Regulations and SEC Investigations Might Actually Be Good for NFTs

It’s time for everyone to wake up from the dream of decentralized immunity to regulatory powers. While the fight against centralization and the advocation of anonymity has long characterized the NFT space, throughout 2022 the United States Securities Exchange Commission (SEC) has made it clear that crypto and NFT regulation is imminent.

With the recent news of the SEC’s probe into Yuga Labs, it feels like the delay between metaverse actions and real-world consequences is vanishing. Many in the space are wondering what the future holds for NFTs as they enter into the world of government-regulated assets.

But should SEC investigations be a cause for serious worry for everyone? Punitive measures have remained one of the only points of contact between the SEC and the NFT space, since bad actors continue to flourish. Perhaps the more useful question is: Is open dialogue possible? And if so, could it lead to both the SEC and the IRS becoming much less alarming Web3 acronyms in the near future?

So NFT regulation isn’t that scary after all?

In the last few years, the idea of government agencies in the metaverse has both frightened and angered the collective NFT community. Since the blockchain acts as a home-base to a microcosm that holds the concept of decentralization near and dear, it’s understandable why entities like the SEC, IRS, and even FBI have taken on the role of the enemy.

Make no mistake, paying a 10 to 37 percent capital gains tax on NFT profits is not at all desirable, but by and large, crypto and NFT regulation doesn’t seem aimed at punishing artists and collectors, but bad actors that have continued to sour the reputation of blockchain tech. This is precisely why some of the biggest headlines surrounding government influence in Web3 have focused on the FBI cracking down on insider trading, prosecuting rug pullers, and rooting fraud and money laundering out of the NFT space.

Since there are few rules surrounding NFTs and crypto (aside from those being established by the IRS), it stands to reason that the SEC and fellow government agencies are taking their time to figure out best practices for regulating digital assets. After all, it’s not like Yuga Labs was accused of any deviousness by the commission; rather, the SEC’s probe is meant to serve as a way for policymakers and regulators to “learn more about the novel world of Web3,” as Yuga Labs made clear in a report published by Bloomberg.

Even SEC Commissioner Hester Peirce believes that a collaborative and iterative process of rule-building is the best way to create new regulatory frameworks for crypto and NFTs, remarking in a previous interview with nft now that she finds the SEC’s approach of prioritizing enforcement to be an unhealthy process. The fact of the matter is, the SEC — whose mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation — wouldn’t be doing its job if it didn’t look into new technologies. So perhaps we all knew deep down that regulation was inevitable.

The future of NFT regulation

Despite the wheels turning in the SEC, regulation has yet to be rolled out in the NFT space. Although commissioner Peirce did define 2022 as the year of setting the basis for future legislative and regulatory activity, currently, efforts seem to be focused on the regulation of crypto exchanges.

The SEC reportedly launched investigations into every U.S.-based crypto exchange in August, distrust has understandably been growing between the regulatory powers that be and exchanges that seemingly only desire clearer and more appropriate rule-making for Web3 organizations. While these investigations could affect the average NFT enthusiast eventually, they aren’t an immediate threat, since NFTs and crypto remain difficult to classify on a regulatory basis.

According to the proposed 2022 crypto bill penned by U.S. Senators Cynthia Lummis and Kirsten Gillibrand, “digital assets” are defined as natively electronic assets that confer economic or proprietary access rights or powers and include virtual currency and payment stablecoins. Similarly, “virtual currency” is defined as a digital asset used “primarily” as a medium of exchange, a unit of account, or a store of value, and is not backed by an underlying financial asset.

These definitions give us a bit of insight into potential regulation, as NFTs could be treated as commodities (like petroleum, cotton, soybeans, etc.) rather than as securities, meaning they would fall under the purview of the Commodity Futures Trading Commission (CFTC). But while the aforementioned bill attempts to regulate digital asset exchanges, distinguishing a “centralized” and ‘”decentralized” exchange, it fails to actually define what a “digital asset exchange” is, seemingly leaving out a key factor of the regulation equation.

Hopefully, investigations launched into crypto exchanges by SEC Chair Gary Gensler will help define and give voice to Web3 entities. But for now, given the information we have surrounding the Yuga Labs probe, things could be looking up for the near future of NFT regulation.

So if you are an admin to any significant Web3 org, being investigated could provide an opportunity to contribute to the conversation surrounding regulation. But for those who are artists, collectors, traders, or otherwise general NFT enthusiasts, fret not and think positive thoughts, but make sure to put some crypto aside for taxes come 2023.