Zack Shapiro

The Securities and Exchange Commission is investigating whether the Ethereum Foundation’s sale of ETH since the September 2022 “Merge” constitutes an unregistered securities offering in violation of US law, according to <a href="https://fortune.com/crypto/2024/03/20/sec-gary-gensler-ethereum-security-commodity-crypto-foundation/">Fortune</a>.



If the reports are true, then this investigation — just ahead of the SEC’s May deadline for a decision on an Ethereum spot ETF (more on that later) — raises the question: Did Ethereum’s switch to proof-of-stake transform it into a security?&nbsp;



The short answer is “no.”&nbsp;



The slightly longer answer is “still probably no.”



ETH tokens are not, in and of themselves, “securities” in the way that stocks or bonds are. They do not confer legal ownership of any business entity or contractual rights to any kind of payments — they are just code in a decentralized database.&nbsp;



When we talk about ETH “being a security,” we are instead actually asking whether the offer and sale of ETH tokens (in a particular context, between a particular buyer and seller) constitutes an “investment contract” under the dreaded Howey test. Under the Howey test, the offer and sale of an asset like ETH constitutes an investment contract if (1) someone invested money, (2) in a “common enterprise,” (3) in the expectation of profit and (4) where that expectation is based on the “essential managerial efforts of particular others.” 



The four Howey “prongs” have already been discussed and debated to death in the crypto space, so I’ll avoid beating a dead horse here. But if you look closely at the language from Howey, I think two things quickly become apparent about the sale of ETH tokens over time:



First, the sale of pre-mined ETH tokens to investors in Ethereum’s 2014 ICO sure looks a lot like an “investment contract.” ICO participants invested money (BTC) in order to receive their allocation of ETH (Howey prong #1). That BTC was pooled to fund a common effort led by Vitalik and the Ethereum Foundation to develop the Ethereum blockchain and produce the ETH tokens (Howey prong #2). Given that the Ethereum blockchain “pre-launch” at the time of the ICO, the only plausible motivation to take part in the ICO was to make money on the price appreciation of ETH (Howey prong #3). And, at the time of the ICO, if Ethereum was going to succeed as a protocol and ETH was going to succeed as an asset, Vitalik and his developers were going to have to roll up their sleeves and put in some good old “managerial efforts” to make the tokens worth anything (Howey prong #4).



Had the SEC brought suit around the time of the Ethereum ICO, they would have almost certainly won in court, and that may well have been the end of ETH.&nbsp;



However, the SEC didn’t bring suit, and the statute of limitations for such a claim (typically five years) would have run out in 2019. And importantly, the Ethereum ecosystem has evolved in ways since its ICO that make current sales of ETH tokens look less like an investment contract than they once did.&nbsp;



For one thing, the proliferation of applications (think DeFi and NFTs) utilizing ETH for “gas” provides a &#8220;consumptive utility&#8221; for ETH tokens that challenges the notion that current-day purchases of ETH are solely, or even mainly, based on profit expectation.&nbsp;



Even more important, however, is the so-called “<a href="https://www.sec.gov/news/speech/speech-hinman-061418">Hinman speech</a>” delivered in 2018 by Bill Hinman, then the director of corporation finance at the SEC, where he proposed that a digital asset’s classification under Howey could evolve over time.&nbsp;



According to Hinman’s logic — to the extent that Ethereum’s success no longer hinges on the efforts of a particular entity, like Vitalik or the Ethereum Foundation — the sale of ETH tokens would no longer fulfill the requirement of the final Howey prong that there be “particular others” upon whose efforts a buyer would rely for their profits. 



Read more from our opinion section: <a href="https://blockworks.co/news/staking-eth-no-security">Staking or not, ETH is no security</a>



Therefore, regardless of the legally dubious nature of the ICO, the Ethereum network (at least from 2018 onwards) has become “sufficiently decentralized.” This means that its native token constitutes a digital commodity like bitcoin, rather than an investment contract, subject to SEC jurisdiction.



Since the Hinman speech, the securities law status of ETH has been at a bit of a stalemate. The SEC has never explicitly endorsed the notion that ETH (even pre-merge) is a digital commodity — which they readily concede with regard to bitcoin. And Gary Gensler regularly<a href="https://www.youtube.com/watch?v=aIcNGfF8FDA"> ties himself in knots</a> before Congress trying to evade questions about his view on ETH’s current legal status.&nbsp;



But the fact remains that (at least until now) the SEC has never brought an action specifically alleging that primary or secondary sales of ETH constitute investment contracts under Howey (like they did with over a dozen other tokens in the Coinbase, Binance and Kraken lawsuits). The SEC even went as far as to approve the listing of ETFs based on ETH futures contracts that trade on the CME, which would be hard to understand if the Commission felt that ETH tokens traded as unregistered securities.



But what about Ethereum’s migration to proof-of-stake? Does the fact that ETH tokens can be staked for “yield” change the legal situation and turn either (A) current-day sales of ETH, or (B) the act of staking ETH into securities offerings under Howey?&nbsp;



In my opinion (and I spend an unhealthy amount of time thinking about crypto securities law), no.



With regard to present-day sales of ETH tokens — whether directly from the Ethereum Foundation or on the secondary market — I don’t think ETH’s staking functionality makes much of a difference under Howey. That is, the ability to stake does not make ETH tokens any less useful for individuals who might buy them for their consumptive utility (i.e. gas fees).&nbsp;



And while the Ethereum Foundation does indeed still hold a large supply of ETH tokens, there is no reason to think that the introduction of staking makes the foundation’s “managerial efforts” “essential” to the financial success of ETH in some way that was not the case at the time of the 2018 Hinman speech.



