Web3 Foundation announced a landmark achievement towards the realization of Web 3.0: the Polkadot blockchain’s native digital asset (DOT) has morphed and is no longer a security. It is software. This announcement marks the third anniversary of Web3 Foundation’s first engagement with the U.S. Securities and Exchange Commission’s (“SEC”) Strategic Hub for Financial Innovation (“FinHub”), in response to FinHub’s public invitations to digital asset-related projects to “come in and talk with us.” At the time, the Web3 Foundation was still six (6) months away from taking the initial step to launch the Polkadot network in May 2020, and concluded with the launch of parachains in December 2021.
In November 2019, the digital asset regulatory climate was tense. When the Web3 Foundation first approached FinHub, the SEC had recently filed its complaint against Telegram, and the FinHub staff’s Framework for “Investment Contract” Analysis of Digital Assets (the “Framework”) had been published only a few months earlier, on the heels of many other SEC enforcement actions and announcements, including its 21A Report of Investigation: The DAO (“The DAO Report”), the Munchee cease-and-desist order and the Kik decision.
Daniel Schoenberger, Chief Legal Officer at Web3 Foundation, said: “The Framework suggested that nearly every digital asset offered and sold for fundraising purposes, initially, was highly likely to constitute a security when it was delivered to initial purchasers. Yet the Framework also contained a compliant path forward – one that would permit a digital asset initially offered and sold as a security to be re-evaluated at a later date. For purposes of U.S. federal securities laws, there was a possibility that it would no longer be a security. In other words, digital assets could morph.”
Over the next three years, the Web3 Foundation’s experience was a positive one, as it met regularly with the SEC and attempted to break new ground and comply with U.S. federal securities laws, including with respect to the offer and sale, marketing and delivery to initial purchasers of tokens as securities, and treatment of retail purchasers, generally in line with public companies.
“In the Web3 Foundation’s view, current offers and sales of DOT, the native token of the Polkadot blockchain, are not securities transactions. DOT is used for the purposes for which it was designed – among other things, to bid for and secure parachains and facilitate on-chain governance. Control of the Polkadot network has long been in the hands of DOT holders. Today, DOT is not a security. It is software,” added Mr. Schoenberger.