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The U.S. Securities and Exchange Commission (SEC) has made a noteworthy move in its oversight of blockchain gaming projects by delivering a Wells notice to CyberKongz, a leading NFT gaming platform. This situation highlights the increasing frictions between blockchain pioneers and federal oversight regarding the overlap of NFTs, utility tokens, and securities regulations. See here for our analysis of earlier SEC NFT enforcement actions.
SEC Focuses on NFTs and Utility Tokens
On December 16, CyberKongz disclosed in a post on X (previously Twitter) that the SEC’s Division of Enforcement reached out to the project with a troubling message: blockchain games that include an ERC-20 token alongside NFTs need to register that token as a security.
A Wells notice serves as an official communication indicating the SEC’s plans to contemplate enforcement actions based on its observations. Recipients usually have 30 days to reply to the notice, after which the SEC may opt to initiate formal charges. CyberKongz expressed that this move could have extensive repercussions for the blockchain gaming sector, especially for endeavors that merge NFTs with utility tokens.
Overview of CyberKongz and its Banana Token
CyberKongz began as a unique and randomly generated assortment of 1000, 34×34 pixelated NFT gorillas now recognized as the Genesis Collection. CyberKongz was the first to introduce and popularize various innovative NFT mechanics, including distinctive tokenomics for their utility token $BANANA, which encompasses breeding and Babies. Each Genesis Kong generates 10 $BANANA daily until March 18th 2031, resulting in a total of 36,500,000 $BANANA over the entire contract duration of 10 years. Anyone possessing two Genesis Kongz in their wallet and burning 600 $BANANA is granted an incubator to produce a baby. Each offspring is unique and holds randomized items of varying rarities. The project boasts numerous other creative features as well.
As stated on its website: “CyberKongz is fueled by community, utility, and of course the essential life source of any ape, $BANANA! $BANANA is the utility token that energizes the CyberKongz ecosystem. It is NOT an investment and has NO economic value.”
However, the SEC does not place much weight on disclaimers like this. Instead, it centers on the entirety of the facts and circumstances and the economic realities surrounding any tokens.
CyberKongz Responds
In its reply, CyberKongz indicated its plan to contest the SEC’s stance. The project also criticized the SEC for what it identified as a “complete lack of comprehension of blockchain technologies,” citing “unjust allegations and incorrect information” that have marred the agency’s interactions within the blockchain realm. CyberKongz further emphasized the significance of resisting the SEC’s position for the welfare of the broader blockchain gaming community.
Broadening the Perspective: What’s at Risk?
The CyberKongz Wells notice underscores the hurdles that blockchain projects encounter as they navigate the SEC’s changing enforcement strategies. If the SEC’s viewpoint is upheld, it may establish a precedent that necessitates NFT gaming platforms incorporating utility tokens to register those tokens as securities.
The SEC is not the sole federal agency monitoring blockchain gaming. The Consumer Financial Protection Bureau released a report on Banking within Video Games and Virtual Worlds, cautioning of heightened scrutiny and enforcement of financial services in games that simulate conventional banking and payment systems. See here for our examination of the report.
As the confrontation between CyberKongz and the SEC evolves, the scenario is poised to attract significant attention from the blockchain community, regulators, and legal professionals alike. For the time being, CyberKongz is preparing to defend its initiative and principles in what could become a crucial case for the blockchain gaming industry.
Blockchain gaming firms that harbor uncertainties regarding whether NFTs they have released or intend to release could involve securities laws should consult a knowledgeable attorney, based on the specific details of their offering. In some situations, certain measures can be taken to reduce the risk of enforcement.
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