🚨 NFTs are Securities!

The SEC sends OpenSea a Wells Notice and is looking to sue the platform stating NFTs are securities.

Aug 28, 2024

Hey Thinkers 💡

SEC Cracks Down on NFTs - OpenSea Receives Wells Notice

Just a day after Donald Trump unveiled his new NFT trading cards, the SEC, led by Gary Gensler, issued a Wells notice to OpenSea, the largest NFT marketplace. This notice signifies the SEC's intention to potentially sue OpenSea, claiming that the NFTs traded on the platform are securities.

Devin Finzer, Co-founder and CEO of OpenSea, responded via Twitter:

“OpenSea has received a Wells notice from the SEC threatening to sue us because they believe NFTs on our platform are securities. We're shocked the SEC would make such a sweeping move against creators and artists. But we're ready to stand up and fight. Cryptocurrencies have long been in the crosshairs of the SEC, and companies like Coinbase, Uniswap, RobinhoodApp, krakenfx, and Consensys have been fighting against the SEC's single-track approach of "regulation by enforcement." But this is a move into uncharted territory. By targeting NFTs, the SEC would stifle innovation on an even broader scale: hundreds of thousands of online artists and creatives are at risk, and many do not have the resources to defend themselves. NFTs are fundamentally creative goods: art, collectibles, video game items, domain names, event tickets, and more. We should not regulate digital art in the same way we regulate collateralized debt obligations.
In addition to standing our own ground, we're pledging $5M to help cover legal fees for NFT creators and devs that receive a Wells notice. Every creator, big or small, should be able to innovate without fear. I hope the SEC will come to its senses sooner rather than later, and that they'll listen with an open mind.”

Historical Context: SEC’s NFT Enforcement History

This is not the SEC's first foray into the NFT space. In 2023, the SEC settled with Stoner Cats, where Stoner Cats 2 (SC2) agreed to a $1 million fine without admitting or denying the SEC's allegations. SC2 also agreed to cease offering NFTs, destroy all NFTs in its possession, and issue a notice of the order on its website and social media channels.

SEC Fines Stoner Cats NFTs Creator $1 Million for Securities Violation

Congress Reacts: The Gensler and Torres Exchange

The regulatory storm surrounding NFTs gained traction after a 2023 viral exchange between Congressman Ritchie Torres and SEC Chair Gary Gensler regarding whether Pokémon cards on the blockchain would be considered securities. Gensler's response hinted that these cards could indeed be treated as securities if traded on the blockchain.

Political Landscape: SEC Under Pressure

Despite a relatively quiet summer from the SEC in terms of enforcement, this recent action suggests a renewed vigor. The timing is surprising, given the political heat Gary Gensler and the SEC have been facing. Donald Trump has been openly critical of Gensler, threatening to fire him if re-elected. Even within the Democratic Party, Gensler has faced criticism, with talks of Vice President Kamala Harris showing support for crypto.

Ron Hammond of the Blockchain Association tweeted:

“Strictly from a political perspective this is a pretty bold move by the SEC. Close to the election and a month out from the Chair testifying in front of the House and Senate. A reminder both the DNC and Donald Trump have used NFTs this cycle.”

Democrat Congressman Wiley Nickel added:

“The aggressive use of “regulation by enforcement” from SECGov is a blatant abuse of power that erodes trust and transparency in our regulatory system. This heavy-handed approach creates widespread uncertainty and threatens to derail the progress driving digital innovation in the United States. The SEC should choose to work with Congress to craft clear, fair regulations through a collaborative and transparent process that includes public input. Only then can we build a regulatory framework for Web3 that protects consumers and supports digital innovation - instead of crushing it.”

Looking Ahead: The Fight for Crypto

The crypto industry is no longer as fearful of the SEC as it once was. Many companies are now challenging the SEC in court or even preemptively launching lawsuits, regardless of receiving a Wells notice. Gary Gensler seems to be losing ground both legally and in public opinion.

As we move closer to 2025, the crypto community is hopeful that Congress will take steps to create clear and fair legislation, providing much-needed clarity for the industry.

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