SEC vs. BAYC? Here’s what legal experts say it means for NFTs

Some news leaked last week from an unknown source NFT The world is in turmoil.

Anonymous report Bloomberg That the Securities and Exchange Commission Currently investigating Whether the NFTs sold by Yuga Labs, the $5 billion company behind Bored Ape Yacht Club, violated securities registration laws. The Securities and Exchange Commission did not deny this report.

Depending on who you ask, the news confirmed a possibility that was either unthinkable or inevitable: the US government might seek to regulate the nascent multibillion dollar NFT industry as a stock market.

Several legal experts, in an interview with DecryptTaking evolution as a clear indication that the Securities and Exchange Commission – which has It has sharply increased its approach to regulating cryptocurrency In recent months – it is taking unprecedented steps towards asserting its dominance in the virtual art market. Other legal minds dismissed the move as loud but empty policy maneuvers on the part of the Securities and Exchange Commission — unlikely to lead to any drastic changes to regulation.

However, across this spectrum of opinions, there was consensus that if the Securities and Exchange Commission chose to escalate its current investigation of Yoga Labs into litigation, the consequences would be seismic.

“The potential for regulatory action is greater than I expected, even with respect to NFTs where each digital asset is unique,” ​​said Alfred Steiner, an artist and lawyer who specializes in NFTs. Decrypt. Steiner is currently representing Ryder Ripps, a conceptual artist and provocateur, and is currently a target of Experience Yuga Labs on trademark infringement.

Prior to Monday’s news, Steiner thought the SEC was unlikely to go after a blue chip NFT like BAYC, simply because most of the 10,000 Bored Ape NFTs in circulation feature different optical properties (eg an earring or other colored background). Steiner believes these differences will make NFTs look less like stock and more like artwork.

“My impression before this news was that the kind of diversity you have among the digital resources in a group like BAYC would be enough to keep regulatory actions at bay,” Steiner said. I’m not aware of any prior indication that they would do what they did.”

However, other legal experts disputed, saying they had been expecting this escalation for some time.

“I’m not surprised. I’ve seen this coming for the past two years,” said Brian Fire, a professor of law at the University of Kentucky. Decrypt.

“What are all the different NFT kits Yuga Labs selling other than a functional investment in the future value of the Bored Ape Yacht Club brand?” Four said. “That’s all they really are, at the end of the day.”

For a law professor, it makes perfect sense for the Securities and Exchange Commission to target a major NFT brand to get its start to regulate the NFT space. Fire said people buy into premium NFTs like Bored Apes because of their collective reputation, not because of the artistic value of individual NFTs. The professor argued that it is a lot like buying stock in a company.

“What you buy is a piece of Bored Ape Yacht Club, and the value of the NFT goes up or down along with the value of the Bored Ape Yacht Club token,” Fyre said.

Steiner agreed. “I don’t think there is much doubt that the vast majority of people who buy expensive NFTs are expecting a profit,” he said.

Jeremy Goldman, an attorney who specializes in NFT, said getting into regulating the NFT space by starting with the biggest NFT brand of them all goes against the way the SEC operates.

“It seems more likely that if the SEC were to go after someone, they would pursue projects that more easily fit within the framework of what the SEC considers safe,” Goldman said. Decrypt. Goldman previously represented Yuga Labs, although he does not currently do so; I like him too Decrypt.

Goldman believes there are other NFT ventures besides Bored Ape Yacht Club that are clearly identifying funds to appear as securities. He is confident that the SEC will almost certainly pursue these projects first — if they continue after any of them.

The Securities and Exchange Commission (SEC) usually begins with the pursuit of the bottom hanging fruit. Think of a project where marketing said, “This is going to be a huge investment, ‘We’re going to increase what you put in 10 times and take you to the moon,'” Goldman said. And I just don’t see BAYC in that category.”

Goldman believes the SEC is unlikely to sue Yuga Labs for securities violations. He believes that YOGA is only here to help the Securities and Exchange Commission in a propaganda-oriented battle for supremacy over the crypto space. Goldman went so far as to suggest that the leak may have been planted by the SEC itself.

“To me, that’s a little fishy. Suddenly an anonymous source says, ‘Oh, yeah, yoga is on the list,’ and then it hits the headlines,” Goldman says. “I just wonder if this is part of the government’s fight for control. They put it up there, ‘We’re already looking into this,’ and they want to put a big name out there so it gets the audience’s attention.”

Other sources familiar with the matter, who did not wish to be named, agreed that the SEC could use the Yoga Lab as a pawn in a larger game aimed at fending off rival regulators including the Commodity Futures Trading Commission (CFTC) and the Treasury. and the judiciary.

“The Securities and Exchange Commission is clearly committed to protecting turf,” Fire said. “Whichever agency gets into this area first, it will ultimately be the one that is most likely to take the longest. I don’t think the SEC wants to shift this regulatory area to the competing agencies.”

Regardless of the underlying motive, what if the Securities and Exchange Commission went ahead and won a lawsuit against Yuga Labs?

“This is going to be an industry-wide problem,” Goldman said. “Launching an NFT would be like going public. It would require a tremendous amount of legal work, accounting work, disclosure and registration work. […] It is simply not feasible or feasible for the vast majority of startups.”

Fyre does not believe that a scenario in which NFTs are legally treated as securities would be very disastrous for NFT originators, as much of the necessary disclosure information will already be publicly available on the blockchain. However, he believes that such a scenario could quickly become a nightmare for the SEC.

“The NFT market is just a very transparent, radically functional, radically stripped version of the art market,” Fire said. But the economic logic of both is exactly the same. I don’t know how the SEC marks NFTs [profile picture] The market is the art market.

four of her, for yearsHe insisted that the NFTs regulate, but doing so would open a Pandora’s box that would logically force the agency to regulate the art market, a complex headache he had avoided for decades.

For this reason, the SEC has likely found itself between a rock and a hard place for years, eager to go after cryptocurrency – a new and volatile financial sector that has won and lost billions from investors – but has been wary of setting an explosive precedent with the art market in mind.

In the meantime, however, Yuga has acquired flashy NFT companies Huge amounts of capitalAnd the Lots of titlesand a lot of Celebrity endorsementsIt can now be very difficult for the SEC to remain inactive.

“The more impact they see yoga having in the markets, the more likely they are to see it as something they want to regulate,” Fire said. “The question is not whether or not BAYC is a security. The only real question here is, what does the SEC want to regulate?”

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