Many well-known public chain tokens are recognized as securities by the SEC, why is DOT software?

Author: Polkadot Labs

background

Due to the series of Crypto black swans triggered by FTX last year, existing countries have strengthened their supervision. This can be intuitively felt from the recent discussions and policies related to supervision in various countries, which often mention the need to avoid financial incidents similar to FTX.

Since the beginning of this year, the supervision in the United States has also changed its previous style and frequently attacked the Crypto industry. Previously, I have expressed sadness to stablecoins such as Kraken exchange and BUSD/USDC.

The frequency of policy and meeting releases on supervision is also increasing, and it is no longer just a wait-and-see or discussion atmosphere in the past, but tends to be more direct supervision.

In addition to such a trend in policy, this point has also been mentioned to Crypto practitioners in the United States. We have also communicated with some American teams in Hong Kong before. Many local teams are leaving the United States one after another. The United States is no longer a regulatory-friendly atmosphere for the Crypto industry.

What the SEC did

Speaking of the things that everyone is most concerned about recently, there is nothing more than the SEC’s prosecution of Binance.US and Changpeng Zhao (CZ).

According to public information and analysis in the Crypto field, the United States Securities and Exchange Commission (SEC) filed a lawsuit against Binance and its CEO CZ with the following key points:

The SEC’s complaint targets three subsidiaries of Binance (BAM MANAGEMENT US HOLDINGS INC., BAM TRADING SERVICES LIMITED, BINANCE HOLDINGS LIMITED) and CZ himself.

The SEC accused Binance of providing three core services involving securities under the direction of CZ: a trading platform, a broker, and a clearinghouse. Binance knows that it needs to be registered to engage in these businesses according to US law, but deliberately does not register to avoid supervision.

The SEC accused Binance and BAM Trading of illegally offering and selling unregistered securities, including BNB Vault, Staking, Simple Earn and other products. Users are not given adequate disclosure, including potential risk factors.

The SEC accused Binance and BAM Trading of making false statements about the situation at Binance US. And it has attracted about 200 million US dollars in investment and billions of dollars in transaction volume.

The SEC accused the defendants of illegally earning themselves billions of dollars in profits while putting investors at risk.

The SEC's complaint includes:

• Permanently ban the defendant from continuing to violate the law
• Recover the illegal proceeds of the defendant
• Deprive CZ and related subjects of the ability to use interstate trade channels and means (that is, business rights) to engage in related illegal business
• Civil penalty imposed on defendant
• Properly compensate investors

The SEC’s lawsuit against Binance is a civil suit, not a criminal one.

In the United States, the SEC is a federal government agency charged with enforcing federal securities laws, protecting investors, maintaining fair, orderly and efficient markets, and facilitating capital formation.

SEC lawsuits are typically civil in nature and seek to correct violations, prevent their recurrence, and seek compensation to investors.

**Criminal proceedings involve violations of criminal law, brought by the government against a person or entity, and may result in fines, imprisonment, or other criminal penalties. **

In the world of securities law, criminal proceedings are typically handled by the U.S. Department of Justice, not the SEC. As such, the SEC’s lawsuit against Binance is a civil action that seeks damages, prevents future violations, and may require Binance to pay a fine.

Among them are the key points worthy of our attention. The lawsuit mentioned the sale of unregistered securities, and the lawsuit documents show that SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS and COTI were identified as securities.

In the lawsuit documents, the SEC analyzed the above-mentioned tokens in turn, and it is obvious that they have a similar model: the process of the initial coin offering (1C0), the ownership of Token, the distribution of the core team, and the promotion of profit generation by owning these tokens.

On the other hand, the SEC also initiated a lawsuit against Coinbase, the largest Crypto exchange in the United States and the first company listed on Nasdaq, which also found that Coinbase sold unregistered securities, including multiple tokens. In summary, a total of 19 tokens were mentioned:

• Binance：ATOM、BNB、BUSD、COTI
• Coinbase：CHZ、NEAR、FLOW、ICP、VGX、DASH、NEXO
• Both: SOL, ADA, MATIC, FIL, SAND, MANA, ALGO, AXS

**Previously, the SEC only discriminated individual projects, and only claimed in publicity that many tokens are actually securities, but this time the large-scale identification of tokens of multiple projects is securities, which may have a negative impact on the entire encryption industry. great influence. **

What would be the impact if they were treated as securities?

1. These tokens will not be able to be traded on US exchanges.

2. They may be delisted from US exchanges. (There have been some precedents for delisting before)

3. So many projects are judged at the same time, which will affect the normal development of many existing projects.

4. Practitioners or projects will face greater policy risks, which will inhibit many talents who originally wanted to enter the industry.

