Web3 Foundation, the entity in charge of research and development of the Polkadot ecosystem, has stated that Polkadot’s native token, DOT, is no longer a security.
According to the foundation, the DOT token has morphed and can no longer be classified as a security by the Securities and Exchange Commission. According to Daniel Schoenberger, CLO at Web3 Foundation, the team has developed a workable theory on how token morphing could be achieved.
A Landmark Announcement
Web3 Foundation announced a landmark achievement towards the development of a decentralized, trustless, and serverless internet. The announcement was made in a blog post posted on the 4th of November by the Web3 Foundation’s Chief Legal Officer, Daniel Schoenberger. According to Schoenberger, the DOT token, Polkadot’s native token, had morphed and was no longer a security. Instead, it was to be considered as software.
“In the Web3 Foundation’s view, current offers and sales of DOT, the native token of the Polkadot blockchain, are not securities transactions. DOT is used for the purposes for which it was designed – among other things, to bid for and secure parachains and facilitate on-chain governance. Control of the Polkadot network has long been in the hands of DOT holders. Today, DOT is not a security. It is software.”
Schoenberger also claimed that the claim was consistent with views shared by the SEC following discussions that began in November 2019. The announcement by the Web3 foundation was made on the third anniversary of its first engagement with the Securities and Exchange Commission.
“While the Polkadot vision had not contemplated that the blockchain’s native token would be a security, we understood that the SEC’s view was likely to be that the to-be-delivered token would be a security, at least at the time of delivery. Whatever it took in order for DOT, the native token of the Polkadot blockchain, to be — or to become — a non-security, we were willing to do it.”
Regular Engagement With The SEC
Schoenberger stated that the Web3 Foundation and SEC’s Fintech wing, FinHub, had multiple engagements under SEC Chair Gary Gensler’s offer to crypto firms to come and talk to the SEC. According to Schoenberger, the team developed a workable theory around how they could achieve morphing for the DOT token based on the U.S. federal securities law and SEC’s concerns. When the Web3 Foundation first approached FinHub, the SEC had filed a complaint against Telegram and had published the Framework for “Investment Contract” Analysis of Digital Assets. According to Schoenberger,
“The Framework suggested that nearly every digital asset offered and sold for fundraising purposes, initially, was highly likely to constitute a security when it was delivered to initial purchasers. Yet the Framework also contained a compliant path forward – one that would permit a digital asset initially offered and sold as a security to be re-evaluated at a later date. For purposes of U.S. federal securities laws, there was a possibility that it would no longer be a security. In other words, digital assets could morph.”
Web3 Foundation also stated that it had shared the theory with the SEC on numerous occasions. However, it remains to be seen how or when the federal regulator will respond to the claims by the foundation. The SEC has often leaned on enforcement actions as a basis for regulation. Earlier, the regulator had identified nine tokens as “crypto asset securities” in a case against a former product manager at the COINBASE exchange.
The Ripple Effect
Web3 Foundation’s claim that the DOT token should not be considered a security and, as a result, remain outside the regulatory control of the SEC is similar to the claim by XRP advocates. Ripple is in the midst of a prolonged legal battle with the SEC over allegations that the co-founder and CEO of the company raised over $1 billion through unregistered securities sales using the XRP token. Ripple has argued that XRP cannot be considered a security and was highly critical of the SEC for overreaching its authority.
Ripple has received significant support from the wider crypto industry in its ongoing legal tussle with the SEC. So far, over 12 fintech and crypto companies have publicly come out in support of the protocol.
