Hester Peirce Warns NFTs Community Over Use of the Howey Test 

Deepshikha  |  Mar 27, 2021

Recently, SEC Commissioner Hester Peirce said investors should be careful not to create unregistered securities when buying and selling fractional shares in NFT. According to her, the Howey Test mostly used by courts to determine whether a cryptocurrency asset is a security or not does not do any good to the industry.

Peirce Criticize the Use of Howey Test to Assess Whether NFTs Are Securities

Hester Peirce will work with the incoming Chairman of SEC Gary Gensler on her “safe harbor plan" that could ensure that emerging blockchain networks face reduced regulatory scrutiny.

Warning investors yesterday that some NFTs could be considered unregistered securities under certain circumstances. She said:

“The whole concept of an NFT is [it’s] supposed to be non-fungible, so it’s supposed to be unlike anything else.” 

Peirce during a Security Token Summit webinar on Thursday said: 

“Which means that it’s, I think, in general, less likely to be a security, but people are being very creative in the types of NFTs they’re putting out there. It’s a wonder what some people will pay for. And so I think, given that creativity, as with anything else, you should be asking questions.”

NFTs are Cryptographically Secured Digital Assets

Essentially a token attached to an image or video file, NFTs are sold for ridiculous amounts of money. The digital artist Beeple sold a single NFT for $69 million at Christie’s and has been used to promote music, digital art, tweets, and journalism.

However, NFTs have also posed problems to the investors. There are potential copyright issues, as well as ethical concerns around the Ethereum network’s energy consumption. According to Peirce, certain kinds of fundraising efforts tied to NFTs might raise the same kinds of questions that ICOs have raised.

Her statement reads:

“If you’re doing something where you are saying, ‘I’m going to sell you this thing and I’m going to put a lot of effort into building something so that this thing that you’re buying has a lot of value," those kinds of sales will attract more regulatory scrutiny.

Peirce also suggested fractionalized NFTs (i.e. selling a partial interest in a single, expensive NFT) could run the risk of being unregistered securities. 

“You’ve always got to ask those questions,” she added. “As we’ve seen, the definition of a security can be pretty broad.”

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