In late August, the U.S. Securities and Exchange Commission sent a Wells notice to the popular non-fungible token (NFT) marketplace Opensea alleging its platform’s tokens are “unregistered securities.” While a Wells notice is merely an advance notice to a recipient that the SEC intends to bring a legal suit forward, it has already created controversy among NFT holders.
Crypto vs NFTs
Crypto tokens are often in the news. A crypto such as Bitcoin, Ethereum or Solana has a spot price at any given time that is determined by the number of buyers vs sellers.
An NFT differs from cryptocurrency in that each digital NFT is unique and can be priced differently. But both reside on the blockchain, with the uniqueness of each NFT as the primary difference. (Author’s note: I do not currently invest in NFTs or crypto, but I first gained success in the mobile advertising space, hence these topics interest me.)
The same goes for physical art, whether these are paintings, classic movie posters, baseball cards and the like. An NFT is simply a way to tell the world that a particular person (or group of people) is the current owner of that asset. It is basically a digital ownership certificate that can sometimes be wrapped into the digital asset itself. That asset can be art, a house, a car, etc. In this case, we are talking about NFTs of digital artwork.
Note that if a particular NFT is unique, there would only be one. However, the artist can issue maybe 100 copies of that same NFT, but that determination is made by the issuer for that particular work, much like a limited edition print run of a collectible baseball card.
Like their cousin crypto, however, NFTs allow artists global reach. Try selling a painting or a baseball card in a physical form. You could do it using a traditional website, but then you would have to package and ship it to a customer in another place. That alone limits the speed and audience of that type of transaction.
You may ask, why not just sell the digital jpeg or png of the artwork and not make it an NFT? The problem you will face is how you will determine its provenance and identify counterfeit copies of your artwork. The digital proof of ownership on the blockchain is how you overcome those problems.
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Why NFTs should not be labeled securities
In my opinion, NFTs are not securities because companies and businesses typically do not use NFTs to fundraise for their capital. They have the stock and bond markets to raise money. I say “typical” because someone always finds a way to do something new, like raise funds for a business using non-traditional means. If that is the case, then sue those offenders, but do not take down the whole village with you.
The problem if you label something a security is that the SEC can then require all sorts of things, such as a balance sheet and income statement; environmental, social and governance documents (ESG); and other documentary requirements. Imagine an artist who has created a nice sunset painting being required by the SEC to send documents showing that the computer they used does not pollute the environment and emit harmful radiation.
NFTs are the vehicle by which artists can sell their artwork to a global audience without worrying too much about counterfeiters. So we may be talking about people here who might make money but are otherwise struggling to pay their bills.
Granted, some people and companies abuse the system to generate capital that passes the definition of a security, but the majority of NFT generators are ordinary artists already struggling to make a living and have found a new way of doing it. These are artists who are not experts in balance sheets or income statements, but are experts in drawing pads and color theory.
Let’s not penalize these artists by labeling NFTs as securities. The life of an artist is already hard enough as it is. Instead, we should celebrate their art and not create more hurdles for them.
