NFTs, after shooting to fame in the latter half of the past decade, are being scrutinized by regulatory institutions (especially the SEC) as they have become a significant investment option.
The Bored Ape Yacht Club (BAYC) NFT collection founder, Yuga Labs, has been the latest addition to the list as it is being investigated by the United States Securities and Exchange Commission, the apex body in the country to investigate matters relating to stocks and other securities.
What has Happened?
The Securities and Exchange Commission, under Chair Grey Gensler, has started investigating Yuga Labs, the company behind the biggest NFT collection, i.e., the Bored Ape Yacht Club (BAYC). The reason behind the same is to find out whether the BAYC NFTs fall under the category of securities as per SEC. If it is found to be the case, then the company would be held liable for violating federal laws by selling assets and tokens which were unregistered.
However, the agency has not accused Yuga Labs of anything as of now and has also refrained from commenting on the same. One of the biggest reasons behind the SEC’s move is the sudden growth of interest of investors in unconventional assets like the NFTs, as it is the agency’s duty to protect the interest of the investors, which may come under risk due to malpractices. The SEC regulates the U.S. securities market and only permits registered securities.
This leaves the SEC with an even bigger question that it needs to address, which is whether assets like the NFTs are similar to stocks and hence can be identified as securities. The SEC’s regulation of these assets, along with its authority to take actions against Yuga Labs, are all contingent on this question. The agency will rely on the Howey Test when finding out the answer for the same.
It is not just the BAYC tokens that are under scrutiny. The Mutant Ape Yacht Club tokens, along with the tokens of Otherside ( a metaverse being developed by Yuga Labs) and the ApeCoin, are also being investigated. ApeCoin, although not developed by Yuga Labs, was airdropped to the holders of BAYC and MAYC after the launch, and a portion of its total supply was also given to Yuga Labs as the coin relies a lot on the BAYC ecosystem and is also the official currency of Otherside.
BAYC is a collection of over 10,000 tokens, all resembling a monkey in different backgrounds (with obviously a bored face) on the Ethereum blockchain. The tokens were first sold by Yuga Labs in the year 2021 for 0.08 Ethereum (roughly $190) and were sold out in less than 12 hours from the time they were put out for sale.
The Tokens then have been resold multiple times their value and have cumulatively managed to reach billions of dollars in valuation. BAYC tokens have become very popular. The list of investors in BAYC includes big celebrities like Jimmy Fallon, Madonna, Eminem, Gwyneth Paltrow, Shaquille O’Neal, Neymar, Mark Cuban, etc. The BAYC investors are offered membership in exclusive committees, among other things.
The Apecoin has fallen by more than 10% in the last 48 hours following the release of Bloomberg’s report regarding the SEC’s investigation of Yuga Labs. The value of the coin has fallen sharply from $5.17 to $4.33 in the past two days and is still in its bearish run.
This is because of the coin’s dependence on the BAYC ecosystem. ApeCoin was developed by the Ape Foundation after the resolution for the same was passed by the Ape DAO. A majority of the ApeCoin owners are BAYC and MAYC NFT holders, and hence the coin also came under scrutiny along with Yuga Labs.
What is Howey Test?
Howey test is a method used by the SEC to assess whether a particular investment option qualifies as a security. The test was originally given by the US Supreme Court in the year 1946. If an investment qualifies as a security, it will be regulated by the Securities Act of 1933 and Security Exchange Act of 1934, and therefore it will have to be registered and make disclosures accordingly.
The Howey test says that an asset will qualify as a security if people invest in it expecting to gain profits from the efforts of others. The results of the Howey test on cryptocurrencies and NFTs have been blurry, giving the SEC a big responsibility on its shoulders.
If the NFTs and cryptocurrencies of Yuga Labs are declared to be securities by the SEC, then the federal agency will have direct control over its demand and supply, which it has only been able to influence indirectly by increasing the countrywide interest rates.
Fractionalized NFTs or F-NFTs have also been under the radar of the SEC, and they may get scrutinized along with the other NFTs. F-NFTs are smaller parts of one complete NFT that are sold separately. The concept was brought to make expensive NFTs that go over millions of dollars in value available to average buyers who want to own them but don’t have the necessary fund to spend on these NFTs.
The BAYC NFTs are the best examples of expensive NFTs that an average buyer can’t own, and so it needs to divide into many F-NFTs that could be sold at affordable rates to prospective buyers.
SEC under the leadership of Grey Gensler, has been very vigilant in its attempt to regulate the Cryptocurrency market. He has said that some of the cryptocurrencies and NFTs have the characteristic of security in the sense that they are purchased for the purpose of making profits in the future and that they are purchased using a Fiat currency, making it an “investment contract”.
However as the SEC has refrained from making comments regarding the present matter and the factc that it has not accused Yuga Labs of anything the result of the investigation could go anyway. In case the SEC ends up identifying NFTs as securities, it’ll come as a good news for the investors as they will be protected aginst malpractices and frauds.
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