Followups: King TUT and crypto's evasive Trustless Utility Tokens

Anthony Bardaro
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14 min readJan 31, 2023


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White paper: Cryptoeconomics as a Limitation on Governance

by Nathaniel Schneider (University of Colorado Boulder) 2022.08.11

[R]eliance on cryptoeconomics also introduces limitations on governance possibilities. Drawing on earlier critiques of how economic logics can erode democracy, this paper identifies specific limitations that cryptoeconomic governance faces. It contends that, to overcome these limitations, designers should envelop cryptoeconomics within forms of politics capable of seeing beyond economic metrics for human flourishing and the common good…

Although it is far from clear what role cryptoeconomic systems will play in the economy and society of the future, the actually existing experiments contain innovations in governance that attract persis- tent interest. Some of these innovations include:

• Dynamic decision-making processes that evaluate preferences in nearly real time
• Voting systems unavailable in conventional politics or business
• Mechanisms for incentive alignment among diverse participants
• Algorithmic dispute resolution
• Permissionless participation
• Widely shared accountability and distribution of benefits
• Self-enforcing security and censorship resistance
• Sovereignty from external control or regulation
• Transparency of on-chain activity
• Competitive markets for governance
• Ease of exit and capacity to fork systems […]

Vote-buying, a practice usually considered anathema in legacy political systems, has risen to an art in crpytoeconomic design, suggesting a culture in which economics is a preferable replacement for politics.

Cryptoeconomics also serves as a kind of “overlapping consensus” that enables people with diverse aims and social visions to work together. Designers describe this in terms of aiming for “credible neutrality” through systems apparently free of bias toward any set of participants. Aiding claims to neutrality is the apparent transparency of a public blockchain, where the visibility of transaction data is integral to its value and function. Built-in neutrality and transparency offer the prospect of previously untenable coordination among parties without another basis for trust. Yet, as the processes of The Graph suggest, cryptoeconomic mechanisms are only part of the story. [A 2016 study] pointed out an “invisible politics” at work in the early Bitcoin community; practices opaque to blockchain ledgers remain integral to crypto governance in practice. Personal relationships, cabals, private chat groups, invite-only calls, and other flows of “off-chain” power shape whatever appears “on-chain.” In earlier-stage projects aspiring to “progressive decentralization” — that is, gradually expanding ownership and control from a particular founder or company to a wider community of stakeholders — participants perform cryptoeconomics even where it does not yet fully reign, because cryptoeconomics is the engine of the confidence machine. When the machine is not yet fully operational, cryptoeconomic performances can engender trust until confidence presumably replaces them…

A common anxiety is the danger of “Sybil” attacks, in which a single user can benefit by masquerading as many users. Such attacks can be easy and damaging. Some applications may require users to verify their identities by multiple means, such as by posting a code on social media accounts, producing a video of themselves, and submitting biometric data. In cryptoeconomic contexts, personhood cannot be taken for granted, and establishing it incurs costs. Enduring a complex process of identity verification, for instance, may prevent less-motivated users from completing the on-boarding process, thus reducing adoption.

For many blockchain enthusiasts, the lack of reliance on personal identity is a feature not a bug, offering advantages in terms of privacy and permissionless participation. Cryptoeconomics could also produce identification protocols that improve on existing options, such as through “self-sovereign identity” mechanisms based on reputation and mutual attestation of others across a network…

This kind of voice, however, has persistently favored wealthier participants and institutional investors, frustrating people attracted by the prospect of shared governance. The persistent dominance of early-to-market blockchains like Bitcoin and Ethereum means that cryptoeconomics also lends outsized power to their early adopters. Mechanisms like quadratic voting and 1Hive’s conviction voting can reduce plutocracy by balancing the influence of large vote-buyers with the degree of preference among smaller token-holders. But this may come at the cost of greater vulnerability to Sybil attacks in the absence of robust means of establishing personhood. For now, plutocracy may be endemic in cryptoeconomic systems…

The US Securities and Exchange Commission has indicated a safe harbor from securities regulation for distributed-ledger systems whose control is “sufficiently decentralized” — providing an important incentive for projects to practice at least some of the decentralization that they so often preach…

It may be that a more mature cryptoeconomics can help political systems incorporate an unprecedented diversity of data and feedback loops, across a wider range of concerns. By integrating cryptoeconomics with democracy, both legacies seem poised to benefit.

