SEC probes OpenSea, but NFT artists are likely not the target

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Coinbase, Uniswap, Robinhood, Kraken, and Consensys are names that the digital asset industry has become accustomed to watching receive the dreaded Wells Notices from the U.S. Securities and Exchange Commission. These companies are exchanges that offer a wide variety of tokens on their platforms, many of which are clearly investment vehicles with the promise of future profits thanks to the work of centralized teams. It would make sense that some of the offerings on these platforms would fall into the security category.

But last week, a new and unexpected name joined the list: OpenSea, the largest online NFT marketplace. And now, hundreds of thousands of online artists feel like they’re under attack. But it doesn’t seem like real artists need to worry. An NFT project for art’s sake probably isn’t the kind of project the SEC has on its radar.

Most NFTs are not securities

The SEC’s move came as a huge surprise, because most NFTs are not securities, but simply works of art that people buy and sell. And there’s a long history of people—investors, really—buying works of art that the SEC doesn’t regulate as securities. And so the precedent for going after OpenSea is weak.

Until now, NFTs have generally been viewed as a consumer product, not a financial product, which has stripped the SEC of any regulatory authority. Of course, there are some exceptions, such as fragmented ownership in startups, but OpenSea has tried to keep projects that promise returns outside of the platform.

Despite the facts, the SEC is considering filing a lawsuit against the NFT market.

The truth is on the side of OpenSea and NFT artists

The facts of the case against OpenSea are that the platform generally allows its users to buy and sell works of art, but not to trade securities.

There would be no precedent for the SEC to go after NFT artists. In fact, all the facts speak against art being categorized as a security in any shape or form. It doesn’t make sense. Everyone knows that individuals and organizations are buying and selling art that is not regulated as a security. Online NFTs follow this model in most cases.

So when it comes to most projects in OpenSea, the SEC will have no standing in any potential legislation.

Instead, the SEC’s focus will be on NFTs that are promoted as investments and also generate some future profit thanks to the efforts of the founders of an NFT collection, rather than pure artists simply trying to sell their art online in new and exciting ways.

NFTs similar to SEC counterparts and token counterparts

In past lawsuits filed by the SEC against the NFT industry, the SEC has established a clear pattern. How NFTs are promoted has been at the center of the case, as has the promise of future profits from the work of the NFT collection team.

Just like in the days of ICOs, many projects made bold promises without working on the technology, while many non-NFT projects served as vaporware or tools through which founders attempted to raise investment. Instead of innovation, many projects relied solely on hype and hype, particularly around the potential resale value of the project, which the SEC viewed as a red flag.

Royalty schemes, revenue distribution, and similar NFT projects are the ones that the SEC is after, so most NFT artists can breathe easy, leave the fight to OpenSea lawyers, and get back to creating.

Those experimenting with more complex NFT structures must now play the waiting game. Indeed, if the SEC’s Wells Notice to OpenSea is to be of any use, it will at least be for the long term prospect of regulatory clarity in the NFT space.

Kadan Stadelmann

Kadan Stadelmann is a blockchain developer, operations security expert, and chief technology officer of Komodo Platform. His experience ranges from working in operations security in the government sector and launching technology startups to application development and cryptography. Kadan began his journey into blockchain technology in 2011 and joined the Komodo team in 2016.