non fungible tokens

Bored Ape creators and other NFT projects investigated by SEC probe

A source familiar with the matter said the SEC is looking into whether certain NFTs from Yuga Labs could be “more akin to stocks.”

Sources say that the United States Securities and Exchange Commission (SEC) probe into Yuga Labs is actually part of a wider investigation into the nonfungible token (NFT) market, which already came to light in March.

On Oct. 11, a report from Bloomberg, citing a source “familiar with the matter,” said the SEC is investigating Yuga Labs over whether certain NFTs are “more akin to stocks” and whether the sales of certain digital assets violate federal laws.

However, Cointelegraph understands that the investigation is part of the ongoing SEC probe into the wider NFT market, which is looking at whether certain NFTs and fractional NFTs could fall under federal securities laws.

In March, anonymous sources told Bloomberg that the SEC was investigating NFT creators and marketplaces regarding whether “certain nonfungible tokens […] are being utilized to raise money like traditional securities.”

A spokesperson for the SEC told Cointelegraph that it “does not comment on the existence or nonexistence of a possible investigation.”

Meanwhile, Yuga Labs appears to be looking at the bright side of things. In a statement to Cointelegraph, a spokesperson said, “It’s well-known that policymakers and regulators have sought to learn more about the novel world of Web3,” adding:

“We hope to partner with the rest of the industry and regulators to define and shape the burgeoning ecosystem. As a leader in the space, Yuga is committed to fully cooperating with any inquiries along the way.”

Bloomberg also reported the regulator is examining the distribution of ApeCoin (APE), which was given to the holders of Bored Ape Yacht Club (BAYC) and other NFTs.

According to the ApeCoin website, Yuga Labs is a community member in the ApeCoin DAO and will adopt APE as the primary token across its new projects.

Update (2:45 am UTC): Comments from the U.S. Securities and Exchange Commission were added to this article.

Get ready for the feds to start indicting NFT traders

Securities and Exchange Commission regulators should move to protect investors from traders who distort the NFT market with manipulative trades — and they probably will soon.

Studies show that most people who attempt to wash trade nonfungible tokens (NFTs) are unprofitable. But that doesn’t stop them from trying, which makes it a glaring regulatory and enforcement issue for the industry.

In wash trading, manipulators buy and sell an asset between themselves to create the appearance that the asset is in higher demand and, therefore, worth more than it would be otherwise. With NFTs, wash trading is fairly straightforward: Imagine an investor holds $1 million in Ether (ETH). The investor mints an NFT and proceeds to sell it to themself for all the ETH they own. The transaction is then on the blockchain for $1 million in ETH. The price of the NFT has been set through a wash trade to the benefit of the individual who minted the NFT.

It might be tempting to think that this is a “victimless” crime since it’s unlikely any money actually changed hands if it was a wash trade, but that’s false. By rewarding allegedly fake high-volume traders with real money, NFT investors stand to lose millions to scammers, and legitimate traders may be fooled into overpaying for their investments.

These fraudulent transactions also drive Gresham’s Law (bad money drives out good money) in crypto, driving out legitimate investors and traders as the exchange’s reputation is destroyed.

When it comes to NFTs, however, the rules are not so clear. Such tokens may not be securities, so the same laws and regulations governing securities trading may not apply to them.

The background on wash trading laws

Wash trading has been barred in the United States since the passing of the Commodity Exchange Act in 1936 in response to its popularity as a manipulation tool. Since then, however, the Securities and Exchange Commission and Commodities Futures Trading Commission have carefully scrutinized markets and brought numerous enforcement actions for “wash traders,” thereby adding a degree of safety to the securities and futures markets.

According to the SEC, “Wash trading is an abusive practice that misleads the market about the genuine supply and demand for a stock.” Meanwhile, the U.S. Internal Revenue Service prohibits taxpayers from deducting losses that result from wash sales, so it is entirely possible that wash trading NFTs could result in an enforcement action. It hinges on how NFTs are classified by regulators.

Traders should examine sales history closely before buying NFTs

Accepting the idea that cryptocurrencies tend to be volatile, along with the slow pace of enforcement actions against new assets like NFTs, it seems natural that many sellers will try to inflate their asset’s value to attract new buyers and earn a profit. NFT buyers should think twice and do their due diligence before making a significant investment into an NFT.

