The US Securities and Exchange Commission SEC has continued to ramp up its scrutiny of non-fungible tokens NFTs as evidenced by the issuance of a cease-and-desist letter to Flyfish Club LLC. The New York-based entity raised about $ 14. 8 million using approximately 1,600 NFTs sold between August 2021 and May 2022. 

These NFTs were sold as memberships offering access to a glamorous dining club, promising token holders substantial utility value-adds. The SEC’s enforcement position categorizes these NFTs as securities due to the possibility of reselling at higher prices and the possibility of holders earning rental income based on leasing of memberships. 

The SEC stated that Flyfish Club’s operations were unlawful because they flouted Sections 5(a) and 5(c) of the Securities Act of 1933, which require securities to be registered. Flyfish has also been ordered to refrain from further violations of the Act, pay the penalty of $750,000, and surrender any additional NFTs in their possession.

Utility Over Securities in NFTs

Even though the SEC has been assertive in its legal actions, there is a significant internal disagreement over how to address the issue of NFTs as securities. Hester Peirce and Mark T. Uyeda voted against, stating that Flyfish Club’s NFT should be categorised as utility tokens, not securities. 

They argue that these tokens are fundamentally used to offer consumers an opportunity to access real services, for example, a dining experience, and such tokens should not be regulated under securities laws simply because they hold the potential for future monetary gain if sold.

Peirce and Uyeda also raised issues concerning the general use of the Howey Test, a conventional measure that seeks to determine what constitutes a security. Some of them support the adoption of a liberal regulatory style that allows the liberal use of NFTs while also promoting people’s creativity and business-mindedness. 

The commissioners also highlighted the importance of the SEC coming up with better policies that could encourage the creation and innovation of new digital asset classes as they pointed out that some of their rules were acting as restraints.

Legislative Efforts to Clarify NFT Regulations

The actions of the SEC against Flyfish Club are part of a ramp-up campaign against digital assets where players such as OpenSea, Coinbase, as well as Kraken have experienced a heightened regulatory crackdown. This vigorous regulatory approach has pushed for a debate across different industries where various stakeholders have advocated for better and more appropriate governance under SEC chair Gary Gensler.

Amid these regulations, Congressman William Timmons has proposed the New Frontiers in Technology Act (NFT Act) to provide more legal certainty for NFTs. This regulatory attempt aims to prevent NFTs, especially those not promoted as investment products, from being categorized as securities.