/>iThe U.S. Securities and Exchange Commission (SEC) has taken a significant step in its regulatory scrutiny of blockchain gaming projects by issuing a Wells notice to CyberKongz, a prominent NFT gaming platform. This development underscores growing tensions between blockchain innovators and federal regulators over the intersection of NFTs, utility tokens, and securities laws. See here for our discussion on some previous SEC NFT enforcements.
SEC Targets NFTs and Utility Tokens
On December 16, CyberKongz revealed in a post on X (formerly Twitter) that the SEC’s Division of Enforcement approached the project with a concerning message: blockchain games featuring an ERC-20 token alongside NFTs must register the token as a security.
A Wells notice is a formal notification indicating the SEC’s intention to consider enforcement actions based on its findings. Recipients typically have 30 days to respond to the notice, after which the SEC may decide to pursue formal charges. CyberKongz warned that this action could have far-reaching implications for the blockchain gaming industry, particularly for projects that integrate NFTs with utility tokens.
Overview of CyberKongz and its Banana Token
CyberKongz started as a unique and randomly generate collection of 1000, 34×34 pixelated NFT gorillas now known as the Genesis Collection. CyberKongz were the first to introduce and popularize a number of innovative NFT mechanics, such as unique tokenomics for their utility token $BANANA, which led to breeding and Babies. Each Genesis Kong produces 10 $BANANA every day until March 18th 2031. The total $BANANA produced for entire collection over the 10 year contract is 36,500,000 $BANANA. Anyone who holds any two Genesis Kongz in their wallet and burn 600 $BANANA receives an incubator to breed a baby. Each baby is unique and owns randomized items with different rarities. The project features many other creative aspects as well.
According to its website: “CyberKongz is driven by community, utility, and of course the main life source of any ape, $BANANA! $BANANA is the utility token that fuels the CyberKongz ecosystem. It is NOT an investment and has NO economic value.”
Of course the SEC does not place much emphasis on disclaimers such as this. Rather, it focuses on the totality of the facts and circumstances and the economic realities of any tokens.
CyberKongz Pushes Back
In its response, CyberKongz signaled its intention to challenge the SEC’s position. The project also criticized the SEC for what it described as a “complete lack of understanding of blockchain technologies,” citing “unjust accusations and information inaccuracies” that have plagued the agency’s engagement with the blockchain space. CyberKongz further stressed the importance of defending against the SEC’s stance for the benefit of the wider blockchain gaming ecosystem.
Zooming Out: What’s at Stake?
The CyberKongz Wells notice highlights the challenges faced by blockchain projects as they navigate the SEC’s evolving approach to enforcement. If the SEC’s position is upheld, it could set a precedent requiring NFT gaming platforms that incorporate utility tokens to register those tokens as securities.
The SEC is not the only federal regulator with an eye on blockchain gaming. The Consumer Financial Protection Bureau published a report on Banking in Video Games and Virtual Worlds, warning of increased scrutiny and enforcement of financial services in games that mimic traditional banking and payment systems. See here for our analysis of the report.
As the battle between CyberKongz and the SEC unfolds, the case is likely to draw significant attention from the blockchain community, regulators, and legal experts alike. For now, CyberKongz prepares to defend its project and principles in what could be a pivotal case for the blockchain gaming sector.
Blockchain gaming companies that have concerns about whether NFTs they have issued or plan to issue implicate securities laws should seek advice from a knowledgeable attorney, based on the specific facts of their offering. In some cases, certain actions can be taken to minimize the risk of an enforcement.
