Regulations and SEC investigations can actually be good for NFTs

It is time for everyone to wake up from the dream of decentralized immunity from regulatory authorities. While the fight against centralization and advocacy of anonymity has long characterized the NFT space, the United States Securities Exchange Commission (SEC) has made it clear throughout 2022 that crypto and NFT regulation is imminent.

With the recent news of the SEC’s investigation into Yuga Labs, it feels like the lag between metaverse actions and real-world consequences is disappearing. Many in the space wonder what the future holds for NFTs as they enter the world of government-regulated assets.

But should SEC investigations be a cause for serious concern for everyone? Penalties have been one of the only points of contact between the SEC and the NFT space as bad actors continue to flourish. The more useful question is perhaps: Is open dialogue possible? And if so, could that lead to both the SEC and the IRS becoming much less alarming Web3 acronyms in the near future?

So NFT regulation isn’t so scary after all?

In recent years, the idea of ​​government agencies in the metaverse has both frightened and angered the collective NFT community. Since blockchain serves as a home base for a microcosm that holds the concept of decentralization near and dear, it’s understandable why entities like the SEC, IRS, and even the FBI have taken on the role of the enemy.

Make no mistake, paying 10 to 37 percent capital gains tax on NFT profits is not at all desirable, but for the most part, crypto and NFT regulation seems aimed not at punishing artists and collectors, but bad actors who have continued to sour the reputation of blockchain -technology. This is precisely why some of the biggest headlines surrounding government influence in Web3 have focused on the FBI cracking down on insider trading, prosecuting carpetbaggers and driving fraud and money laundering out of the NFT space.

Since there are few regulations surrounding NFTs and crypto (apart from those established by the IRS), it is only natural that the SEC and other government agencies take time to figure out best practices for regulating digital assets. After all, it’s not like Yuga Labs was accused of any kind of trickery by the commission; rather, the SEC’s probe is meant to serve as a way for policymakers and regulators to “learn more about the new world of Web3,” as Yuga Labs made clear in a report published by Bloomberg.

Even SEC Commissioner Hester Peirce believes that a collaborative and iterative rulemaking process is the best way to create a new regulatory framework for crypto and NFTs, noting in a previous interview with nft now that she finds the SEC’s approach to prioritizing enforcement is an unhealthy process. The fact is that the SEC – whose mission is to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation – would not be doing its job if it did not investigate new technologies. So maybe we all knew deep down that regulation was inevitable.

The future of NFT regulation

Despite the wheels turning in the SEC, regulation has yet to be rolled out in the NFT space. Although Commissioner Peirce defined 2022 as the year to lay the groundwork for future legislative and regulatory activity, for now it appears that efforts are focused on regulating crypto exchanges.

The SEC has reportedly launched an investigation into each US-based crypto exchange in August, mistrust has understandably grown between the regulatory powers that be and exchanges that apparently just want clearer and more appropriate regulations for Web3 organizations. While these investigations may ultimately affect the average NFT enthusiast, they are not an immediate threat, as NFTs and crypto are still difficult to classify on a regulatory basis.

According to the proposed 2022 crypto bill authored by US Senators Cynthia Lummis and Kirsten Gillibrand, “digital assets” are defined as native electronic assets that provide financial or proprietary access rights or powers and include virtual currency and stablecoins. Similarly, “virtual currency” is defined as a digital asset that is “primarily” used as a medium of exchange, a unit of account or a store of value, and is not backed by an underlying financial asset.

These definitions give us some insight into potential regulation, as NFTs may be treated as commodities (such as petroleum, cotton, soybeans, etc.) rather than securities, meaning they will fall under the Commodity Futures Trading Commission (CFTC) ). But while the aforementioned bill attempts to regulate digital asset exchanges, distinguishing between a “centralized” and “decentralized” exchange, it fails to actually define what a “digital asset exchange” is, seemingly leaving out a key factor in the regulatory equation.

Hopefully, investigations launched by crypto exchanges by SEC Chairman Gary Gensler will help define and give voice to Web3 entities. But for now, given the information we have surrounding the Yuga Labs probe, things could be looking up for the near future of NFT regulation.

So if you are an administrator of a significant Web3 organization, being investigated can provide an opportunity to contribute to the conversation around regulation. But for those who are artists, collectors, traders or other general NFT enthusiasts, don’t worry and think positive thoughts, but be sure to put some crypto aside for 2023 taxes.