Regulators in four states have banded together to accuse a metaverse casino of selling NFTs that violated securities laws.
On Thursday, state securities regulators from Texas, New Jersey, Kentucky, and Alabama filed emergency cease-and-desist orders against Slotie NFT, a Tbilisi, Georgia-based virtual gambling entity that markets itself as “the largest and fastest growing online casino network on the blockchain.”
Slotie, which operates gambling games in over 150 virtual casinos, sells NFTs that claim to grant holders ownership interest in those casinos, and the ability to passively share in Slotie’s gambling profits. The NFTs—of which Slotie issued 10,000—are distinguished by rarity; the rarer the Slotie NFT, the greater the share of casino income its holder is purportedly entitled. It is one of a large number of NFT projects on the market today that offer similar services and revenue-sharing rewards to holders.
State regulators found the NFTs to be unregistered securities issued in violation of state laws. They have ordered Slotie to cease and desist from selling its NFTs immediately in the four states that filed orders.
Slotie has 30 days to comply with the orders, else its operators risk jail time of two to 10 years, in addition to fines, should they be prosecuted and convicted.
State Securities Regulators have filed enforcement actions against @SlotieNft! Claiming they are engaging in fraud by selling securitized #nfts. The project could be facing a sentence of 2 to 10 years and a fine if they don't comply pic.twitter.com/qypcwJeqyA
— OKHotshot (@NFTherder) October 21, 2022
The gambling company, meanwhile, has made no public acknowledgment of the charges, doubling down today on Twitter on its allegedly illegal practices.
More than utilities, what makes Sloties special is the conviction of the team and community 💪
We're all pushing towards massive success. We’re all in 🎰
— Slotie (@SlotieNft) October 21, 2022
The action comes at a time when tensions surrounding American regulators’ attitude towards NFTs seem to have reached an all-time high. Until now, regulators have been particularly tight-lipped about their interest in regulating NFTs as securities, though recent developments indicate that may soon be changing.
Jeremy Goldman, an attorney specializing in NFTs, told Decrypt he believes it makes perfect sense that an NFT project like Slotie would be one of the first to incur a securities regulator’s wrath.
“This is low-hanging fruit,” Said Goldman. “[Slotie NFTs] are marketed as giving the holders a passive income in revenue that's generated through the efforts of Slotties and its partners, which is the definition of a security.”
One reason these states may have chosen to pursue Slotie for securities violations, Goldman says, is the fact that the case pertains to gambling, a highly regulated and closely monitored sector of state law enforcement.
“I imagine that part of the reason it came from the states is because they started with concern over gambling,” said Goldman. “And then, I guess, as a matter of litigation strategy and enforcement, they thought that the securities angle was an easier shot.”
How this state-level action against an online casino will impact broader conversations about federal-level regulation of blue-chip, multi-billion dollar NFT collections remains to be seen.
Earlier this month, an anonymous source told Bloomberg that the Securities and Exchange Commission (SEC) is investigating whether Yuga Labs, the $4 billion company behind prominent NFT collection Bored Ape Yacht Club, violated securities laws in its promotion and selling of NFTs.
Some experts thought the move could have been a play on the SEC’s part to make headlines and stave off other governmental bodies, including the Commodities Future Trading Commission (CFTC), from planting flags on the turf of NFT regulation.
Goldman sees the biggest development from this week’s enforcement action against Slotie to be the indication that there could be even more dogs in that fight than previously anticipated.
“The federal agencies are not the only sheriffs in town,” said Goldman. “I can only speculate, but it does feel to me that there's some jockeying for power and control. And this is a signal that the states still have a role to play when it comes to even securities in the crypto space.”