The question of whether the act of staking ETH in order to receive “yield” in the form of staking rewards constitutes an investment contract under Howey is more nuanced — but properly understood, the answer should still be no.&nbsp;



Read more from our opinion section:&nbsp;<a href="https://blockworks.co/news/ether-commodity-or-not" target="_blank" rel="noreferrer noopener">Ether is the Schrödinger’s cat of crypto</a>



When you run a validator node and stake 32 ETH tokens in exchange for rewards, what you are actually doing is providing a service to the Ethereum network and getting paid for that service. You only get the reward if you honestly validate blocks, and you stand to lose your stake to “slashing” if you attempt to validate dishonestly.&nbsp;



This is very different from the type of passive “yield” you might expect to receive from holding a bond or a dividend-paying stock or real estate asset (which rewards ownership and not activity). Unlike with these traditional financial instruments, you are not relying on “managerial efforts” of other people in order to profit when you stake ETH directly, but rather on your own skill and honestly as a validator.



This question becomes trickier, however, when we move from direct proof-of-stake validation to “staking services” such as those run by exchanges like Coinbase and collaborative staking protocols like Lido and Rocketpool.&nbsp;



At one end of the extreme, you could see an argument for how custodial staking services could look quite security-like under Howey (given how reliant depositors would be on the staking service provider’s efforts in order to earn yield).&nbsp;



At the other end of the spectrum, you could imagine a purely on-chain tool that allowed users to jointly stake their ETH in collective, automated, validator nodes with clearly defined behavior looking much more like direct staking than an investment contract.&nbsp;



Where the specific services by Coinbase, Lido and Rocketpool fall on this continuum is very much an open legal question — and one that in Coinbase’s case is being actively litigated in federal court in the Southern District of New York.&nbsp;



But none of this makes ETH itself, even when being used for staking purposes, an investment contract and therefore none of this seems to justify the SEC’s new investigation.



Why, then, might the SEC be pursuing this type of weak claim about Ethereum?&nbsp;



Observing the success of the Bitcoin ETF — and the SEC&#8217;s dissatisfaction with its launch — suggests that the investigation into Ethereum might be a pretext to deny the upcoming spot ETH ETF application.&nbsp;



Moreover, acknowledging Ethereum’s transition to a commodity despite its seemingly illegal ICO genesis could concede a legal strategy meant to apply to other token projects that the SEC believes aiming to circumvent securities classification (in other words, creating a loophole).&nbsp;



The SEC’s actions could be seen as a strategic move to maintain regulatory leverage over the crypto market, rather than a clear-cut determination of Ethereum’s status as a security.



<hr class="wp-block-separator has-alpha-channel-opacity"/>


<div class="wp-block-post-author-biography">Zack Shapiro is the Managing Partner at Rains and leads the law practice. Previously, he was co-founder and general counsel of BZR, a startup backed by Founders Fund, Greycroft, and Abstract Ventures. Zack is a graduate of Williams College and Yale Law School, and started his legal career clerking in the federal courts for the S.D.N.Y. and the 2nd Circuit, and at Davis Polk &amp; Wardwell. Zack serves in various advisory roles in the crypto industry, including as a member of the Pleb Lab Accelerator advisory board, and as a Legal Fellow at the Bitcoin Policy Institute.
</div>


<hr class="wp-block-separator has-alpha-channel-opacity"/>



Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



Get alpha directly in your inbox with the <a href="https://blockworks.co/newsletter/research">0xResearch newsletter</a> — market highlights, charts, degen trade ideas, governance updates, and more.



The Lightspeed newsletter is all things Solana, in your inbox, every day. <a href="https://blockworks.co/newsletter/lightspeed">Subscribe to daily Solana news</a> from Jack Kubinec and Jeff Albus.

No, ETH isn’t suddenly a security now

Jack Kubinec

Web3 entertainment platform Playbux will be raising $150,000 from the public via a token sale later this month. Rather than securing the funding through an initial coin offering, Playbux is giving pre-listing access to engaged users of the platform through a so-called fair community offering. This will be handled by crypto investing platform Raiser.&nbsp;



The fair community offering (FCO) creates a ranking of a project’s users based on things like on-chain activity, referring other users, taking educational quizzes and following its X profile, Raiser co-founder Kori Leon said. Based on their ranking, users have a chance to invest in some amount of a project’s token before its listing on centralized exchanges.&nbsp;



The new community fundraising mechanism presents an alternative to initial coin offerings (ICOs), which were a common fraud vector in earlier days of crypto.&nbsp;



Read more: <a href="https://blockworks.co/news/crypto-ceo-who-faked-paypal-partnership-pleads-guilty-for-21m-fraud">Crypto CEO who faked PayPal partnership pleads guilty for $21M fraud</a>



Between 2017 and 2018, crypto saw a wellspring of ICOs as buzzy crypto projects crowdfunded their early development. Some of these <a href="https://blockworks.co/tag/ico">ICOs</a> helped promising projects get off the ground: <a href="https://blockworks.co/tag/ethereum">Ethereum</a>, for instance, <a href="https://cryptorank.io/ico/ethereum">raised</a> roughly $18 million via ICO in 2014, selling the tokens for $0.31 at the time.&nbsp;



But the ability to raise large amounts of capital <a href="https://jimmysong.medium.com/why-icos-are-very-different-than-seed-capital-a59e4c78b84a#:~:text=That%20means%20that%20ICOs%20have,ICOs%20a%20much%20riskier%20investment.">without</a> reporting requirements or accounting standards lured unsavory actors as well. ICOs created fertile ground for <a href="https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-16">fraud</a> and have mostly fallen out of favor in crypto. The concept has instead <a href="https://www.vaneck.com/pl/en/blog/digital-assets/the-rise-of-airdrops/">given</a> way to new trends, like dispersing tokens for free via airdrops.



