The world of NFTs promised a revolution. An opportunity for artists to finally cut out the gatekeepers, go straight to collectors and make a living from their work. So the question is, are we delivering on that promise? Or is it just another golden cage that helps the already privileged few and takes advantage of creators?

OpenSea, the behemoth of NFT marketplaces, is now pleading with the SEC to declare it's not an exchange or broker. They claim they’re simply a neutral intermediary, a digital town square where artists and collectors can connect. What I view is something far more insidious, and just as likely more deadly.

Who Benefits From Regulatory Ambiguity?

Think about it: who really benefits from the lack of clear regulations in the NFT space? Is it the fledgling creator who can’t afford rent, working in this new Wild West of rug pulls and con-artists? Or should it be the venture capitalists, the crypto whales and the platforms themselves profiting to the tune of billions.

Yet the SEC’s recent lawsuit against OpenSea has repercussions far beyond the digital art community. It gets at the heart of the matter as it relates to economic justice in the 21st Century.

And the marketplace OpenSea just wants to assure users that each NFT is totally unique. Consequently, they do not facilitate trade in the same asset type as a traditional exchange. Second, they argue on-boarding new users by having them hold their own NFTs off-market in personal wallets, stressing that transactions occur right on the blockchain. What of the lopsided political leverage baked into this system? What about the artists who are forced to rely on marketplaces such as OpenSea for discovery and visibility? They are stuck bound by the platform’s TOU.

It takes me back to the old days of Amazon. Like them, they argued that they were a neutral platform just matching buyers and sellers. However, year after year, they used their control to pressure suppliers, uplift their private label products over others, and accumulated monopoly power like never before. Are we doomed to repeat the same mistake with NFTs? This time, will it be visual artists filling in the void that’s left by displaced libraries and mangled home wares? Consider the following:

  • Platform Fees: Artists pay fees to list and sell their work, enriching the platform regardless of the artist's success.
  • Market Manipulation: The lack of regulation makes the NFT market vulnerable to wash trading, pump-and-dump schemes, and other forms of manipulation that harm genuine artists and collectors.
  • Copyright Infringement: The ease with which NFTs can be created and sold makes it difficult for artists to protect their intellectual property.

Innovation or Exploitation?

OpenSea argues that existing regulations are a poor fit for the decentralized, global nature of NFTs and would hamper innovation. They're not entirely wrong. Overzealous regulation can crush nascent industries. Yet the fear of stifling innovation cannot be the excuse for letting exploitation go unchecked.

Just take a look at the history of the internet, itself. Those early days were marked by a regulatory void that allowed for an astounding level of innovation. It also resulted in the creation of monopolies, the spreading of misinformation, and the decline of privacy. We need to learn from those lessons.

OpenSea relies heavily on the newly released SEC v. Coinbase decision, disclaiming liability on the basis that its own role is just as narrow, only providing a platform. The context matters. Where Coinbase was mostly just treading water with the well-established cryptocurrencies, OpenSea swims in a much more turbulent and speculative market. We are much more concerned about the harm that will come to vulnerable creators.

Imagine walking into a high-stakes poker game where some players are billionaires and others are scraping together their last few dollars. Why would you advocate that nobody be able to play as they are expensive to maintain, except those who can afford it, go ahead. Or would you be in favor of some sort of protections to ensure that the disadvantaged aren’t preyed upon.

The Social Justice Angle

This isn't just about NFTs. It's about social justice. It’s about ensuring that the benefits of this technological innovation accrue equitably, not concentrated in the hands of a privileged few. We’re making the case for what’s possible with the introduction of creators and the evolution of the creator economy. We should be creating pathways that empower artists, not enacting policies that set them up to be preyed upon.

With this proposed rule, the SEC should keep in mind that their decisions have practical effects in the real world, on real people. Their action determines the future of the market as a whole.

A balanced approach. One that recognizes the distinct nature of NFTs, but still protects our most vulnerable artists, while maintaining market integrity. This could involve:

  • Clearer definitions: The SEC needs to provide clear guidance on what constitutes a security in the NFT space.
  • Targeted regulations: Regulations should be tailored to address the specific risks associated with NFTs, such as market manipulation and intellectual property infringement.
  • Investor education: Investors need to be educated about the risks of investing in NFTs.

OpenSea's call for clarity is understandable. It’s time for the SEC to prioritize the artists that it pretends to serve. Putting the platform’s business interests ahead of creators isn’t either. The future of the NFT market — indeed the future of the entire creator economy — may depend on it. It’s high time for SEC to act now. It’s important that we don’t allow bad practices to ruin the promise of NFTs and make them beneficial to everyone, particularly the new little guy.