Are all NFTs securities? 

October 21, 2022

By Sharan Kaur Phillora

Non-fungible tokens are here to stay because the possibilities and the opportunities of NFTs are boundless and go beyond art and celebrities’ tweets or photos. The future of NFTs lies in business applications. The true power of NFT is providing authentication and facilitating the transfer of ownership. Thus, you can create NFTs for wine, a Dolce and Gabbana-designed dress or a crown, a property, or any physical or digital asset that is deemed unique.

Fractional NFTs offer NFT enthusiasts a way to collect and own a fraction of an NFT, creating a smaller microeconomy of fractionalized digital assets. Within this now quickly-growing microeconomy is a wide array of interesting use cases. 

By definition, securities are fungible and tradable financial assets used to raise capital. In contrast with NFTs, they are interchangeable. As fractional NFTs provide partial ownership of an NFT, they more or less could be viewed as fungible securities in the eyes of the SEC. 

Such securities are legally required to be registered with the SEC, with complete information about the seller and the offering made available to investors — which would be a huge ask of developers involved in a community that values decentralization and anonymity above all else.

Fractional NFTs must be taken with a grain of salt. As with the greater NFT market, not every token will increase in value. Both monumental gains and losses are to be found throughout the ecosystem.

A securities classification can also be based on participation in governance, according to SEC Commissioner Hester Peirce, who spoke to the Financial Times. Stockholders are generally responsible for determining the direction of a common enterprise when you take a step back and think about how companies work.

So the top three things to avoid are fractionalizing an NFT, offering revenues, or participating in governance. According to Peirce, some guidelines could be provided by the SEC regarding NFTs.

About the author

Sharan Kaur Phillora’s thirst for knowledge has led her to study many different subjects, including NFTs and Blockchain technology – two emerging technologies that will change how we interact with each other in the future. When she isn’t exploring a new idea or concept, she enjoys reading literary masterpieces.

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