• SEC's actions on crypto assets?

• Polkadot has morphed ?= Security -> Software

• What has Web3foundation achieved w/ self-certification?

• Why no-action letter doesn't mean what people think?

• Why no marketing?

Seeking answers amidst the noise?

All that fuzz about SEC's actions

It is becoming the new norm seeing SEC’s enforcements on another centralized structures every month. At the same time, debates flare over which crypto assets should be classified as securities and whether they are subject to enforcement.

Do you remember June 2022 when SEC Chair Gensler has warned that non-cooperating exchanges are operating outside of the law & may face enforcement? [1]

In Feb 2023, Kraken was accused of selling unregistered investment contracts since customers are promised regular returns by staking. [2]

Questions have been pointed out;

• Are these CEXs lending, borrowing, or trading with these staked assets?
• Where do the rewards come from?
• Are you, as a staker, getting your fair share?

It’s a misconception to see this action by the SEC as outlawing the staking mechanism. It’s about the behavior of the staking.

Are you staking your tokens as a part of the security of a PoS blockchain network, or are you staking to a middleman to receive a return on it?

BUSD follow-up

Right after Kraken, SEC has taken an action against BUSD alleging it to be unregistered security. Many people were shocked to see the enforcement to a stablecoin. Rumors extend to other stablecoin issuers, such as Circle and Tether.

People argued that the SEC got it wrong or acted against its law, saying that stablecoins pass the Howey test.

But the main issue occurs from the ambiguity of interpreting the Howey test and security laws on digitals assets being vague.

Do stablecoin issuers hold centralized treasuries like money market funds?

Some say yes.

Others question whether initial purchasers bought these stablecoins at a discount to stabilize the price with an expection of return, making them securities in the end. [3]

What is the common behavior in these actions by SEC?

The SEC appears to be after central exchange firms that have been found to be breaking the law, starting with stablecoin issuers.

First a disclosure: SEC’s views and Gary Gensler’s opinions aren’t the law. But if one can trace the clues back, can put the pieces of the puzzle together. Recall 2021 when Gensler compared stablecoins to casino poker chips. [4]

Gensler said that “You might think of them as the casinos wherein the investing public is looking for a better future and because most of these tokens are securities, that means that the casinos need to come into compliance with our time-tested laws.”[5]

He adds “Their business model right now is offering the public, they say, an interest return in crypto and then possibly trading against their customers, trading ahead of their customers, lending that out. Anywhere else in finance, these conflicts are not allowed and they’re separated out.”

These were just the tip of the iceberg. It was always there and has been expected for long. It just became more apparent after many rule-breaking activities in 2022 starting from Terra Luna collapse and Do Kwon to SBF and FTX case. Now we’re facing the enforcement phase.

Howey test

I told the framing of the digital and cryptocurrency assets are vague. It’s true and wrong. For the SEC, there exists the Howey test, the DAO report and the framework guide.

But it all goes back to the DAO investigation in 2017 due to the debut of the SEC acts and its outcome.

If you are selling a token for fundraising, you’re likely selling securities in the SEC’s eyes and you have to comply with US Federal Securities laws. [6]

This act was followed by the release of ‘’Framework for Investment Contract Analysis of Digital Assets’’ by former SEC director Bill Hinman in April 2019 by introducing 9 factors for analyzing whether a digital asset is an investment contract and whether offers and sales of a digital asset are securities transactions under Howey test. And then they openly have encouraged exchange firms and the foundations of blockchain networks to come, talk, consult, and comply with SEC, thereby, the laws.

After that, the famous Telegram case happened in October 2019, with the SEC charging Telegram for offering unregistered securities.

Where are we leaning toward?

It would be naive to think that the SEC's actions are an attempt to kill crypto. But it’s apparent that regulations are here, more aggressive acts are expected as promised and the runaway for illegal projects in the crypto space shortens.

