With the launch of the EIGEN token, this article delves into the regulatory compliance strategies in the cryptocurrency field, particularly addressing the SEC’s broad view on digitized assets as securities, and discusses conservative methods such as “non-transferability” and “geofencing”. The article is sourced from Jake Chervinsky and compiled, translated, and written by BlockBeats.
Table of Contents:
– Why can’t EIGEN be transferred?
– Why can’t EIGEN be claimed by users in the United States?
– Conclusion
The launch of the EIGEN token has sparked discussions about two specific design decisions: firstly, the token cannot be transferred, and secondly, it cannot be claimed by EigenLayer users in the United States. These decisions reflect a very conservative approach to regulatory compliance.
As we all know, the current leadership of the U.S. Securities and Exchange Commission (SEC) considers every digital asset, except for Bitcoin, as a “security”. This means that every team considering token issuance must face the fact that the SEC will definitely consider the token as subject to federal securities laws. Unfortunately, many legal analyses stop at the point of “if the regulatory agency says it’s illegal, you can’t do it”.
Lawyers usually do not take risks. They are trained to comply with regulatory requirements and say “no” to things that cannot be done. In a traditional securities context, this is straightforward. Compliance lawyers can register securities with the SEC, such as through an initial public offering (IPO) or meeting all requirements for exemptions, like Reg D private placements.
However, this approach simply does not work for cryptocurrencies. The SEC has consistently refused to provide a viable pathway for the registration of digital assets, and exemptions are difficult to reconcile with the decentralized nature of public chains.
So, what can risk-averse lawyers do?
That’s where “non-transferability” comes into play. Generally, securities laws only apply to assets that can be bought and sold, which are intended to protect investors seeking profits from the buying and selling of assets. In particular, the Howey Test applies to transactions and assets, and only when investors have a reasonable expectation of profit.
Therefore, making an asset non-transferable creates an argument that securities laws do not apply. If token holders cannot trade, then they cannot profit. Unless there are other mechanisms, such as revenue rights or dividend rights, which are rarely seen in cryptocurrencies, they do not need the protection of securities laws.
In theory, the SEC could still argue that non-transferable assets are securities, but from a policy standpoint, it seems unreasonable to still consider non-transferable assets as securities. Therefore, even risk-averse lawyers generally feel relatively secure when it comes to issuing non-transferable tokens.
What if a team does not want to make their tokens non-transferable? That’s where “geofencing” comes in. Generally, securities laws only apply to transactions that occur within the United States. This means that if a transaction occurs far enough outside the U.S. border, the SEC has no jurisdiction from the beginning.
Although the SEC has some jurisdiction over cross-border matters, many lawyers believe that implementing appropriate geofencing measures can strongly argue that the SEC has no jurisdiction over token distribution. This is also why many token issuances exclude U.S. participants. From a policy perspective, this approach may seem somewhat unreasonable, even absurd, as it effectively prevents Americans from obtaining free tokens. However, for lawyers who tend to avoid risks, this method can indeed meet their needs.
These two strategies are on the conservative end of the spectrum in terms of regulatory risks in token distribution. It is called a “spectrum” because in the absence of clear regulatory guidance, every team needs to decide how much risk they are willing to take under the advice of legal counsel. Adopting both strategies, distributing non-transferable tokens only to non-U.S. individuals, is already considered a very cautious approach in the cryptocurrency industry. The SEC itself may even agree that no securities issuance has occurred within its jurisdiction.
However, there are also rational positions on the risk spectrum, even if the SEC may hold different opinions. As I often remind, the SEC does not make laws; it only expresses its views and enforcement strategies. The SEC’s judgments may be wrong and it may lose in court. Taking a less conservative approach to token distribution is not to appease the SEC, but to correctly understand the law.
For example, another point on the risk spectrum is that free airdrops are not considered securities transactions, so the tokens airdropped do not need to be non-transferable or geofenced. Given the broad interpretation of the “investment of money” part in the Howey Test, the SEC may not agree with this view, and this issue is still being litigated in court. However, for less conservative teams, this is still a viable strategy option under the advice of legal counsel.
It should be noted that taking a more proactive approach is not suitable for the timid. This not only means taking on more SEC investigation risks but also facing enforcement action risks, while sincerely believing in winning in court. Additionally, this requires the team to have the courage to persist and the necessary financial support.
However, this strategy reflects the practices of the vast majority of the cryptocurrency industry, including some reputable companies in the industry, such as Coinbase, which is currently engaged in a legal battle with the SEC that could have a significant impact on the entire industry.
Non-transferability and geofencing are indeed useful tools for managing regulatory risks in token distribution. However, they are not the only choices and may not be suitable for every team and token.
It is worth noting that I am not your lawyer, and any content here should not be construed as legal advice. If you want to conduct token distribution, you need to hire your own legal counsel for advice. I am happy to provide recommendations if you need assistance.
This article provides general information only and does not constitute investment advice or recommendations regarding the purchase, sale, or holding of any investment. It should also not be used as a basis for evaluating the merits of investment decisions. The content of this article should not be used as a substitute for accounting, legal, or tax advice or investment advice. Before making any investment decisions, you should consult your own legal, business, tax, and other relevant professional advisors.
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