With the launch of the EIGEN token, this article delves into the regulatory compliance strategies in the cryptocurrency field, particularly focusing on the SEC’s extensive view on digital asset securitization, and discusses conservative approaches such as “non-transferability” and “geofencing”. This 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?
Summary
The launch of the EIGEN token has sparked discussions on two specific design decisions: first, the token cannot be transferred; second, it cannot be claimed by EigenLayer users in the United States. These decisions reflect a very conservative regulatory compliance approach.
As we all know, the current leadership of the U.S. Securities and Exchange Commission (SEC) considers every digital asset except Bitcoin as a “security”. This means that every team considering token issuance has to face the fact that the SEC will definitely consider the token as an object governed by federal securities laws. Unfortunately, the analysis of many lawyers stops at “if the regulatory agency says it’s illegal, then you can’t do it.”
Lawyers are generally risk-averse. They are trained to comply with regulatory requirements and say “no” to things that cannot be done. This is not complicated in the traditional securities context. Compliance lawyers can register securities with the SEC. For example, initial public offerings (IPOs) or meeting all the requirements for registration exemption, such as Reg D private placements.
However, this approach does not work for cryptocurrencies. The SEC has consistently refused to provide a viable path for the registration of digital assets, and the exemption provisions are difficult to reconcile with the decentralized nature of public chains.
So, what should a risk-averse lawyer do?
The answer is to embrace “non-transferability”. Generally, securities laws only apply to assets that can be bought and sold, which are assets whose value can rise or fall in order to protect investors seeking profits from the buying and selling of assets. In particular, the Howey test only applies to assets that are traded and is only applicable when investors have a reasonable expectation of profit.
Therefore, making the asset non-transferable creates an argument that securities laws do not apply. If token holders cannot trade, they cannot profit. Unless there are other mechanisms, such as income rights or dividend rights, which are rare in the cryptocurrency industry, they do not require the protection of securities laws.
Theoretically, the SEC can still argue that non-transferable assets are securities, but from a policy perspective, it is unreasonable to still consider non-transferable assets as securities. Therefore, even risk-averse lawyers generally feel relatively safe issuing non-transferable tokens.
What if a team does not want to make the token non-transferable? Enter “geofencing”. 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 U.S. Securities and Exchange Commission (SEC) has some cross-border jurisdiction, many lawyers believe that taking 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 practice seems somewhat illogical and even absurd because it effectively prevents Americans from obtaining free tokens. However, for lawyers inclined to risk aversion, this approach does meet their needs.
These two strategies are on the conservative end of the token distribution regulatory risk spectrum. It is called a “spectrum” because in the absence of clear regulatory guidance, each team needs to decide how much risk they are willing to take under the advice of legal counsel. For risk-averse individuals, adopting both of these strategies, that is, only distributing non-transferable tokens to non-U.S. individuals, is already a very cautious practice in the cryptocurrency industry. The SEC itself may even agree that there has been no securities issuance within its jurisdiction.
However, other positions on the risk spectrum are also reasonable, even if the SEC may hold a different opinion. 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 may be unsuccessful in court. Taking a less conservative approach to token distribution is not about complying with the SEC, but about correctly understanding 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 of the Howey test by the SEC, 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 strategic option under the advice of legal counsel.
It should be noted that adopting a more proactive approach is not suitable for the overly cautious. This not only means taking on more SEC investigation risks but also facing risks of enforcement actions and genuinely believing in winning in court. In addition, it requires the team to have the courage to persevere and the corresponding financial support.
However, this approach reflects the practices of the majority of the cryptocurrency industry, including some reputable companies in the industry, such as Coinbase, which is currently involved 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 should be noted that I am not your lawyer, and any content here should not be considered or interpreted as legal advice. If you want to distribute tokens, you need to hire your own legal counsel to provide advice. If you need assistance, I am happy to provide recommendations.
This article provides general information only and does not constitute any investment advice or recommendations for buying, selling, or holding any investments. 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 recommendations. Before making any investment decisions, you should consult your own legal, business, tax, and other relevant professional advisors.
Some of the information contained in this article is sourced from third parties, including companies invested by funds managed by Variant Fund. While this information is obtained from sources believed to be reliable, Variant Fund has not independently verified this information. Variant Fund does not guarantee the ongoing accuracy of the information or its applicability to specific circumstances.
The views expressed in this article are solely the current views of the author and do not represent the positions of Variant Fund or its clients, nor necessarily reflect the views of Variant Fund, its general partners, affiliates, advisors, or individuals associated with Variant Fund. These views may change without being updated.
Related Reports:
What real use cases can the first batch of AVS from EigenLayer provide?
In-depth exploration of the “restaking ecosystem”: Changing the way yields are generated with EigenLayer
Why is A16z heavily invested in EigenLayer? Detailed explanation of the value and economic security of Ethereum staking protocols.