The SEC must clarify which NFTs are to be regulated, says the commissioner

US regulators have kept digital art creators and investors in the dark about which non-fungible tokens (NFTs) can qualify as securities, according to SEC Commissioner Hester Peirce.

In an interview with the Financial Times, the US stock market regulator’s senior Republican member said some NFTs could be regulated like stocks or bonds. She asked the SEC to publish more information about the market, which includes the Bored Ape caricatures.

NFTs that include “management rights” or offer investors rights to income streams could be caught by U.S. securities laws, Peirce said. Tokens that are shared and then sold can also fall into this category.

As retail investors have rushed to buy digital creations by artists and other enthusiasts, “NFTs are a particular area where we can provide some guidance,” she said. “What would be the harm if we were to go out with something like that?”

Peirce, one of five SEC members, has often split with Chairman Gary Gensler over cryptocurrency regulation.

Gensler has taken a tough enforcement stance against the crypto market, which he has called “the Wild West.” He has encouraged digital asset platforms to register with the regulator and considers most tokens to be securities.

The SEC chief has resisted creating new rules for crypto markets, arguing that existing laws are sufficiently clear. In May, the SEC doubled the size of the enforcement team looking into cryptocurrencies, including NFTs.

“If an NFT was a security and someone misrepresented it, then they have a securities fraud problem,” Peirce said.

Peirce joined the agency in 2018 after researching financial regulation at the free-market think tank Mercatus Center and serving as SEC counsel.

Her comments come as Yuga Labs, NFT pioneer and creator of the well-known Bored Ape Yacht Club collection, is reportedly under investigation by the SEC. The company said it was “well-known” that regulators had “sought to learn more about” online decentralization and blockchain, adding that it was “committed to cooperating fully with all inquiries along the way.” Peirce declined to comment on reports of the investigation.

NFTs, which use blockchain technology to validate the ownership and authenticity of digital artworks and artifacts, surged in popularity last year.

But calls for more regulation have coincided with a slowdown in the NFT market, where trading volumes have fallen since the start of the year. The average price of Bored Ape Yacht Club NFTs has fallen nearly 20 percent over the past 30 days, according to tracker DappRadar.

At the start of the year, Yuga was valued at $5 billion in a funding round led by Andreessen Horowitz, making the startup one of the most valuable NFT players.

As the SEC under Gensler has unveiled a series of proposed rule changes since last year, Peirce has questioned the need for new rules for private funds. In February, the SEC proposed rules that would require annual audits of private funds, ban certain fees charged by buyout shops and prohibit preferential terms for certain investors.

Large, sophisticated investors typically haven’t needed the same SEC oversight of funds that retail investors do, she said.

Asked whether U.S. regulators had a role to play in increasing oversight to avoid blowups like Archegos Capital Management — a private fund whose 2021 default on margin calls triggered losses of more than $10 billion across Wall Street— banks — Peirce said: “I I’m just not sure the regulator is the one to come in and prevent these problems. I think regulators tend to come in later, but you really need risk managers to come in earlier.”

Additional reporting by Tim Bradshaw in London