Piracy, plunder, and non-fungible tokens
Problems on the OpenSea
Bloomberg’s Matt Robinson reported on March 2 that the U.S. Securities and Exchange Commission is scrutinizing creators of NFTs, and the crypto exchanges where they trade, “to determine if some of the assets run afoul of the agency’s rules,” citing the usual “people familiar with the matter”.
It’s another shot across the bow for proponents of cryptoassets.
NFTs, or non-fungible tokens, are digital assets that are unique and not interchangeable — like a snowflake — rather than fungible — like a grain of corn in a silo. NFTs are more like diamonds, real estate, or even professional sports trading cards because they have unique characteristics that drive their overall value. Digital asset cousins bitcoin and Ethereum, and fiat currency such as the U.S. dollar, are fungible since one unit of bitcoin or one U.S. dollar is as good or equal to another.
Bloomberg says the focus of the SEC’s probe is whether non-fungible tokens, in particular those that represent fractional ownership of art, real estate or sports memorabilia, for example, are securities and should therefore be regulated as securities. The SEC’s enforcement attorneys have sent subpoenas to all kinds of creators and exchanges demanding information about their token offerings.
According to data from Chainalysis, NFT activity ballooned in 2021, to about $44 billion worth of crypto sent to smart contracts on the Ethereum blockchain during 2021, up from $106 million in 2020.
I warned there would be a reckoning on Feb. 9 in an OpEd in the FT:
Trickier accounting challenges might be coming. Take the hot market for NFTs, or non-fungible token art, for example. How should companies record NFTs in their accounts? David Larsen, an alternative asset specialist at Kroll, told me there is still very little secondary market for NFTs. So how will companies put a Bored Ape NFT on the balance sheet?