SEC threatens to sue NFT platform, triggering new conflicts between innovation and regulation.

Recently, a well-known NFT trading platform received a Wells notice from the U.S. Securities and Exchange Commission (SEC), which means the SEC may file a lawsuit against the platform. For those unfamiliar with the recent movements of the SEC, this news may come as a surprise: how could NFTs (including collectibles, digital art, gaming items, and event tickets) be related to securities law?

However, for those who have been closely following the political and regulatory landscape of cryptocurrencies, their reaction is more one of weariness and disappointment. Cryptocurrencies have long been a focus for the SEC, but by targeting NFTs, the SEC is entering a new and uncharted territory that may have potential negative implications for consumers, creators, and entrepreneurs.

The NFT platform firmly believes that its operations are legal, and users are not trading securities when using the platform to buy or sell NFTs. Users have various reasons for using NFTs, such as purchasing game items or avatars, supporting their favorite artists, or expressing loyalty to the sports teams they support.

Classifying NFTs as securities not only misinterprets the law but also jeopardizes the livelihoods of artists, deprives collectors and gamers of their rights, and stifles innovation in many promising use cases of NFTs.

We have seen that the SEC's enforcement approach hinders artistic expression. For example, the lawsuit filed by musician Jonathan Mann and conceptual artist Brian L. Frye against the SEC highlights their concerns that their art and music sales may be viewed as unregistered securities offerings. This clearly illustrates the chilling effect that misguided institutional actions can have on creative expression and innovation.

The complaints from Mann and Frye indicate that the SEC's actions threaten the livelihoods of artists and creators who are simply trying out a novel, rapidly developing technology or using it as a preferred medium. Artists across the country suddenly face the threat of the SEC, as their visual or musical art releases are attacked in the form of unregistered securities offerings. Artists - whether they are established artists or young newcomers - suddenly face a strange question: do they need to hire a securities lawyer to sell their artworks?

This is a dangerous slope: if NFTs are classified as securities, where will it stop? How can we prevent non-NFT collectibles (such as physical or digital baseball cards) from also being classified? Or physical or digital art?

As noted in the complaints by Mann and Frye, NFTs are often compared to physical artworks and collectibles, such as baseball cards, Pokémon cards, sneakers, or watches. The SEC's broad interpretation of the Howey test could not only potentially bring all digital artworks represented by NFTs under its jurisdiction, regardless of the context in which they are offered and sold, but it would also encompass all artworks and collectibles.

In the Stoner Cats settlement, the dissenting opinions of two current SEC commissioners further emphasize the potential impact on creative expression. They pointed out that if securities laws are applied to physical collectibles in the same way they are applied to NFTs, artists' creativity would wither in the shadow 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.

These commissioners also compared the Stoner Cats NFT to Star Wars collectibles sold in the 1970s. They questioned whether the "early bird certificate package" sold by toy company Kenner after the release of Star Wars in 1977 constituted an investment contract. Based on an analysis of today's enforcement actions, the SEC should have intervened to prevent those kids from participating in the Star Wars craze.

To ensure that creators can continue to innovate without fear, the NFT platform promises to provide $5 million to cover legal fees for NFT artists and developers who receive Wells notices.

We hope the SEC can reconsider its position and approach this issue with the openness it deserves. Until then, the platform remains committed to defending its vision for a better internet - empowering individuals and fostering creativity, rather than stifling creativity with unnecessary regulatory burdens.