31st August 2024 > > The SEC & NFTs.

tl;dr

Gensler, the SEC, and the obvious absurdity that NFTs are securities.

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The boring phase continues.

Curious Cryptos’ Commentary – The SEC and NFTs

A recent edition of the CCC (https://www.curiouscryptos.com/post/29th-august-2024-gensler) made the non-controversial claim that Gary Gensler, chair of the SEC, is mad. Utterly mad. His recent action to start an enforcement process against OpenSea for selling NFTs that the SEC regards as securities can only be interpreted as the opening salvo in his personal plan for world domination. If selling digital art whose USP is that ownership is inscribed on the blockchain is subject to securities laws, then so are vast swathes of human activity that until now has been seen as outside the remit of the SEC.

This much is obvious, but it would be nice to explain it in satirical fashion.

I have come across a delightful little tale that does exactly that. It highlights the absurdity of the SEC’s position. Let me share it with you.

Brian L. Frye of the University of Kentucky was previously a securities lawyer. His opinion of the SEC, and Gensler, may even be more damning than mine. In December 2019 he published an article entitled “SEC No-Action Letter Request” with a twist:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3501251

The abstract explains:

“This article is a work of conceptual art in the form of a law review article. It argues that the sale of conceptual art violates the Securities Act of 1933. And it proposes to prove itself by requesting an SEC no-action letter holding that the sale of a work of conceptual art titled "SEC No-Action Letter Request" does not violate the securities laws.”

Brian is most definitely prodding the bear.

This work of art is the request for an SEC no-action letter accepting that this work of art is not a security. However, the work of art itself makes the case for it being a security and demands that the SEC refuses the request for a no-action letter.

The SEC failed to respond, and in an obvious attempt not to tie its hands in the future, denied all FOI requests. When a regulator insists on clarity from us, and obfuscation from itself, it is out of control.

…

Then along came NFTs, and Brian spotted a new opportunity.

He refashioned the original artwork into a new one but this time as an NFT. The contents of this iteration of the artwork refer to the original piece, with additional information about the terms of the sales of the NFT, further evidence that it is a security, a repeat of the request for a no-action letter, and the demand for a refusal of the no-action letter:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3917699

The abstract explains:

“This article is a legal scholarship in the form of a no-action letter request to the SEC, proposing to sell the work of conceptual art "SEC No-Action Letter Request 3: Securitized NFTs" in the form of 50 NFTs, each of which constitute ownership of 2% of the work.”

Pleasingly, the NFTs sold out in an hour or so.

…

The only logical conclusion to be drawn is contained within the NFT itself:

“Based on the SEC’s failure to respond to my no-action letter request or my FOIA request, and the SECs failure to pursue an enforcement action against me for the sale of editions of the work conceptual art “SEC No-Action Letter Request,” I assume that the SEC has concluded that the sale of the work was not the sale of an unregistered security.

My proposal to sell the work of conceptual art “SEC No-Action Letter Request 3: Securitized NFTs” is not materially different from my proposal to sell the work of conceptual art “SEC No-Action Letter Request.” So, I assume the SEC will conclude that my proposal to sell this work also does not constitute the sale of an unregistered security.”

It seems that the SEC is keeping schtum on this issue, for it has no reasonable exit out of this delightfully tangled web of Brians, other than to concede that NFTs are not securities. This it cannot countenance, for it would fatally damage Gensler’s personal ambitions of being the one true World Leader.