OpenSea’s NFT Problem: Policing the Murky Line Between Art and Securities

OpenSea has regularly delisted or disabled non-fungible tokens, or NFTs, that may behave like financial instruments. It has targeted “anything which promised returns, had a token, or could be construed as a security in any way,”

OpenSea, one of the largest global marketplaces for NFTs, has taken actions that suggest it has been aware for years that some NFT collections listed on its site are more than just art, according to three former employees of OpenSea, as well as company documents seen by DL News.

Those actions include delisting or disabling non-fungible tokens, or NFTs, that may behave like financial instruments. It has targeted “anything which promised returns, had a token, or could be construed as a security in any way,” a person familiar with the practice told DL News.

The company also issued a vocabulary guide directing employees to avoid using financial terms such as “broker,” “shares,” “trading” or “exchange,” in their communications, according to one company document.

While crypto leaders may scoff at the idea that NFTs are securities and ridicule Gensler and the SEC, OpenSea’s longstanding efforts to weed out problematic collections complicates the narrative. Aware of potential problems, the company acted.

A spokesperson for OpenSea declined to comment on questions sent by DL News for this article.

OpenSea’s tangle with the SEC comes as the venture struggles to recapture the mojo that drove the NFT space to such giddy heights in 2021. OpenSea’s revenue multiplied more than 18 times between the second and third quarter that year, to $167 million, according to an internal document.

Now, as the popularity of Bored Ape Yacht Club and other NFTs wane, OpenSea’s monthly volume has plunged about 55% in the last 12 months, to $36 million, according to Dune Analytics.

Through it all, OpenSea has laboured to screen the many NFT collections that have been listed on its platform.

In October 2021, OpenSea disabled trading of a collection called DAO Turtles after finding the pixelated images of the shelled amphibians violated its terms of service, according to social media posts by DAO Turtles.

That meant visitors to OpenSea could still see the NFTs, but they couldn’t buy or sell them.

OpenSea told DAO Turtles’ team that NFT collections could not use the platform to carry out financial services such as ”listing, or buying securities” and similar instruments, or fundraising, according to a screenshot of an email.

While OpenSea did not provide any details on precisely why DAO Turtles raised a red flag, the NFTs were more than images on a blockchain.

Owners could collect royalties from future releases, and receive an associated cryptocurrency called Turtleshells, according to an archived version of the project’s website.

Other collections OpenSea delisted or disabled on its site for violating the prohibition on financial assets include Steady Stack, and Yaypegs, said a former employee.

The teams behind DAO Turtles and Yaypegs did not respond to requests for comment. A representative for Steady Stack could not confirm why the collection was delisted.

From the get-go, OpenSea addressed the financial capabilities of NFTs in its terms of service.

“WE ARE NOT A BROKER, FINANCIAL INSTITUTION, OR CREDITOR,” reads the earliest archived copy of its terms of service from August 2018, which was printed in all caps to hammer the point home.

Two years later, in October 2020, OpenSea added clauses that prohibited users from “any financial activities subject to registration or licensing, including but not limited to creating, listing, or buying securities, commodities, options, real estate, or debt instruments.”

The marketplace also barred any assets “that are redeemable for financial instruments or that give owners rights to participate in an ICO or any securities offering.”

ICO is an acronym for an initial coin offering, a token distribution practice the SEC targeted around 2018.

In 2022, the SEC began to send OpenSea information requests, The Verge reported in August. As part of that process, the company received a Wells notice, which is a notification the agency sends to the target of a potential enforcement action. Finzer said in August that OpenSea received the notice “recently.”

If the SEC sues OpenSea, it would have to show that certain NFT collections the company listed are unregistered securities, said Philip Moustakis, a New York-based securities lawyer at Seward & Kissel.

“Can you use an NFT to make a securities offering? Absolutely,” he told DL News.

Moustakis added that it’s not about the technology, but rather the offering, or the initial sale of objects, which can be pieces of paper, computer code, or even citrus groves.

Generally, the SEC follows legal guidance that an asset is a security if purchasers have a “reasonable expectation of profit from others.”

On September 19, users sued OpenSea for allegedly offering NFTs that behaved like financial instruments.

“NFTs are treated like securities by OpenSea despite being unregistered with the SEC,” said the complaint, which is being managed by Adam Moskowitz,