When Does a Nonfungible Token (NFT) Become a Security?
43 Pages Posted: 12 Mar 2022 Last revised: 6 Mar 2023
Date Written: March 11, 2022
Non-fungible tokens (NFTs) gained prominence in the news cycle during March 2021when $69 million was paid in a cryptocurrency known as ether for a single piece of unique digital art titled “Everydays – The First 5000 Days.” Regulation of NFTs is complicated by the fact that the technology encompasses so many varied applications. Therefore, it is the particular use of a given NFT that will determine its appropriate regulatory regime, since it may take the form of a collectible, data associated with a physical item, financial instrument, or a permanent record associated with a person, such as marriage license, or property deed. Just as in the case of digital art in the form of NFTs, our laws and regulations are in a constant struggle to keep pace with rapid introduction and diffusion of technological changes. Unlike digital or cryptocurrencies which are fungible, NFTs are not. The effective regulation of U.S. securities markets has a significant impact on capital formation, job creation, economic security, and growth of both the American and global economies. In recent years, the advent of the Internet has created novel regulatory challenges for the SEC.
The focus of our article is how and when an NFT becomes a security for purposes of U.S. securities law. We proceed in six parts. First, we briefly explain the evolution of the digital world and emergence of virtual economies within. Second, we describe blockchain technology and the growth in virtual currencies. Third, is an explanation of NFTs along with some examples of their various uses. Fourth, we discuss when a nonfungible token is a security. Fifth, we explore SEC interpretations of when a crypto-asset is a regulatable security. And last, we conclude. Given the importance of U.S, securities markets in fostering job creation and global economic growth, we believe this work contributes to the understanding of this new technology and is of considerable interest to securities issuers, investors and the regulatory community.
Keywords: blockchain, capital formation, crypto art, CryptoPunks, cyberlaw, cyberspace governance, digital, economic security, equities, Howey, intangible property, job creation, non-fungible tokens, NFTs, online rights, SEC, securities markets, technology law, venture capital, virtual currencies
JEL Classification: G18, G28, G38, K22
Suggested Citation: Suggested Citation