The SEC may include NFTs under securities regulation, creators worry about stifled innovation.

The U.S. Securities and Exchange Commission (SEC) recently issued a Wells notice to a well-known NFT trading platform, which means the SEC is considering filing a lawsuit against the platform. This move has sparked widespread attention and discussion within the industry.

For those who are not very familiar with the regulatory trends surrounding cryptocurrencies, this news may come as a surprise. After all, NFTs, as collectibles, digital art, game items, and event tickets, seem to have no direct connection with securities law. However, for those closely following the political and regulatory landscape of cryptocurrencies, it is more a feeling of helplessness and disappointment. Although cryptocurrencies have always been a focus for the SEC, regulatory actions targeting NFTs have indeed opened up a new unknown territory, which could have potential negative impacts on consumers, creators, and entrepreneurs.

It is generally believed in the industry that the operation of NFT trading platforms is legal, and users buying and selling NFTs on the platform is not equivalent to trading securities. The use cases for NFTs are diverse, including purchasing in-game items, avatars, supporting favorite artists, or expressing loyalty to a specific sports team, among others. Classifying NFTs as securities not only risks misinterpreting the law but could also endanger the livelihoods of artists, deprive collectors and gamers of their rights, and hinder innovation in the many potential applications of NFTs.

In fact, the SEC's regulatory approach has negatively impacted artistic expression. The lawsuit filed against the SEC by musician Jonathan Mann and conceptual artist Brian L. Frye is a typical example. They are concerned that their artistic works and music sales may be regarded as unregistered securities offerings, which clearly illustrates the chilling effect that improper regulatory actions can have on creative expression and innovation.

They pointed out in the lawsuit: "The SEC's actions threaten the livelihoods of artists and creators who are merely trying new technologies or using them as their preferred medium. Artists across the country suddenly face the threat of the SEC, with their visual or musical artworks potentially being considered unregistered securities offerings. Whether established artists or newcomers, they all face a peculiar question: Do they need to hire a securities lawyer to sell their own artwork?"

If NFTs are classified as securities, it could trigger a series of chain reactions. How can we ensure that non-NFT collectibles (such as physical or digital baseball cards) are not similarly classified? And how do we distinguish between physical or digital artworks? As pointed out in the Mann and Frye lawsuit, the SEC's broad interpretation of the Howey test could not only bring all digital artworks represented by NFTs under its jurisdiction but also potentially regulate all artworks and collectibles.

In the Stoner Cats and settlement case, the dissenting opinions of two current SEC commissioners further emphasize the potential impact of this regulation on creative expression: "If we apply securities laws to physical collectibles in the same way we do to NFTs, artists' creativity will wither in the shadows of legal ambiguity... Whether an artist is selling numbered versions of physical prints for fans to display on their walls, or selling NFTs for fans to showcase on social media, she should receive clear guidance on whether and how securities laws apply."

To support creators in their fearless innovation, a certain NFT trading platform has committed to providing $5 million to cover legal fees for NFT artists and developers who receive Wells notices.

The industry hopes that the SEC can reconsider its position and approach the issue with a more open attitude. Before that, NFT trading platforms will continue to strive for a vision of a better internet—empowering individuals and fostering creativity, rather than stifling the spirit of innovation with unnecessary regulatory burdens.