In charging Caroline Ellison + Gary Wang in FTX scandal, SEC classifies FTT token as securities – major development for cryptocurrencies and NFTs

  • In the civil complaints against Caroline Ellison and Gary Wang in the FTX scandal, the SEC has officially categorized FTX’s token called FTT as securities (investment contracts) within the scope of SEC regulation.
  • This is a major development that will likely have profound implications beyond this case. If the SEC applies the same analysis to other cryptocurrency or digital tokens, including NFTs, they will likely be deemed securities if the tokens are deployed in ways similar to FTT, for example, in “earn programs” or “staking programs” to earn returns on their investment, or marketed touting the management team.

SEC points to as signs FTT are securities

  • For example, the complaint alleges the following facts to establish that FTT tokens are securities (investment contracts):
    1. Token FTT revenue used to fund business development of FTX: FTX used FTT token sales revenue to “fund marketing, business operations, and growth of FTX, depending on the success of FTX and its management team in developing, operating, and marketing the trading platform.”
    2. FTX touted growing the ecosystem: “FTX’s FTT marketing materials—consisting of an FTT ‘whitepaper’ and information posted on FTX’s website—described FTT as ‘the token powering the FTX ecosystem.'”
    3. FTX used bonus tokens: “On the FTX website, FTT purchasers were offered a 5% bonus of tokens during the first three days of the IEO if they pre-funded their FTX wallets to purchase FTT, providing a potential immediate profit to investors.”
    4. FTX touted buyback of FTT to control supply to maintain value, plus allowed use of token as collateral on margin trading: “We have carefully designed incentive schemes to increase network effects and demand for FTT, and to decrease its circulating supply. The FTT materials stated that the token provided investors with fee rebates and discounts on FTX, and the ability to use the token as collateral for futures positions as well as for ‘margin trading’ that FTX promised to launch’ ‘in the future.’ The FTT materials referred to potential gains from FTX’s future repurchase and burning of FTT (the “buy and burn” program), to be funded by FTX’s revenues.”
    5. FTX promoted its staking program and rewards program: “FTX also marketed FTT as an asset that could be used in an “earn program” or in “staking programs” (i.e., a program promising interest payments on deposited assets), as additional ways in which investors could earn returns from FTT.”
    6. FTX touted its management team: “The FTT whitepaper emphasized ‘Why Invest? — All-Star Team,’ and highlighted the importance of the management team’s experience and success in developing crypto asset trading systems.'”

Excerpts from SEC Complaint against Caroline Ellison and Gary Wang

  • Without formally stating the test, the SEC is using the Howey test to determine if tokens are securities: “under the Howey test, an ‘investment contract’ exists when there is (1) the investment of money (2) in a common enterprise (3) with a reasonable expectation of profits to be [solely] derived from the efforts of others.” The last requirement tends to be the crucial one. The alleged facts listed above relate to how FTT buyers would have “a reasonable expectation of profits to be [solely] derived from the efforts of others,” meaning FTX and Sam Bankman-Fried’s management team.
  • In 2018, the SEC Strategic Hub for Innovation and Financial Technology issued a paper on digital assets that analyzes the Howey test as applied to digital assets (click here).
  • Meanwhile, in its complaint against Sam Bankman-Fried, the CFTC has already classified BTC, ETH, and tether as commodities within its jurisdiction: “Certain digital assets are ‘commodities,’ including bitcoin (BTC), ether (ETH), tether (USDT) and others, as defined under Section 1a(9) of the Act, 7 U.S.C. § 1a(9).

Why should NFT utility projects be nervous?

  • This is potentially relevant–and concerning for NFT utility projects–because, well, just read the list above. How many NFT projects are using NFT revenues to fund business development? Or are engaged in staking programs? Or tout the management team? Or use a token for an ecosystem they are building? HUGE ramifications. Ominous sign for NFT utility projects, especially the blue chips.

**Nothing on this website is legal advice.