SEC is aware that decentralization is mostly used in definitions in crypto space, and they are now looking for the leaks. Just recently, Gensler stated everything other than Bitcoin is a security. This might reflect the SEC’s long-held view towards cryptocurrencies. [7]

Why is Bitcoin the exception?

Because there was no token sale. The public doesn't anticipate profits based on a centralized figure or a foundation that controls it. Neither you can find a website nor a group of entrepreneurs directly connected to it.

SEC is prioritizing the level of decentralization, and looking for who is controlling when analyzing a digital asset.

If these blockhain networks are truly borderless, decentralized, and censorship-resistant, enforcements wouldn’t matter. Right?

Decentralization is the promised land to the public but only a few are shifting to it even though many initially have proclaimed it. Behind the scenes, some so-called decentralized networks turn out to be controlled by few entities.

Lido Finance, a decentralized on-chain liquid staking protocol, is the largest staker of ETH, boasting a total of ~31% of the total staked ETH. Following Lido, Coinbase, Kraken, and Binance have ~30% of the total staked ETH.

Decentralization is a meme?

• How does your favourite GameFi project handle the randomness?
• Who controls the project?
• How were the tokens issued and distributed?

Are you playing the governance game that shows ‘look everyone is voting’ while holding all the cards?

Polkadot has morphed ?= Security -> Software

How are all of these connect to Polkadot?

DOT was initially offered, sold and delivered as a security. But just the 5 days before the FTX apocalypse, Web3foundation announced that DOT has morphed from a security into software.

To be a security, or not to be: When Howey met Gary (Plastic)

After all who wasn’t a security initially?

But there is an escape. Former SEC director suggested that securities can later ‘morph’ into non-securities in 2018.

The self-clarification statement of Polkadot disclosed the fact that W3F has proactively engaged with SEC for 3 years over 50 meetings led by Angie Dalton and Joshua Ashley Klayman. These two are among the people with the highest reputation in crypto law and financial register securities.

Angie Dalton is a fin register securities property dealer, having a license for 20 years now. She spent the first half of her career before crypto in politics and government.

Joshua Ashley Klayman aka mother of blockchain is recognized by Chambers and Partners as one of only three ‘Band 1’-ranked US Blockchain & Cryptocurrency lawyers for 2019 and she is the chair of the prominent Wall Street Blockchain Alliance Legal Working Group. She is a highly recognizable figure in the industry and frequently speaks and lobbies about blockchain tech with regulators worldwide.

When we look at this self-certification and their care in complying with the existing laws since the beginning, it is very clear that Polkadot has taken a different path from other projects and has been very careful about the disclosures since then.

This might even give some thoughts why there is no marketing by Polkadot, and why there is no direct relation with any CEX. After all these insights, it might lead some to speculate about why Gavin Wood stepped back from his CEO position and morphed into just a tech guru.

Parity Tech and the Web3 Foundation are trying to fully separate themselves from the network's ‘control’, removing every centralized entities in the upcoming governance model. Soon expect OpenGov to Polkadot giving users the full control of the network. [8]

But, Is Polkadot truly decentralized?

As we look back to the moment of Ethereum’s upgrade to PoS, it has turned out that the 4 Staking pool entities were holding ⅔ of staked Ether in the Beacon chain. Here, SEC is looking for the control aspect as the primary variable of true decentralization. And this issue with Ethereum wouldn’t happen to Polkadot due to how it is designed.

It’s a fact that because the decentralization of human behavior is not something you can control, it’s hard to claim decentralization with a single metric. Still, the number of projects built and the number of validators are variables for that.

Another look-through point is: How many centralized entities contribute to the code of Polkadot?

If the main contribution is coming from a few actors, that means this blockchain is highly centralized in terms of its development and maintenance.

Polkadot distribution of public rewards by Node Operator

Yes, Ethereum has a considerable number of validators in comparison with Polkadot, but Polkadot validators receive the same reward by incentivizing users to nominate the smallest validators, thereby equalizing. The validators are the natural state of equilibrium in Polkadot.

