SEC must clarify which NFTs will be regulated, says commissioner

US regulators have kept digital art creators and investors in the dark about which non-fungible tokens (NFTs) could qualify as securities, according to SEC commissioner Hester Peirce.

In an interview with the Financial Times, the US stock market regulator’s senior Republican member said some NFTs could be regulated like stocks or bonds. She called for the SEC to publish more information on the market, which includes the Bored Ape caricatures.

NFTs that include “governance rights” or offer investors rights to revenue streams could be captured by US securities laws, Peirce said. Tokens that are split and then sold off could also fall into this category.

As retail investors have rushed to buy digital creations by artists and other enthusiasts, “NFTs are one particular area where we could provide some guidelines,” she said. “What would be the harm in us going out with something like that?” 

Peirce, one of five SEC members, has often split with chair Gary Gensler over cryptocurrency regulation.

Gensler has taken a tough enforcement stance against the crypto market, which he has called the “wild west”. He has urged digital asset platforms to register with the regulator and deems most tokens to be securities.

The SEC chair has resisted crafting new rules for crypto markets, arguing existing laws are sufficiently clear. In May, the SEC doubled the size of its enforcement team looking at cryptocurrencies, including NFTs.

“If an NFT were a security and someone did make misrepresentations about it, then they’ve got a securities fraud kind of issue,” Peirce said.

Peirce joined the agency in 2018 after researching financial regulation at free-market think-tank Mercatus Center and serving as an SEC counsel.

Her comments come as Yuga Labs, the NFTs pioneer and creator of the well-known Bored Ape Yacht Club collection, is reportedly being probed by the SEC. The company said it was “well-known” that regulators had “sought to learn more about” online decentralisation and blockchain, adding it was “committed to fully co-operating with any inquiries along the way.” Peirce declined to comment on reports about the investigation.

NFTs, which use blockchain technology to validate the ownership and authenticity of digital artworks and items, surged in popularity last year.

But calls for more regulation have coincided with a slump in the NFT market, where trading volumes have tumbled since the beginning of the year. The average price of the Bored Ape Yacht Club NFTs has fallen nearly 20 per cent in the last 30 days, according to tracker DappRadar.

At the start of the year, Yuga was valued at $5bn in a funding round led by Andreessen Horowitz, making the start-up one of the most valuable NFT players.

As the SEC under Gensler has unveiled a flurry of proposed rule changes since last year, Peirce has questioned the need for new regulations for private funds. In February, the SEC proposed rules that would require annual audits of private funds, ban certain fees that buyout shops charge and prohibit preferential terms for certain investors.

Big, sophisticated investors have typically not needed the same SEC oversight for funds that retail investors do, she said.

Asked whether US regulators had a part to play in increasing oversight to avoid blow-ups akin to Archegos Capital Management — a private fund whose 2021 defaults on margin calls triggered losses of more than $10bn across Wall Street banks — Peirce said: “I’m just not sure that the regulator is the one that’s going to come in and prevent those problems. I think regulators tend to come in after the fact but you really need risk managers to come in before.” 

Additional reporting by Tim Bradshaw in London

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