SEC informs Paxos of incoming lawsuit regarding “unlisted security” $BUSD

by The Wall Street Journal (WSJ) 2023.02.12

The Securities and Exchange Commission has told crypto firm Paxos Trust Co. that it plans to sue the company for violating investor protection laws… The SEC’s enforcement staff issued a letter to Paxos known as a Wells notice, which the agency uses to inform companies and individuals of a possible enforcement action, according to the people. The notice alleges that Binance USD, a digital asset that Paxos issues and lists, is an unregistered security…

BUSD is a Binance-branded stablecoin pegged to the dollar on a one-to-one ratio. Binance and Paxos announced the partnership to launch it in 2019. The Paxos-run digital asset exchange, itBit, also lists BUSD. Many other exchanges also list BUSD.

It couldn’t be determined if the SEC notice is specifically related to Paxos’ issuing of the coin, the listing of the coin or both.

In the wake of FTX collapse, Binance’s majority marketshare increases for 4th consecutive month despite regulatory scrutiny

by Coindesk 2023.03.08

The exchange market share increased from 59.4% in January to 61.8% in February, according to a report from crypto market data provider CryptoCompare…a +13.7% increase in its spot volumes to $504B, an all-time high...

This comes as regulators in the U.S. and beyond have ratcheted up their scrutiny of the exchange in recent months. Most recently, a U.S. Securities and Exchange (SEC) official said that agency staff believe Binance.US may be operating an unregistered securities exchange…

Coinbase is second to Binance in volume, trading $39.9 billion (-29% from the previous month), followed by Kraken, which traded $19.3 billion (-11%)… OKX and Bybit followed with 14% and 13.3% market share, respectively.

On the US Securities and Exchange Commission’s regulatory crackdown on crypto

by Matt Levine (Money Stuff/Bloomberg Opinion) 2023.06.07

[A crypto] project might do what is called a SAFT, a “simple agreement for future tokens,” in which the VC pays the crypto project now and gets back a contract promising delivery of the project’s tokens in, say, a year. The theory here is that the SAFT fundraising is a securities offering — the crypto project is selling investment contracts for cash — but the underlying tokens are not securities; the tokens are just a form of currency for use in the crypto project. They are, in crypto lingo, “utility tokens”; people buy them not as speculative investments in a business but to use them to do crypto-y stuff.

I have sometimes explained ICOs by saying that “they’re like if the Wright Brothers sold air miles to finance inventing the airplane.” Raising financing from investors to build a speculative new technology feels like a securities offering, so ICOs are securities offerings, but actually existing airline miles are not securities: They are a loyalty program, a way to pay for an airline seat. The SAFT concept is a way to embody this difference: Selling the tokens before the project exists is a securities offering, but once the project is running and the tokens are useful, the tokens are just tokens, not securities…

The SAFT is not the only way to do it, though; even if the tokens are always securities, selling them in private placements to VCs and locking the VCs up for a year is more or less a way to comply with securities laws. Broadly speaking, the US securities laws regulate mostly public sales of securities, widespread sales to retail investors; private placements to big investors are less regulated.

In any case there are plenty of crypto projects, these days, that the SEC has not gone after for doing illegal securities offerings. There are various reasons why a crypto project might not have gotten in trouble with the SEC:

1. Some of them did not do securities offerings. Bitcoin, most notably, never raised money from investors by selling Bitcoins to build its network; this whole analysis does not apply to Bitcoin, and everyone agrees that it is not a security.

2. Some of them did securities offerings, but by the time the SEC noticed they were too entrenched and decentralized and it would have been a pain for the SEC to go after them. Ethereum, most notably, very very clearly did an ICO in 2014, raising about $18.3 million by selling ETH tokens. If they did that today, or in late 2017, the SEC would have some serious questions. But by the time the SEC got around to cracking down on ICOs in 2017, Ethereum was big and decentralized and the SEC would have had a hard time, practically and legally, challenging its 2014 ICO. And so everyone sort of grudgingly concedes that ETH is not a security.

3. Some of them did securities offerings after the SEC started cracking down, and they learned the right lessons and followed enough best practices (lockups, SAFTs, not selling in the US, etc.) that the SEC had no real cause for complaint. They did legal (private) securities offerings.[3]

4. Some of them did illegal securities offerings, before or after the SEC got around to cracking down on ICOs, but the SEC has limited time and attention and chose not to go after them, because it could get better bang for its enforcement buck by going after different offerings.

