Many NFTs Are Not Securities: SEC Commissioner Peirce Clarifies, Paving the Way for Industry Innovation

Main Points:

• Peirce’s Position: SEC Commissioner Hester Peirce asserts that most NFTs—including those with embedded royalty-payment features—do not meet the legal definition of securities.
• Royalty Mechanisms: Contrary to some expectations, automated creator-royalty smart contracts do not grant token holders equity-like rights in an issuing entity.
• Regulatory Context: The SEC’s broader stance is shifting away from blanket crypto enforcement, as evidenced by dropped investigations into major platforms and plans for clear token rules.
• Market Implications: This clarification reduces legal uncertainty, potentially boosting liquidity and adoption in the NFT space.
• Emerging Trends: The NFT market is showing signs of recovery, fueled by Web3 gaming, AI-driven “iNFTs,” and renewed collector interest.
• Safe Harbor & Innovation: Peirce suggests safe-harbor frameworks for early-stage token distributions and emphasizes lock-up arrangements to align stakeholder expectations.

1. Commissioner Peirce’s Rationale: Why NFTs Are Not Securities

At the SEC’s “SEC Speaks” conference on May 19, 2025, Commissioner Hester M. Peirce—affectionately known in crypto circles as “Crypto Mom”—delivered remarks emphasizing that the majority of non-fungible tokens (NFTs) do not exhibit the hallmarks of securities. Crucially, Peirce stated that even NFTs explicitly programmed to pay royalties to creators upon secondary sales lack “rights or interests in a common enterprise” and do not promise token holders any “type of return traditionally associated with securities”.

Peirce’s viewpoint challenges a regulatory-by-enforcement approach that dominated under prior leadership and aligns with her longstanding advocacy for clearer, innovation-friendly frameworks. By distinguishing NFTs from equity or debt instruments, she seeks to ensure that a digital token’s unique characteristics—such as irreproducibility and smart-contract-driven royalty flows—remain unhampered by securities-law burdens.

2. Understanding NFTs and Royalty Mechanics

What Is an NFT?
A non-fungible token is a unique digital asset recorded on a blockchain. Unlike fungible cryptocurrencies (e.g., Bitcoin or Ethereum), each NFT carries a distinct identifier, enabling digital ownership of art, collectibles, virtual real estate, and beyond.

Royalty Features in NFTs
Many modern NFTs embed smart contracts that automatically route a percentage of each resale to the original creator. This mechanism mirrors streaming-platform royalties—where artists earn each time their work is played—and represents a groundbreaking approach to secondary-market revenue sharing. However, Peirce clarified that these royalty flows are contractual execution features, not equity distributions, and thus do not, by themselves, render an NFT a security.

3. The Broader SEC Shift: From Enforcement to Regulation

Under Chair Gary Gensler, the SEC pursued aggressive enforcement actions against crypto firms, often categorizing tokens based on Howey-test considerations. Recent developments mark a departure from that posture:

• Investigation Wrap-Ups: The SEC dropped its nearly two-year-old investigation into OpenSea, signaling a narrowed focus on fraud and illicit behavior rather than broad token classification.
• Crypto Task Force Leadership: Peirce now leads the SEC’s Crypto Task Force, tasked with crafting guidance that clarifies which tokens fall within securities laws and which do not.
• Upcoming Rulemaking: SEC Chair Paul Atkins announced plans to draft specific rules for crypto tokens, aiming for a “rational framework” that supports legal issuance and trading while deterring misconduct.

These shifts reduce uncertainty for innovators and investors, potentially unlocking trillions in digital-asset value currently sidelined by regulatory risk.

4. Implications for Creators, Collectors, and Developers

For Creators:

• Stable Royalty Revenue: With reduced fears of securities litigation, artists and developers can confidently integrate royalty protocols, knowing these do not equate to equity issuance.
• Expanded Platforms: Marketplaces may broaden offerings, hosting NFTs without worrying about triggering registration requirements.

For Collectors & Investors:

• Liquidity Gains: Recognizing NFTs as non-securities could unlock secondary liquidity—investors may trade tokens more freely on diverse platforms.
• Risk Calibration: While price volatility remains, legal clarity allows for better-informed risk assessments.

For Developers & Platforms:

• Innovation Spur: Developers can experiment with hybrid token models—such as dynamic NFTs that evolve based on user input—without immediate regulatory alarm bells.
• Interoperability: Standards like the ERC-721 royalty interfaces and proposed ERC-7857 for “intelligent NFTs” (iNFTs) can gain traction, bolstered by a friendlier legal environment.

