In June, the SEC filed a complaint against Kik Interactive alleging that Kik failed to register a securities offering. We’ve previously spoke about the distractions in the complaint that don’t matter and the possibility that this case could provide much-needed clarity for the open blockchain ecosystem. In this post, we focus our analysis on what the case didn’t address, and why it’s good news for the ecosystem.
Over a year ago, the SEC’s Division of Corporation Finance Director Bill Hinman gave a speech where he acknowledged that while Ethereum may have been a security at some point, it is no longer a security today. In a letter to Congress, Chairman Clayton affirmed that this transition is possible.
When we look at the Kik investigation, we can tell from the Wells Notice that the SEC originally looked at both Kik Interactive and the Kin Foundation. However, when the complaint was issued, it only focused on the offering of Kin in the September 2017 token sale, not Kin in the ecosystem today. The fact that the SEC investigated the Kin Foundation, but decided not to pursue a complaint is good news for developers, platforms, and others in the ecosystem who use these tokens because it separates the question of the token sale from the activities in the ecosystem since then. This is notable because SEC Chairman Jay Clayton has stated that in his view all ICOs have been securities — which would include Ethereum — but that doesn’t necessarily make the tokens a security today. We see that same fact pattern here in how the SEC has brought a case against Kik for the initial sale of Kin but not against the Kin Foundation for future distributions to developers and users. We may see more of this distinction as the SEC evaluates more token projects.
This poses an interesting public policy problem. Today, we have tokens in circulation that function as commodities that were possibly issued in a way that was in violation of securities laws. Ethereum, Kin, and other tokens are circulating in networks in a way that is completely legal under certain laws. But if we look at what Hinman said in his speech and what the SEC discusses in its complaint, these tokens were distributed using methods that potentially were not in line with the law.
Going forward, the Blockchain Association will continue to work with the sponsors of the Token Taxonomy Act and other leaders in Congress to find a clearer regulatory pathway from centralized project to functional open blockchain network. In the meantime, the ecosystem can take some comfort in knowing that those networks that have reached functionality are likely safe.