*NFT sales to self-financed addresses in 2021. Source: Chainalysis*

It may seem like they are getting a valuable asset because of the number or size of transactions in which the investment has been involved, but the truth may be that the asset was only bought and sold between two wallets owned by the same person making the asset appear more in demand that it actually is.

The SEC is probably already preparing to bag its first NFT traders

Even with laws and enforcement actions, we still see wash trading in the regular securities and commodities market, so you can be certain it exists in newer and evolving markets. Hopefully, the SEC is already working on enforcement in the NFT market. Investigations are generally nonpublic, so some traders may already be in regulators’ sights. It’s a safe bet that in the long run, federal regulators will catch up with this new asset class, and wash trading among NFTs will be reined in as well.

The SEC should move to protect investors, first by ruling that NFTs will be treated like securities, and then monitoring exchanges for signs of manipulation as they do for other asset classes.

Brendan Cochrane, Esq., CAMS is the blockchain and cryptocurrency partner at YK Law LLP. He is also the principal and founder of CryptoCompli, a startup focused on the compliance needs of cryptocurrency businesses.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

19 celebrities called out by consumer watchdog group for shilling NFTs

Consumer watchdog group Truth in Advertising says celebrities promoting non-fungible tokens (NFTs) on their social media channels is an area “rife with deception.”

Consumer watchdog group Truth in Advertising (TINA.org) has called out 19 celebrities for allegedly promoting non-fungible tokens (NFTs) without disclosing their connection to the projects.

The not-for-profit consumer advocacy organization said on their website they investigated “celebrities who promote non-fungible tokens (NFTs) on their social media channels”, finding that “it is an area rife with deception.”

Among the star-studded list are sports stars Floyd Mayweather and Tom Brady, music icons Eminem and Snoop Dog, and several actresses, including Gwyneth Paltrow, all of whom have been sent letters urging them to immediately disclose any material connections they have to NFT companies or brands they have promoted, stating:

“The promoter often fails to disclose material connection to the endorsed NFT company.”

NFTs are digital certificates stored on the blockchain proving ownership of a digital or physical asset, often an artwork, with many high-profile projects often attracting celebrity endorsement and promotion.

While no real legal penalty has been attached, TINA.org noted that it sent letters to the celebrities involved on Aug. 8 outlining their grievances and advising them of the potentially harmful effect shilling NFTs can have on the public.

One of the group’s primary concerns outlined in the letters is that the possible financial risks associated with investing in such speculative digital assets are not being disclosed.

TINA.org previously sent letters to Justin Bieber and Reese Witherspoon’s legal teams on June 10 for promoting NFTs on their social media accounts without disclosing their connection to the projects.

Bieber’s legal team responded on July 1, denying any wrongdoing but stating the posts would be updated.

While Witherspoon’s legal team contacted TINA.org on July 20, claiming the actress is not receiving any material benefits from promoting NFTs.

Shilling could violate FTC guidelines

In a blog post on their website, TINA.org wrote that the previously mentioned celebrities could be violating the Federal Trade Commission (FTC) rules regarding the Use of Endorsements and Testimonials in Advertising and the requirements for influencers.

The advocacy group links to the FTC website which outlines that influencers must disclose any material connections to brands they are endorsing, and make the disclosures clear, unambiguous, conspicuous, and within the endorsement.

So far, there has not been a publicized case of celebrities facing legal penalties for shilling NFTs or crypto.

Though there are several ongoing class action suits, most famously against Elon Musk for his endorsement of Dogecoin, and Mark Cuban for promoting Voyager crypto products.

A handful of other celebrities like Matt Damon caused a significant stir when he appeared in an ad promoting crypto products, which saw the actor relentlessly mocked and ridiculed for his involvement.

Don’t listen to celebs: SEC

In 2017, the U.S. Securities and Exchange Commission (SEC) warned investors about celebrity-backed initial coin offerings in a post on their website.

“Investors should note that celebrity endorsements may appear unbiased, but instead may be part of a paid promotion.”

“Celebrities who endorse an investment often do not have sufficient expertise to ensure that the investment is appropriate and in compliance with federal securities laws.”

According to the SEC, celebrities and influencers using social media to encourage their followers to purchase stocks or other investments could be unlawful if they do not disclose the nature, source, and amount of any compensation paid, directly or indirectly.

Justin Bieber, Paris Hilton among 19 celebs called out for shilling NFTs

Consumer watchdog group Truth in Advertising says celebrities promoting nonfungible tokens on their social media channels is an area “rife with deception.”

