This article was updated on April 5, 2022, with a quote from Blockworks.com that has been corrected on their site.
There may be no one Crypto Twitter likes to complain about more than Securities & Exchange Commission (SEC) Chair Gary Gensler. But one new Algorand (ALGO-USD) project is reportedly playing ball with the SEC and moving ahead in the very field the SEC is now targeting: fractional NFTs.
On Wednesday evening, news leaked in Bloomberg that “the SEC is seeking information on so-called fractional NFTs, which involve breaking down the assets into units that can be easily bought and sold,” as part of a bigger probe “scrutinizing creators of NFTs and the crypto exchanges where they trade to determine if some of the assets run afoul of the agency’s rules.”
Before the SEC can regulate an asset as a security, it must pass (or fail) the Howey Test. Back in 1946, the Supreme Court ruled that, before a Florida orange company called W.J. Howey sold off parcels of its farm, it should have registered them with the SEC. How can citrus groves count as securities, you might ask? If the sale constitutes:
- An investment of money
- In a common enterprise
- With the expectation of profits
- Solely from the efforts of others.
This is still the standard today. So, just like everyone else from AT&T (NYSE:T) to Zillow (NASDAQ:Z), NFT projects are on notice from the SEC that they’ll likely be expected to register these fractional NFTs as securities.
Fractional NFTs are nothing new… But they’ve exploded in popularity since 2021, as NFTs became all the rage – and the most popular collections came with million-dollar price tags! You can even buy a fraction of the classic Doge meme through PleasrDAO. The NFT art collective bought the Doge photo for $4 million last June. When it auctioned off its DOG tokens, representing roughly 7 billion slices of the Doge NFT, PleasrDAO made a cool $45 million!
“Information requests from [the SEC] don’t always lead to enforcement actions,” the Bloomberg article notes. But the SEC Commissioner Hester Peirce has been warning about this issue for at least a year. In Cointelegraph last March, Peirce cautioned that fractional NFTs stretch the definition of “non-fungible” and issuers should “always be asking those questions” as to whether they qualify as securities before they proceed.
Peirce, who’s been nicknamed “Crypto Mom” for her frequent advice to blockchain projects, also said: “We want to make sure people who are buying these things are getting good information and not being lied to, but we do want people to be able to build these networks.”
NFTs in general had record sales in January: nearly $5 billion. Demand cooled in February, with 12% fewer NFT buyers and 27% less sales volume, but it was still the #2 month in NFT history.
CoinMarketCap spoke to veteran crypto executive Ryan Carson for his take on the trend. He predicted that most NFTs could be headed for a crash – while “one-of-one pieces by renowned artists, NFT projects that offer membership to exclusive clubs, and early projects such as CryptoPunks and Bored Ape Yacht Club will be among the few categories that prevail.”
But what these takes seem to be forgetting is that there’s a lot more to NFTs than digital art.
“We expect 2022 will be a year when all different kinds of ‘value’ will be tokenized on the blockchain,” writes Luke Lango for his Ultimate Crypto service. In this New Digital World, financial services will be brought onto networks like Algorand, where we can transact more quickly, with fewer middlemen – and, thus, fewer fees. So, with these forms of tokenization, the utility is definitely there!
Real estate is a perfect example. Through Vesta Equity, the latest project on Algorand, people who own their house outright can access their equity without selling the home – or taking on debt. Rather than going to a bank for a home-equity loan, you can sell up to 80% of its value as an NFT. That’s what this client is doing with their condo in the tech district of Hillsboro, Oregon, a Portland suburb:
“The fractionalized NFTs — which do not confer residential rights — are packaged as a security and are exempt from registration with the Securities and Exchange Commission,” reports Blockworks. For buyers, it’s a quick and easy way to build a diverse portfolio of real-estate investments.
Lofty AI is another venue for buying fractional real estate on the Algorand blockchain. Here, the incentive is not just capital appreciation of the tokens’ value – but also rental income…paid daily!
“Longtime subscribers know that Algorand is a blockchain that was designed to speed up transaction processing and shorten the time it takes to complete transactions, with the transaction throughput on par with large financial and payment networks,” Luke wrote for Ultimate Crypto in September.
That’s when Anthony Scaramucci (yes, the guy who left Wall Street to spend 10 days as Trump’s Communications Director) launched an Algorand investment fund.
“Scaramucci said that Algorand is important to the industry because it ‘is going to be the winner in building the backbone for what institutions need and financial services companies need.’ We agree,” Ultimate Crypto reports.
How so? “Algorand is immune to forks, gives instant finality on sales, which usually clear within four seconds, as well as having low fees,” The Block writes as to why Vesta Equity went with Algorand for these new fractional NFTs.
Ethereum might have a lot more NFTs via popular marketplaces like OpenSea… But it ain’t cheap. In the last 24 hours, OpenSea saw 73,000 transactions – which cost over $2 million in “gas fees” on Ethereum! No wonder it’s starting to offer its customers alternatives to Ethereum.
Algorand might be much lesser known, but last month it managed to hire a former executive director of JPMorgan as its new CEO! Its original founder, Silvio Micali, is an MIT professor who won a Turing Award for his advancements in cryptography. ALGO has been in our Ultimate Crypto portfolio since April 2020, where it’s returned nearly 260%. To get Luke Lango and Charlie Shrem’s latest and greatest recommendations, go here to watch Charlie’s video.
Ashley Cassell
Contributing Editor, The New Digital World
On the date of publication, Ashley Cassell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines. To have more news from The New Digital World sent to your inbox, click here to sign up for the newsletter.