Read more: <a href="https://blockworks.co/news/solana-dex-record-volumes">Solana DEXs book record volumes following airdrops</a>



Partly as a spillover from the ICO era, centralized crypto exchanges now ask projects to have some token supply locked at launch and some supply vested to prevent investors from dumping too much of the supply, said Leon, who previously worked on the listings team at Binance.&nbsp;



Raiser’s FCO process lets crypto startups meet these more-rigorous listing requirements while offering pre-listing token access to community members who may be less keen to sell their tokens on listing day, Leon said.



The public FCO for Playbux’s PBUX token will happen sometime in late January, Leon said.&nbsp;



Playbux was part of Binance Labs’ incubation <a href="https://www.binance.com/en/blog/ecosystem/%E2%80%8Bbinance-labs-launches-season-4-of-its-incubation-program-with-14-earlystage-startups-421499824684903808">program</a> and was <a href="https://www.prnewswire.com/apac/news-releases/visa-partners-seven-new-startups-to-accelerate-payments-innovation-in-asia-pacific-301824488.html">added</a> to Visa’s Asia Pacific 2023 accelerator program. The metaverse-focused platform <a href="https://www.playbux.co/about-us">offers</a> shop-to-earn experiences and customizable avatars, per its website.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



Get alpha directly in your inbox with the <a href="https://blockworks.co/newsletter/research">0xResearch newsletter</a> — market highlights, charts, degen trade ideas, governance updates, and more.



The Lightspeed newsletter is all things Solana, in your inbox, every day. <a href="https://blockworks.co/newsletter/lightspeed">Subscribe to daily Solana news</a> from Jack Kubinec and Jeff Albus.

Visa-backed crypto project to launch ‘fair’ token offering instead of ICO

Shalini Nagarajan

Crypto projects with more posts from Twitter bots tend to have lower returns over the long-term, according to a study from two Yale University academics.



The researchers examined more than one million tweets about 48 different cryptocurrencies created between 2019 and 2021. All had a fundraising goal of more than $1 million via token sales.



Their study focused on projects including axie infinity (<a href="https://blockworks.co/price/axs" target="_blank" rel="noreferrer noopener">AXS</a>), cowswap (<a href="https://blockworks.co/price/cow">COW</a>) and polygon (<a href="https://blockworks.co/price/matic">MATIC</a>) leaving out bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>) and ether (<a href="https://blockworks.co/price/eth">ETH</a>). All had a fundraising goal of more than $1 million via token sales.



A system to measure a so-called &#8220;engagement coefficient&#8221; quantified the level of interest and interaction displayed by social media users.



“Low engagement coefficients signal a lack of interest, while high engagement coefficients signal artificial activity which is likely from automated accounts known as bots,” Prof. Tauhid Zaman and PhD student Khizar Qureshi wrote in the <a href="https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0284501#references" target="_blank" rel="noreferrer noopener">paper</a>.



“We found that the [engagement coefficient] was correlated with the future returns of the cryptocurrencies, and was most predictive of short-term returns.”



If a cryptocurrency has a very low engagement coefficient, it means that people aren&#8217;t really interacting with posts about it. This shows a lack of interest, which usually results in low returns over a long time horizon, the study said.



To predict future performance, the researchers devised an investment strategy that weighted portfolios based on bot activity and engagement coefficient. The latter appears to have a bigger influence, they found, especially over the first month of a token’s life.



The researchers noted that people can create a bunch of bots and make them engage with posts about a cryptocurrency to make it seem like there&#8217;s a lot of hype around it. This is what usually happens in pump-and-dump schemes, they said.



&#8220;These findings suggest that long-term returns are less dependent on social media features than short-term returns.&#8221;



<h2 class="wp-block-heading">Tracking viral crypto bots to trade better</h2>



As part of the analysis, the team looked at social media posts from the first month of each crypto’s existence.&nbsp;



Out of its chosen tokens, the researchers identified krypto as the cryptocurrency with the most buzz, a token used for in-game purchases in NFT battle game Kryptobellion.&nbsp;



At first, krypto had good returns, hitting as high as 49% after two months. But then things went downhill, and its returns turned negative. &#8220;This is likely due to bots programmed to like and retweet any tweets about krypto,&#8221; they said.



After 12 months, some cryptocurrencies had returns of over 2,000%, and the top dog was Axie Infinity’s AXS with returns of more than 24,500%.&nbsp;



“Overall, our results show that one can use social media activity to predict the future performance of cryptocurrencies over longer time horizons than previously known (months versus hours or days),” the researchers said.



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1490" height="936" src="https://blockworks-co.imgix.net/wp-content/uploads/2023/06/Screen-Shot-2023-06-22-at-13.02.10.png?w=1024&amp;h=1024" alt="crypto twitter bot study returns" class="wp-image-59636" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2023/06/Screen-Shot-2023-06-22-at-13.02.10.png?w=1490 1490w, https://blockworks-co.imgix.net/wp-content/uploads/2023/06/Screen-Shot-2023-06-22-at-13.02.10.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2023/06/Screen-Shot-2023-06-22-at-13.02.10.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2023/06/Screen-Shot-2023-06-22-at-13.02.10.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2023/06/Screen-Shot-2023-06-22-at-13.02.10.png?w=409 409w, https://blockworks-co.imgix.net/wp-content/uploads/2023/06/Screen-Shot-2023-06-22-at-13.02.10.png?w=415 415w, https://blockworks-co.imgix.net/wp-content/uploads/2023/06/Screen-Shot-2023-06-22-at-13.02.10.png?w=349 349w, https://blockworks-co.imgix.net/wp-content/uploads/2023/06/Screen-Shot-2023-06-22-at-13.02.10.png?w=80 80w" sizes="(max-width: 1490px) 100vw, 1490px" /><figcaption class="wp-element-caption">AXS sat around the middle of the pack in terms of engagement coefficient.</figcaption></figure>



They continued: “If it is truly the case that virality significantly drops after one month, investors can begin to exit their speculative positions, and potentially avoid the infamous ‘pump and dump.’ As their chosen cryptocurrency begins to lose engagement, their expected returns should be revised downward, which in turn should influence their investment decisions.”