5. Severely hit the confidence of traditional funds entering Web3, which will be reflected in both the primary and secondary levels.

As for how to judge whether a token is a security, it is necessary to mention a standard with a sense of age - the Howey test.

**The Howey test is a standard used by the U.S. Supreme Court in a 1946 decision (SEC v. Howey) to determine whether a particular transaction constitutes an offering of securities. **

If deemed a security, it is subject to the U.S. Securities Act of 1933 and the Securities Exchange Act of 1934. The standard contains four conditions:

1. It is an investment of money;

2. The investment expects profits (profits);

3. The investment is for a specific business (common enterprise);

4. The generation of interest comes from the efforts of the issuer or a third party.

The concept of "money" in this definition continues to expand and can be extended to investment in assets. The definition of a specific undertaking is vague, and different judges have different understandings. Most federal courts believe that it can be an investment in a project.

As for the last point, if the investor's own actions will determine whether the profit will be generated or not, then such investment will not constitute a security.

According to the SEC, the above-mentioned 19 tokens meet the requirements of the Howey test due to the three common factors mentioned earlier, thus generating "profit expectations."

**Many of these 19 tokens are tokens of public chain projects, but Polkadot’s DOT is missing. **

Why did Polkadot survive?

In fact, as early as 2019, Polkadot has been planning for a rainy day.

In April 2019, the staff of the SEC Innovation and Financial Technology Strategy Center ("FinHub") released the "Analytic Framework for Digital Asset 'Investment Contracts' (the "Framework").

Elements of this framework suggest that virtually all digital assets offered and sold for fundraising purposes initially constituted securities in the hands of the initial purchaser with a high probability.

However, other elements of the framework also indicate that there is a compliance path that allows digital assets initially offered and sold as securities to be reassessed later.

This path demonstrates that, under certain circumstances, digital assets can cease to be securities under U.S. federal securities laws. In other words, a qualitative shift can occur.

This gives a compliance path to explore. In November 2019, the Web3 Foundation behind Polkadot made a decision, which changed its development trajectory and also caused changes in business processes, personnel management, and public communication methods.

They have elected to accept a "Come in and Chat" offer from the Securities and Exchange Commission ("SEC").

After three years of continuous communication with SEC officials and adjustments to itself, the Web3 Foundation finally explored a set of feasible theories.

That is, how to achieve a transformation in the nature of tokens for increasingly decentralized projects (such as Polkadot) and a digital asset that does not have securities-like attributes other than being initially offered and sold for fundraising purposes.

And in November 2022, nearly a year away from completing the Polkadot launch process, which includes a truly decentralized governance mechanism and on-chain treasury.

The Web3 Foundation is also excited to announce that they agree with the SEC staff that the original digital asset DOT of the Polkadot blockchain has completed a qualitative transformation.

**The current offer and sale of DOT is not a securities transaction, and DOT is not a security, it is just software. **

Therefore, DOT is software and not self-proclaimed. This is a path jointly explored by the Web3 Foundation and the regulators, and Polkadot is a successful practitioner on this path.

In fact, although the regulators seem to have a wide range of attacks, their own vision is to control the chaos (after all, the impact of FTX is too great), but they do not completely ban the Crypto industry, but hope that it will be in the future. Implement support for new technologies in an orderly environment.

However, regulation often lags behind technological development, which requires the project party and the regulator to communicate together to find a balance.

It is great to see that the Web3 Foundation has explored this path. After all, Dr. Gavin Wood, the founder of the Web3 Foundation and the founder of Polkadot, proposed the concept of Web3.

The success of this path is not only a milestone for Polkadot, but also a milestone for the entire Web3.

**Intuitively, thanks to this, Polkadot's DOT has fewer regulatory risks than other public chains. **

In addition, Polkadot’s regulatory risk is low, and with practical experience, many regulatory issues in the Polkadot ecosystem can seek official help, which will become the reason why many projects or companies prefer to choose Polkadot as their infrastructure.

Of course, more importantly, for the entire Web3 industry, Polkadot's move is equivalent to a precedent, and the Web3 Foundation is also very happy to share such advanced experience.

Based on Polkadot's regulatory history and success, they will launch a relevant experience content, which is the Polkadot Purple Paper.

For more information about the Purple Paper, you can check the Polkadot official forum. For details, please refer to:

Although the supervision is very strict now, even the United States, which has called out "how to make Web3 happen in the United States", has reached such a strict supervision, but the supervision will not be supervised for the sake of supervision, and will always explore a balance between development and supervision. Methods.

In this process, the Crypto industry will encounter some difficulties, but in the end, after the regulation is more standardized, it will definitely usher in a new spring.