Defend Crypto Movement

A real movement to get clarity from the SEC or a single company's lobbying effort?

The new Defend Crypto Movement is the biggest news in cryptocurrencies this week.

Defend Crypto is taking a more proactive role against the SEC to get clarity for cryptocurrencies by challenging the 70+ year old definition of what is an investment contract? The leader, Kin, hopes to take the SEC to court to fight it.

In the crypto-economy, we are used to having to wait for SEC rulings, statements, or enforcement actions to see what they REALLY think about a subject. This happens because the question of ‘What Is a Security?’ has so many gray areas. Securities are based on a case called Howey and is known now as the Howey test. Being classified as a security means many more expensive compliance policies to follow and pay for.

Some of the gray areas include something like this for a lending business which I saw in my previous life in the equipment finance industry:

  • Company A originates a 5 year lease for a customer to finance a John Deere tractor for $50,000. If Company B wants to buy this $50k lease from Company A and hold it as an investment, then this is not a security. However,

  • Company A originates the same 5 year lease for a customer to finance a John Deere tractor for $50,000. Now me and 3 friends want to hold it as an investment so we each put up $12,500 +/- to acquire an equal share of the lease for investment purposes. This IS a security.

Why? Because according to the Howey Test, buying a whole loan from someone isn’t a security but buying a piece of a loan (1/4 for 4 people) is a security. Confused yet? This is what makes compliance with US securities laws so difficult.

Defend Crypto is a move to force the SEC into a more modern interpretation of what is a security so companies can comply.

Defend Crypto

The Background

Kik is a messaging app founded in Canada in 2009 and has some prominent investors including Foundation Capital who was the first to coin the term marketplace lending, now the replacement term for peer to peer lending, and Tencent. Tencent is the maker of Chinese messaging app WeChat and is an enormous conglomerate.

Kik did an ICO in 2017 for its Kin Coin, a coin to be used on the Kik platform to spend on certain goods or as a reward for making community contributions. They raised $98 million from it. Kin has been fighting with the SEC to prove that their ICO is not a security. The SEC believes it is one.

This headline sums up what some people think of Kin & Kik: Kik raised $98M with a potentially illegal ICO. Now it wants your money to fight the SEC. This is one perspective on their part of Defend Crypto from The Next Web (TNW).

The Announcement

Kin says it has already spent $5 million trying to work with the SEC. Kin is staking the Defend Crypto fund with another $5 million and asking for donations from others in the industry.

Besides the TNW article, here are some other sites reporting on the announcement:

Coindesk

CCN

The fund was launched on Coinbase Custody (their custody arm) seeded with the $5 million Kin donated. They accept 19 cryptocurrencies from Bitcoin, Ethereum, and Kin (naturally), to Civic, Decentraland, and Golem.

Messari, Shapeshift, and Circle are already backing the idea and may have contributed to the fund as well.

Defend Crypto has a twitter handle @defendcrypto and a Reddit at r/defendcrypto

The original announcement came on Laura Shin’s very popular Unchained Podcast

Reaction Around the Crypto Community

Pomp (Anthony Pompliano) discusses Defend Crypto with Kik CEO Ted Livingston. You can listen to them go into lots of detail in this hour long conversation.

Ryan Selkis, founder of Messari, who is contributing to the project

While many people like this idea, many don’t love Kin and their part in it. Aside from TNW, here’s a thread from Tim Swanson of advisor Post Oak Labs

Tim references how Kik

  • HAD to do an ICO that’s probably illegal cause they could not get any other funding

  • how they probably don’t even need a blockchain for Kin and

  • how while the clarity from the SEC would be good that this is probably not a great case to ‘hitch your wagon’ to.

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Nathaniel Whittemore, whose Long Read Sundays are an excellent source of info sums up those not in favor of Defend Crypto with this Twitter poll.

You can see that the idea is more split than you might think even with the possible result of greater SEC clarity, which is something everyone wants.

Conclusion

For the first time since I started this newsletter, I am not doing an ‘Our Crypto News Over Nonsense Take’ because I don’t know what to think. I have some conflicting ideas like:

  • The SEC Howey Test is antiquated and its tough to apply it to these digital assets

  • Better SEC clarity is a good thing, if we can get it from this case

  • I think Kin is probably a security so it may not be a great test case

  • I’d like to see more cooperation with the SEC and not more animosity (which could happen if Defend Crypto goes forward with a lawsuit)

  • Many industry advocates are wanting common sense regulation from the SEC

  • I do think something needs to be done or digital asset companies will just go to Switzerland, Malta or Singapore and create companies there where the regulation is more certain

  • If you are long any quality project like Bitcoin, ETH, LTC, then I think this is a bullish sign as the industry is saying some regulation is good, but please just be clear about what you want

What do you think?