Flare and the SEC

[Montoya]

Is Flare a security in the eyes of the SEC? Obviously, considering the current legal ambiguity surrounding all crypto, this question is not easy to answer. However, I think that given the information we know, and the current on-the-record stances of the SEC, it is worth speculating on. Because the SEC has stated that essentially all airdrops are securities, it seems highly likely that they would consider Flare's airdrop of the 15% to XRP holders to be an illegal "sale" of securities. However, I think the following 85% is not so clear. The IRS is treating it as wages. Does this mean that the SEC would see it simply as one being paid in "securities"? If this is the case, then it seems the SEC stance is that the security status of all tokens is determined by the initial method of distribution of the very first token. An "original sin" of sorts, determining the status of all other tokens that follow. If the first 15% of a token were given away by its creator, and then the other 85% gained through mining, the SEC would consider it all a security? What if the 15% were 10% or 1%? What if it were one single token given away in an "airdrop" and the rest required to be mined? All securities? So why is BTC not a security? Is it simply because they can't find the person/people who made it? If Satoshi were positively identified, would it magically turn BTC into a security?

I suppose one could argue that Satoshi is not doing any work to increase the value of the token and so their is no "common enterprise". If this is the case, could the Flare foundation simply disband? Is it even needed? Can't the whole FTSO reward process and state connector be automated?

Furthermore, with their recent shift with regards to Ether, it seem that the SEC may be demonstrating that they see any rewards gained from "staking" and "delegating" as securities, even if the token itself is not a security. They have been clear that tokens gained from mining, and which have no central controlling authority (eg BTC) are not tokens. But if one were to stake them, then any proceeds from the staking somehow are securities. Either that, or any staking activity itself "taints" all the tokens.  This creates a bizarre and contradictory situation where fungible tokens have different legal status according to the SEC, or a single person choosing to create a staking rewards program on a distributed blockchain could render the entire token a security.

What say you?

[Montoya]

Another thought, if one looks at the case with Ether, it seems that the SEC's stance is that if a decentralized network relies on mining of a token it means that it is NOT a security but that the very same network using staking to confirm means the token IS a security. What is functionally different about these two techniques with regard to Howey?  

The situation with Ether really is the achille's heal of the SEC argument. It undercuts their entire stance. On the one hand, they want to say security status is determined by the method of initial distribution (airdrop, ICO). This is the case against Ripple. But by being on the record as having given Ether a pass (which had an ICO), they also have demonstrated that it is not the distribution method that solely determines security status. That its status can "change" with further decentralization. However, the SEC's recent 180 on Ether even further weakens their argument. They are now trying to say that security status is determined by how the network is confirmed as well. But this is the height of absurdity. What is fundamentally different with regards to howey between staking and mining?

My guess is that the SEC wishes it had declared Ether a security right from the beginning. They are now trying to do an end run around the law to patch their "mistake" by creating some new baseless distinction between staking and mining so they can bring ether back under their wing. To be honest, I'm surprised they haven't with bitcoin as well. Just make up another absurd condition to define what makes something a security and bob's your uncle.

[Gringo]

Flare Network is NOT a US entity. The SEC (no matter what they think) jurisdiction is limited to the US.

[Montoya]

21 hours ago, Gringo said:

Flare Network is NOT a US entity. The SEC (no matter what they think) jurisdiction is limited to the US.

Yes. Of course. But that is irrelevant. If you think the reach of the SEC, when it comes to killing a market, is just the US, then I have a bridge to sell you. Moral or not, they claim global jurisdiction. They can prevent all US based exchanges from touching it. They can also make it illegal for US citizens to deal in it. Do you think this wont affect the market? It would likely effectively kill the project.

[Gringo]

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Yes. Of course. But that is irrelevant. If you think the reach of the SEC, when it comes to killing a market, is just the US, then I have a bridge to sell you.

Let me guess, you are american, right? Well, the SEC has no reach outside the US, it doesn't matter that you think otherwise. Hugo is in Dubai and FLR network can exist without any US citizen as user. By the way, Ripple has plans to exit the US if they lose against the SEC.

[Montoya]

3 hours ago, Gringo said:

Let me guess, you are american, right? Well, the SEC has no reach outside the US, it doesn't matter that you think otherwise. Hugo is in Dubai and FLR network can exist without any US citizen as user. By the way, Ripple has plans to exit the US if they lose against the SEC.

LOL Keep telling yourself that. You think an SEC ruling regarding the status of Flare as a security would not affect the international market? 

[Montoya]

FWIW, I am a US citizen but I do not currently live in the US. Which means that every single day I have to deal with bullshit caused by US regulators, that according to you, can't exist because I'm outside the US. You ever hear of FATCA? Try being a USC and opening a bank account in a different country. The banks are forced to act as enforcement agents for the IRS and FINCEN. Do you think these banks enjoy doing that? No, they are coerced into it by the threat of being cut-off from the global reserve currency. If the US government's reach ended at the borders this wouldn't be the case. And don't mistakenly believe it is just USCs who are affected. I have met people from all over the world who have to jump through regulatory hoops simply to appease some US bureaucrat. But sure, let's just pretend Flare will be magically immune to the SEC's shenanigans since they are based outside the US.

[Gringo]

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LOL Keep telling yourself that. You think an SEC ruling regarding the status of Flare as a security would not affect the international market? 

Yup, it wont. Crypto as time goes by is more decoupled from a falling US hegemony on money. The cat is out the bag.