New stage for NFTs: How the market will change if they become securities

In August 2023, the US SEC first saw signs of unregistered securities in NFTs. The editors of BeInCrypto decided to find out how regulatory pressure on the non-fungible token market could affect the crypto industry. To do this, we asked seasoned market experts to comment on the SEC's interest in NFTs. We tell you whether we should expect a collapse of the non-fungible token market and how the SEC's interest in NFTs could affect the cryptocurrency market

What's happened

In late August 2023, the US Securities and Exchange Commission (SEC) charged Impact Theory, LLC. in the illegal issuance and sale of unregistered securities in the form of non-fungible tokens (NFTs). The incident was the first in history. Previously, the SEC brought charges of illegal issuance of securities only to cryptocurrency issuers. At the same time, news that NFTs may come under the regulator’s radar has been circulating since 2021.

Let us remind you that in the United States there is still no clear scheme for determining the status of digital assets. The SEC cannot agree on the rules for classifying tokens with another regulator, the Commodity Futures Trading Commission (CFTC).

Most often, when bringing charges of illegal issuance of unregistered securities, the SEC refers to the results of the Howey test. With its help, the regulator determines the status of digital assets. Let us remember that the Howey test was invented in 1946 - long before the advent of cryptocurrencies. Therefore, many members of the crypto community believe that it cannot be used to determine the status of digital assets.

Indicted by Impact Theory, LLC. there is no mention of the Howey test. In this case, the regulator evaluates the status of NFTs according to the criteria included in the test. For example, the SEC states that the purchase of company tokens can be considered an investment in a business that comes with the expectation of profit. This is one of the criteria of the Howey test, which indicates that the asset in question has the characteristics of a security.

Let us remind you that the “black list” of cryptocurrencies, which the SEC considers illegally issued securities, contains over 60 coins. Regulatory pressure on issuers of digital assets was one of the factors behind the market decline in 2023. The editors of BeInCrypto decided to find out how the crypto industry would react to the recognition of NFTs as illegally issued securities.

What will happen if NFTs are recognized as securities?

StormGain crypto exchange expert Dmitry Noskov considers the SEC's interest in NFTs a negative signal for the entire crypto industry. Our interlocutor is confident that the Commission's actions can have serious consequences. As an example, Dmitry Noskov recalled the stop of the issue of the Binance USD (BUSD) stablecoin of the largest crypto exchange Binance. The reason is that the SEC saw signs of an unregistered security in the token. Regulatory pressure on NFTs, according to our interlocutor, may be one of the reasons for a further fall in prices in the digital asset market.

Finance and investment expert, founder of the Multiplier financial club Evan Golovanov, in turn, believes that the Impact Theory case should not be taken as an accusation against the entire NFT industry. Each case should be considered separately. For example, in the case against Impact Theory, Evan Golovanov noted, the company artificially inflated buyers' expectations regarding the future potential of its NFT collections. In his opinion, such actions constitute a violation of the law, which prompted the SEC to take action.

“The ability to classify NFTs as securities depends on the actions of sellers, who create expectations of utility and financial gain. For example, if NFTs were tied to dividends, then they could potentially be considered securities,” our interlocutor explained his point of view.

According to Evan Golovanov, the Impact Theory case can become an impetus for the formation of transparent regulatory standards for the NFT market. At the same time, the SEC’s pressure on the company, according to our interlocutor, should not be taken as a harbinger of the death of the non-fungible token market.

The editors of BeInCrypto also talked about the future of NFTs with Nikita Zuborev, senior analyst at BestChange.ru. Our interlocutor believes that the SEC’s pressure on Impact Theory should not be taken as recognizing all non-fungible tokens as illegally issued securities.

In his opinion, the regulator’s interest in NFTs can seriously transform the market.

“If earlier it [the NFT market] was the Wild West, now it has become clear that new rules of the game are emerging. Many existing projects may reconsider their approaches, and all new ones will prepare proposals with an eye to the possible consequences,” our interlocutor is sure.

At the same time, Nikita Zuborev, unlike Dmitry Noskov, believes that the SEC’s fight against violations of the law in the NFT market will not affect the rate of major cryptocurrencies in any way. Our interlocutor explained his point of view by saying that the market for non-fungible tokens has little in common with the cryptocurrency market.