5. Recent NFT Market Trends & Use Cases

Despite a steep downturn in 2023–24—when trading volumes plunged by over 60%—the NFT sector is staging a comeback. Several factors are driving this revival:

1. Web3 Gaming: Blockchain-based games, where in-game items are NFTs, attract both hardcore gamers and speculative investors seeking play-to-earn opportunities.
2. AI-Integrated NFTs: The rise of intelligent NFTs (iNFTs)—which leverage AI models to evolve over time—marks a hot frontier, with the ERC-7857 standard enabling smart, adaptive digital collectibles.
3. Cross-Chain Platforms: Enhanced interoperability protocols allow NFTs to move seamlessly across Ethereum, Solana, and Layer-2 chains, reducing congestion and lowering minting costs.
4. Institutional Adoption: Major auction houses and brands are tokenizing real-world assets—luxury goods, concert tickets, even carbon credits—bringing deep pockets and credibility to the NFT ecosystem.

These diversified applications underscore NFTs’ maturation from speculative art flippers to robust digital‐ownership tools with real economic functions.

6. Regulatory “Safe Harbor” & Early-Stage Distribution

Peirce highlighted a thorny scenario: tokens distributed in a project’s infancy—before network decentralization occurs—risk being classified as securities, since purchasers may reasonably expect token-value appreciation tied to the project’s success. To mitigate this, she proposed:

• Lock-Up Periods: Token issuers can demonstrate good faith by instituting mandatory lock-ups for founders and early buyers, aligning incentives toward long-term network health.
• Conditional Exemptions: Implementing a temporary “safe harbor” that shields token sales from registration—as long as developers meet transparency and disclosure conditions—could balance investor protection with innovation.

These measures, if codified, would provide clearer guardrails for emerging protocols during their most vulnerable developmental stages.

7. Looking Ahead: Potential U.S. Legislative Actions

Beyond the SEC, Congress is debating comprehensive crypto bills. For example, the Federal Innovative Token (FIT21) Act would categorize NFTs explicitly, while MiCA (in the EU) offers a parallel blueprint for digital asset regulation. Legal scholars contend that carving out NFTs as a distinct asset class could:

• Reduce Ambiguity: Prevent tokens from defaulting into “security” or “commodity” boxes by definition.
• Encourage Standardization: Spur development of uniform royalties and IP-verification protocols, fostering a healthy secondary market.

As these legislative discussions evolve, Peirce’s clarifications strengthen the case for NFT-specific rules that recognize unique digital-asset traits.

8. Practical Takeaways for Crypto Enthusiasts

For readers seeking new crypto assets, revenue streams, and practical blockchain uses, here are actionable insights:

1. Explore Royalty-Enabled NFTs: With royalties confirmed non-securities, artists can monetize beyond the initial mint—look for platforms offering transparent, on-chain royalty splits.
2. Watch iNFT Developments: Follow protocols like ERC-7857; early adoption of AI-infused NFTs could yield both creative rewards and investment upside.
3. Leverage Cross-Chain Marketplaces: Use bridges and Layer-2 chains to reduce fees—platforms such as ImmutableX, Magic Eden, and OpenSea’s X2 may offer cost-effective minting and trading.
4. Assess Lock-Up Terms: When participating in token launches, review any lock-up provisions; aligned lock-ups often signal responsible governance and reduce “pump-and-dump” risk.
5. Stay Informed on Rulemaking: Monitor SEC rule proposals and Congressional bills; shaping your portfolio around emerging legal frameworks can mitigate compliance risks.

Conclusion

Hester Peirce’s declaration that most NFTs—and even those with built-in royalty payments—do not qualify as securities represents a watershed moment for the industry. By disentangling smart-contract features from equity-like claims, the SEC paves the way for a more innovation-friendly market. Combined with broader regulatory recalibrations—such as dropped investigations into OpenSea and forthcoming token-specific rules—the NFT ecosystem is poised for renewed growth. As the market recovers, fueled by Web3 gaming, AI-driven collectibles, and institutional partnerships, both creators and collectors stand to benefit from clarified legal boundaries. For blockchain practitioners and investors alike, the opportunity lies in harnessing these emerging trends within a now-more-predictable regulatory landscape.