Recently, OpenSea, the largest NFT marketplace, made an unprecedented move. Specifically, they petitioned the U.S. Securities and Exchange Commission (SEC) to exempt NFT platforms from federal securities regulations. OpenSea’s legal counsel, Adele Faure and Laura Brookover, called out SEC Commissioner Hester Peirce as well as the SEC Crypto Task Force. In addition, they called for more definitive regulations to remove market ambiguities and promote innovation and development within the NFT market. The appeal comes at a time of increasing unease within the wider crypto industry about the SEC’s treatment of digital assets.
OpenSea is urging the SEC to clarify that NFT marketplaces like theirs do not fall under the definition of an "exchange" as outlined in U.S. securities law. For one, they claim NFT trading platforms don’t facilitate trades. Instead, they just play an agency role, matching buyers and sellers of the same financial instrument.
OpenSea's Argument for Exemption
OpenSea argues that NFT marketplaces do not function as a typical securities exchange. For the avoidance of doubt, the company does not give investment advice. They similarly do not custodian user assets or facilitate financial transactions on behalf of users. OpenSea’s letter to the SEC Crypto Task Force. In it, they laid out in some detail why NFT marketplaces like OpenSea are not exchanges or brokers as defined by federal securities law.
“The Commission’s past enforcement actions have created legal uncertainty,” - OpenSea's letter to SEC Commissioner Hester Peirce
According to the letter, … NFTs are unlike any other digital asset. It advocates for customized regulatory structures that recognize the unique nature of these digital assets. OpenSea's general counsel argued that platforms facilitating NFT trades do not execute transactions, act as intermediaries, or bring together multiple buyers and sellers for the same financial instrument.
This appeal marks the latest example of the SEC’s continued efforts to mislead the public regarding digital assets. In February 2020, the SEC had already declared that some stablecoins to be “non-securities,” freeing them from transaction reporting obligations. In a similar vein, the SEC’s Division of Corporation Finance recently announced that meme coins are not securities, but digital collectibles.
Regulatory Landscape and Future Outlook
The request from OpenSea comes amidst a broader regulatory landscape potentially poised to shift and evolve. Additionally, Donald Trump recently signaled a more crypto-friendly administration as he gears up to assume an unlikely second term as U.S. president. At the same time, Gary Gensler is likely to step down as SEC Chair, resulting in a dramatic shift towards a friendly regulatory environment. The SEC under a Trump administration would probably move in the opposite direction from this Gensler-led SEC’s regulatory onslaught. This change might be able to occur organically over time.
Under Gary Gensler’s leadership, the SEC had cracked down, filing over 100 enforcement actions against crypto companies. This muscular approach triggered fears of regulatory overreach and its ability to cure innovation in its shell. For one, OpenSea has petitioned the Commission to exempt NFT marketplaces from the broker regulations they’re proposing.
Call for Clear Guidance
OpenSea is advocating for the SEC to provide clear and specific guidance on the treatment of NFTs under securities laws. This guidance, they assert, will encourage innovation and development in emerging markets related to NFTs.
“We ask the SEC to publish informal guidance to resolve confusion around NFTs,” - OpenSea's general counsel Adele Faure and deputy general counsel Laura Brookover
OpenSea believes that by clarifying the regulatory landscape, the SEC can help to unlock the full potential of NFTs and promote responsible innovation in the digital asset space.
