Digital videos of key sporting moments have become hot property, with some on the National Basketball Association’s (NBA) Top Shot website selling for hundreds of thousands of dollars.

But Rialto Markets’ Head of Market Structure Lee Saba worries about investor protection, and questions how long these and other sporting NFTs (Non-Fungible Tokens) can evade regulation by the US Government’s Securities Exchange Commission, and the need to trade on a properly approved and regulated alternative trading system (ATS).

Saba – also co-chair for the global financial industry standards organization FIX Trading Community – asks:

“How is the consumer protected here? What if the system goes down and the asset is lost? What redress is there?

“September’s insider trading scandal at OpenSea – claimed to be the world’s largest NFTs marketplace – highlights a need to police a sector spreading across many sports, including auto racing, baseball, soccer and football, as well as other sectors such as digital art.

“The Top Shot blockchain-based platform has one of the highest profiles. Created by the NBA, National Basketball Players’ Association and Dapper Labs, it allows fans to buy, sell and trade video highlights described as ‘digital collectibles’.

“An asset might list at $1,000 on their own trading platform and sell for more than $1,500 moments later, but if the NBA then says it will never reproduce another asset quite like it, this can drive the value through the roof to then sell for far more, minus commissions, fees, etc. 

“No surprise then that all NFTs have generated $2.5 billion in the first six months of the year. Other sports and genres are watching closely – the NFL has just signed a deal with Dapper Labs.

“But the US Government’s referee – the SEC’s new Chairman, Gary Gensler, and his team – will surely be measuring NFTs against the Howey Test (the 1946 Supreme Court case that determines whether something is a security).

“Rialto Markets’ believes the SEC will have to act and legislate that NFTs must be traded on a regulated alternative trading system (ATS), which contrasts sharply with the freewheeling unregulated world of NFTs.

“Having taken two years to achieve FINRA (Financial Industry Regulatory Authority) recognition and SEC-qualification for our ATS platform, Rialto Markets has seen first-hand how essential it is to protect the investor and deliver long-term confidence in these exciting new markets.

“We further suggest a mechanism and strong compliance rules, like that applied by the 2012 Jobs Act and private company crowdfunding through Reg CF and Reg A+.

“Once registered properly, NFTs must then trade on a registered ATS because regulations exist to protect investors against scamming, mistreatment, and overcharging. 

“But Mr Gensler surely has this on his SEC radar, having already described the cryptocurrency market as the Wild West of our financial system and desperately needing rules so, expect regulations on NFTs with tough penalties for failure – Mr. Gensler has already shown he will levy millions or billions in fines to match profits made by those dealing outside the legislative framework.

“Others must see this happening and we have already had many inquiries from parties interested in ‘white labelling’ our approved ATS platform, in expectation that the SEC will act soon against NFTs.

“While Rialto Markets recognizes the new type of market structure offered by blockchain technology, we are also pragmatic about how it must be implemented.”

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