- Hester Peirce has compared the resale of NFTs to music and video streaming royalties
- The SEC’s newly established Crypto Task Force is working on establishing regulatory clarity.
- Peirce believes that crypto assets used solely for “consumption” should be exempt from federal securities laws.
Hester Peirce, aka “Crypto Mom”, a long-serving member of the U.S. Securities and Exchange Commission (SEC) and the head of the SEC Crypto Task Force, has posited that certain types of non-fungible tokens (NFTs) do not qualify as securities.
Furthermore, she believes that cryptocurrencies that don’t represent economic rights or interests in a business entity shouldn’t be subject to federal securities laws.
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NFTs, Non-Securities
During her speech at the SEC Speaks event on Monday, May 19, pro-crypto advocate Peirce stated that there are numerous types of NFTs that do not offer economic rights, and they shouldn’t be treated as securities.
“These NFTs are powered by smart contracts, which can be programmed to transmit automatically a portion of the sale price of an NFT to the creator of the artwork as a royalty each time that it is resold,” she explained.
Peirce compared this to streaming platforms that pay royalties to song or video creators every time their work is played. She said this system allows creators to benefit from ongoing sales of their work.
She emphasized that this “creator royalty” feature does not give NFT owners rights or interests in a business or the types of profits normally linked to securities.
Peirce also shared her views on how to treat crypto tokens that do not represent economic rights or interests in a business and are used solely for consumption. She said these tokens should be exempt from federal securities laws.
She added, “The analysis does not change even if purchasers are speculating on an increase in the future value of the crypto asset.”
The Gray Area
According to Peirce, challenges around a token’s security status arise when non-security cryptos are distributed in the early development of the network or application, before the assets can function, and “while the network or application is centralized.”
It’s common practice for crypto and blockchain projects to raise capital through crypto pre-sales and initial coin offerings (ICOs), promising future token utility amongst other future developments.
This can influence a buyer’s expectations, resulting in the purchase of a non-functioning crypto asset that could be worth zero if the developers abandon the project.
She notes that these transactions begin to resemble ones that courts have declared to be covered by securities laws.
“Because the crypto assets are sold with promises to develop the network or application and deliver functionality, the crypto assets may be subject to a contract, transaction, or scheme that qualifies as an investment contract, a type of security under federal securities laws,” she said.
This leads to the biggest challenge for crypto issuers, trading platforms, and early-stage buyers, namely, how or when to determine a non-security crypto asset that qualifies as an investment contract “separates from the investment contract.”
“In other words, the crypto asset’s value is intrinsically linked to something other than rights or an interest with respect to a business entity or other promisor. These assets are not themselves securities, nor are they any longer part of an investment contract, even if they once were,” Peirce added.
Noting the arguments on either side and offering several solutions, Peirce concludes that ultimately, the SEC’s newly created Crypto Task Force is working to establish clear rules, stating that “forthcoming rulemaking” by the SEC and legislation from Congress will serve to bring clarity to the industry.
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