SEC notifies NFT marketplace, OpenSea, of likely lawsuit
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The Securities and Exchange Commission (SEC) has served the best known marketplace for non-fungible tokens, OpenSea, with a notice that it is likely to sue it for securities law violations, according to the company.
Why it matters: The SEC has sued the makers of NFTs before, but now it's going after the leading place where buyers and sellers of digital collectibles meet up and trade.
Driving the news: The securities regular issued what's known as a Wells notice, which alerts a company to the substance of an investigation before any charges are brought.
- The SEC does not confirm the existence or non-existence of investigations.
Between the lines: The specifics of what the SEC is objecting to is not yet clear.
- The main thing OpenSea is known for is selling digital art (such as Autoglyphs) and collectibles (such as CryptoPunks), but there are other kinds of NFTs available on the site that fall well outside those categories.
- "There is a lot of information that we don't yet know about any potential SEC enforcement, including which — if any — specific NFTs the SEC may allege to be securities," Joshua Ashley Klayman, head of Linklaters' blockchain practice, tells Axios.
"By targeting NFTs, the SEC is diving into new, uncharted waters, with potentially harmful consequences for consumers, creators, and entrepreneurs alike," OpenSea CEO Devin Finzer wrote in a blog post about the warning.
- "We're confident that OpenSea operates legally and that our users aren't trading securities."
Catch up fast: In 2022, federal prosecutors brought an insider trading case against a product manager at OpenSea.
- "The SEC was conspicuously absent, and no allegations were made about any available NFTs on the platform being securities," Klayman pointed out.
- But when similar insider trading charges were brought against a Coinbase employee around the same time, the SEC stepped in with parallel charges, alleging that at least nine of the crypto assets the defendants had traded were securities.
Yes, but: The SEC has been active in the NFT space more recently. It reached settlements of securities violations with two producers of NFTs: Impact Theory and Stoner Cats.
What they're saying: The threat of a lawsuit by the agency is "an example of how circa 1930s securities laws are out of sync with 2020s risks and technology," Stephen Palley, a litigation partner at the law firm Brown Rudnick who advises blockchain clients, tells Axios.
- "Enforcement priorities seem out of line with risks and consumer protection priorities."
The big picture: NFT trading is still well down from its 2021 heyday, but there's still a lot of money being made in the sector.
- Trading volume on OpenSea has been in the tens of millions monthly all year, though that is well down from the billions people were trading in the boom
- OpenSea is no longer the leading venue in volume. That spot has been taken by Blur, but OpenSea still has the most people trading on it.
What's next: An actual lawsuit.
