My previous post was apparently a sensitive subject since Kik is now under investigation by the Securities Exchange Commission (SEC). To summarize the pending investigation, the SEC believes Kik violated securities laws during their Initial Coin Offerring (ICO) in 2017. After the SEC notified Kik of these violations, Kik then gathered an army of lawyers and sent their 39 page response to the SEC, after review they will then decide whether or not to officially bring charges against Kik. Please read my previous article to get a better understanding of what Kik is and how their cryptocurrency is being used.
The argument really boils down to whether or not Kin is considered a security or a currency. Kik is adamant that they have always marketed Kin as a cryptocurrency. The fact that it’s in the top 10 most used cryptocurrencies should say something about its use as a “currency”. The only way I’ve seen it used as such is through an app called Madlipz which is an app that allows you to make dank video memes. In Madlipz you can dub audio over short movie clips. You can also tip other users with Kin. I chuckled a few times while on the app, it’s definitely worth a look. Kin is reportedly used in over 30 apps today, I have only explored a few of these. There were ways to buy gift cards but it looks like they’re all sold out.
Securities and Currencies and Commodities – Oh my!
Jay Clayton Head of the SEC defined cryptocurrencies as “replacements for sovereign currencies, [they] replace the dollar, the euro, the yen with bitcoin. That type of currency is not a security.” He then goes on to define securities as, “a token, or a digital asset used in a fundraising process known as an initial coin offering, or ICO, [these] are securities.” The SEC already classified Bitcoin and Ethereum as currencies, this precedent gives Kik some legal ground to stand on. However, Ethereum and Bitcoin are not identical (nor is the way they were funded) and dissecting the differences between Bitcoin, Ethereum and Kin is a little out of scope of this article. Just know that they have a lot of similarities too.
Clayton went on to say, “We are not going to do any violence to the traditional definition of a security that has worked for a long time. We’ve been doing this a long time, there’s no need to change the definition.” I think this is a grave mistake. Currently, the SEC classifies a security by using the Howey Test. The Howey test includes a set of criteria that has to be met in order for something to be considered a security. It has to meet all 4, they are:
- It must be an investment of money
- With an expectation of profit
- In a common enterprise
- With the profit to be generated by a third party
Kin does not perfectly meet the first point because there are people who buy the currency just so they can tip other users, or buy services from them. These users are probably the vast minority right now, but they do exist. Taking this further, those users who buy Kin to tip other content creators on an app like Madlipz do not (only) hold it as an expectation of profit, they’re using it as a currency. However, if you only look at the ICO itself, it appears to meet all 4 points. It’s obvious that Kin has elements of being a security and a currency. Kik uses the SEC’s own verbiage as a defense saying that a currency and a security are mutually exclusive, if Kin is a currency then it can not be a security. The SEC refuses to be flexible with their definition of a security.
At this point, we either need a new regulatory body to oversee and regulate ICOs, or at the very least a regulatory framework specific to ICOs. We are going to see more and more businesses generate their own funding through ICOs. These tokens will be used as an expectation of profit and used as a currency since the token will be spendable in various ways similar to Kin. Making this new regulatory body fully transparent in regards to its decisions and funding is necessary and completely possible with blockchain technology. The genesis of which could be a big step in creating the type of government that we want to morph into. We should also look at what other countries are doing in the crypto-space.
Malta – They’ve created a new framework called the Digital Innovation Authority, their mission is to “offer legal certainty to a space that is currently unregulated, and touches on a number of issues, including types of authorizations, legal personality and the applicability of law to smart contracts.”
Japan – They’ve recently proposed new regulation guidelines for ICOs.
Israel – They are introducing new legislation and requiring companies that start an ICO to be licensed, supervised, and are financial stable.
Switzerland – The Swiss are working closely with Israel to formulate the necessary framework to regulate ICOs and cryptocurrency. “Crypto Valley” is located in a Swiss city called Zug. It is the fastest growing tech community in Europe.
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