Michael J. Casey is the chairman of CoinDesk’s advisory board and a senior advisor for blockchain research at MIT’s Digital Currency Initiative.
The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday exclusively to our subscribers.
The only certain thing to say about the implications of any isolated Securities and Exchange Commission case is that it’s risky to assume it sets a precedent. That goes doubly for those in which a settlement is reached with no admission of guilt.
That hasn’t stopped loads of people in the crypto community armchair-analyzing last week’s news of Block.one’s paltry penalty from the SEC over its 2017 sale of EOS ERC-20 tokens. As lawyer Stephen Palley put it over at The Block, “some commentary was useful and a whole lot of it was, well, the kind of blather one expects.”
But that’s not to say one can’t or shouldn’t try to read some tea leaves out of a decision as stunning and historically significant as this one. And while, I’m no lawyer, I am going to go out on a limb and say that, on balance, there are elements in here that the crypto industry should be happy with.
Happiness is not the way many are feeling about this result. A host of crypto commentators are royally angry about it.
It seems many folks don’t like the Block.one crew. In addition to their disdain for the EOS’s blockchain’s governance challenges andthe worrisome centralization of its network in China, many people also felt that the whopping $4 billion raised in the ICO was, well, obscene. To them, that fundraise tally was the high point – or more accurately, low point – of an ICO mania period that many in the community, rightly, want to put behind them.
Block.one’s $24 million payment — with no admission of guilt, and a waiver allowing it to continue to legitimately raise money through future securities issues — represented a mere 0.6% of the ICO’s gargantuan raise. Lined up against up the $225,000 infines and disgorgement that blockchain-based storage provider Sia also agreed to pay in relation to its much smaller $120,000 unregistered securities sale, it just seemed so unfair.
Good lawyers are worth it – if you can afford them
Naturally, the announcement got people’s minds spinning. Why?
Was the soft penalty because Block.one had put geofencing in place and tried to keep its tokens out of the hands of Americans? Maybe. (Some argued that the $24 million fine is possibly about as much was raised from U.S. investors.)
Was it because the SEC now implicitly recognized that EOS has evolved into a decentralized platform and that the new, on-platform tokens into which the ERC-20 tokens were swapped, were not securities? Maybe. (Was this an application of the de facto “Hinman doctrine?”.)
Was there some other, unwritten deal kept off the public record? Who knows?
The reality is that the only reliable conclusion to draw from Block.one’s “victory” is that it pays to get good lawyers. Proof of that lies in the successful waiver request that Cooley lawyer Karen Ubell submitted on the company’s behalf, detailing the lengths to which Block.One has since gone to up its compliance game and do the right thing by the SEC.
As legal commentator Katherine Wu put it in a scribbled comment that was included in another one of her extremely useful post-decision annotation exercises, “Fuck man, their lawyers are good.”
One cynical conclusion to draw, then, is that the crypto startup community is now following the same norms as the Wall Street banks it seeks to dislodge. Here too, it seems, money buys protection, if not from the law per se but from the impediments to business that adverse rulings have on those of lesser means. It’s a melancholy thought for those who want this technology to lower barriers to entry and give scrappy garage-based startups a chance to change the world.
Clues in cooperation
But I also think the negativity slung at Block.one in this instance is excessive. There’s too much desire for schadenfreude in this industry; when people are looking for blood and it’s not delivered, their disappointment is palpable.
A more upbeat view is possible. And it’s also formed from the waiver letter. While its words are those of a Block.one lawyer, not an SEC representative, the letter’s details hint at what the SEC could be looking for from token-issuing entities. Here, it’s important to note that the Cooley letter came, in Udell’s words, after “settlement discussions with the SEC” – a line that Wu annotated with the observation that the two sides had “def been back & forth for a hot minute….” That suggests its contents captured agreed-to-elements that formed the SEC’s implicit quid pro quo for its light touch.
With that in mind, the part of the letter that jumped out at me lay in the section detailing Block.one’s cooperative position with the SEC – one adopted in stark contrast with the team from Kik, who have angrily refused to settle over their ICO and are going to court with the SEC.
It’s the section where the Cooley team highlights Block.one’s work on “technological mechanisms” regarding the token it plans to issue for its decentralized media project, Voice.
These include mechanisms aimed at cutting-edge “identity verification and transfer restrictions that could be used to support compliance with securities laws” in the future, and others that could “ensure that future tokens are only provided to individuals in jurisdictions where it has been confirmed that implementation of such token will be fully compliant with all applicable regulations.”
On all these matters, the letter said, “Block.one is initiating a process of consultation and discussion with staff of the Division, including the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub).”
Signs of openness to innovation
There’s a positive takeaway here about the SEC. The Commission has been maddeningly on the fence, or at least stubbornly silent, on how or whether it should embrace some of the more innovative compliance solutions for strengthening security while reducing friction in science.
Yet here, in a way, we have evidence that the SEC is not only open to innovation but willing even to reward transgressors who help them get their heads around that innovation.
Regulators are an unavoidable reality for startups looking to use blockchain technology to disrupt the old order. Their best hope is not to ignore them, fight them, or try to evade them, but to help them work with the crypto community’s developers to employ some of the incredible cryptographic solutions now at hand to design a more inclusive, less friction-filled financial system.
Block.one might well have gotten less than it deserves. But its approach with government is worth following.
SEC headquarters image via Shutterstock