For companies looking to raise money with blockchain-based digital tokens, the United States regulatory system has been under pressure to provide relief. While Congress looks at legislative options, and the SEC is challenged to apply decades-old regulation and case law to emerging technology, concern over innovation flight out of the U.S. has been a common theme.
For Telegram, the messenger application company domiciled in the United Kingdom, operated out of Dubai, and run by Russian entrepreneur Pavel Durov, the company recently announced its decision to give up on its blockchain project. Durov’s firm had raised $1.7 billion in an ICO offering in 2018; however, the SEC filed an injunction in October 2019 claiming it was an unregistered securities offering and a judge ruled in the SEC’s favor this past March.
Kik, another messenger application located in Canada that was about to be shut down until it was acquired by a new firm late last year, also faces an ongoing battle in court with the SEC over a $100 million blockchain token raise. Kik then decided to raise funds in a new non-profit organization called ‘Defend Crypto’ as crypto companies and investors were fed up with the SEC.
Meanwhile, in what is less scintillating for the headlines, there is one blockchain company is providing an unprecedented level of transparency to Wall Street analysts. In providing details of the business of blockchain, this firm is using compliance as a means of helping to educate investors and regulators on this new emerging technology.
Blockstack PBC, a firm that is a ‘public benefit corporation,’ meaning that in addition to making money for investors, the company looks to provide social good. Blockstack PBC issued a form 1-K this year on April 29, 2020, an annual report pursuant to Regulation A of the SEC. The class of securities was titled as ‘Stacks Tokens.’ The tokens in 2019 that were issued to the public were the first SEC-regulated and compliant blockchain-based token raise.
The report states, ‘We are a Delaware public benefit corporation that was founded in June of 2013, and since that time we have been developing an open-source peer-to-peer network using blockchain technologies to build a network for decentralized applications…’
As a public benefit corporation, Blockstack mentions in its report, ‘Public benefit corporations are required by law to create a general public benefit through a material, positive impact on society.’ For Blockstack, this public benefit is described in its report, ‘…to enable an open, decentralized internet, which will benefit all internet users by giving them more control over their information and computation.’ The report goes on to state, ‘The Stacks blockchain is, in turn, central to our public purpose of developing an open, decentralized internet, which will benefit all internet users by giving them more control over their information and computation.’
The long-term strategy of the firm is ‘…to decentralize development of the Blockstack network such that no single entity, including us, is in control of the network. When this decentralization process is complete and there is a healthy ecosystem of applications and users on the network, Blockstack PBC expects to develop new business models, which may include the development and commercialization of premium versions of open-source software, enterprise licensing for blockchain technology, and development of new applications for the network.’
The Annual Report helps the public and investors understand what some of the risks are that exist – not just for Blockstack PBC – but for the rest of the blockchain industry. Mentioning uncertainties related to cryptocurrency assets or digital currencies, the firm described the criticality of keeping the encrypted private key to hold crypto.
Dr. Muneeb Ali, Founder and CEO of Blockstack PBC, held an ecosystem update call and described their unique position in how transparent the firm is being with the SEC. Ali explained after the call, ‘The treatment in the U.S. is different and obviously we are being very cautious and very careful instead of taking more risks like some other projects. But interestingly, that made us the only crypto asset that is listed on CoinMarketCap – let’s say [in] the top hundred. We are on the front page of CoinMarketCap and we are doing a full SEC annual report with audited financials and every single detail of major happenings listed out there. I was feeling like hey wow, no one has ever done this before.’
As Ali was asked a great deal about the revenue numbers, I asked him what he thought the right question was to ask. Ali said, ‘I think the right question to ask is very high-level, actually. The first question is how relevant is this report to the decentralized network. Even if you look at the market the day that the report came out, nothing happened. No movement at all. You don’t expect that if there is an earnings call for Google – you don’t expect that to happen. That’s the question that I wish someone would ask me – how relevant is your report? Then I would say that maybe it is not that relevant as there is a huge difference between the company and the decentralized ecosystem.’
While revenue decreased from 2019 to 2018, a note in the filing explains that the source of the revenue is not the long-term expected revenue for the firm. ‘Blockstack’s revenue can vary significantly based on demand for Stacks Tokens, the timing of revenue recognition, and whether Stacks Token sales are affected through consolidated funds. ‘Blockstack does not expect to generate revenue from Stacks Token sales in the future…’ states the report.
Ali went on to note about the revenue, ‘almost every startup in this space is raising capital by selling crypto assets…to fundraise….So what we are saying is if we raise $47.4M in 2017, part of it got recognized in 2018, and in 2019, we raised $23M. It’s like a financial accounting thing where we treat this as ‘revenue.’ No one pays taxes on venture capital money raised for equity because things are very straightforward there. Again, being very careful, we are like, ‘you know what, the IRS might say that we owe taxes here, because they don’t know what the right framework is.’
With this dual purpose, the question for those holding the ‘Stacks’ tokens is, how relevant are Blockstack PBC’s financials to them anyway? The network is already live and it is a utility token. While Stacks 2.0 is looking to provide enhancements to the first blockchain, Ali contemplates the question that will likely be asked in the near future is ‘Should Stacks be treated as a security in the U.S.? How relevant is the company to the broader network?’”
The Cost of Building Web 3.0 On a Blockchain
In the 1990s, investors looked to buy AOL stock while others looked to simply build on the open Internet. The difference today is that the open Internet did not have an embedded utility token that must be exchanged. ‘Businesses are built [on the new Web 3.0] but a fundamental difference is that there is an underlying crypto asset that powers and fuels the network and people can directly invest in it,’ says Ali.
The report refers to the competitors including Ethereom, EOS, Cardano, Dfinity, Steller, and Cosmos, along with Facebook.
‘Blockchains are a very fundamental part of defining ownership and these crypto assets and the type of smart contracts are ones that people want to build. That part everyone agrees with. What’s not clear is which blockchain. Some of the projects like Ethereum, EoS, and others, they are all roughly trying to go in the Web 3.0 direction with different technical architectures. Our technical architecture is extremely different from Ethereum and EoS, and we are in many ways like the inverse of that architecture,’ explains the report.
In talking about Facebook, the concern in the report mentions the question is where will Web 3.0 emerge on? Ali notes, ‘Then when we mention companies like Facebook, that’s basically a different category of competition. That’s not internal competition within the existing crypto industry, where all these blockchains are trying to have Web 3 built on top of them, it is the bigger players who realize that this is what is happening and they try to enter and they try to have their own versions of what a decentralized network looks like, which in Facebook’s case is fairly centralized actually with Libra which we all know how that is structured and is different from an open network like Blockstack or Bitcoin. In the report, the idea of what the company is aiming for is decentralization. Bitcoin is a great example of decentralization because I think in many ways it helped Bitcoin a lot that no one knows who Satoshi Nakamoto is. And I think the real genius of Satoshi Nakamato – the group or the person – is that not only that they disappeared, it’s also if you look deeper into it as to how they started mining. The way the network started, even if the SEC was looking into Bitcoin, they might actually conclude that it is not a security, just because of the way the network was actually launched, and I think it took people a while to really understand the brilliance of what happened there. It was really done in a very sophisticated manner, either by accident or by design.’
The full SEC report can be found here.
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