The Economic Reality of NFT Securities

Abstract

Non-Fungible Tokens (NFTs) are used in numerous markets for collectibles, art, securities, and commodities. These are different markets, and there is no regulatory framework for all NFTs. To determine a proper legal regime, it is essential to locate the market to which an NFT belongs. This task requires a deep understanding of the economic realities of the associated rights, assets, and transactions. Economic-reality-based interpretations should provide a solid footing for better regulation of NFTs in the United States and other jurisdictions grappling with NFT regulation. The new cryptoasset regime in the EU already incorporates a “substance over form” approach. In the US, courts have been successfully applying the Howey test to examine transactions and schemes and establish whether securities law should apply to cryptoassets. In 2023, the SEC and a US federal district court applied the Howey test to demonstrate why and how securities law built for legacy markets where mainstream assets are fungible could apply to transactions in non-fungible assets. The decisions are an example of establishing economic realities of transactions with novel assets regardless of the underlying technologies on which the assets are built. Admittedly, the application of the Howey test to crypto has been criticized as far-reaching and uncertain. These criticisms of the test’s application may be explained by the lack of a comprehensive regulatory regime tailored to all forms of cryptoassets and by the flaws of what has been described as “regulation by enforcement” in the crypto space. By no means do these arguments prove that the Howey framework is inapplicable to cryptoassets and NFT markets, particularly without any guidance from the US Congress. This chapter concludes by examining how an economic reality approach may help courts and other policymakers ascertain to which market an NFT belongs and which corresponding legal regime should govern.

Keywords: NFT, blockchain, securities law, economic reality, financial regulation, reform

JEL Classification: K00, K2, K22, K29, K12