Traders could even estimate engagement coefficients themselves using daily social media feeds for various cryptocurrencies to make short-term bets on the most “viral” tokens, the researchers posited.



There were concerns that the data could be skewed somewhat, considering some of the analysis covered a bull market when traders were more &#8220;risk-loving.&#8221; Still, the authors believe their social media engagement model is flexible, so it can work in all sorts of situations.



In the future, researchers could check if the model can predict other stuff like how well movies and TV shows do, sales of fashion items, who wins in political campaigns or even how cryptocurrencies with bigger market caps perform.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



Get alpha directly in your inbox with the <a href="https://blockworks.co/newsletter/research">0xResearch newsletter</a> — market highlights, charts, degen trade ideas, governance updates, and more.



The Lightspeed newsletter is all things Solana, in your inbox, every day. <a href="https://blockworks.co/newsletter/lightspeed">Subscribe to daily Solana news</a> from Jack Kubinec and Jeff Albus.

Crypto returns are worse if Twitter bots drive engagement: Study

John Rizzo

When it comes to complying with US rules and regulations, SEC Chair Gary Gensler says the rules are “<a href="https://www.cnbc.com/2023/04/27/sec-chairman-gary-gensler-says-the-law-is-clear-for-crypto-exchanges.html">clear</a>.”&nbsp;



You might agree if your definition of clear is similar to the middle of a mud pie.&nbsp;



While the SEC under Gensler has refused to issue crypto-specific rules guidance, his predecessor did at least try to begin laying out some principles on specific aspects of crypto assets in a 2019 document, “<a href="https://www.sec.gov/files/dlt-framework.pdf">Framework for Investment Contract Analysis of Digital Assets</a>.”



That document is not a formal rule. But given the paucity of clear crypto guidance from the current SEC, it’s worth examining to judge its worth and, if that’s missing, what the SEC should instead provide market participants with today.&nbsp;



Four years in crypto is a lifetime, and the 2019 document might as well be an Edsel when the market really needs a Tesla. While useful at the time, that document focuses intently on initial coin offerings (ICOs), which have become extinct and are unlikely to be revived.&nbsp;



An ICO <a href="https://crsreports.congress.gov/product/pdf/R/R45301">allows the backer</a> of a new token to raise capital in exchange for tokens. The SEC’s 2019 document clearly comes down on the side of believing ICOs represent a securities transaction. Even legal scholars who disagree with the current SEC’s approach to crypto policy <a href="https://corpgov.law.harvard.edu/2022/12/06/why-cryptoassets-are-not-securities/">agree</a> that raising capital in exchange for tokens is a securities transaction.&nbsp;



The problem for market participants seeking clarity is that ICOs have gone the <a href="https://coinmarketcap.com/ico-calendar/">way of the dinosaur</a>. They are merely one aspect of crypto, and the SEC’s 2019 framework only speaks to whether the process of offering tokens in exchange for capital represents a security — not whether the underlying asset is itself a security.&nbsp;



This is why the SEC owes market participants more precise answers on a framework for crypto assets, and why <a href="https://blockworks.co/news/coinbase-sec-rulemaking-petition" target="_blank" rel="noreferrer noopener">Coinbase was compelled to sue</a> the SEC to force them to provide that guidance.&nbsp;



Gensler’s pablum about the law being “clear” simply doesn’t align with the facts.&nbsp;



The complexity of this topic and the problematic nature of the SEC’s lack of clarity was recently explored by DLX Law in a <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4282385">paper</a> entitled “The Ineluctable Modality of a Securities Law.” In it, the authors go under the hood of crypto assets and reveal that the debate over whether an ICO represented a securities transaction obscured a more critical discussion about whether the underlying asset is also a security, particularly in secondary transactions such as the ones that Coinbase and other crypto exchanges engage in.&nbsp;



The paper&#8217;s authors persuasively argue that contrary to the SEC’s self-assured claims, whether an underlying crypto asset is a security doesn’t have an answer in current law. Getting that answer requires action by Congress or a novel regulatory framework tenuously relying on existing policy.&nbsp;



The federal government has given crypto market participants neither. Instead, they have embarked on a regulation-by-enforcement campaign, which some legal experts have said is <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4405036">legally dubious</a> when used as a first and not a last resort.



A market that has moved beyond ICOs (the crux of the 2019 document) might wonder why the SEC has stubbornly refused to issue guidance and even asserted that none is needed.&nbsp;



In answering that question, one must look back at the DLX Law paper and its assertion that current law doesn’t speak to the unique nature of crypto assets. One can infer that the SEC also knows this, but it has decided that it doesn’t like the framework that Congress is likely to come up with and will therefore pursue regulation through enforcement until the courts stop them.&nbsp;



While the SEC is engaged in an end-run around the political process, other countries have leaped at the opportunity to bring crypto innovation to their shores and within their regulatory perimeter. France is <a href="https://au.news.yahoo.com/french-regulator-says-fleeing-u-164457341.html">welcoming</a> crypto market participants, while Hong Kong <a href="https://blockworks.co/news/crypto-exchanges-hong-kong" target="_blank" rel="noreferrer noopener">prepares</a> to accept applications for crypto trade platforms, and the Europe Union <a href="https://www.consilium.europa.eu/en/press/press-releases/2023/05/16/digital-finance-council-adopts-new-rules-on-markets-in-crypto-assets-mica/">celebrates the passage of MiCA</a>.&nbsp;



