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Obviously, NFTs can be considered as a type of security

Obviously, NFTs can be considered as a type of security

The biggest fear of everyone in the NFT market is that the US Securities and Exchange Commission (SEC) will decide that non-fungible tokens (NFTs) are securities and start regulating them. They should get over it. NFTs are, of course, a type of security. Because of this, they are very powerful and show great promise.

Instead of trying to avoid SEC oversight, the NFT sector should accept this classification. It will happen and is a good thing, especially since the SEC is likely to regulate lightly once it knows more about how the NFT market works.

Brian Frye is a professor of law at the University of Kentucky and an NFT artist who works with ideas. This article is in Crypto 2023.

We couldn’t see that the art market was also a securities market because there were always things in the way. The art market is the market for art as an investment.  Most people think that when you buy art, you’re also buying something else. Wrong. In reality, what you’re buying is a place in the artist’s catalogue raisonné, which is a list of all the works that the market says are theirs.

A dirty piece of canvas or a big lock is often used as a physical token that goes with the ledger entry. It doesn’t matter what is shown because the only important thing is the ledger entry. This is clear because, even though the object itself hasn’t changed, if the link between it and the ledger entry is broken, the object loses all of its value. In other words, the object just lets the ledger record be sold.

The NFT market works exactly the same way; it just gets rid of the item and lets collectors trade ledger entries directly instead of going through a middleman. That’s great, because it’s much harder and more expensive to trade fragile, expensive things. In Swiss art freeholds, collectors used to trade receipts for paintings. What a relief that they can now trade non-financial assets instead.

But getting rid of the art object forces us to think about how the NFT and art markets are different. We can  call NFTs “uncanny” tokens because, as Freud said, they are a sign of the repressed coming back as the familiar becomes strange. Why do so many people feel weird about NFTs and the NFT market? because they make strange what everyone thought they knew about how art and the art market go together. Why would it cost collectors $1 million to digitize a receipt? They spend $1 million on a dirty canvas for the same reason: they want to get more money when they sell it.

So, what are you really buying when you buy a piece of art or an NFT? a piece of an artist’s “clout,” or more specifically, a small piece of the money that comes from the artist’s reputation. If the artist becomes well-known in the art world, you will be able to sell your art or NFT for more money. But your art or NFT will be worthless if it loses its popularity, just like any other bad investment.

Is it a security to buy NFTs or works of art? No doubt. The well-known Howey test, set up by the Supreme Court, says that an investment is a security that the SEC can watch over if it is an investment in a joint venture that could make money because of the work of others. Every investment in fine art or NFTs is an investment in the artist’s career, with the hope (or expectation) that the artist’s fame will bring financial gain. It couldn’t be clearer that art and NFT collectors are buying a security interest in an artist’s career.

So the SEC might be in charge of the art market and the NFT market? It’s clear that it can. But it doesn’t want to, and it’s not likely that it would regulate the asset class in a big way even if it did. Everyone agrees that the most important question is whether an investment “is” a security. But that’s stupid. The Howey test is ridiculously broad; if you look at something just a little bit sideways, it can be a security. The real and most important question is whether or not the SEC wants to regulate an investment.

The SEC has made it clear that it doesn’t want to regulate the art market, and I think it will soon reach the same conclusion about the NFT market.

Why should you come? Why? Because the SEC’s job is to keep an eye on things that “look like” securities. The SEC hasn’t regulated new things in the past, even if they fit the definition of a security. Instead, it has regulated the kinds of things it has always regulated (like stocks and bonds). This is especially true when the SEC has to deal with problems that have been around for a long time, like the art market.

The SEC has talked about wanting to regulate NFTs, which makes sense. Since the agency doesn’t have anything to offer the NFT market, I think it will soon start to backtrack on most of what it has said. If it starts to regulate the NFT sector, it will be hard to explain why it doesn’t also regulate the art market.

At that point, it starts to get cool. Because the NFT market has a lot of potential if it really can do what a securities market can do. We live in a “clout economy,” where fame is the only thing that matters. Celebrities help people figure out what’s going on in their own lives and in the rest of the world. They make a lot of social capital because they give their customers a sense of purpose in the world.

But only some of the social value that celebrities create can be turned into money. Kim Kardashian may be worth a billion dollars, but what she can’t claim is much more valuable to society.

NFTs could change all of this by letting famous people invest in their fame. What if Kim Kardashian could sell NFTs that were just a small part of her power? People who think she will become even more well-known in the future may guess how well-known she will get, while those who think she is just a passing trend may downplay her impact.

The idea is that it would give well-known people, like novelists, access to money markets that they have never had before. This could completely change the market for knowledge goods if authors could sell investments in their ideas instead of expensive copies.

About MahKa

MahKa loves exploring the decentralized world. She writes about NFTs, the metaverse, Web3 and similar topics.

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