Tokenized Pokémon Cards: A Security or Not? SEC Chair Gary Gensler Weighs In

In a recent meeting with the House Financial Services Committee (HFSC), SEC Chair Gary Gensler found himself in a discussion about whether a tokenized Pokémon card could be classified as a security under United States law. The conversation, initiated by New York Representative Ritchie Torres, delved into the nuances of tokenization and its implications on conventional transactions.

The Inquiry

Representative Torres posed a hypothetical scenario to Gensler, asking whether purchasing a Pokémon card would constitute a security transaction. Gensler responded that buying a Pokémon card at a retail store would not be considered a security transaction. However, when Torres pressed further, inquiring if tokenizing such a card—essentially creating a Pokémon card NFT—would yield the same classification if purchased from an online exchange, Gensler’s response was less definitive, stating, “I’d have to know more.”

The Core of the Howey Test

Torres sought to understand if the process of tokenization could transform a non-security transaction into a security transaction. Gensler referred to the Howey Test, emphasizing that if the investing public is anticipating profits based on the efforts of others, it would be at the core of determining whether a transaction is a security.

Incoherent Responses?

Torres found Gensler’s responses to be “incoherent,” reflecting his overall approach to regulating crypto. He argued that the tokenization of a Pokémon card does not transform it into a security and accused Gensler of having a profound prejudice against blockchain technology.

Tokenization and Its Benefits

Tokenizing Pokémon cards, or any collectibles, is seen as a way to bridge the physical and digital worlds. Platforms like Courtyard allow collectors to retain a digital version via the Polygon NFT version of the card, while the physical card remains vaulted and insured. This method also enables collectors to earn passive royalties on their collectibles each time they’re sold.

The Ongoing Debate

This discussion is part of a broader ongoing debate about the classification of digital assets. Gensler has previously accused the crypto industry of “wide-ranging noncompliance” and has likened some actors in the crypto space to “hucksters” and “fraudsters.” However, the SEC has yet to offer clear regulatory guidelines surrounding what constitutes a security in the realm of digital assets.

The dialogue between Torres and Gensler highlights the complexities and ambiguities surrounding the classification of tokenized assets. It underscores the need for clear, coherent, and comprehensive regulatory frameworks to address the evolving landscape of digital assets and their intersection with traditional ones. The conversation about tokenized Pokémon cards may seem trivial on the surface, but it opens up a plethora of questions and considerations about the nature of assets, the impact of tokenization, and the role of regulatory bodies in shaping the future of digital and traditional finance.