SEC’s Hester Peirce: Regulatory ambiguity means NFT projects need to be ‘very careful’

The Securities and Exchange Commission can be ready to strike down of several billion dollars NFT industry – but one of its own doesn’t think the SEC should be so quick to bring down the hammer.

SEC, according to reports, is currently investigating Yuga Labs—the $4 billion company behind Bored Ape Yacht Club—for securities violations. But the commission has so far made zero statements regarding its stance on NFTs specifically, leaving creators feeling unsure and frustrated about how to navigate what they consider to be an ambiguous regulatory environment.

And they have a sympathetic ear within the SEC itself: SEC Commissioner Hester Peirce, affectionately known as “Crypto Mom” ​​in the industry.

“I think the SEC has provided very little clarity [on NFTs]”, Commissioner Peirce told Decrypt. “There is a lot of uncertainty. And in situations where there’s so much ambiguity, I think people really have to be very careful. This is not the ideal condition [of regulation].”

Peirce is one of five presidentially appointed commissioners of the bipartisan SEC, and she has long rejected the agency’s approach to crypto regulation in general — and now NFTs in particular.

“I’ve been saying this for two years,” Peirce said. “A good government approach is to make the law clear. And then if people break it, then you bring in enforcement actions. You don’t use enforcement actions to tell people what the law is. You should at least have a baseline of clarity.”

Peirce feels the SEC has taken the opposite approach when it comes to NFTs. “The SEC has taken the position that securities laws need only be enforced for this area, not interpreted or modified,” she said.

NFTs are uniquely blockchain-based tokens used to prove ownership of digital assets that have exploded in popularity over the past two years.

In January of this year alone, the NFT market saw $5.36 billion in organic trading volume, coming off 2021’s record high of $25 billion in sales. Since May’s crypto crash, these huge numbers have dwindled to approx $1 billion in monthly NFT trading volume.

Still, big companies like it Meta and Twitter has recently rolled out NFT compatibility for its social media platforms, indicating a consensus among the world’s biggest tech companies that the new technology is here to stay.

Peirce believes the SEC could easily provide a significant amount of clarity to NFT creators as they navigate mainstream adoption, but the federal agency, for whatever reason, has chosen not to provide that guidance.

“We could do that whenever we wanted. We have mechanisms to do that,” Peirce said. “We could work with some kind of block exemption order that could say, ‘If you meet these parameters, you’ll be fine under the securities laws.’ We could set up parameters that people could operate within. We could draft a class injunction that says, ‘If you do these things, we probably won’t recommend an enforcement action against you,'” she said.

“We can do it when we want to. But we just don’t,” Peirce said.

Beyond specific guidelines that may need to be adjusted for NFTs, Peirce said Decrypt that there are certain classic characteristics of securities that project creators should avoid in order to avoid violations.

“How close does it look to something that’s in the traditional securities space? Is there revenue sharing for a project? Is it fractionalized and you sell parts of it? Do you have any claim on assets underlying assets?” said Peirce. ‘You know, the same things that would mark something as being a stock or a bond.’

Peirce would not comment on whether any specific NFT projects’ actions constituted a securities violation in her opinion. But she also did not rule out the possibility that profile picture generative NFT collections like BAYC, CryptoPunks and Moonbirds could be classified as securities.

These projects, and others like them, have raised billions of dollars in secondary sales, but they purport to be works of art that offer their holders co-benefits and social utility, not investment products. Peirce stated that a decision regarding the securities status of each of these collections would have to come down to case-specific “facts and circumstances.”

Other legal experts, such as University of Kentucky law professor Brian Fyre, previously told Decrypt that NFT collections like BAYC could very well be classified as securities – if the SEC chooses to go this route. “What you’re buying is part of the Bored Ape Yacht Club, and the value of your NFT rises or falls with the value of the Bored Ape Yacht Club brand,” Fyre said.

Peirce, for her part, said it is not for her to say. “It would really be more valuable for us as a commission to come out with guidance that reflected the majority view of the commission,” she said.

But if the way Chairman Gary Gensler’s SEC has approached crypto and NFTs so far is any indication, that guidance isn’t likely to come anytime soon.