Tag Archives: securities

Are NFTs Securities or Collectibles? Labeling Debate Heats Up

Are NFTs Securities or Collectibles? Labeling Debate Heats Up

On August 28, 2024, the co-founder and CEO of OpenSea, Devin Finzer, said that his company received a Wells notice from the US Securities and Exchange Commission (SEC) threatening to sue the company amid beliefs that the non-fungible tokens (NFTs) on the platform could be considered securities.

 

A bold statement sent shockwaves through the crypto community as discussions arose over whether NFTs should be considered securities.

What are industry experts saying, and what could a lawsuit mean for the NFT community?

Key Takeaways

  • The SEC’s Wells notice to OpenSea signals heightened regulatory attention on NFTs.
  • Some could potentially be categorized as securities, reshaping the legal landscape for the entire NFT market.
  • Experts are divided on whether NFTs qualify as securities, with some arguing that fractionalized or value-based NFTs might meet the criteria, while others see them as digital collectibles.
  • If NFTs are regulated as securities, the focus could shift from creativity and community to financial instruments, potentially stifling innovation in the NFT space.
  • NFT creators and marketplaces may need to enhance their legal and compliance frameworks, including more rigorous due diligence and onboarding processes, to navigate potential new regulations.
  • Regulation could drive a surge in NFTs tied to real-world assets (RWAs) and utility-driven NFTs.

SEC vs. Crypto: A Never-Ending Battle

The recent news that the SEC has targeted OpenSea with a Wells notice may have come as a surprise to many in the blockchain space. However, the battle between US regulators and the cryptocurrency industry has been ongoing for years.

  • In July 2024, the SEC charged Consensys, a blockchain software company, with engaging in the unregistered offer and sale of securities through its service MetaMask Staking.
  • In November 2023, the SEC charged Kraken, a US-based crypto exchange, for operating as an unregistered securities exchange, broker, dealer, and clearing agency.
  • In July 2023, the SEC charged Celsius, a cryptocurrency platform and Bitcoin mining company, with fraud and the unregistered offer and sale of securities.

However, the SEC’s current focus on the largest NFT marketplace, comes as a first, with the regulator seemingly stepping into uncharted territory.

Finzer said in a statement published by OpenSea on Thursday:

“Cryptocurrencies have long been in the crosshairs of the SEC. But, by targeting NFTs, the SEC is diving into new, uncharted waters, with potentially harmful consequences for consumers, creators, and entrepreneurs alike.”

While a Wells notice does not automatically mean that a lawsuit will ensue it does indicate that the SEC is seriously considering taking enforcement action, thus keeping the industry on its toes.

Are NFTs Securities?

While not all cryptocurrency experts agree with the SEC’s latest statement, some are more inclined to believe that certain NFTs could be classified as securities.

Teddy Ellison, the COO and general counsel of Mojito, a leading platform for NFT commerce and community engagement, told Techopedia that certain NFTs could surely be considered securities.

“It is well accepted amongst legal scholars in the industry that fractionalized NFTs likely are securities. Further, we have seen NFTs released with no utility, for fundraising purposes and with value-based marketing that also likely are securities. Many projects in today’s NFT market have taken the ‘NFT’ technology and used it to create identical bundles of NFTs in large numbers. How many NFTs until it looks and talks like a fungible token? The analysis is complex and there are arguments on both sides.”

Anndy Lian, an inter-governmental blockchain adviser and best-selling author of NFT from Zero to Hero, agreed, citing the Howey Test, a legal standard used by US courts to determine whether a transaction qualifies as an investment contract and, therefore, a security, by assessing if it involves an investment of money in a common enterprise with an expectation of profits primarily from the efforts of others.

“The question of whether NFTs are securities is complex and depends on how they are structured and marketed… NFTs involve investing money, but whether they represent a common enterprise with profit expectations dependent on others’ efforts is less clear.

“Some NFT projects, especially those promising future benefits tied to the NFT’s value, might meet these criteria.”

However, other experts argue that NFTs should not be considered securities when compared to more traditional collectibles such as pieces of art, trading cards, and antiques, which also carry a similar potential for value appreciation over time.

