SEC charges Stoner Cats in latest move against NFTs

Hello and welcome to the latest edition of the FT Cryptofinance newsletter. This week, we’re revisiting the tumultuous world of NFTs.

Those who read last week’s edition of this newsletter will know the venture capitalists of the world are no longer interested in the lofty pitches and promises of non-fungible tokens. 

The same cannot be said for US regulators, who this week again targeted crypto, an embattled industry that once promised to revolutionise a huge array of sectors such as property and medical records by recording asset ownership as NFTs on the blockchain. 

On Wednesday the Securities and Exchange Commission — which has spent the year issuing a blitz of enforcement actions against every corner of the crypto sphere — charged the creator of the Stoner Cats animated web series with conducting an unregistered offering of crypto asset securities in the form of NFTs. For those who have not watched it, it is an adult animated TV show about cats that become sentient after being exposed to their owner’s medical marijuana (the SEC’s words, not mine . . .). 

According to the SEC, Stoner Cats 2 LLC’s offering raised roughly $8mn from investors by selling more than 10,000 NFTs for roughly $800 each. The offering sold out in 35 minutes. 

The SEC’s enforcement case has garnered headlines this week because it has embroiled yet another cast of celebrities in a crypto clash with regulators. 

TV couple-turned-real life couple Mila Kunis and Ashton Kutcher gave voice to some of the stoned cats, and Vitalik Buterin — the mind behind ethereum — also has a role, as does film star Jane Fonda. Read my colleague Louis Ashworth’s entertaining take on the issue here

But there is another reason why the case of the Stoner Cats matters. It proves that the SEC — under the command of the hard-charging Gary Gensler — is ready to uphold the standard on NFTs that it set just last month, when it charged LA-based Impact Theory for (you guessed it) conducting an unregistered offering of crypto asset securities via NFTs.

“The order finds that the NFTs offered and sold to investors were investment contracts and therefore securities,” read the SEC’s statement announcing charges against Impact Theory. 

“Regardless of whether your offering involves beavers, chinchillas or animal-based NFTs, under the federal securities laws, it’s the economic reality of the offering — not the labels you put on it or the underlying objects — that guides the determination of what’s an investment contract and therefore a security,” said Gurbir Grewal, director of the SEC’s enforcement division, addressing the Stoner Cats case.

If it was not already clear a month ago, then it is obvious now: the SEC has expanded its remit against what Gensler has described as a crypto industry “rife with non-compliance” to include NFTs. 

“When Grewal said you have to look at the economic reality of the offering, that was a critically important message,” John Reed Stark, former head of the SEC’s office of internet enforcement, told me. 

“People buy NFTs not because they enjoy looking at a funny cartoon, and not because the hyperlink to the metadata of a jpeg file is going to provide some unique indication of ownership, they do it because they hope their value will go up,” he added.

It is easy to make the case that the SEC is late to the party here. After last year’s crypto crash, the NFT sector lost its swagger. Like Silicon Valley’s venture capitalists, retail investors have gone cold on the sector too.

According to industry data tracker “CryptoSlam” (I know, me neither) global NFT sales volume peaked at $578mn in May 2022, just as crypto stood on the precipice of a market crisis. Since, volumes have fallen to around $10mn, an eye-popping decline of roughly 98 per cent. 

But, in the eyes of the SEC, investors in even the smallest markets still need protection under securities laws. The crypto industry’s $1tn market cap is smaller than several individual companies including Apple, Microsoft and Google, but that has not softened the regulator’s enforcement blitz against the sector. 

“It’s clear based on the Impact Theory and Stoner Cats cases that the SEC has got NFTs in their sights, and they’re leaning in, not backing down,” added Reed Stark. 

What’s your take on the SEC’s recent blows against the NFT sector? As always, email me at scott.chipolina@ft.com

Weekly highlights 

  • Remember Su Zhu and Kyle Davies? The pair that ran crypto hedge fund Three Arrows Capital — which was one of the highest-profile casualties of last year’s crypto crash — have been hit with a nine-year ban from any regulated activity by Singapore’s watchdogs. In a statement, the Monetary Authority of Singapore issued prohibition orders against the two that will prevent them from taking part in the management of any capital market services firm under the city-state’s Securities and Futures Act. 

  • Crypto humanitarianism had its latest run out this week when Binance announced it was sending $3mn worth of its in-house cryptocurrency BNB to earthquake victims in Morocco (who, importantly, also had to be pre-existing Binance customers). International aid and relief experts gave me a list of reasons why Binance’s move is not very helpful at all. Read more here

Soundbite of the week: Brian Armstrong picks another fight with regulators 

Coinbase chief executive Brian Armstrong has pulled no punches in his previous statements about the Securities and Exchange Commission, which is suing his company for alleged violations of federal laws. 

But this week, he trained his sights on the Commodity Futures Trading Commission, which recently sued three platforms in crypto’s decentralised finance sector for allegedly offering products in the US illegally. 

Armstrong came to the defence of the niche crypto corner on social media platform X, formerly Twitter, where he said

“My hope is these DeFi protocols take these cases to court to establish precedent. The courts have proven to be very willing to uphold rule of law. The only thing this is accomplishing is to push an important industry offshore.” 

Data mining: Binance’s dying token

A final word on Binance this week. 

Its BNB token is in the news on account of Binance’s international aid efforts in Morocco and Libya, but the exchange’s flagship cryptocurrency is losing its shine. 

Currently trading at $211, it is down roughly 40 per cent since its highest point this year: $348 in April. Not only that, it’s become less and less important to the exchange itself. 

During the crypto bull run days of 2021, BNB represented almost 10 per cent of trading volume on the exchange. This month, that has dropped down to just over 2 per cent. 

Of course, BNB is not the only coin dying on Binance. The dollar-pegged stablecoin BUSD — issued by Paxos but which carries Binance branding — accounted for roughly 40 per cent of trading volume on the exchange before New York regulators halted further issuance of the coin. Today, that figure has fallen to around 7 per cent. 

Column chart of Percentage of BNB trading volume on Binance  showing BNB's contribution to trading volume on Binance has hovered around just 2 per cent all year

FT Cryptofinance is edited this week by Laurence Fletcher. Please send any thoughts and feedback to cryptofinance@ft.com

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