The U.S. Securities and Exchange Commission (SEC) has recently clarified that non-fungible tokens (NFTs) are not considered securities under federal securities laws, with SEC Chair Paul Atkins reiterating and expanding on this stance. Atkins pointed out that NFTs are not viewed as securities because people purchase them as digital collectibles rather than as investment vehicles.
This move is part of the SEC's newly launched "Project Crypto" initiative, aimed at helping all parties better understand which digital assets comply with existing laws and clarifying whether they fall under securities regulations.
SEC States NFTs Are Not Securities
The SEC has identified four main types of digital assets that are not subject to securities laws: digital commodities, digital instruments, digital collectibles (like NFTs), and stablecoins.
Atkins stated that NFTs are similar to physical collectibles, where purchasers buy them for personal interest or value rather than expecting profits from others' work. Furthermore, the SEC focuses on how NFTs are used rather than the name itself when determining if they are securities.
Unlike shares in an investment company, purchasing an NFT does not involve an expectation of a team or company enhancing the asset's value. In an interview, Atkins compared NFTs to collectibles like baseball cards or memes, emphasizing that people buy these items primarily for ownership rather than expecting a company to increase their value, thus not classifying NFTs as securities.
However, he also noted that if certain NFTs promise profits or are part of a larger system where purchasers expect to gain returns through the efforts of a team, then these NFTs could potentially be considered securities.
According to the SEC Chair, the SEC is working to clearly define NFTs to promote fairness and allow innovation to continue while protecting users. This clear definition enables creators to design projects better, and buyers can understand what they are purchasing more clearly.
SEC Changes Approach to Create Clear Crypto Rules
Atkins stated that the SEC wants to create a more open and predictable environment where people can develop products without fear of sudden penalties. To achieve this, the SEC will gradually explain how the system works rather than relying on enforcement actions.
He pointed out that due to past mistakes and unclear rules, the U.S. has fallen behind in crypto development by as much as 10 years, with many projects slowing down or moving to regions with more lenient legal frameworks because of the complex legal environment.
Therefore, the SEC launched "Project Crypto" to help developers, exchanges, custodians, and investors understand how the agency treats digital assets under the law, thereby reducing confusion.
Atkins also explained that a security may lose its status when users no longer rely on a central team or company to create value. For example, if a project was initially driven by a team but, as it develops, user reliance decreases, it might no longer be considered a security.