entry is the only item that matters, it doesn't matter what is displayed. This is evident because, despite the fact that the item itself hasn't changed, the item loses all of its worth if the connection between it and the ledger record is severed. In other words, the object only permits the sale of the ledger record.

The NFT market operates in the same way; it just disposes of the object and allows collectors to exchange ledger entries without the use of a middleman. That's fantastic because trading delicate, precious items is far more difficult and expensive. Collectors used to exchange receipts for artworks in Swiss art freeholds. That people can now trade non-financial assets is such a relief.

However, getting rid of the artwork compels us to consider the distinctions between the NFT and art markets. Because NFTs are, as Freud noted, a symptom of the repressed returning when the familiar turns unfamiliar, we can refer to them as "uncanny" tokens. Why are NFTs and the NFT industry so strange to so many people? because they challenge the conventional wisdom about how art and the art market interact. Why would digitizing a receipt cost collectors $1 million? For the same reason that they spend $1 million on a dirty canvas, they want to sell it for more money.

So, whether you purchase a work of art or an NFT, what are you actually purchasing? a little portion of the money generated by an artist's fame, or more precisely, a portion of the artist's "clout." You will be able to sell your artwork or NFT for more money if the artist gains recognition in the art community. But like any other terrible investment, your artwork or NFT will be worthless if it loses appeal.

Is buying NFTs a security or an art purchase? Of course. According to the well-known Howey test, which was established by the Supreme Court, an investment is a security that the SEC can monitor if it is an investment in a joint venture that has the potential to be profitable thanks to the labor of others. With the goal (or anticipation) that the artist's notoriety will bring financial advantage, every investment in fine art or NFTs is also an investment in the artist's career. The security interest in an artist's career that art and NFT collectors purchase is crystal evident.

The art market and NFT market may so fall under the purview of the SEC. We can all see that it can. However, it doesn't want to, and even if it did, it's doubtful that it would significantly regulate the asset class. The majority of people concur that the most crucial inquiry is if an investment "is" a security. But that is foolish. The Howey test is absurdly inclusive; even a slight sideways glance can reveal a vulnerability. Whether or not the SEC wants to regulate an investment is the true and most crucial question.

It has been made apparent by the SEC that it does not intend to regulate the art market, and I predict that it will soon come to the same conclusion regarding the NFT market.

Why come, you ask? Why? Because it is the SEC's responsibility to monitor items that "look like" securities. Even though they meet the definition of a security, new items have not historically been subject to SEC regulation. Instead, it has continued to control the same categories of products (like stocks and bonds). This is especially true when the SEC has to deal with issues like the art market that have existed for a long time.

It makes natural that the SEC would wish to regulate NFTs. I believe the agency will soon begin to retract most of what it has claimed because it has nothing to offer the NFT market. It will be challenging to justify why it doesn't also regulate the art market if it begins to regulate the NFT industry.

It starts to get cool after that. Because if the NFT market can truly perform the functions of a securities market, it has significant potential. The only thing that counts in our "clout economy" is fame. Celebrities assist people in making sense of both their own lives and the wider world. They generate a lot of social capital by giving their clients a sense of significance in the world.

However, only a portion of the social value that celebrities produce may be exchanged for cash. Although Kim Kardashian is reportedly worth $1 billion, what she cannot claim is much more priceless to society.

By enabling celebrities to invest in their renown, NFTs have the potential to transform everything. What if Kim Kardashian had some limited power and was able to sell NFTs? In contrast to those who believe she is just a passing trend, those who believe she will become even more well-known in the future may predict how well-known she will become.

According to the plan, it would grant famous individuals—like novelists—access to financial markets that they have never had before. If authors could offer investments in their ideas rather than pricey copies, this might totally alter the market for information commodities.