But still, it’s quite easy to find out centralization elements in operator trends in Polkadot.

Polkadot has shown significant decentralization by network providers. Top-5 networks reduced their share by 15.6% while active operators from other networks more than doubled. But still seemed very centralized by region metrics. The validation activity is primarily concentrated in Europe and North America regions. Therefore it’s important to read the details and find out the centralized variables in ecosystems to understand where they are leading. [9]

So, Polkadot isn’t yet there to proclaim to have achieved a truly decentralized structure, but implementations according to the decentralization ethos are constantly being applied. None of the other major ecosystems prioritizes as much as Polkadot does at the moment when we look through the speeches of the core developers and the founders.

What has Web3 Foundation achieved with self-certification?

It is to provide reassurance for those who want to come & build on Polkadot without worry by showing there has been a commitment to the existing law. Spare your 6 minutes to hear more of these insights from the Polkadot’s legal team.

Do Kusama or other parachains inherit this?

Nope. But they still love each other. Every parachain project must rely on its legal counsel and decide how to handle its crowdloan rewarding method. They are all just sovereign chains under the same shared security umbrella.

Why no-action letter doesn't mean what people think?

The tribalist approach was: ‘’SEC hasn’t said anything, and therefore this means nothing’’ or ‘’this is due to prevent some enforcement act towards Polkadot which they should be assuming is coming’’.

CoinBureau - in the email newsletter from Nov. 6th.

Joshua and Angie strongly emphasize that as a team, they went to the SEC by themselves at the very beginning and have conducted more than 50 meetings with them over 3 years. And again, I have to say that these two have very high reputations in crypto law and financial register securities. They aren’t playing around by coming upfront with this statement unless they wouldn’t believe in it. Otherwise, it would be a suicide tagging the SEC for all these months.

Let’s return to the Brooklyn Law School meeting attended by Sec Commissioner Jaime Lizárraga in 2022 which Joshua organized. Lizarraga stated, ‘’It bears noting that it is not the SEC’s responsibility to provide legal advice or analysis to any market participants under its purview. That applies in equal measure, in my view, to those operating in the digital asset market. In light of this, it falls on the issuer or the intermediary and their legal counsel to determine whether their products, business practices, or assets require compliance with the federal securities laws.’’ [10]

Therefore, not saying anything means something here.

But what is no action letter exactly?

As Joshua stated, the incoming no-action letter is written by and relies on the opinion of a lawyer, not the SEC, basically saying if you comply with what you put in your letter, we don’t recommend any enforcement against you.

This letter is not future-proof. It doesn’t let the entity, firm, or foundation to act as they wish later on. You have to keep complying with the laws as you are supposed to be doing without a letter. Yes, it is a bonus for public communication, but in practice, it is not a wildcard for the projects to act as they want.

Why no marketing?

Everything Polkadot has done and hasn’t done all this time is connected with Polkadot’s ethos of decentralization and commitment to complying with the law starting from ‘no-marketing’. Therefore you haven’t seen any shilling like other projects.

In a sense, Polkadot asks the question to its holders:

Are you here for investment for a quick return or care about its ethos?

Are you building something or helping the security of the network?

That's why, on Polkadot's side, you often see tech gurus just doing tech gurus. In this case, keeping track of where developers are going is still a good metric, if not the only accurate metric.

Afterall, Polkadot doesn’t try to be an alternative form of currency. It is positioning itself as an infrastructure similar to a decentralized CPU, where many vertical and use case agnostic cores can operate in it. [11]

Still no marketing -> no hype = less user activity?

Polkadot is embracing the negative impacts of not taking advantages like others do. They are running for the ultramarathon and beliving they will one of the few survivors when all these noise and dust dissolves in crypto space.

Question

So let’s ask ourselves.

How much more time and money are we going to spend on so-called decentralized Web3 organizations, shillers, one hit wonder influencers?

What more do we need to wake up?

Please, less trust, more truth.