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SEC Issues Warning on Fractionalized NFTs and NFT Basket Index

UTC by John K. Kumi · 3 min read
SEC Issues Warning on Fractionalized NFTs and NFT Basket Index
Photo: Fortune Brainstorm TECH / Flickr

Hester Peirce said that the SEC has a special interest in anything that could become security.

Following the recent breakout of Non-Fungible Tokens (NFTs), issuers have found ways to become very creative in the distribution of their products. However, attention has been drawn that the creativity around the NFTs can lead to an unintentional distribution of financial products. Hester Peirce, the commissioner of SEC, issued these words of caution about NFTs when speaking at the Draper Goren Holm’s Security Token Summit.

SEC on NFTs

According to her, the Non-Fungible Tokens (NFTs) are supposed to not fall in the bracket of securities as its name suggests – Non-Fungible. However, whilst attempting to sell fractional interest in NFTs or NFT Basket, their creativity can produce something that violates the law.

“You better be careful that you’re not creating something that’s an investment product – that is a security, ” she said.

She also said that the SEC has a special interest in anything that could become security. The Non-Fungible Tokens has over the past few months gained a lot of attention with its interesting concept disrupting the traditional music, arts, and sports industries. Several brands have so far joined the craze with much popularity gained in the NBA ecosystem.

Speaking on Other Issues

While speaking, Peirce touched on a very interesting subject that has been a topic of discussion in the industry – the Howey Test. The Howey Test is mostly used by courts to determine whether a cryptocurrency asset is a security or not. According to Peirce, this test does not do any good to the industry.

The Howey Test dates back to 1946 when the court used it on a case where a Citrus Grove owner issued a Real Estate Contract to fund his business. She stated that if the application of the test on cryptos was used in the 1946 case, it could have produced different results as the court would have sought to determine whether the fruit trees were securities or the investment contracts that related to the plants.

The system has been designed to be a bit tough on blockchain networks. With the incoming Chairman of SEC Gary Gensler, Peirce believes that there could be a good collaboration that could ensure that emerging blockchain networks face reduced regulatory scrutiny. Her “Safe Harbor Plan”, expected to help new token issuers, will demand them to submit a comprehensive roadmap stating the individuals and investors behind the network as well as the token sales. There will be a three-year period of “securities law-free” where the network can be created and made decentralized.

She said that the US has a lot to learn from Switzerland as they have been able to put measures in place to create a conducive environment for the operation and growth of blockchain and digital currency businesses.

Altcoin News, Blockchain News, Cryptocurrency news, News
John K. Kumi
Author John K. Kumi

Excellent John K. Kumi is a cryptocurrency and fintech enthusiast, operations manager of a fintech platform, writer, researcher, and a huge fan of creative writing. With an Economics background, he finds much interest in the invisible factors that causes price change in anything measured with valuation. He has been in the crypto/blockchain space in the last five (5) years. He mostly watches football highlights and movies in his free time.

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