Consumer watchdog group Truth in Advertising (TINA.org) has called out 19 celebrities for allegedly promoting nonfungible tokens (NFTs) without disclosing their connection to the projects.

The not-for-profit consumer advocacy organization said on their website they investigated “celebrities who promote non-fungible tokens (NFTs) on their social media channels,” finding that “it is an area rife with deception.”

Among the star-studded list are sports stars Floyd Mayweather and Tom Brady, music icons Eminem and Snoop Dog and several actresses including Gwyneth Paltrow all of whom have been sent letters urging them to immediately disclose any material connections they have to NFT companies or brands they have promoted, stating:

“The promoter often fails to disclose material connection to the endorsed NFT company.”

One of the group’s primary concerns outlined in the letters is that the possible financial risks associated with investing in such speculative digital assets are not being disclosed.

Bieber’s legal team responded on July 1, denying any wrongdoing but stating the posts would be updated.

While Witherspoon’s legal team contacted TINA.org on July 20, claiming the actress is not receiving any material benefits from promoting NFTs.

Shilling could violate FTC guidelines

So far, there has not been a publicized case of celebrities facing legal penalties for shilling NFTs or crypto.

Though there are several ongoing class action suits, most famously against Elon Musk for his endorsement of Dogecoin, and Mark Cuban for promoting Voyager crypto products.

Don’t listen to celebs: SEC

In 2017, the United States Securities and Exchange Commission (SEC) warned investors about celebrity-backed initial coin offerings in a post on their website.

“Investors should note that celebrity endorsements may appear unbiased, but instead may be part of a paid promotion.”

“Celebrities who endorse an investment often do not have sufficient expertise to ensure that the investment is appropriate and in compliance with federal securities laws.”

According to the SEC, celebrities and influencers using social media to encourage their followers to purchase stocks or other investments could be unlawful if they do not disclose the nature, source and amount of any compensation paid, directly or indirectly.

NFT market worth $231B by 2030? Report projects big growth for sector

Continued adoption of nonfungible tokens across a variety of industries from video gaming, music, art and digital collections could see the sector valued at $231 billion by 2030.

A market report published by Verified Market Research (VMR) provides a lofty prediction for the future of the nonfungible token (NFT) market, projecting its value to swell to $231 billion by 2030.

The global research and consulting firm valued the global NFT market at $11.3 billion in 2021 as part of 202-page deep dive into the burgeoning space. VMR predicted that the sector will grow at a compound annual growth rate of 33.7% over the next eight years. A key driver of demand for NFTs is their proliferation across multiple industries and walks of life, including music, films and sports. The report highlights some key areas of interest and use cases that have helped drive NFT sales.

The gaming sector has been a key driver of adoption, with the report highlighting Enjin as one of the first major gaming firms to combine blockchain technology with its infrastructure and launch its own token (ENJ). The ecosystem transformed in-game assets into NFTs to allow gamers to monetize in-game assets.

Play-to-earn gaming also tapped into NFT markets, with Axie Infinity (AXS) offering users in the Philippines an alternative revenue source during the COVID-19 pandemic, which has been the subject of much intrigue and inevitable regulatory attention.

The world of sport continues to dabble in NFT offerings, with the VMR report highlighting Dapper Labs’ partnership with UFC to launch collectibles. UFC Strike is a similar concept to the widely popular NBA Top Shots, with NFTs of highlights set to digitize and monetize UFC history.

In the business world, NFT marketplace OpenSea integrated Adobe service to introduce a number of features to its offering as conventional IT solutions converge with blockchain-based platforms.

VMR’s report shared a similar outlook to a report on NFTs released by growth consulting firm SkyQuest Technology in May 2022. The firm projected an analogous growth rate of 34% for the sector between 2022 and 2028 while valuing the market at $15.7 billion in 2021.

US trademark and copyright offices to study IP impact of NFTs

The U.S. Patent and Trademark, and Copyright offices will explore the impact of NFTs on intellectual property rights as lawsuits begin to stack up.

As nonfungible tokens (NFTs) continue to garner interest, the United States Patent and Trademark Office and U.S. Copyright Office are set to launch a study into their impact on intellectual property rights.

The examination of NFTs comes after a request from Senators Patrick Leahy and Thom Tillis in June for a deep dive into the potential ramifications the burgeoning asset class could have in regard to intellectual property rights.

