Are NFTs Securities? with Brian Frye

Bankless Nation, another state of the nation for you. The first one of the year, our first live stream of the year as well. R NFT Securities. David, you have been obsessed with this topic for the last couple of weeks and wanted to do a show on it. Um I was a little hesitant at first. Maybe we'll get into you a a little bit why. Uh, but uh what are we gonna cover today and what's the what's the topic?

Yeah, I've been going down the securities law rabbit hole, which is actually a place where I started my crypto journey. A lot of people don't really know this, Ryan, but uh my first foray into crypto was first with an ICO advisory company. And that company ground to a halt because we realized that everything we were doing was a security. Uh and so the way I got through the 2018 bear market was working inside of the world of security tokens. And so going back down the security token rabbit hole has been extremely interesting. And I think that there are a ton of lessons that we as an industry need to learn about why do securities law exists? What is this word security? Why do we have the SEC? And why does our guest, Brian, think that all NFTs are securities? And also, why might that not be that be such a bad thing? Uh, these are all fantastic questions.

Yeah, I'm actually super bullish on this episode because I think we we get to kind of the base principles of why securities laws exist in the first place. And that's really where we're gonna start the conversation and build up. So David, um, why are you taking us down the securities rabbit hole today? All right, because I I'll tell you I have some reservations about it, which is even just the word, the title of this episode, our NFT security. I've I find myself getting a little little triggered by that.

Yeah, the the the securities word is triggering for many, many people out there, isn't it?

Yeah. Why is that? And why why did you want to cover it with um with our guest here today?

Sure, yeah. I I think the reason why the word securities triggers people is because it invokes uh feelings of the SEC and Gary Gensler, and obviously it kind of should because that's what the SEC is. They that what is the SEC? It regulates securities. But securities, Ryan, were a thing before the SEC was. Uh before we had the federal SEC, we had these things called blue sky laws, uh, which are state state laws around securities. But the concept of a security exists outside of the SEC. And we often talk about speedrunning the history of money and finance on banklists. Sometimes we expand that to speedrunning human coordination. And the story of securities and security regulation is a part of the story of human coordination. Humans coordinate better when we can collectively manage our own human greed when it comes to our financial assets. And so this is where securities come from. And so understanding the spirit of securities laws is something that we definitely need to do in order to be informed about how to build crypto. And so, Brian, our guest, is bringing a unique perspective about the world of NFTs and securities. And if you think he is a Gary Gensler shill who wants to openly invite the SEC into all of our crypto assets, you would be egregiously missing the important lesson that we are going to talk to today. And so that, Ryan, is my preamble to the rest of this show.

And that, by the way, guys, is what made me very excited about this episode, including some uh white papers that Brian uh created. I I read one of those papers coming into this. Uh definitely a first principles thinker, so you want to stay tuned for this episode.

Bankless Nation, we are here with our guest, Brian Frye. And Brian came on to my attention when William Pister, who writes for the metaversal newsletter out of Bankless, forwarded me an article in Coindesk that Brian wrote. And that coin that article was uh titled Every All NFTs are roughly titled All NFTs Are Security and that's great. That's a great thing. And a very thought provoking uh article had Triggering, David. Very triggering. Triggering. Yes. And uh Brian is also a law professor at the University of Kentucky. Uh and today we are going to unpack that article Are all NFTs securities? And what does that really mean? And why does Brian think that we should be bullish on the fact that all NFTs are securities? Brian, welcome to the show.

Hi, nice to talk to all of you. Glad to be here. Big fan.

So, Brian, you you opened your Coindes article with this pretty spicy opener. Uh, and I'll I'll read a quote here. Everyone in the NFT market is terrified that the United States Securities and Exchange Commission, SEC, will decide that NFTs are securities and regulate them. They should get over it. Of course, NFTs are securities. That's what makes them so powerful and promising. Rather than avoid SEC regulation, the NFT industry should embrace this categorization. It's inevitable and desirable, especially once the SEC understands how the NFT markets work. It's likely to regulate it with a light touch. So that spawns, Brian, for me, three questions. First, I want to ask why do you think NFTs are mostly securities? Second, I want to ask, why should we think that that's good? And third, I want to ask why do you think, well, the SEC will only regulate it with a light touch? But let's start with that very first question. What do you mean when you say, of course, NFTs are securities? Why, of course?

Yeah, yeah. Well, I think this is a really important uh ontological

question, right? In the sense that

when we asked the question,

are

NFTs securities or is anything

uh security? I actually think that's the wrong framing. And it was something that struck me when I first became interested

in the NFT market

uh in in 2021, right? Like a lot of people, I saw the big people sale I've been interested in.

