Cryptocurrency has been in the zeitgeist for quite some time now, and one of the most significant players in the game is Polkadot ($DOT). The recent ruling by the US Securities and Exchange Commission (SEC) that $DOT is not a security has been a game-changer for the digital asset and its investors.
Before diving into the details of the SEC’s ruling, let’s take a closer look at what the $DOT token represents. $DOT is the native token of the Polkadot network, a decentralized, multi-chain platform that enables the interoperability of different blockchain networks.
In other words, it aims to connect different blockchains to work together in a seamless and secure way, enabling the transfer of data and assets between them.
A high-level schematic of how Polkadot’s relaychain is laid out. Parachains are the ‘nubs’, the circle in the middle is the Relaychain that unites them all
“But what if it was ruled a security?”
We would be mistaken if we didn’t also discuss a few of the main concerns that would exist if a cryptocurrency did happen to be ruled a security by the SEC.
In short, a security classification would subject the cryptocurrency to a range of regulatory requirements and restrictions that are -ahem- “designed to protect investors”.
To enumerate specific points:
- Compliance Costs: Being classified as a security would require the cryptocurrency to comply with a range of regulatory requirements, such as registering with the SEC and providing ongoing disclosure to investors. This could be a costly and time-consuming process for the teams that would otherwise be building.
- Limits on Distribution: A security classification would also impose limits on how the cryptocurrency can be distributed and traded. For example, the SEC requires that securities be sold only to accredited investors or through a registered offering — not exactly open and permission-less, like most cryptocurrencies aim to be.
- Potential Litigation: If a cryptocurrency is classified as a security, it would expose the cryptocurrency community to the risk of litigation. Investors could sue the cryptocurrency community if they believe they have been misled or if the cryptocurrency fails to meet their expectations.
- Impact on Liquidity: A security classification could also impact the liquidity of the cryptocurrency. Some investors may be hesitant to purchase a security, as they would be subject to restrictions on when they can sell their holdings.
- Impact on Innovation: Finally, a security classification could limit the ability of the cryptocurrency community to innovate and evolve their technology. New developments in the cryptocurrency space may not be possible if they are deemed to be in violation of securities laws.
As you can see, this is a ruling that would be best avoided if a team wants to heads-down innovate without having to worry about simultaneously navigating a regulatory minefield.
On the bright side, currencies to arrive in the future might to learn from these discussions and ensure that their initial token release (or ICO) meets all of the SEC’s checkboxes well in advance (though these goal posts are likely to move).
The ruling
Now, coming back to the SEC’s ruling on $DOT in particular, it is important to note that the definition of a security has been a major point of contention in the cryptocurrency world.
A security is typically defined as:
an investment in a common enterprise with the expectation of profit derived from the efforts of others.
According to the SEC, the $DOT token does not meet this definition, as it is not an investment in a common enterprise and its value is not dependent on the efforts of others. $DOT is instead a software. If the SEC sticks to this position, it would place the Polkadot community in an excellent position to build out their ecosystem with a 0-to-1 blue ocean product approach.
The ruling is also significant for the development of the Polkadot network. With the SEC’s ruling, the network can continue to grow and evolve without fear of being hindered by regulatory hurdles. This, in turn, could lead to increased adoption of the network and further growth in the value of the $DOT token.
Moreover, the SEC’s ruling made $DOT more attractive to institutional investors who are typically more risk-averse and have been hesitant to invest in cryptocurrencies due to the lack of clear regulatory guidance.
In conclusion, the SEC’s ruling that $DOT is not a security has been a major milestone for the cryptocurrency industry. It provides greater clarity and stability for investors and opens up new opportunities for the development of the Polkadot network. As the world continues to embrace cryptocurrencies, the significance of this ruling will only become more apparent in the coming years.
One caveat
At the time of writing (2/11/23), to my knowledge, the SEC has not distributed a no-action letter.
A no-action letter is a statement from the SEC indicating that it will not take enforcement action against a particular company or individual for a specific activity. A no-action letter provides regulatory certainty and clarity for the recipient, as it allows them to proceed with their plans without fear of enforcement action from the SEC.
While the Web3 Foundation (the Polkadot network’s version of the Ethereum Foundation) seems confident that they are in the clear, a lack of a no-action letter manifesting means that the SEC can backpedal at almost any time with little to no repercussions. Investors should keep this in mind.
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