The United States Securities and Exchange Commission (SEC) has taken an important step in its regulatory review of blockchain gaming projects by issuing a Wells Notice to CyberKongz, a leading NFT gaming platform. This development highlights growing tensions between blockchain innovators and federal regulators over the intersection of NFTs, utility tokens and securities laws. See here for our discussion of some previous SEC NFT applications.
SEC targets NFTs and utility tokens
On December 16, CyberKongz revealed in a post on as security.
A Wells Notice is a formal notice indicating the SEC’s intent to consider enforcement action based on its findings. Recipients generally have 30 days to respond to the notice, after which the SEC may decide to file a formal complaint. CyberKongz warned that this action could have far-reaching implications for the blockchain gaming industry, particularly for projects integrating NFTs with utility tokens.
Overview of CyberKongz and its Banana Token
CyberKongz began as a unique, randomly generated collection of 1,000 34×34 pixelated NFT gorillas, now known as the Genesis Collection. CyberKongz was the first to introduce and popularize a number of innovative NFT mechanics, such as unique tokenomics for their $BANANA utility token, which led to breeding and babies. Each Genesis Kong produces $10BANANA every day until March 18, 2031. The total $BANANA produced for the entire collection over the 10-year contract is $36,500,000BANANA. Anyone who holds two Genesis Kongz in their wallet and burns $600 BANANA receives an incubator to raise a baby. Each baby is unique and has random items of different rarities. The project also has many other creative aspects.
According to its website: “CyberKongz is driven by community, utility and of course every monkey’s primary source of life, $BANANA! $BANANA is the utility token that powers the CyberKongz ecosystem. This is NOT an investment and has NO economic value.
Of course, the SEC doesn’t put much stock in such disclaimers. Rather, it focuses on all of the facts and circumstances as well as the economic realities of any token.
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 “unfair accusations and information inaccuracies” that have undermined the agency’s engagement in the blockchain space. CyberKongz further highlighted the importance of defending against the SEC’s position for the benefit of the broader blockchain gaming ecosystem.
Zoom out: what are the issues?
CyberKongz Wells’ opinion highlights the challenges facing 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 integrate utility tokens to register those tokens as securities.
The SEC is not the only federal regulator interested in blockchain gaming. The Consumer Financial Protection Bureau released a report on banking in video games and virtual worlds, warning of increased monitoring 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 plays out, the case is likely to attract attention from the blockchain community, regulators and legal experts. For now, CyberKongz is preparing to defend its project and its principles in what could be a pivotal issue for the blockchain gaming sector.
Blockchain gaming companies considering whether NFTs they have issued or are considering issuing have implied securities laws should seek advice from competent counsel, based on the specific facts of their offering. In some cases, certain measures can be taken to minimize application risk.
