On Wednesday, Oktober 4th 2017, a major crypto-currency exchange has announced to de-list BitShares for, to many surprisingly undisclosed reasons, followed by a significant amount of speculation about the reasoning and motivation behind this move and consequently, fear, uncertainty and doubt. A few aspects of what might have been seen as root causes need to be addressed:
BitShares is NOT a Security
The US Supreme Court case of SEC v. Howey established the test for
whether an arrangement involves an investment contract. An investment
contract is a type of security.
In the context of blockchain tokens, the Howey test can be expressed
as three independent elements (the third element encompasses both the third
and fourth prongs of the traditional Howey test). All three elements
must be met in order for a token to be a security.
Furthermore, it provides an easy to use framework to apply the circumstances during the initial donation period to fund the development of BitShares 1 and BitShares 2 and obtain an notion of legal risks of that particular asset.
Those that have been around long enough to remember or have the patience to crawl through the historical documents of bitshares on bitsharestalk, will be able to easily fill in this form and obtain this notion. A notion that is far away from showing any thread that SEC might eventually consider investigating if BTS is a security.
Furthermore, Coinbase gives recommendations and best practices for token sales.
- Principle 1: Publish a detailed white paper: check
- Principle 2: For a presale, commit to a development roadmap 1, 2
- Principle 3: Use an open, public blockchain and publish all code: github
- Principle 4: Use clear, logical and fair pricing in the token sale: check
- Principle 5: Determine the percentage of tokens set aside for the development team: None, or fully shareholder controlled
- Principle 6: Avoid marketing the token as an investment: BTS was marketed as share in a DAC, initial distribution was 50% mined and 50% donations
Ultimately, although not yet clear to many, BitShares fulfills all 6 principles listed by Coinbase in order for a Blockchain token to not be interpreted as a security by U.S. regulations.
Market-Pegged Assets (a.k.a. Smartcoins or BitAssets) are NOT Contracts for Difference
There is awareness raised by regulation-close and undisclosed parties that parts of the Bitshares documentation deem market-pegged assets as contracts for difference which would render them illegal in some jurisdictions including the U.S. Anybody knows that Is not the case.
Upon further investigations and legal advice, it turned out that a minor misunderstanding of technical personal caused this confusion and wrongly presented MPAs as CFDs.
A Contract for difference is a type of financial derivative, where two parties exchange the difference between opening and closing value of an underlying asset.
However, the underlying smart contract implemented on BitShares represents a secured loan where the borrower (user) obtains a loan (e.g. bitUSD) from the smart contract (blockchain) by providing sufficient collateral.
It is understandable that parts of the documentations might have been misread or misrepresented this distinction and it is kindly requested from everyone to adequately update their documents. That said, BitAssets are loans and therefore are fully legal in most jurisdictions.
Flawed Blockchain Code
Arguments have been maid that the BitShares blockchain is instable and comes to a halt on a regular basis. These claimes are unfounded. In the years of operation, the BitShares blockchain has had only two major consensus issues where the block production has been halted for only few hours in total. At no point in time were funds at risk.
After having clarified this, further investigations with undisclosed parties resulted in statements of blockchain nodes losing connection to the P2P network and consequent loss of synchronization with the rest of the network. The root cause of this has been identified and a (non-consensus) patch is been worked on. The core developers have not been made aware of this issue by any affected parties and never experienced this rather rare event themeselves. Eitherway, the BitShares core backend code will be improved from the helfpul information and the excellent support of our decentralized development team.
This document does not constitute legal advice and should not be relied on by any person. Developers and users should consult their own counsel in connection with their initiatives in this area. You should not rely on this document as legal advice. It is designed for general informational purposes only, as a guide to certain of the conceptual considerations associated with the narrow issues it addresses. You should seek advice from your own counsel, who is familiar with the particular facts and circumstances of what you intend and can give you tailored advice. This document is provided “as is” with no representations, warranties or obligations to update, although we reserve the right to modify or change this Framework from time to time. No attorney-client relationship or privilege is created, nor is this intended to be attorney advertising in any jurisdiction