5. Just wait! The fact that the SEC has not yet sued any particular crypto project doesn’t mean that it won’t.

And so the result is that lists something like 10,408 crypto tokens, and only a handful of them have been sued by the SEC for doing illegal securities offerings. The first token on the list is Bitcoin, which the SEC has not sued for Reason 1 above. The second is Ethereum, Reason 2. The third is Tether… The fourth is Binance’s BNB token, which the SEC just sued this Monday. Sixth is Ripple’s XRP, which the SEC has been suing since 2020.

The more interesting ones, though, are Cardano’s ADA token (#7 on the list), Solana’s SOL token (#9) and Polygon’s MATIC token (#10). The SEC absolutely thinks these tokens are all securities; it said so, in some detail, in court filings this week. But it has not sued Cardano or Solana or Polygon for selling these tokens illegally. I don’t really know why, but any combination of Reason 2 (they are pretty big and entrenched and decentralized, so it’s hard to even know who to sue), Reason 3 (they did follow best practices; Solana, for instance, sold its tokens through a SAFT and filed forms with the SEC about the offering), Reason 4 (so many tokens, so little time) and Reason 5 (it is still early days) is possible. I would probably bet mostly on Reason 3: These are tokens that were issued in securities offerings to raise money for crypto projects, but they weren’t issued in illegal securities offerings. These projects had good lawyers and were launched in a time of sunny optimism for crypto regulation in the US; they tried to follow the law as they understood it, and more or less succeeded.

In the last few months or so, the SEC has launched a new and more aggressive crackdown on crypto than the 2017 version. And its approach is different.

There are two main securities laws in the US, the ’33 Act and the ’34 Act. The ’33 Act — the Securities Act of 1933 — regulates the issuance of securities: If you want to raise money for your business by selling stocks or bonds, you have to register your sales with the Securities and Exchange Commission and give buyers a prospectus with disclosure about your business. The ’34 Act — the Securities Exchange Act of 1934 — regulates the trading of securities: It has rules for stock exchanges and brokers, rules against fraud in stock trading, rules for continuing disclosure by companies with publicly traded stock.

The SEC’s 2017ish ICO crackdown was very much a ’33 Act crackdown: People were raising money by selling scammy stock-like tokens, and the SEC shut down their scams, one at a time.

And one result of this approach is that lists 10,408 crypto tokens, and only a handful of them have been sued by the SEC for doing illegal securities offerings. Maybe that’s fine! Maybe the SEC’s crackdown on ICOs deterred 30,000 other, scammier crypto projects from launching; maybe the 10,000 current crypto tokens are all pretty good and not scammy…

What can the SEC do about it? Well, it can go sue thousands of crypto projects, but that is hard not only because there are thousands of them but because many will be decentralized and/or foreign enough that they are hard to sue.

Also some of them didn’t do anything wrong: Solana, let’s say, did do a securities offering of SOL tokens, but legally, selling them to venture capitalists in private placements subject to appropriate SAFTs and lockups. The fact that those tokens now trade publicly, with less disclosure and fewer investor safeguards than the SEC would like, is, from the SEC’s perspective, unfortunate. But it’s not exactly Solana’s fault, or rather it is Solana’s fault but in a perfectly legal way.

But what the SEC can do is sue crypto exchanges. What it can do is try to shut down Coinbase Inc., the biggest US crypto exchange, and shut Binance, the biggest global crypto exchange, out of the US market. And it can go after other companies — Bittrex, Kraken, Gemini — that offer crypto trading to US customers. Because if it is illegal to operate a crypto exchange in the US, then US customers won’t be able to trade crypto, which means that they will be protected from the bad aspects — the scams, the lack of disclosure, the lack of investor protections — of crypto…

I think the better analysis here is “these crypto tokens are a sort of investment contract that looks like stock, and if they are securities when they are offered then they are securities forever, and if you run an exchange that lists these securities then it is a securities exchange.” And if that analysis is wrong and Coinbase is right, then it means that crypto has essentially discovered a way to sell unregulated stock: You can include most of the economic features of stock in a crypto token [per the Howey Test], and if you sell it to venture capitalists and wait a year then you never have to worry about securities regulation.

