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The SEC in recent months, has hinted at regulating the crypto and NFT market, given the volatility of the sector and massive inflows. The regulatory body has summoned NFT creators and exchanges, requesting extra details about their projects.

The SEC under the leadership of their boss Gary Gensler, is reportedly planning to investigate any irregularity or breach of rules in the sector. The media disclosed that NFT developers and traders henceforth would be under scrutiny by the regulator.

The regulator suspects that traders use NFTs to garner money, similar to traditional securities. However, the SEC’s main emphasis is on fractional NFTs – tokens separated into unique pieces and sold in chunks. Fractionalized NFTs allow users to own a digital collectible at a fraction of the total price.

The NFT Market Gets Under the Microscope

The NFT sector has witnessed rapid growth in the last two years, with a revenue generation of $40 billion. Until now, the industry wasn’t subjected to any scrutiny by the SEC, but the recent probing suggests that the market will face a hard time.

Since last year, the regulator has been cross-examining lending products coming out of the industry. Recall that Coinbase planned to launch their lend project last year, but it was suspended after several warnings from the SEC to the disappointment of users.

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By launching a probe, it’s evident that the SEC is ready to move in on the sector and investigate how fractional NFTs are used. Whether NFTs are securities under U.S. law or not is subjective. Since fractional NFTs are the main focus for the regulator, for now, other NFTs like those connected to digital art pieces will not be labeled as securities. 

However, if NFTs are offered to the public with promises of increased return from the issuer, that NFT could be labeled as a security because it is under a contract. Such products would be subject to investigation. 

Gensler Believes Cryptocurrency Must Be Regulated

Gensler thinks that digital currencies are securities. Therefore, they must be regulated. According to Howey Test, a token is described as a security if it promises more returns on the token investment. 

Regulating cryptos has been in discussion for some years now. Crypto Mom Hester Peirce stated last March that fractionalized NFTs could be illegal. She said that product-promoting investment could be a security, cautioning everyone to be extremely careful. 

The latest effort from the SEC seeks to ensure that virtual currencies and the NFT sector are safe and compliant. Any DeFi project found guilty of non-compliance with security rules would be fined, like the case of BlockFi, which was fined $100 million. 

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Alicia Maher

By Alicia Maher

Alicia Maher is an accomplished news writer with a passion for storytelling. With years of experience in the field, she is skilled at delivering accurate, engaging, and insightful news coverage to her audience.