BitOoda Global & Regulatory Analysis, 10/7/2019: The Block.one Settlement: Validation Despite Inequality
Regulatory enforcement actions typically give us a data point or two on the SEC’s current thinking about unregistered offerings, inadequate KYC, false marketing statements, or other specific topics. Followers of regulatory issues analyze the action and whatever community discussion there might be on the case, draw any conclusions we can, and lament the absence of clearer guidelines. Usually individual actions are not enough to warrant our focus in this weekly writeup.
However, last week’s settlement between the SEC and Block.one has important implications for BitOoda and the U.S. digital asset regulatory arena writ large, so we wanted to make sure our clients and partners understand the issues raised by the action, what they mean in terms of BitOoda’s role in the market, and takeaways on how best to navigate this complex regulatory landscape.
Summarizing the key relevant points of the Block.one settlement:
· The developers of the EOS protocol agreed to pay $24 million for its unregistered ICO in 2017–2018; this is a fraction (0.6%) of the $4.1 billion it raised in the offering. We will put aside the glaring inequality of this settlement amount, compared to other recent precedents such as Nebulous and the Sia network, and instead address the more substantive issues.
· The company claims the settlement applies only to its original ERC-20 tokens, not the fully-developed EOS tokens used since its mainnet went live. This is the crux of the broader question in this case: the ‘manner of sale’ of the company’s original ERC-20 token made the initial offering a security because it was offered prior to the launch of its network, explicitly to fund development of future functionality, and with the expectation of profit from the efforts of others (a key prong of the Howey test). The SEC’s actions here indicate that it believes the post-launch EOS tokens — for use on the native blockchain — are not securities.
· Therefore, the company is not subject to any additional reporting, registration requirements, or trading restrictions for the EOS tokens. However, it is an open question whether firms that traded the initial ERC-20 tokens could be held accountable for buying/selling unregistered securities.
The case appears to validate two broader concepts, each of which has significant implications for the U.S. regulatory outlook:
1. SEC Director for Corporation Finance William Hinman’s statements that a token’s classification can change depending on how it is used. EOS’s tokens, this ruling indicates, changed classification between the time of initial sale and their post-launch form.
2. The SAFT (Simple Agreement for Future Tokens) model, in which it is possible to sell as a security an investment contract giving participants future ownership rights to tokens that are not securities.
These two key takeaways demonstrate why BitOoda’s compliance-focused approach — we are both a registered NFA Introducing Broker and a FINRA Broker Dealer — is critical to our ability to not only enable our clients to safely navigate the ambiguities of the digital asset landscape, but to create opportunities for our clients that other firms do not have the regulatory stack to pursue. We are actively engaged with FINRA on brokering SAFTS, and we can follow the lifecycle of any viable token, from initial offering to trading on primary or secondary markets. If indeed the Block.one action demonstrated one of the first clear cases of “the Hinman doctrine” and represents a regulatory precedent for the use of SAFTs, then BitOoda is uniquely positioned to take advantage of these new guideposts with bespoke solutions for clients across the digital economy.