Corey Wright, the CEO of Honeyland, a blockchain-based strategy game, said:

“Key arguments against treating NFTs as securities revolve around their identity as collectibles and their additional functionalities. Many NFTs offer more than just potential economic benefits—they often provide utility, access to communities, or digital ownership rights. Applying a decades-old securities framework like the Howey Test fails to acknowledge the modern digital context and could stifle the innovative potential of NFTs rather than protecting investors.”

Classifying NFTs As Securities Could Be Positive

Speaking with Techopedia, Mojito’s Ellison debunked the overall negative sentiment surrounding the recent news, highlighting that if NFTs are classified as securities, the impact could be positive.

“I believe the impact will be positive in that it will cause NFT projects to look more critically at their goals and structure to bring to market something that is pre-baked legally to be sold as a commodity and not a security.

“For all the NFT projects that are truly unique (such as selling non-fractionalized artwork 1 of 1s) nothing will change as those are clearly not securities, but for the more creative projects looking at fractionalization, loyalty programs or bundling NFTs, they will need to be careful.”

Of course, if the classification of NFTs as securities comes into fruition, creators, marketplaces, and collectors would have to pay much closer attention to the legalities behind purchasing, creating, and selling non-fungible tokens.

Ellison highlighted that:

  • Creators would have to figure out how they are planning to sell their IP.
  • Marketplaces will need to build much more serious customer due diligence and Know Your Business (KYB) or Know Your Customer (KYC) onboarding processes.
  • Collectors should also exercise greater caution and due diligence before purchasing an NFT and determining their risk appetite.

Utility-Driven & RWA-Linked NFTs Could Strive

Naturally, new regulations could also drive a shift in the types of NFTs created.

Lian highlighted that a surge in NFTs tied to real-world assets (RWAs), such as real estate, intellectual property rights, or fractional ownership in businesses, is highly likely since these offer the inherent value and potential for income generation and utility, perfectly aligning with the characteristics of traditional securities.

He added:

“Utility-driven NFTs, granting access to exclusive content, services, or communities, could also gain traction. However, creators would need to carefully structure these offerings to avoid inadvertently creating an expectation of profits based on their ongoing efforts.”

Honeyland’s Wright noted that if the SEC says NFTs are securities the new regulation could truly stifle the innovation with this fundamentally creative industry.

“The focus would likely shift from NFTs as vehicles of artistic expression, cultural significance, and recreational gaming to more financial-focused instruments. This shift would erode the foundational elements of creativity and community that have been central to the rise of NFTs.”

The Bottom Line

As the SEC clarifies its stance on NFTs, the market could likely see a period of adjustment and maturation, Lian told Techopedia.

“While some uncertainty remains, the NFT space will probably evolve in a way that balances innovation with regulatory compliance. We can expect to see platforms adapting to meet disclosure and registration requirements, leading to a more secure and transparent marketplace.”

The classification of NFTs as securities could also bring a much more mainstream group of investors into the industry, who previously might have hesitated to get involved amid regulatory ambiguity.

However, stricter regulations could also present the space with a number of challenges, especially for smaller creators and platforms.

Even so, the new regulation would show how the NFT market is positioned to become more integrated into the existing financial system, with a greater focus on compliance and investor protection.

 

Source: https://www.techopedia.com/are-nfts-securities-or-collectibles

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
j j j

Tokenized Securities: A Financial Revolution or Just Hype?

Tokenized Securities: A Financial Revolution or Just Hype?

Remember that scene in “The Wolf of Wall Street” where Jordan Belfort is barking orders on the trading floor? That’s the traditional world of finance – fast-paced, high-pressure, and dominated by human intuition. But what if I told you robots and video game mechanics are about to crash the party?

Enter tokenized securities. This fancy term essentially means converting traditional investments like stocks, bonds, and even real estate into digital tokens that live on a blockchain, the same technology behind cryptocurrencies. Proponents are calling it a revolutionary step forward, promising to make investing cheaper, easier, and accessible to everyone. Sounds too good to be true, right? Well, I’m here to tell you it’s a mixed bag.

The Tokenized Dream: Lower Costs, Faster Trades, and Global Investors

Imagine a world where you can buy a fraction of a million-dollar mansion in Miami or invest in a hot startup with just a few clicks on your phone. That’s the promise of tokenization. By cutting out middlemen and leveraging the magic of blockchain, the theory goes that tokenized securities will be cheaper to trade, settle faster, and be accessible 24/7 to a global pool of investors. Sounds pretty darn convenient, doesn’t it?