Without action in Congress or more rational leadership at the SEC, market participants will be left with a stale document from 2019 and regulatory muddy waters — not the clear skies that the SEC claims exist.&nbsp;



<hr class="wp-block-separator has-alpha-channel-opacity"/>


<div class="wp-block-post-author-biography">John Rizzo is Senior Vice President for Public Affairs at Clyde Group where he provides strategic counsel and communications guidance to a broad range of financial services clients, including market participants in traditional finance along with emerging and innovative spaces such as digital assets and fintech. Rizzo most recently served as the Senior Spokesperson at the U.S. Department of the Treasury where he led public affairs strategy on digital assets, fintech, climate finance, financial stability, domestic finance, and economic policy. Prior to his service at the Treasury Department, Rizzo was a top communications adviser to Sen. Chuck Schumer (New York) and Sen. Bob Casey Jr. (Pennsylvania).</div>


<hr class="wp-block-separator has-alpha-channel-opacity"/>



Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



Get alpha directly in your inbox with the <a href="https://blockworks.co/newsletter/research">0xResearch newsletter</a> — market highlights, charts, degen trade ideas, governance updates, and more.



The Lightspeed newsletter is all things Solana, in your inbox, every day. <a href="https://blockworks.co/newsletter/lightspeed">Subscribe to daily Solana news</a> from Jack Kubinec and Jeff Albus.

It’s 2023, Not 2019: The SEC Needs to Get With the Times

Casey Wagner

<div id="highlights-block_63289820334ca" class="highlights">
 <ul>
 <li>Influencer and crypto promoter Ian Balina latest to be targeted by the SEC</li>
 <li>According to the SEC, Balina agreed to invest around $5 million in the Sparkster offering and promote the offered SPRK tokens on YouTube, Telegram and other social media platforms</li>
 </ul>
 
</div>



The US Securities and Exchange Commission has charged self-described crypto influencer Ian Balina for actions related to the offering and promotion of SPRK tokens, according to a court filing released Monday.&nbsp;



Balina, who promoted SPRK tokens in 2018, failed to disclose to investors that he was compensated by the issuer, the SEC alleges in the suit. He also “failed to file a registration statement with the SEC for the tokens that he re-sold using an investing pool that he organized,” the <a href="https://www.docdroid.net/ObMjm8S/ian-balina-unregistered-securities-offeroooor-pdf" target="_blank" rel="noreferrer noopener">filing</a> states. 



Sparkster, a project that promised a “no-code” software creation platform, raised over $30 million from its initial coin offering in July 2018. After raising the funds, the project never materialized, as far as investors were concerned. In May 2022, Sparkster appeared in headlines again after the otherwise dormant blockchain appeared to convert $22 million in ether into USDC.&nbsp;



According to the SEC, Balina agreed to invest around $5 million in the Sparkster offering and promote the offered SPRK tokens on YouTube, Telegram and other social media platforms. Balina’s agreement also came with a 30% bonus from Sparkster on the tokens he purchased in the Sparkster offering, but Balina never publicly disclosed the commission he received for his promotion, the SEC alleges.&nbsp;



The court filing comes as fallout from the popular ICO days of 2018 continues to persist in the crypto industry. 



The SEC sued settlement system Ripple and two executives — founder Christian Larsen and CEO Brad Garlinghouse — about two years ago over allegations that its XRP token was an unregistered security offering. Ripple disputed the allegations and claimed XRP should be treated as virtual currency, not a security. If both parties <a href="https://cms.blockworks.co/ripple-and-the-sec-agree-on-one-thing-let-the-judge-decide-xrps-fate/" target="_blank" rel="noreferrer noopener">get their way</a>, the legal battle will be determined by a federal judge in a summary judgment.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



Get alpha directly in your inbox with the <a href="https://blockworks.co/newsletter/research">0xResearch newsletter</a> — market highlights, charts, degen trade ideas, governance updates, and more.



The Lightspeed newsletter is all things Solana, in your inbox, every day. <a href="https://blockworks.co/newsletter/lightspeed">Subscribe to daily Solana news</a> from Jack Kubinec and Jeff Albus.

SEC Charges Crypto Influencer for Promoting Unregistered ICO

Sebastian Sinclair

<div id="highlights-block_6315c9872f943" class="highlights">
 <ul>
 <li>Bnk to the Future is looking to bounce back after backing failed crypto lender Celsius</li>
 <li>SALT settled SEC charges in September 2020 over its $47 million token sale</li>
 </ul>
 
</div>



Crypto lender SALT is eyeing a buyout nearly two years after it was charged by the US securities watchdog for operating an unregistered initial coin offering (ICO).



Secured Automated Lending Technology (SALT), which allows users to take out crypto-backed loans, <a href="https://saltlending.com/were-excited-to-announce-a-potential-acquisition-by-bnk-to-the-future/" target="_blank" rel="noreferrer noopener">said Friday</a> it was in talks with digital asset and fintech investment platform Bnk To The Future (BF).



BF has signed a letter of intent to acquire SALT, the companies said in a statement. The deal is dependent upon inking definitive agreements and regulatory approval.



SALT said the deal would bolster its suite of products. The Denver-based lender noted customers’ loan terms, security of investments and services would remain unchanged as it seeks to hash out the terms with BF.



Blockworks attempted to contact both companies to further understand the terms of the deal but have yet to receive a response.



SALT launched in October 2017 — peak-ICO mania — as bitcoin was on its way to $20,000 for the first time. 



The startup <a href="https://www.sec.gov/enforce/33-10865-s" target="_blank" rel="noreferrer noopener">ran afoul</a> with the Securities and Exchange Commission (SEC) in September 2020, when it was charged with operating an unregistered ICO starting in June 2017, which by December of that year had raised $47 million.&nbsp;



The firm settled the charges and agreed to pay a $250,000 civil penalty and return money to investors who initiated a claims process. SALT has since become a registered entity with the SEC, which means it must now file regular financial statements. 