Judge rules that Ripple ($xrp) was a security when marketed and sold directly to institutional investors, but not a security when mixed with undisclosed secondary sales and sold to retail via exchanges

by Matt Levine (Money Stuff/Bloomberg Opinions) 2023.07.14

Ripple Labs Inc. is a company that… “seeks to modernize international payments by developing a global payments network for international currency transfers”… A big part of that network involves the XRP token, a crypto token that runs on the XRP blockchain, which was created by Ripple’s founders. Unlike Bitcoin and many other cryptocurrencies, though, XRP are not generated by mining in a decentralized way: All the XRP that will ever exist were created at the founding and given to Ripple and its founders; XRP was totally owned and controlled by Ripple. “Of the 100 billion XRP generated by the XRP Ledger’s code, the three founders retained 20 billion for themselves… and provided 80 billion XRP to Ripple.”

And then Ripple, to raise money to build its global payments network, and to create a market for the XRP token that would underpin that network, started selling XRP. It raised about $728.9M by selling XRP in over-the-counter sales directly to institutional counterparties (hedge funds, banks, etc), usually with legal documents governing the terms of the purchases. XRP became a popular and widely traded crypto token, listed on many crypto exchanges. And as it became publicly traded on crypto exchanges, Ripple also sold some of its XRP in the open market on those exchanges, raising about $757.6M by selling XRP “‘programmatically,’ or through the use of trading algorithms.” Ripple also distributed XRP as employee compensation, and to “third parties that would develop new applications for XRP and the XRP Ledger.”

In 2020, the SEC sued Ripple, arguing that XRP is a security and Ripple was doing unregistered securities offerings… selling this token to raise money to build its business[and] telling investors that it was a good investment… but Ripple did not register its securities offerings or file financial statements with the SEC.

Yesterday the federal judge in the case, Judge Analisa Torres of the Southern District of New York, issued an important and rather strange ruling in the case. Here is her opinion. Basically she ruled that sometimes XRP is a security and sometimes it isn’t. When Ripple sold XRP to institutional investors in over-the-counter trades, with due diligence and investment agreements, that was an “investment contract” and so a securities offering. When Ripple sold XRP to retail investors in on-exchange trades, anonymously and with no disclosure, that was not an “investment contract” and so not a securities offering…

[In the judge’s opinion,] Ripple raised money by selling XRP to [institutional] investors, it used the money to try to build its payments network, and it told the investors that if it successfully built its payments network then the value of XRP would go up. That seems very securities-offering-like… But then she went on to say that when Ripple went around selling XRP on crypto exchanges with no disclosure, it was not selling securities. The disclosure creates the liability: If you go to an investor and say “hi, we are the issuer of this token, we think it is a good token, would you like some,” then you are selling a security; if you just anonymously dump the token to retail investors on a crypto exchange, then you are not… She seems to conclude not only that secondary-market transactions are never securities offerings, because the money doesn’t go to Ripple, but also that even when the money does go to Ripple it’s not a securities offering, as long as Ripple’s sales are mixed in with enough secondary sales that people don’t know that their money is going to Ripple... The implication is that if a crypto issuer publicly and openly sells its tokens, that is an illegal securities offering, but if it sneaks in a few token sales on the exchange then it is not[:]

“It may certainly be the case that many Programmatic Buyers purchased XRP with an expectation of profit, but they did not derive that expectation from Ripple’s efforts… Having considered the economic reality of the Programmatic Sales, the Court concludes that the undisputed record does not establish the third Howey prong. Whereas the Institutional Buyers reasonably expected that Ripple would use the capital it received from its sales to improve the XRP ecosystem and thereby increase the price of XRP… Programmatic Buyers could not reasonably expect the same. Indeed, Ripple’s Programmatic Sales were blind bid/ask transactions, and Programmatic Buyers could not have known if their payments of money went to Ripple, or any other seller of XRP. Since 2017, Ripple’s Programmatic Sales represented less than 1% of the global XRP trading volume. Therefore, the vast majority of individuals who purchased XRP from digital asset exchanges did not invest their money in Ripple at all. An Institutional Buyer knowingly purchased XRP directly from Ripple pursuant to a contract, but the economic reality is that a Programmatic Buyer stood in the same shoes as a secondary market purchaser who did not know to whom or what it was paying its money.”

I assume the SEC will appeal.

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Anthony Bardaro
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“Perfection is achieved not when there is nothing more to add, but when there is nothing left to take away...” 👉 #NIA #DYODD