SEC Commissioner Hester Peirce Clarifies NFT Royalties and Securities Status

In a recent address at the SEC Speaks event, Hester Peirce, a commissioner of the U.S. Securities and Exchange Commission (SEC), clarified that many non-fungible tokens (NFTs), including those that pay creator royalties, do not automatically qualify as securities. This statement marks a significant shift in the regulatory landscape for digital assets, particularly NFTs, which have been a topic of intense debate regarding their classification under federal securities laws.

Key Takeaways

• NFTs that provide royalties to creators do not automatically classify as securities.

• Peirce compares NFT royalties to streaming platforms that pay artists.

• The SEC's stance on NFTs may differ from previous leadership under Gary Gensler.

• Ongoing discussions about the regulatory framework for digital assets are essential for industry clarity.

Understanding NFT Royalties

Peirce emphasized that NFTs are programmable assets that can distribute proceeds to artists, similar to how streaming services compensate musicians. She stated, "Just as streaming platforms pay royalties to the creator of a song or video each time a user plays it, an NFT can enable artists to benefit from the appreciation in the value of their work after its initial sale."

This comparison highlights the potential for NFTs to create new revenue streams for artists, allowing them to earn from secondary sales without the tokens being classified as securities. Peirce noted that the feature of paying royalties does not grant NFT owners any rights or interests in a business enterprise, which is a key characteristic of securities.

The SEC's Evolving Perspective

Peirce's remarks indicate a departure from the previous SEC leadership's approach, particularly under Gary Gensler, who had a more stringent view on the classification of digital assets. Peirce, often referred to as "Crypto Mom," advocates for a clearer regulatory framework that distinguishes between different types of digital assets.

She pointed out that many NFTs do not provide holders with economic rights typical of securities, such as ownership stakes or profit-sharing rights. This distinction is crucial as it shapes how regulators will approach the burgeoning NFT market.

Legal Implications and Industry Reactions

Legal experts have weighed in on Peirce's comments, suggesting that her views reflect a sound legal interpretation of the current regulatory landscape. Oscar Franklin Tan, chief legal officer of Enjin, noted that the SEC has never prohibited contracts where artists receive royalties from secondary sales of their work. He emphasized that the SEC's focus is on regulating investments, not compensating creators for their work.

Tan also cautioned against misinterpretations of Peirce's statements, urging regulators and market participants to apply traditional legal reasoning to blockchain technologies. He suggested that if a similar arrangement were made using traditional methods, it would likely not raise regulatory concerns.

Future of NFT Regulation

While Peirce's comments provide some clarity, the SEC has yet to issue formal guidance on the regulatory status of NFTs. This leaves a degree of uncertainty for creators and marketplaces operating in the NFT space. The SEC's Crypto Task Force, under Peirce's leadership, aims to engage with the digital asset sector to develop clearer guidelines, moving away from an enforcement-driven approach.

As the NFT market continues to grow, the need for a well-defined regulatory framework becomes increasingly important. Stakeholders in the industry are encouraged to participate in discussions and provide feedback to help shape the future of NFT regulation.

In conclusion, Hester Peirce's recent statements signify a potential shift in how NFTs are viewed under U.S. securities laws, offering a more favorable outlook for creators and the NFT market as a whole. The ongoing dialogue between regulators and the industry will be crucial in establishing a balanced approach that fosters innovation while ensuring consumer protection.

Sources

• Many NFTs that pay creators over time are not securities: SEC’s Hester Peirce, Cointelegraph.

• NFT royalties don’t turn tokens into securities, CryptoTvplus.

• Future-Proofing Growth of NFT Asset Trading Solutions Market,, openPR.com.

• Hester Peirce Says Many NFTs Don’t Meet Securities Criteria – The Shib Daily, The Shib Daily.

• SEC’s Peirce says NFT royalties do not make tokens securities — TradingView News, TradingView.