SALT’s native token of the same name has doubled since word of the potential acquisition first broke on Friday, trading for $0.077 — down 75% over the past year and more than 99% below its $17.22 record <a href="https://www.coingecko.com/en/coins/salt" target="_blank" rel="noreferrer noopener">high</a> posted in December 2017.



As for BF, it was founded in 2011 by former investment banker turned bitcoin backer Simon Dixon. It helps qualified investors pour money into companies, funds and other products focused on the future of finance.&nbsp;



BF was a leading investor in troubled crypto lender Celsius, which <a href="https://cms.blockworks.co/celsius-to-file-for-bankruptcy-imminently-report/" target="_blank" rel="noreferrer noopener">filed for bankruptcy</a> in July, nearly a month after it froze fund withdrawals. It&#8217;s reported that more than 1,000 BF users were exposed to Celsius&#8217; collapse, with Dixon himself one of the platform&#8217;s top depositors.



The Cayman Island-registered firm claims to have facilitated investments worth more than $1.7 billion over the years.



David Canellis contributed reporting.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



Get alpha directly in your inbox with the <a href="https://blockworks.co/newsletter/research">0xResearch newsletter</a> — market highlights, charts, degen trade ideas, governance updates, and more.



The Lightspeed newsletter is all things Solana, in your inbox, every day. <a href="https://blockworks.co/newsletter/lightspeed">Subscribe to daily Solana news</a> from Jack Kubinec and Jeff Albus.

Crypto Lender SALT in Buyout Talks, 2 Years After SEC Settlement

<div id="highlights-block_62f38c1de0eca" class="highlights">
 <ul>
 <li>Bloom Protocol ran an ICO at the height of 2018&#8217;s bull market</li>
 <li>Regulators demand Bloom register its tokens as securities within nine months</li>
 </ul>
 
</div>



Crypto startup Bloom Protocol has been ordered by the SEC to register its tokens or face a $31 million fine.



The regulator issued a cease-and-desist <a href="https://www.sec.gov/litigation/admin/2022/33-11089.pdf" target="_blank" rel="noreferrer noopener">order</a> to the company on Tuesday, accusing it of offering unregistered securities. 



Bloom violated the Securities Act by offering and selling Bloom Tokens (BLT) in an unregistered initial coin offering (ICO) between November 2017 and January 2018, the order said. 



The Gibraltar-registered firm managed to raise $30.9 million from nearly 7,400 investors around the world, including in the US, which means the SEC plans to fine Bloom for the amount of crypto raised in its ICO.



Founded in 2017, Bloom <a href="https://bloom.co/about/" target="_blank" rel="noreferrer noopener">describes itself</a> as a blockchain-powered solution for credit scoring that aims to reduce the risk of identity theft. It claims its system minimizes fraud and reduces the cost of customer onboarding.



Bloom promoted BLT as investment contracts which inherently marks them as securities, in line with the <a href="https://www.investopedia.com/terms/h/howey-test.asp#:~:text=The%20Howey%20Test%20refers%20to,Securities%20Exchange%20Act%20of%201934." target="_blank" rel="noreferrer noopener">Howey Test</a>, according to the SEC.



“A purchaser in the offering of BLT would have had a reasonable expectation of obtaining a future profit based upon Bloom’s efforts&#8230;to create an online identity attestation system that would increase the token’s value on crypto asset trading platforms,” the regulator said.



<h3 class="wp-block-heading">Bloom&#8217;s crypto tanks even more after SEC order</h3>



BLT opened trade in late January 2018 at around $1.38, still its record high, at the height of the previous bull market, per <a href="https://www.coingecko.com/en/coins/bloom" target="_blank" rel="noreferrer noopener">CoinGecko</a>. BLT went on to collapse up to 80% over the next few months — an incredibly volatile time for cryptocurrencies, especially so for small and illiquid ones, including BLT.



After a brief spike above $1 in May 2018, BLT&#8217;s price has been firmly squashed ever since. Bloom&#8217;s token now trades for a fraction of a cent, after dumping 70% on news of the SEC&#8217;s action.



At its peak, BLT&#8217;s market capitalization reached nearly $60 million, however that figure is now less than $500,000.



Bloom allegedly told prospective investors its limited presale was “oversubscribed” and that it raised a “hard cap of $50m total.” The average investment during the pre-sale was $340,000, and the average during the public sale was $2,000, regulators found, which when calculated, doesn&#8217;t add up to the advertised cap.



Bloom is expected to register BLT as a class of securities within 270 days and inform investors about potential claims to recover their money within 60 days. It has been ordered to fulfill all payments to investors within three months of the claim form’s submission deadline.&nbsp;



Bloom didn’t return Blockworks’ request for comment by press time.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



Get alpha directly in your inbox with the <a href="https://blockworks.co/newsletter/research">0xResearch newsletter</a> — market highlights, charts, degen trade ideas, governance updates, and more.



The Lightspeed newsletter is all things Solana, in your inbox, every day. <a href="https://blockworks.co/newsletter/lightspeed">Subscribe to daily Solana news</a> from Jack Kubinec and Jeff Albus.

SEC Orders Crypto Startup To Register ICO Tokens or Face $31M Fine

<div id="highlights-block_62dfbc1894bdb" class="highlights">
 <ul>
 <li>Michael Alan Stollery faked Titanium&#8217;s business relationships with the Federal Reserve, PayPal and others, authorities say</li>
 <li>He used funds raised from the project&#8217;s ICO for credit card payments and bills for a Hawaiian condo</li>
 </ul>
 
</div>



A cryptocurrency executive who raised $21 million in a 2018 initial coin offering (ICO) has pleaded guilty over fraud charges.



