In reviewing this week’s SEC charges there is one top digital currency that is missing from the SEC’s list of unlicensed securities and that is Polkadot (DOT). The reason for this is an argument that the Layer 0 cross-blockchain protocol token is no longer a security and morphed into software.
In 2017, the SEC published the DAO report which suggested that basically every digital asset used for fundraising processes would constitute a security, but the framework also cited the ability for a digital asset to change and no longer be considered a security when the protocol became fully decentralized.
The Web3 Foundation, the original developer of the Polkadot protocol, took a proactive “come in and talk” approach to meeting with the SEC. They spent three years working together with the SEC to set up business processes and communication guidelines. They also worked to enable a truly decentralized governance mechanism and on-chain treasury. All of this was to ensure Polkadot would become compliant with security laws.
My friend Angela Dalton has been a long-term advisor to the Web3 Foundation and I reviewed this process with her as this evolution was occurring. One take away from our discussions was the positive tone she used to describe the meetings. The Foundation stressed this in their own posts stating “the SEC has welcomed meetings with the Web3 Foundation, and there has been a spirit of open communication and dialogue.” This is very contradictory to the recent message from Coinbase and other companies who attempted to also meet with the SEC.
Maybe it’s a much simpler answer. Ethereum was not identified in the SEC’s list of securities in the filings, but the SEC seems to be undecided on its status. In 2018 the SEC said it was “sufficiently decentralized that we'll consider it not a security,” but following the Shapella fork and a number of comments from Ethereum founder Vitalik Buterin it seems this declaration is being questioned.
The Howey Test’s statea that an investment contract exists if there is an "investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others." If there are no “others” to direct the efforts of the enterprise, i.e. the protocol is fully decentralized, then its not a security and this would allow for a token to morph into a non-security.
This should answer the question as to whether a protocol is a security or not, but it does not address the SEC’s concern over exchanges like Binance and Coinbase (COIN) offering tokens which may or may not be securities. In public equity markets, the SEC approves company listings before exchanges can begin trading the stock. This may eventually be the answer as we have seen in the Polkadot case – the original developers sought approval from the SEC – but for now we’ll just have to wait and see what the SEC tell us or more likely what Congress decides.
◾ Binance.US suspended USD deposits and is preparing to pause fiat (USD) withdrawal channels in a move to an all crypto exchange. (Twitter)
◾ Crypto custodian BitGo is acquiring Nevada-based competitor Prime Trust. (WSJ)
◾The SEC asked a federal court for permission to use “alternative means” to serve papers to Binance Holding Ltd. and CEO Changpeng Zhao noting the executive is “famously protective of revealing his whereabouts.” (Bloomberg)
Government & NGO Actions
◾President Biden and British Prime Minister Rishi Sunak signed the signed the "Atlantic Declaration," a first-of-its-kind economic partnership on artificial intelligence and other economic and commercial relations. (Reuters)
◾ The House Financial Services Committee released a new draft of the stablecoin bill which states “It shall be unlawful for any person other than a permitted payment stablecoin issuer to issue a payment 9 stablecoin for use by any person in the United States.” (House.gov)
◾ Senator Elizabeth Warren (D-MA) sent a letter to US Attorney General Merrick Garland asking the Justice Department to investigate whether Binance made false statements to lawmakers about its business practices. (Bloomberg)
◾ US Senators introduced two bipartisan bills on AI: one requiring the government to be transparent when using AI to interact with people, and a second bill to establish an office to assess the US’ competitive position in this field. (Reuters)
◾ The European Union officially published its Markets in Cryptoassets law (MiCA) in its official journal. (Europa.eu)
Public Company Releases
◾ Hive Blockchain (HIVE) produced 304.6 bitcoin ( 3.30 EH/s) in May. (Newsfilecorp)
◾ DMG Blockchain (DMGI) mined 70.5 bitcoin with a 0.78 EH/s realized hashrate and sold 34.5 BTC in May. (Globenewswire)
◾ Hut 8 (HUT) generated 147 bitcoin and sold 179 in May. (PRNewswire)
Restructuring, Losses and Legal News
◾ The FTX bankruptcy judge in the US said he would not hand over claims to a Bahamian bankruptcy court. (Bloomberg)
◾ FTX says the bankruptcy court should not reveal a list of the exchanges customers arguing this would harm the exchanges sales value. (Cointelegraph)
◾ OG Ethereum development studio Consensys is facing a shareholder vote over the controversial transfer of company assets. (Coindesk)
◾ Mara eliminated 85% of the positions at the African crypto exchange and reportedly cut salaries of its remaining employees. (News.bitcoin)
AI Announcements
◾ Meta (META) used an an all-hands meeting to demonstrate its use of a ChatGPT-like chatbot and other AI tools to its employees. (Reuters)
Protocols, Applications & Business News
◾ The Solana Foundation “address[ed] the elephant in the room” stating it “strongly believes that SOL is not a security.” (Fortune)
◾ IOHK, the engineering and research company behind cardano (ADA) made their own declaration stating “under no circumstances is ADA a security under US securities laws. It never has been.” (Iohk.io)
◾ Binance CEO Changpeng Zhao sent an internal email to all employees warning them to be diligent in their social medial posts and chat logs explaining “anything you say (type) can/will show up in a court room.” (Twitter)
◾ Schroders Plc is actively looking to hire a third-party custodian for its client’s digital assets. (Bloomberg)
◾ Moody's Investors Service affirmed Coinbase’s (COIN) B2 corporate family rating and improved its outlook from negative from stable. (Moodys)
◾ Ethereum browser wallet MetaMask is integrating with enterprise crypto operations platform Fireblocks to provide institutional investors and builders with best-in-class wallet security alongside increased access and functionality to DeFi and web3. (Businesswire)
◾ USDC issuer Circle announced the hiring of former CFTC Chairman Heath Tarbert as its Chief Legal Officer. (WSJ)
◾ Galaxy Digital (GLXY) CEO Mike Novogratz said his firm is responding to the US regulatory attack by actively looking to move US personnel overseas. (Decrypt)
◾ Crypto.com is integrating its exchange with CoinRoutes to provide institutional access to digital asset liquidity. (Crypto.com)