Bankless - Are NFTs Securities? with Securities Lawyer Brian Frye
Primer: Meet Brian Frye — artist, lawyer, and troll! Find out how he trolled the SEC (and why!) in this episode of the Bankless Podcast.
Background
Went to art school before going to law school
Became a securities lawyer
Is a law professor at a state law school
“Because artists were always like why are you talking about securities? And I tried to explain conceptual art to securities lawyers, and they'd be like, why would anyone buy something like that? That's stupid.”
- Brian Frye
Why Does He Think That NFTs Are Securities?
In 2021, he started engaging with the NFT ecosystem
People were terrified that NFTs may be perceived by the SEC as securities
He was a former securities lawyer
The SEC was not in the business of deciding whether something is a security. It’s in the business of deciding what it needs to regulate
The Supreme Court had a famous case called the Howey test where they established the criteria of what constitutes an investment contract
The Howey test was so broad that any investment could be considered a security
The correct question should be whether is it something that the SEC should be regulating
The primary mandate of the SEC is to make the securities market work more efficiently
The goal is to explain to the SEC what the crypto market needs
SEC No-Action Letter Request
Created a law review article in the form of a prospectus for the sale of a work conceptual art
The article was titled SEC No-Action Letter Request
It proposes the sale of conceptual art, titled No-Action Letter requesting an edition of 100 for $10,000 per edition
Wanted the SEC to prohibit him from selling it to the public
Did not get any response from the SEC
His friend got the SEC to respond. The SEC was talking about it but provided no actual information
“A friend of mine actually described the first SEC action letter request he'd ever seen, because I was basically, come at me, bro.”
- Brian Frye
Putting It On OpenSea
Fooled around and minted it on OpenSea
One day, Sam Hart, an NFT collector, bought it for 0.5 ETH
A Better Alternative Term For “Securities?”
History Of The Term
The term securities predated the SEC and Blue Sky Laws
Securities is just a fancy way of saying how do we enable people to invest in something that they believe is going to be more valuable in the future
The issue is that it is too narrow
The art market has always been a securities market
When someone buy an artist’s artwork, they are buying a security interest in the artist’s future fame
“The object itself is not valuable. The only thing that's valuable in the art market, as an investment market in art, is the attribution.”
- Brian Frye
The Term “Collectibles”
Some NFT projects are fundamentally collectibles
The market for Veblen goods/luxury goods sit between the 2 poles
His Take On David’s Graphic
It’s a complicated ecosystem with lots of moving parts
One way to think about it is to distinguish between consumption goods and investment goods
The SEC is wrestling with understanding what its real purpose and mission is
Most of the securities disclosures that the SEC requires are irrelevant to the majority of investors
The reason humans invented securities was to give companies access to capital markets for them to run their business and generate more money
However, historically, authors, artists, etc. did not have access to those capital markets because there were no tools for them to sell shares in their enterprises
The traditional art market is largely controlled by insiders
The NFT market and decentralization took control away from the insiders and gave it to the general public
Starting Conversations With The SEC
Have to start conversations with the SEC and help them to understand what’s going on
The SEC is a really old agency used to doing things in its own way
They are used to dealing with their client companies like Goldman Sachs, J.P. Morgan, etc., but not DeFi users, artists, and crypto enthusiasts
On one level, he’s a troll. On another level, he’s a fully promoted law professor at a state law school
Have been sending them law review articles explaining things to them but was ignored
His Article On Copyright
In the past, production and distribution of copies of work were expensive
Copyright was a way to minimize competition and make it economically feasible for publishers to publish
Copyright did not exist before the printing press
Copyright was privately created by the Stationers’ Company in London
Initially, it was industry self-regulation
It was only enshrined into law until hundreds of years after the Stationers’ Company
Now that everything is digital, the marginal cost for publication and distribution is zero
NFT marketplaces enable people to sell clout directly to speculators
Previously, people could not internalize/monetize it. They had to do it via proxy (e.g. doing endorsements, selling products, etc.)
“The premise of copyright is artificial scarcity. But we don't need artificial scarcity in the world of perfect abundance, right? Works of authorship are natural public goods, they aren't diminished by consumption.”
- Brian Frye
The idea is to encourage people to consume the artist’s works more, so that the artist’s clout will grow, leading to real value
Has a musician friend called Simon Indelicate
Simon wrote an album called Arcadia Park, which was a soundtrack for an imaginary theme park
He sold Arcadia Park as an NFT collection, putting his work in the public domain
The collection sold out in less than 15 mins, making him more money than years of all his previous albums combined
His Next Prank
Don’t want to spoil it
Is a big proponent of plagiarism
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