The Department of Justice (DOJ) <a href="https://www.justice.gov/opa/pr/ceo-titanium-blockchain-pleads-guilty-21-million-cryptocurrency-fraud-scheme" target="_blank" rel="noreferrer noopener">announced</a> on Monday that 54-year-old Titanium Blockchain CEO Michael Alan Stollery misled investors with false statements to buy “BARs” — the cryptocurrency token offered by Titanium’s offering (ICOs are a form of fundraising used by crypto businesses to raise capital).



Prosecutors say Stollery admitted to faking aspects of Titanium’s white papers, which fudged the token’s purpose, underlying technology, uniqueness and the likelihood of returns. He didn’t register the token with the Securities and Exchange Commission, nor did he have a valid exemption, the agency said.&nbsp;



Titanium, which was pitched to provide blockchain infrastructure solutions, in its <a href="https://www.allcryptowhitepapers.com/titaniumblockchain-whitepaper/" target="_blank" rel="noreferrer noopener">white paper</a> named services like “Bring Your Own Cloud,”  “Monitoring as a Service,” “Mining as a Service” and “Instant ICO Incubator.”



“Just as steel changed the building industry forever, Titanium will usher in a new era of network construction,” the firm claimed.



Stollery is also believed to have placed false testimonials on the firm’s website and lied about holding business relationships with the Federal Reserve and companies like PayPal, Verizon, Boeing and Walt Disney to establish legitimacy.



Authorities noted that he also admitted to combining funds raised from the ICO with his personal money, and used a portion towards expenses such as credit card payments and bills for his condominium in Hawaii.



<h3 class="wp-block-heading">Titanium website now helps fraud victims recover ICO funds</h3>



Stollery, who is set for a November 18 sentence, has pleaded guilty to one count of securities fraud. He faces up to 20 years in prison.



His guilty plea comes four years after the SEC obtained a <a href="https://www.sec.gov/news/press-release/2018-94" target="_blank" rel="noreferrer noopener">court order</a> to halt Titanium’s ICO. The court had also approved an emergency asset freeze and appointed Holland &amp; Knight lawyer Josias Dewey as a receiver to hold the firm’s assets.



Titanium was based in Sherman Oaks, California-based, according to a <a href="https://www.sec.gov/litigation/complaints/2018/comp-pr2018-94.pdf" target="_blank" rel="noreferrer noopener">court document</a>. The company’s <a href="https://tbis.io/" target="_blank" rel="noreferrer noopener">website</a> now shows how investors can file claims to recover funds. As of June 28, Titanium has received more than 1,000 claim submissions.



Stollery’s lawyer, Andrew Holmes, told the <a href="https://www.wsj.com/articles/titanium-blockchain-ceo-pleads-guilty-to-fraud-11658795919" target="_blank" rel="noreferrer noopener">Wall Street Journal</a> that the “remorseful” CEO wanted to run Titanium legitimately but overexuberance destroyed his plans. He added that a majority of the funds that were converted to cryptocurrencies are with the receiver and Stollery wants investors to recover as much of their money as possible.



The DOJ recently announced another charge related to a cryptocurrency fraud scheme. Last week, the founder of defunct cryptocurrency business “My Big Coin” was convicted on charges he raised $6 million by <a href="https://cms.blockworks.co/doj-charges-virtual-asset-firm-founder-with-6m-investor-fraud/" target="_blank" rel="noreferrer noopener">marketing a fraudulent currency</a>. 



Randall Crater, the founder, and his associates claimed the currency was backed by $300 million in gold, oil and other valuable assets.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



Get alpha directly in your inbox with the <a href="https://blockworks.co/newsletter/research">0xResearch newsletter</a> — market highlights, charts, degen trade ideas, governance updates, and more.



The Lightspeed newsletter is all things Solana, in your inbox, every day. <a href="https://blockworks.co/newsletter/lightspeed">Subscribe to daily Solana news</a> from Jack Kubinec and Jeff Albus.

Crypto CEO Who Faked PayPal Partnership Pleads Guilty For $21M Fraud

<div id="highlights-block_629ea6ddc5c39" class="highlights">
 <ul>
 <li>Binance is reportedly being probed by the US securities regulator over allegations it failed to register its ICO in 2017</li>
 <li>The SEC is also investigating Binance CEO Changpeng &#8220;CZ&#8221; Zhao&#8217;s connection to Binance.US market makers</li>
 </ul>
 
</div>



US regulators are reportedly probing Binance over its 2017 initial coin offering (ICO), adding additional pressure to the embattled exchange currently facing accusations of having facilitated billions in illicit funds in recent years.



The world&#8217;s largest crypto exchange by trading volume is in the SEC&#8217;s spotlight over allegations it may have failed to register its token as a security with the agency. The agency is determining if a possible breach of US securities laws occurred.



<a href="https://www.bloomberg.com/news/articles/2022-06-06/us-probes-binance-over-token-that-is-now-world-s-fifth-largest?sref=f8taTPHn" target="_blank" rel="noreferrer noopener">Bloomberg</a> first reported the news Monday, citing people close to the matter who wished to remain anonymous due to the confidential nature of the ICO investigation. Blockworks attempted to contact the SEC but did not receive a reply by press time.



The SEC is also reportedly looking at market-making companies connected to Binance CEO Changpeng &#8220;CZ&#8221; Zhao whose ownership stakes of market makers on Binance.US have piqued the regulator&#8217;s interest, Bloomberg reported. Binance.US and Binance are separate entities.



&#8220;We have been working very diligently to educate and assist law enforcement and regulators in the US and internationally,&#8221; a Binance spokesperson told Blockworks while not commenting directly on the probe. &#8220;We will continue to meet all requirements set by regulators.”



