Digital Chamber Calls for Congress to Exempt NFTs From SEC Rules

The Digital Chamber, a Washington-based advocacy group that promotes the blockchain technology, Bitcoin, and digital asset industry, has urged the U.S. Congress to exempt certain non-fungible tokens (NFTs) from the Securities and Exchange Commission’s (SEC) rules.

Certain non-fungible tokens should be classified as consumer products, not securities, according to the group.

In a statement issued on August 10, the Digital Chamber said that many NFTs are not designed for investment or speculation.

Many are indeed comparable to traditional collectibles or artwork, meaning if consumers might sometimes sell them for a profit, this doesn’t make them financial products.

The group advocates for certain NFTs to be classified as consumer products, not securities, and “for legislative clarity that reflects this distinction.”

SEC Running Wild

The move is likely a response to the SEC’s potential enforcement action against the leading NFT marketplace, OpenSea. Last month, the securities regulator reportedly sent a Wells Notice to the company, claiming that the NFTs traded on OpenSea may qualify as unregistered securities under U.S. law.

The Digital Chamber believes that the SEC’s enforcement actions against companies like DraftKings, Dapper Labs, and OpenSea are harming the growth of the NFT industry.

Not only NFT creators, but also consumers “are unjustly restricted by an agency acting beyond its authority,” the agency noted.

The Digital Chamber added that the SEC’s lawsuits and threats of enforcement have created uncertainty and could lead to the industry moving overseas. They urged Congress to intervene to clarify the regulatory status of NFTs and protect the industry.

“Congress must act now to ensure that this burgeoning industry remains within the US, for the benefit of the US economy, and not move overseas to more favorable regulatory environments. The Digital Chamber strongly encourages Congress to clarify that Consumptive-Use NFTs are consumer goods and not financial products.”

NFTs Face Uncertain Future

The NFT market has endured a major downturn since its peak in 2022. 96% of NFT collections are now considered “dead;” many holders face losses.

Data shows that the Azuki collection stands out as one of the most profitable NFTs, with a 2.3X ROI due to strong community engagement and marketing. CryptoPunks and Bored Ape Yacht Club are still popular and successful NFT collections.

However, Pudgy Penguins, an NFT project known for its strong start, is now considered a failed project with many holder losses. Pudgy Penguins is just one of many cases that struggled after their initial success.

The struggling ecosystem now deals with an uncertain future as the SEC ramps up its enforcement efforts. If the SEC successfully classifies NFTs as securities, the whole NFT ecosystem could be at risk.

The SEC’s actions are part of a broader trend of increased scrutiny on the cryptocurrency and NFT sectors. The agency has long focused on digital assets, but its ongoing efforts to regulate the industry through enforcement actions rather than clear regulations, have drawn lots of criticism.

Open Sea CEO Devin Finzer said he was shocked at the SEC’s decision. Finzer stressed it as an overreach that could stifle innovation and harm creators. Similar to the Digital Chamber, he believes NFTs should be viewed as creative goods rather than financial contracts.

Several legal experts contend that the SEC’s demand for NFT registration could restrict artists’ First Amendment rights. They argue that this interpretation diverges from the traditional understanding of “investment contract” under the Securities Act of 1933, which typically referred to contractual rights to profits based on others’ efforts.

The current uncertainty and potential legal consequences may discourage artists from creating NFTs, which essentially adds more harm to the already troubling sector. Advocates propose returning to the original meaning of “investment contract” in the Securities Act in order to clarify the law and safeguard artistic expression.