Who Regulates Digital Assets?
The U.S. government has taken a complex and evolving stance on cryptocurrency and NFTs (Non-Fungible Tokens), particularly regarding how they are classified and regulated.
Regulatory bodies like the SEC (Securities and Exchange Commission) and the IRS (Internal Revenue Service) have worked to apply existing laws to cryptocurrency exchanges, trading platforms, and digital assets, which has sparked ongoing debate. Here’s a breakdown:
1. When Can an NFT Be a Security?
The SEC has said that certain NFTs could be classified as securities under U.S. law. This stems from the Howey Test, a legal framework that comes from a 1946 Supreme Court case and is used to determine whether an arrangement is an investment contract (and thus a security). Under the test, something can be an investment contract when people put money into a common enterprise expecting profits from the efforts of others. The test looks at how an item is offered and marketed, not just what it is. An NFT sold with promises of future profits, royalties, or revenue sharing could fall under the SEC’s jurisdiction, while an item sold purely as a collectible, like a vintage doll or a baseball card, generally would not.
Securities are subject to registration, disclosure, and anti-fraud requirements. Supporters say these rules protect consumers. Critics argue that applying them broadly to digital collectibles creates uncertainty and burdensome requirements for creators and platforms.
2. Banking Access and “Operation Choke Point 2.0”
Some crypto industry advocates have alleged that federal banking regulators discouraged banks from serving cryptocurrency companies, a pattern they have called “Operation Choke Point 2.0.” The name refers to Operation Choke Point, a Justice Department initiative that began in 2013 and was criticized for pressuring banks to cut off services to industries considered high-risk. Regulators have said their guidance was intended to manage risk in the banking system, while critics say it limited crypto firms’ access to banking.
3. IRS and Taxation
The IRS treats cryptocurrency and NFTs as property for tax purposes. This means that selling, trading, or spending crypto or NFTs can be a taxable event.
Some in the industry argue that this creates a complex tax environment that can discourage everyday use, while others see it as a straightforward application of existing tax law.
4. Calls for Clearer Rules
A frequent criticism from the crypto community has been “regulation by enforcement,” meaning that rules are clarified through actions against individual companies rather than through formal guidance. Regulators have responded that existing securities and tax laws already apply to digital assets. People on both sides have called for clearer rules.
5. Recent Developments
Under the Trump administration, federal regulators have signaled a shift toward a more crypto-friendly regulatory environment, and some policymakers have proposed treating many NFTs as “collectibles” rather than securities. This approach has not been universally adopted, and the regulatory landscape remains fragmented.
6. The FTX Collapse
The 2022 collapse of the FTX cryptocurrency exchange added to calls for oversight. According to reports, FTX founder Sam Bankman-Fried was convicted of fraud in 2023, and lawmakers have pointed to the case in debates over how digital assets should be regulated.
This ongoing tug-of-war between innovation and regulation highlights the challenges of integrating emerging technologies into existing legal frameworks.
Realm Land Titles are digital collectibles for use and enjoyment inside The Realm. They are not investments and carry no expectation of profit. See No Offer to Sell Securities.