Hold Your Horses: The Not-So-Glittering Side

Before you pack your bags and head to Wall Street to become a crypto-millionaire, let’s get real. Tokenization isn’t a magic bullet. While it might eliminate some fees, it also creates new ones. Building a secure and compliant platform for tokenizing your assets can be a hefty upfront cost. Plus, there’s the ongoing expense of cybersecurity, legal compliance, and maintaining the platform itself. Think of it like building a fancy new house – sure, it’s beautiful, but the upkeep can be a real pain.

Traditional Listing vs. Tokenization: A Cost Showdown

So, how does tokenization stack up against the traditional listing route, like going public on the NYSE? Traditional listings come with their own set of hefty fees, including underwriting, compliance, and listing costs. An IPO (Initial Public Offering) can easily set you back millions, not to mention ongoing compliance headaches.

On the other hand, tokenization could potentially slash some of these costs. Remember that 24/7 access and the potential for a global investor base? That can translate to lower transaction fees and more liquidity, meaning it’s easier to buy and sell your tokens. But here’s the catch: those savings might be eaten up by the costs of robust cybersecurity and navigating a constantly evolving regulatory landscape. It’s like playing a game with ever-changing rules.

Not All Companies Are Created Equal: Who Benefits Most from Tokenization?

Just like shoes, tokenization isn’t a one-size-fits-all solution. Let’s break it down by business type:

  • Startups and Small Businesses: Struggling to get funding through traditional channels? Tokenization might be your knight in shining armor. It provides an alternative way to raise capital by tapping into a global pool of investors, even for those without a Wall Street pedigree. Plus, you can offer fractional ownership, meaning even small-time investors can get a piece of the action. Think of it like crowdfunding on steroids.
  • Real Estate and Private Equity: Ever wanted to own a piece of the Eiffel Tower, but the price tag is a bit out of your league? Tokenization can make that dream a reality. By tokenizing real estate assets, companies can offer fractional ownership, making high-value properties accessible to a wider range of investors. It’s like buying a slice of that fancy cake you’ve been eyeing, instead of having to purchase the whole thing.
  • Niche Markets and Specialized Assets: Got a one-of-a-kind painting or a rare baseball card collecting dust in your attic? Tokenization can unlock its value and attract a broader investor base. It allows for fractional ownership and secondary market trading of unique assets that would otherwise be difficult to sell. Think of it like turning your collectibles into digital trading cards, with a much bigger marketplace.

The Case of Real Estate Tokenization: Not All Properties Are Created Equal

Real estate often gets touted as a prime candidate for tokenization, but hold on a sec. Not every property is a good fit. Imagine trying to sell a fixer-upper in a bad neighborhood through fancy tokens. It wouldn’t work, would it? The same goes for tokenized real estate. Regulatory hurdles, the quality of the underlying asset, and market dynamics all play a crucial role.

  • Quality of the Asset: Tokenizing a run-down building won’t magically transform it into a prime investment. Investors aren’t lining up to buy tokens for a property with low occupancy rates, structural issues, or a terrible location. Just like a house needs a good foundation, tokenized real estate needs strong underlying assets to be successful.
  • Market Dynamics: Remember that global pool of investors we talked about earlier? Well, for tokenized real estate to truly be liquid (meaning easy to buy and sell), there needs to be a critical mass of participants in the market. Imagine a cool new game with no players – not much fun, right? The same goes for tokenized real estate. Without enough buyers and sellers, the tokens can become illiquid, defeating the purpose of easier investment. Plus, convincing everyone that tokenized real estate is a good investment takes time.
  • Regulatory Hurdles: Real estate is a heavily regulated industry, and tokenization adds another layer of complexity. Different jurisdictions have varying rules and compliance requirements. Imagine navigating a maze with ever-changing walls – that’s what companies trying to tokenize real estate face. These legal headaches can be expensive and time-consuming, potentially outweighing the cost benefits of tokenization.

So, Should You Ditch Traditional Listing and Go All-In on Tokenization?

