Enforcement Imperialism or Applying Precedent? SEC’s NFT Enforcement Actions Reignite Digital Asset Debate
Overreach. Jurisdictional landgrab. Regulation by enforcement. These terms and expressions — and many more “colorful” turns of phrase — are used by some to describe the Securities and Exchange Commission’s approach to enforcement at the intersection of digital assets and the federal securities laws. The SEC has repeatedly rejected such claims and has yet to act upon industry calls for increased clarity and guidance. Instead, the agency has repeatedly asserted that its enforcement approach for digital assets is consistent with what it has done for decades: policing markets for potential violations of the federal securities laws by analyzing the “economic realities” of a transaction and applying long-held precedent — such as Supreme Court cases SEC v. W.J. Howey or Reeves v. Ernst & Young — to those facts. Conversely, two of the five SEC Commissioners take issue with this approach, continually adding oxygen to fiery criticisms of overreach and regulation by enforcement.
Reasonable minds can differ on how justified or off-base the agency has been in its now yearslong journey into digital asset enforcement, progressing from unregistered ICOs to alleged frauds to actions targeting exchanges and intermediaries. But it is the SEC’s most recent enforcement actions — its first two cases involving nonfungible tokens — that have yet again brought forth the SEC’s critics. What should we make of these first-of-their-kind enforcement actions? Doesn’t the lack of fungibility of NFTs move these tokens outside the SEC’s jurisdictional reach, making this the latest example of overreach? Or are these matters simply the latest actions in line with the SEC’s longstanding enforcement approach?