The two departments have agreed to conduct the study in correspondence with Leahy and Tillis, conducting preliminary discussions to plot a plan of action tha will include consultations with various stakeholders well-versed in the NFT landscape.

A broad range of topics, which were initially raised by the Vermont and North Carolina senators, will be considered. This includes potential intellectual property challenges with future applications of NFTs, the rights associated with transferring ownership of an NFT, licensing rights and infringements and the potential IP rights given to NFT creators.

Cointelegraph has reached out to both departments to ascertain how long the study will take to be completed, the scope of its coverage and which industry stakeholders will be consulted. They did not respond immediately.

The NFT space has already caused plenty of strife for companies that have seen their products or intellectual property infringed upon in recent months. A number of high-profile brands have sought legal recourse against NFT marketplaces and platforms that may have infringed on associated IP rights.

Global sportswear brand Nike made headlines in February as it instituted court proceedings against online reseller StockX for infringing on its trademark through the sale of unlicensed sneaker NFTs. The company had sold Nike NFT sneakers that were set to include redeemable, real-world versions of the shoes.

American rapper Lil Yachty is fighting his own legal battle in California, after filing a trademark infringement lawsuit against two music companies. The 24-year-old claimed the firms used his likeness and name to raise more than $6.5 million in venture capital to bankroll the launch of a collection of NFTs.

Production company Miramax also went the legal route in November 2021 after critically-acclaimed film director Quentin Tarantino looked to launch NFTs derived from his blockbuster 1994 film Pulp Fiction. The studio claimed Tarantino infringed on copyrights as he set out to launch an NFT collection featuring seven uncut screenplay scenes, exclusive commentary and original handwritten scripts.

NFT flipping not so profitable for more than half of buyers: Survey

Though a majority are down on their NFT purchases, there are signs which point to a healthy and robust market in the long term.

With the surging popularity of nonfungible tokens (NFTs), many have taken to “flipping” these assets as a trading strategy. Around 64% of people in a recent survey said their top reason for buying an NFT was “to make money.”

Blockchain monitoring software company DEXterlab polled more than 1,300 people on Twitter about their NFT buying habits from late May to early June. Despite a majority looking to gain from NFT trading, less than 42% have made a profit so far, according to the results.

Why do you buy NFTs?

— DEXterLab (@Dexterlabdata) May 27, 2022

The second most cited reason for buying an NFT saw around 15% respond that it was to be part of a community and “to flex.”

“People are highly social creatures, so the desire to be a part of a community and show off isn’t really surprising,” DEXterlab wrote.

The team highlighted the success of the Bored Ape Yacht Club (BAYC), which has celebrities among its ranks along with exclusive perks like access to holder-only events or new popular NFT drops.

Though some NFT collections, such as those of the BAYC, can often see floor prices in the tens or hundreds of thousands, almost half of respondents said they were only comfortable paying a modest price of between $50 to $500 for an NFT.

Surprisingly, the second most popular answer had a quarter of respondents saying they are ready to spend in the upper limits of the poll, more than $2,000 per NFT.

Over the past 30 days, some of the largest “blue chip” NFT collections such as CryptoPunks, Mutant Ape Yacht Club (MAYC), BAYC and Moonbirds have seen their floor prices or market caps halve. In spite of this, these collections have continued to top the charts for the top NFT sales over the same period.

How does your NFT journey going?

— DEXterLab (@Dexterlabdata) June 2, 2022

Though NFT prices have fallen across the board, there are still examples of NFTs that have defied the prevailing bear market.

Recently, a free-to-mint collection with no utility or roadmap called Goblintown topped the charts and has since remained in third place over 30 days seeing nearly $70 million in volume.

Currently, the collection has a floor price of 3 Ether (ETH), or around $4,000 at the time of writing, and the most expensive one sold netted 77.7 ETH on June 1, worth nearly $151,000 at the time.

Other signs point to a healthy market for those still holding out to profit from their NFT buys. Sales volumes for NFTs came in at $3.7 billion last month despite the market conditions, according to a recent DappRadar report.

The report also revealed that Solana NFTs posted their best trading month in the network’s history, generating $335 million in volume across all marketplaces — a 13% growth from April.

NFTs continue to create a robust market for themselves and widespread mainstream adoption looms. According to a CoinGecko report, the NFT market is projected to transact more than $800 billion over the next two years, though hodlers will need to wait a little longer to realize their profits.