Not so fast! While tokenization offers exciting possibilities, it’s not a silver bullet. The effectiveness and cost-efficiency depend on various factors. For companies in heavily regulated industries or with complex assets, traditional listing might still be the safer bet. Think of it like a tried-and-true recipe – it might not be flashy, but you know it’ll deliver delicious results.

On the other hand, for innovative startups, tech companies, and businesses with unique assets, tokenization presents a compelling alternative. The ability to tap into a global investor pool, offer fractional ownership, and potentially increase liquidity can be significant advantages. But remember, these benefits come with the responsibility of building and maintaining a secure and compliant platform.

The Bottom Line: Tokenization – A Promising Future, But Do Your Homework

Tokenization has the potential to be a game-changer, but it’s not a one-size-fits-all solution. Companies considering tokenization need to carefully assess the feasibility and potential benefits for their specific situation. Just like you wouldn’t jump into a swimming pool without knowing how deep it is, don’t dive headfirst into tokenization without doing your due diligence.

The future of finance is likely to see a blend of traditional and tokenized approaches. As regulations evolve and technology advances, tokenization’s potential to complement or even disrupt traditional financial mechanisms will become clearer. This will allow companies to make more informed and strategic decisions about how to raise capital and attract investors. So, buckle up, because the future of finance is about to get a whole lot more interesting!

 

Source: https://wishu.io/tokenized-securities-a-financial-revolution-or-just-hype/

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
j j j

Tokenizing Securities: Weighing the Costs and Effectiveness Against Traditional Listing

Tokenizing Securities: Weighing the Costs and Effectiveness Against Traditional Listing

The concept of tokenizing securities has been touted as a revolutionary step forward in the realm of finance, promising to democratize access to investment opportunities and streamline the processes involved in trading assets. However, despite the buzz and the potential advantages, I remain skeptical about whether tokenizing securities is indeed a cheaper and more effective alternative to traditional listing. I will share some of my thoughts and the intricacies of tokenizing securities, examining its suitability for different types of companies and businesses, and discussing why not all real estate assets are ideal candidates for tokenization.

The Promise and Reality of Tokenizing Securities

Tokenizing securities involves converting traditional financial assets like stocks, bonds, and real estate into digital tokens on a blockchain. Proponents argue that this method offers several benefits, including reduced costs, increased liquidity, and enhanced transparency. Theoretically, tokenization eliminates intermediaries, reduces transaction fees, and accelerates settlement times, making the process more efficient than traditional listing.

However, the reality is more complex. While tokenization has the potential to lower some costs, it introduces new expenses and challenges that are often overlooked. For instance, the initial costs of developing a secure and compliant tokenization platform can be substantial. Legal and regulatory compliance, cybersecurity measures, and the creation of smart contracts all require significant investment. Furthermore, maintaining a tokenized system demands ongoing costs for security updates, regulatory adjustments, and platform maintenance.

Comparing Costs: Tokenization vs. Traditional Listing

Traditional securities listing, particularly on major exchanges like the New York Stock Exchange (NYSE) or NASDAQ, involves significant costs related to underwriting, compliance, and listing fees. Based on what I know, the average cost of an initial public offering (IPO) in the US can range between $4.2 million to $7.6 million, excluding ongoing compliance costs.

In contrast, tokenization can potentially reduce some of these expenses. For instance, tokenized securities can be traded 24/7 on blockchain platforms, reducing the need for intermediary fees and offering greater accessibility. A report by Deloitte suggests that tokenization could significantly reduce operating costs for financial institutions. In my opinion, these savings can be offset by the need for robust cybersecurity measures and compliance with a still-evolving regulatory landscape.

Moreover, the liquidity promised by tokenization is not guaranteed. While blockchain technology enables fractional ownership and potentially broadens the investor base, the actual liquidity depends on market adoption and the presence of active buyers and sellers. Without sufficient market activity, tokenized assets can suffer from illiquidity, diminishing one of their primary advantages.

Suitability of Companies for Tokenization

Not all companies are equally suited for tokenization. The nature of the business, the regulatory environment, and the specific characteristics of the assets being tokenized play crucial roles in determining suitability.

