Crypto-friendly Securities and Exchange Commissioner Hester Peirce is one of the most known SEC officials interested in the digital asset industry. She has shown support for the industry and has spoken many positive things about the rapidly growing industry. Fondly called ‘Crypto Mom’ by members of the crypto space, Peirce warns issuers concerning the growing trends surrounding non-fungible tokens.
NFTs are unique token types and are often used to show ownership of intellectual property. One of the most popularly known NFT is Beeple’s recently sold painting, purchased at around $69 million. There are many other popular NFTs, which is a result of the growing demand for tokens. While NFT industry growth is essential, the SEC commissioner warns issuers against breaking the law.
Hester Peirce warns against fractionalized NFT issuance
She explained that fractionalized NFTs and other NFTs could be seen as investment contracts by SEC. This means that failing to follow appropriate steps laid down by the regulator could mean that the people are breaking federal law.
She explained this development at Draper Goren Holm’s Security Summit. This summit was held around the 25th of March, where she explained some implications to the issuance of NFTs. She explained that the index baskets of NFTs are seen as an investment, leading to some legal problems for the issuers.
Crypto mom explained that NFTs, which means non-fungible tokens, are supposed to be non-fungible. This means that they should be unique and not traded for money. She explained that generally, the tokens are not supposed to be securities while adding that people are showcasing NFTs in a creative way in the sector.
The problem comes with the issuers selling the NFTs with fractional interests or NFT baskets. Peirce’s warning means that she wants issuers to be cautious of not creating investment products, or they could face problems with the law. The numerous NFTs are being sold at mouth-watering prices, making smaller buyers buy a part of the pricey NFT.
Howey test has not been effective
Incidences like this have been happening as many individuals are coming with solutions to fractionalize non-fungible tokens. She also raised the controversial Howey Test issue, which SEC has used on many occasions to determine if an asset is a security or not.
Crypto mom explained that the test’s use in securities hasn’t been very successful. As a relatively new sector, the digital asset industry might need a modern test to show if it’s an investment plan or not. Many businesses have gotten into some trouble with regulators like Ripple, with the watchdog asserting that the fintech company had sold unregistered investment contracts to holders.
This issue led to so much controversy, and critics drew out a lack of clarity for some SEC regulations, which is a major problem affecting the industry. Courts use the Howey test for checking if a scheme is an investment contract or not. The test is known to be archaic and ineffective and has caused some more problems than it’s supposed to fix.