When the NFT marketplace OpenSea indicated that it was bracing for a regulatory crackdown last month, the disclosure delivered a jolt to Magic Eden CEO Jack Lu. “It all happened very suddenly,” he said in an interview with Decrypt (video below), adding that the San Francisco-based firm has not received a so-called Wells notice from the U.S. Securities and Exchange Commission (SEC). OpenSea stated it received a letter from the SEC alleging that NFTs traded on its platform are securities. Meanwhile, the NFT marketplace’s co-founder and CEO Devin Finzer stated that the firm is prepared to “stand up and fight.”
While the regulator has previously brought enforcement actions against NFT projects, OpenSea’s revelation represented something new. It signaled that the SEC has begun scrutinizing entities that provide trading platforms for NFTs, and not just those that initially offer them. Before Magic Eden emerged as the leading NFT marketplace by volume, OpenSea was the go-to venue for digital art and profile picture (PFP) collections. Projects like the Bored Ape Yacht Club and Art Blocks, which also trade on Magic Eden, propelled OpenSea to the forefront of the vibrant market in 2021 and 2022.
Magic Eden is not currently in the SEC’s crosshairs, but Lu acknowledged that a lawsuit against OpenSea could have broad implications for a corner of crypto that has been relatively untouched by regulators compared to exchanges or cryptocurrency issuers. “The lack of regulatory clarity basically comes with the territory,” Lu said. “To the extent that this incident is going to create more clarity in the space, I welcome that.”
From unique works of digital art to human-readable blockchain addresses, NFTs can represent ownership in a myriad of things. Some lawyers have argued that the SEC would face challenges in exerting authority over the NFT space because the regulator does not have a pronounced role in policing markets for physical fine art or collectibles.
Regardless of what could happen to OpenSea, Lu stated that Magic Eden’s business has been guided by a desire to comply with regulators. He said, “The general principle for us is we want to be good actors and really be compliant in the ecosystem.”
When the SEC filed high-profile lawsuits against Coinbase and Binance last year, the regulator provided a list of cryptocurrencies trading on the exchanges that it believes are securities. Shortly after, firms like eToro and Robinhood dropped support for them. When asked whether Magic Eden is prepared to delist NFTs that the SEC might label as securities, Lu demurred, suggesting the firm would first consider any charges. “A lot of these things rest on nuances and the factual circumstances of the case,” Lu said, adding that “it may not be helpful to apply hypothetical things to the future.”
Edited by Andrew Hayward