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HFSC Digital Dollar Hearing; SEC Cracks Down on NFTs

HFSC Digital Dollar Hearing


What happened?

Last Thursday, the House Financial Services Committee - Subcommittee on Digital Assets, Financial Technology and Inclusion conducted a hearing, led by Chair French Hill (R-AR), titled, “Digital Dollar Dilemma: The Implications of a Central Bank Digital Currency and Private Sector Alternatives.”


The hearing focused on the potential merits and risks of issuing a central bank digital currency (CBDC) in the United States and included discussion of consumer privacy concerns and the potential effects of a CBDC on the traditional financial system. While the witnesses (not to mention the representatives at the hearing) disagreed as to whether the US should pursue a CBDC, all of the witnesses argued for the need to protect consumer privacy in any potential CBDC design.


Several members conveyed their view that it is Congress’s prerogative, and only Congress’s, to decide whether the United States should issue a dollar CBDC.


What does this mean?

The tone of this hearing reflected a phenomenon we’ve seen build in force over the last year: the debate over the potential risks and benefits of CBDCs is becoming a red-hot political issue in the United States and could become an important electoral issue.


The CBDC debate isn’t going away. It’s also not going anywhere anytime soon, and we’re keeping our eye on legislation to establish a regulatory framework for custodial stablecoin issuers.


SEC Cracks Down on NFTs


What happened?

Last week, the Securities and Exchange Commission (SEC) and Stoner Cats agreed to a cease and desist order that included the SEC’s allegation that Stoner Cats (SC2) conducted “an unregistered offering of crypto asset securities (sic) in the form of non-fungible tokens” (NFTs).


With respect to facts relevant to the “security” question, the settlement says, “The purpose of the Stoner Cats NFT offering was to fund the production of an animated web series called Stoner Cats. SC2 told investors it would develop the Stoner Cats web series based upon the managerial and entrepreneurial efforts of SC2 and its agents. SC2 promised investors in the Stoner Cats NFTs exclusive access to the web series and an online community, as well as access to unspecified, future entertainment content. SC2 offered and sold the Stoner Cats NFTs as an investment into SC2’s efforts to create this content. SC2’s public communications tied the success of the show to the value of the NFTs and thus led investors reasonably to expect to profit from the managerial and entrepreneurial efforts of SC2.”


SC2, without admitting or denying the SEC's findings, has agreed to pay a $1 million civil penalty and will destroy all their NFTs and post the settlement on their website and social media channels.


What does this mean?

Following the Impact Theory case which we covered in our previous update, Stoner Cats marks the second enforcement action against the creators of NFTs.


This action and the SEC’s press around it includes some interesting nuggets. First, the SEC’s standard practice (and its current practice for non-crypto related cases) is to announce enforcement actions with headlines using terms reflecting the alleged statutory violation. For example, the SEC charged “Ripple and Two Executives with Conducting $1.3 Billion Unregistered Securities Offering” in December 2020 and charged “11 Wall Street Firms with Widespread Recordkeeping Failures” in August 2023. No more. In this case, the SEC settled charges against SC2 and Impact Theory “for Unregistered Offering of NFTs.” Second, the SEC appears to remain committed to willing into existence the idea that tokens themselves are securities (using the term “crypto asset securities” today and “digital asset securities” previously), an idea discounted in several judicial decisions, including Kik a few years ago and Ripple more recently.


The Securities Act of 1933 doesn’t list “NFTs” between “stocks” and “investment contracts” in its delineated list of securities, and that’s because NFTs are not a legally characterized asset class. But we are who we are, therefore rest assured that the SEC is going to continue its attempted extra-statutory jurisdictional grab until Congress or the judiciary puts an end to it.

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