Public ICOs were a popular crowdfunding method in bygone years designed to raise funds for budding crypto projects and ecosystems. They have since fallen out of favor following legal uncertainty.



Binance raised <a href="https://www.linkedin.com/pulse/binancecom-ico-experience-lessons-advices-changpeng-zhao/" target="_blank" rel="noreferrer noopener">$15 million</a> over the course of 16 days from its ICO listing five years ago where it sold binance coin (BNB) for $0.15 each to the public as an ERC-20 token on the Ethereum blockchain. BNB was last seen changing hands for around $283, down 19.86% year to date, according to <a href="https://messari.io/asset/binance-coin" target="_blank" rel="noreferrer noopener">Messari data</a>.



Bloomberg&#8217;s reporting comes amid a separate <a href="https://www.reuters.com/investigates/special-report/fintech-crypto-binance-dirtymoney/" target="_blank" rel="noreferrer noopener">report by Reuters</a> on Monday alleging Binance processed $2.35 billion in illicit transactions between 2017 and 2020 which are said to have derived from hacks, fraud and the illegal sale of drugs.



Reuters has leaned on two industry experts as well as a 2020 report by blockchain analytics firm Chainalysis to arrive at its multi-billion dollar figure. Blockworks attempted to contact Chainalysis to corroborate but did not receive a response by press time.



It&#8217;s the latest string of accusations facing the exchange which landed in regulatory hot water last year over its alleged failure by regulators to appropriately register its business in jurisdictions such as the UK, Italy and Singapore. Binance has no official headquarters.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



Get alpha directly in your inbox with the <a href="https://blockworks.co/newsletter/research">0xResearch newsletter</a> — market highlights, charts, degen trade ideas, governance updates, and more.



The Lightspeed newsletter is all things Solana, in your inbox, every day. <a href="https://blockworks.co/newsletter/lightspeed">Subscribe to daily Solana news</a> from Jack Kubinec and Jeff Albus.

Binance Under SEC Investigation Over Its 2017 ICO Listing: Report

Jacquelyn Melinek

<div id="highlights-block_614b795a9af08" class="highlights">
 <ul>
 <li>“Dapper Labs will use the new funding to continue to scale and support major additional brand-driven sports, entertainment and music based products coming online and being developed on the Flow blockchain,” the company said</li>
 <li>Technological financial services crypto-based company Bit2Me closed its third phase of its initial coin offering (ICO) in just 38 seconds, the company said on Wednesday</li>
 </ul>
 
</div>



Dapper Labs, the creator of CryptoKitties, NBA Top Shot and the Flow blockchain, has closed a $250 million round in new funding led by Coatue, the company announced Wednesday.&nbsp;



The new round brings together established investors from Andreessen Horowitz (a16z,) GV (formerly Google Ventures) and Version One Ventures along with new investors including BOND and GIC.



“Dapper Labs will use the new funding to continue to scale and support major additional brand-driven sports, entertainment and music based products coming online and being developed on the Flow blockchain,” the company said.&nbsp;



The company’s Flow blockchain consists of over 500 developers and more than 100 known projects of decentralized applications for games, NFTs, DeFi and tools, according to its website. Flow also is launching UFC, or Ultimate Fighting Championship, digital collectibles for users to buy, sell, trade and collect on its blockchain, however a date for that was not disclosed.&nbsp;



This year has shown exponential growth for Dapper Labs. While beta testing its flagship product NBA Top Shop, it grew 30 times during the year, with over $780 million in collectibles bought and sold across 13 million transactions and over 1.1 accounts registered, the company said.







While Dapper Labs has grown quickly, its CEO Roham Gharegozlou said it has just scratched the surface of what the technology can do for users. The company will scale NBA Top Shot, launch new titles and improve the ecosystem building on its Flow blockchain, Gharegozlou said.&nbsp;



In March, Dapper Labs <a href="https://cms.blockworks.co/dapper-labs-superrare-consensys-and-nifty-gateway-make-nft-news/" target="_blank" rel="noreferrer noopener">raised $305 million</a> in funding, also led by Coatue. At the time, existing strategic investors included a16z, The Chernin Group, Union Square Ventures, Version One and Venrock also participated alongside Michael Jordan, Kevin Durant and other National Basketball Association players, Blockworks previously reported. 



<h3 class="wp-block-heading">Spain-based Bit2Me closes initial coin offering</h3>



Technological financial services crypto-based company Bit2Me closed its third phase of its initial coin offering (ICO) in just 38 seconds, the company said on Wednesday. In total the Spain-based company raised about $23.4 million, or €20 million.



It raised about $20.5 million, or €17.5 million, in less than three minutes across three public sale phases that took place throughout September. The company also raised $2.9 million, or €2.5 million, from an earlier private sale, it said.



&#8220;As of November 1, our tokens will be available for purchase, like any other cryptocurrency, on Bit2Me, Bittrex, and increasingly on more platforms,” said Abel Peña, chief revenue officer at Bit2Me.&nbsp;



Bit2Me offers over 20 solutions to buy, sell and manage virtual currencies and euros from a single place. Since its inception in 2015, it has expanded to clients across 100 countries and manages operations worth about $1.2 billion.



<hr class="wp-block-separator"/>



Are you a UK or EU reader that can’t get enough investor-focused content on digital assets?<a target="_blank" href="https://cms.blockworks.co/events/das-london/" rel="noreferrer noopener">Join us</a> in London on November 15th and 16th for the Digital Asset Summit (DAS) London. Use code ARTICLE for £75 off your ticket. <a target="_blank" href="https://cms.blockworks.co/events/das-london/" rel="noreferrer noopener">Buy it now</a>.



<hr class="wp-block-separator"/>