  1. Startups and Small Enterprises:
    Startups and small enterprises, particularly those in the technology sector, may benefit from tokenization as it provides an alternative funding mechanism that is potentially more accessible than traditional venture capital or IPOs. Tokenization allows these companies to tap into a global pool of investors, offering fractional ownership and increasing the potential for raising capital.
  2. Real Estate and Private Equity:
    Tokenization is particularly appealing for real estate and private equity firms. By tokenizing real estate assets, companies can offer fractional ownership, making high-value properties accessible to a wider range of investors. This democratization of investment can increase liquidity and provide more flexible exit strategies for investors. Private equity firms can similarly benefit by tokenizing their fund shares, enhancing liquidity and providing greater transparency.
  3. Niche Markets and Specialized Assets:
    Companies dealing with niche markets or specialized assets, such as art, collectibles, or intellectual property, can leverage tokenization to unlock value and attract a broader investor base. Tokenization can facilitate the trading of unique assets that would otherwise be illiquid, providing a platform for fractional ownership and secondary market trading.

The Challenges of Real Estate Tokenization as an Example

While real estate is often cited as a prime candidate for tokenization due to the high value and illiquidity of properties, not all real estate assets are suitable for this process. The primary barriers include regulatory complexities, the quality of the assets, and market dynamics.

  1. Regulatory Complexities:
    Real estate is heavily regulated, with varying rules and compliance requirements across different jurisdictions. Tokenizing real estate requires navigating these regulatory landscapes to ensure compliance with securities laws, property laws, and anti-money laundering (AML) regulations. This legal complexity can increase the cost and time required to tokenize real estate assets, potentially negating some of the cost savings associated with tokenization.
  2. Quality of Assets:
    Tokenizing low-quality or distressed real estate does not mitigate the inherent risks associated with such assets. The process of tokenization does not change the underlying value or condition of the property. Investors are unlikely to be attracted to tokenized assets if the real estate in question has poor fundamentals, such as low occupancy rates, structural issues, or unfavorable locations.
  3. Market Dynamics:
    The success of real estate tokenization depends on market adoption and liquidity. Without a critical mass of participants in the market, tokenized real estate assets can suffer from illiquidity, limiting the ability of investors to buy and sell tokens easily. Additionally, the perception of tokenized real estate as a viable investment option is still evolving, and widespread acceptance is necessary to achieve the liquidity benefits promised by tokenization.

Personal Perspective: Tokenization vs. Traditional Listing

From a personal perspective, while tokenization offers exciting possibilities, it is not a one-size-fits-all solution. The effectiveness and cost-efficiency of tokenization depend on various factors, including the nature of the business, the regulatory environment, and market dynamics.

For companies in highly regulated industries or those with complex asset structures, traditional listing may still be the more practical and reliable option. The established processes, regulatory clarity, and investor confidence associated with traditional exchanges provide a level of stability and predictability that is crucial for certain businesses.

On the other hand, for innovative startups, tech companies, and businesses dealing with unique or fractionalizable assets, tokenization presents a compelling alternative. The ability to access a global pool of investors, offer fractional ownership, and enhance liquidity can provide significant advantages. I want to emphasize that these benefits must be weighed against the costs and challenges of implementing and maintaining a secure and compliant tokenization platform.

Conclusion: A Balanced View on Tokenization

In conclusion, while tokenizing securities has the potential to be a cheaper and more effective alternative to traditional listing in certain scenarios, it is not a universal solution. The success of tokenization hinges on the specific characteristics of the company, the nature of the assets, and the regulatory environment.

Companies considering tokenization must conduct thorough due diligence to assess the feasibility and potential benefits. They must also be prepared to invest in the necessary infrastructure, legal compliance, and cybersecurity measures to ensure the success of their tokenization efforts.

Ultimately, the decision to tokenize or pursue traditional listing should be based on a careful evaluation of the unique needs and circumstances of the business. Both approaches have their merits, and the best choice will vary depending on the specific context and goals of the company. As the regulatory landscape evolves and technology advances, the potential for tokenization to complement or even enhance traditional financial mechanisms will become clearer, paving the way for more informed and strategic decision-making.

 

 

 

Source: https://www.securities.io/tokenizing-securities-weighing-the-costs-and-effectiveness-against-traditional-listing/

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
j j j