Art and art law for a long time. And I was like, wow, something's happening. And I want to

try to understand

what it is. And one of the things I noticed immediately

when I started engaging

in the kind of NFT Web3 ecosystem is that everyone was kind of terrified

of the idea that what they were doing

was a security or might be perceived.

By the SEC as a form of securities trading. And a lot of the discourse was sort of around well, how do we describe what we're doing? How do we characterize what we're doing? How do we structure

what we're doing in such a way that it won't

be a security

and therefore be regulated by the SEC? And

I hate to say it, for better or for worse,

I'm a former securities lawyer, right? I worked at Sullivan and Cromwell,

uh Wall Street law firm from 2007.

To 2010. You know, I worked for Goldman Sachs, I did securities law, you know, related

litigation work primarily,

but also some IPOs and that kind of stuff. And I was like, oh no.

Right? Like this entire discourse is so confused,

right? Because the SEC isn't in the business of deciding really whether or not things are in our securities in the way that I think a lot of the people kind of in the ecosystem think.

I think it is. The SEC is in the business of deciding what it thinks it needs to regulate

and what it thinks it doesn't, right? So we say that there's a test

for whether or not something is a security, right? The

the Supreme Court, in a very famous case called uh Howie,

right, established the criteria for what would constitute an investment contract, which is sort of the broadest definition of uh of a security under the United States securities laws. But the reality is that the Howie test is so broad that

That any investment can be a security if you just kind of look at it,

right? Because all the Howie test says is that something is an investment contract, an investment is a secure is a security. If it constitutes an investment of money in a common enterprise with the expectation of profit to be devised derived from the efforts of others, well, that's that's any investment,

right? That's literally any investment.

Whatsoever, right? So when you ask this question, is it a security? That's the wrong question, right? The real question is always is it the kind of thing the SEC thinks it should be regulating? Is it the kind of thing that the SEC thinks is within its wheelhouse

and is therefore the proper subject of

federal regulation

in the way that the SEC

Does things, right? So, what I want to try to convey to people, really, more than anything else, is like stop trying to use the law's magic words. The law's magic words is a crazy way to think about what's taking place, right? You need to think about what your goals are. What do you want? What do you want the SEC to do? What do you want the regulatory environment to look like? What's going to be beneficial

for the ecosystem? What's going to help it thrive as opposed to destroying it? And rather than be hostile to or try to avoid this regulatory atmosphere, how do you explain?

To the regulator, what you're doing, and how the regulator can add value to the ecosystem instead of destroying it. Because at the end of the day, that's at least theoretically what the SEC is for, right? The idea is that the purpose of securities regulation is to make the securities market work more efficiently, right? I mean, that's the that's the primary mandate of the SEC is to create and maintain healthy capital markets.

Right? They're supposed to be making the market better, right? So it seems to me the goal ought to be how do we explain to the SEC what this market needs, if anything, and what kind of value it can add?

Okay, so I'm I want to park on this, Brian. This is uh so interesting to me. This is fired up by I'm fired up. I'm ex- I'm I'm very excited, okay, uh like to have this discussion because I I gotta admit, at first my first reading of the article, I was a little triggered. Are NFT securities? Like this word is kind of a a dirty word to me. It's my comment to David was like, stop using the word securities. That's their word. And what I meant was like, it's the nation state word, and it means a certain uh set of things. It means you have to file with Edgar and you have to do 10K filings and you have to do all of these things with respect to structure, and it's more imposition. And it's about a a group of regulators, unelected bureaucrats telling us all these things we can't do with a technology they don't even understand. All right.

And by the way, Ryan, if I can quickly go down, why are we talking about this? It's because a couple of weeks ago, um I talked about I s I said on the Bankless Weekly roll up that board apes are securities. Yes. And like Ryan got a quizzical look on his face. Uh as t like I've

Yeah.

Bring off the quizzic

I'll try and pull it up once I'm done talking. But uh like Ryan got a quizzical look on his face, and usually Ryan and I agree on well almost everything. And so that was like it's very rare for me and Ryan to have a disagreement. And then like we sent out the weekly roll up onto uh in to to uh send out on the podcast feed on the YouTube, and then the board apes got extremely triggered that like David Hoffman from Bankless is saying board apes are a security, and how dare he? And what does that mean?

face, David.

Yeah, this was this was Ryan's face. Here here's Ryan's reaction to David saying board apes are a security.