Future Tense

The Feds Think Bored Ape Yacht Club Was Up to Some Monkey Business

The Bored Ape Yacht Club logo is displayed on a smartphone held up against a background of various Bored Ape images.
The Bored Ape Yacht Club logo is displayed on a smartphone held up against a background of various Bored Ape images in Brazil on May 7. Rafael Henrique/SOPA Images/Sipa USA via Reuters Connect

Despite their perpetually blasé façade, Bored Ape NFTs and their holders must be getting a little frantic.

On Tuesday, Bloomberg reported that the Securities and Exchange Commission is conducting a private probe into Yuga Labs, the crypto juggernaut behind the bizarre, once-seemingly-ubiquitous Bored Ape Yacht Club.

You remember: After launching in April 2021, Yuga’s flagship collective rode the crypto hype wave to make individual cartoon ape drawings a sort of status symbol. They were endorsed by celebrities, beloved by crypto-enthusiast communities, and traded for obscene amounts of money. (At their peak, some went for more than $2 million.) The apes, crafted as digital tokens that could be minted and swapped on the blockchain ledger known as Ethereum, were the most prominent example of the nonfungible token craze—they became a mainstay of profile pictures, dance parties, and debates over the future of art.

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Then, of course, the crypto market crashed, and with it, the monetary values and trading volume of the entire NFT market. The Bored Apes pressed on with metaverse gambits, artificial intelligence, awards-show partnerships, and even real-life yachts, yet they never recovered their initial glamour. Rampant thefts, allegations of racist symbology, and myriad other controversies further tanked their reputation and cultural presence.

But the apes had managed to avoid the feds—until now. According to Bloomberg, the SEC has been secretly looking into just how to classify the role of NFTs and virtual coins in the financial sphere, which means determining how to regulate them. Specifically, Bloomberg reports, “the SEC is examining whether certain nonfungible tokens from the Miami-based company are more akin to stocks and should follow the same disclosure rules,” while “also examining the distribution of ApeCoin,” i.e., BAYC’s in-house digital currency, which is freely granted to holders of Bored Apes. (After the investigation was made public, the value of ApeCoin collapsed by about 11 percent.)

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Crypto maxis, including politicians, have been unhappy about this news for various reasons. Yuga Labs holds claim to not only the BAYC ecosystem but also a number of other brands like CryptoPunks, making for about 25 percent of the total NFT market, according to crypto journalist Zack Guzmàn. So a probe into Yuga entails deep scrutiny of the NFT economy—and suggests that other aspects of the crypto world may soon face legal threats.

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Observers have known for a while that this kind of event was coming; back in March, Bloomberg reported that SEC attorneys had been issuing subpoenas to various firms in their attempt to gauge whether NFTs operate like financial securities, which are of course regulated by the agency. Commission Chair Gary Gensler has drawn on historic legislative and legal decisions—including the Securities Act of 1933, the Investment Company Act of 1940, and the Howey test, a legal framework derived from the 1946 Supreme Court case SEC v. Howey—to argue that NFTs, “stablecoins,” smart contracts, and other non-currency crypto-economy anchors should be considered moneymaking tools all their own, as opposed to singular financial assets.

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This is a key point in the tension between apes and the government. Across federal departments, it’s generally understood that cryptocurrencies like Bitcoin and Dogecoin by themselves are tradeable digital commodities, which puts them under the jurisdiction of the Commodity Futures Trading Commission. Many traders see the CFTC’s current head, Rostin Benham, as a relatively crypto-friendly government man running an underresourced agency that is nowhere near as aggressive as the SEC in prosecuting crypto. Perhaps for this reason, there’s been a lobbying push from crypto heavyweights to shove even more parts of their marketplace under the CFTC’s supervision, to place a limit on what the SEC can legally oversee, and to ensure currencies keep being regulated as commodities at all costs. The latter fear remains salient, as Gensler has proposed that currencies mined through a popular method known as “proof of stake” could maybe be subject to securities oversight.

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The fear is, then, that the SEC probe into BAYC—lotta acronyms ’round these parts!—will not only entrench a definition of NFTs as financial securities, but also provide another signal as to how the SEC will approach well-known tokens that are explicitly linked to such collectives, like ApeCoin. What differentiates ApeCoin from, say, Dogecoin is that the former is partly conditioned upon membership within BAYC communities; you have to buy a Bored Ape (at the very least) to get a free supply of ApeCoins that you can then trade or sell. Non-BAYC participants can also buy ApeCoins on open crypto exchanges, albeit without the benefits conferred by aping for apes. ApeCoin ownership also grants you entry into a decentralized autonomous organization, or DAO, a virtual collective of real people who can vote on proposals and decisions governing group conduct as well as appropriate use of the simian tokens. (While ApeCoin is affiliated with Yuga, the ApeCoin DAO itself is not controlled by the company.)

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Thus, the SEC is likely deciding how to classify both NFTs and financial instruments firmly connected with relevant networks. There was similar reasoning at play in last week’s million-dollar settlement between the SEC and Kim Kardashian, regarding an Instagram post in which she hawked a strange crypto token that was fastened to its own individual network of contracts and already-minted tokens. By contrast, anyone can mine a currency like Bitcoin without such contract provisions. As a result, the SEC perceived Kardashian as shilling for a particular securities system without proper disclosure as dictated by law.

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In fact, a lot of government crackdowns have been hitting the news lately—and they’re not just from the SEC. After charging blockchain tool bZeroX last month for not registering its trades, the CFTC decided to sue a separate DAO, known as Ooki, that it claimed was doing the same kind of unlawful trading as bZeroX, while using its status as a “decentralized” organization to act as an “unincorporated association” and thus evade law enforcement. Also in September, the SEC charged the software company Sparkster $35 million for utilizing an initial coin offering—the crypto industry’s version of an initial public offering—to raise money without filing a public registration statement, as is standard for an IPO. Back in August, the SEC filed a complaint against the blockchain startup Dragonchain “for failing to register more than $16 million in crypto asset securities offerings over the course of five years,” as reported by CoinDesk. On Tuesday, the same day Bloomberg uncovered the SEC’s probe into BAYC, the Treasury Department levied multimillion-dollar fines on crypto exchange Bittrex for flouting sanctions laws. Taking a much bigger scope, the IRS recently proclaimed that it’s authorized by law to summon “information about U.S. taxpayers who may have failed to report to the IRS, and pay taxes on, cryptocurrency transactions.”

Government action on crypto isn’t new—but the amount of new cases, the scale of financial penalties, and the specified legal classifications are, and they certainly aren’t ideal for the true believers who went into this whole thing to evade the feds’ dirty hands. Now, NFT specialists will have to worry about government interference in addition to the never-ending hacks. The days of monkey business may be over.

Future Tense is a partnership of Slate, New America, and Arizona State University that examines emerging technologies, public policy, and society.

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