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SEC Shoots Down Kik’s Defense in $100 Million ICO Court Case

The United States Securities and Exchange Commission (SEC) has been in an intense court battle with Kik messaging company over the USD 100 million Kin initial coin offering (ICO) that occurred in 2017. Apparently Kik spent so much money on the court battle that they had to close down their messaging app, which was the meat and potatoes of their business. Despite spending so much on this court case, Kik is now on their last stand, betting everything on the void for vagueness defense.

Essentially, Kik claims that its ICO does not count as a security, and therefore is not under SEC jurisdiction. However, the Howey Test, which is the rule that determines if something is an investment contract, states that if an investment is made in expectation of profit then it is an investment contract and therefore a security.

Now Kik is saying that the Howey Test should be voided because it is too vague, and allows the SEC to regulate the crypto space in an arbitrary and discriminatory manner.

That being said, it seems unlikely that Kik will be able to nullify the Howey Test since it has been the law since 1946. The SEC calls Kik’s void for vagueness claim “untenable”.

 

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Today’s SEC Blockchain Forum Could Open Up Old Debate of Crypto as Security

Today’s SEC Blockchain Forum Could Open Up Old Debate of Crypto as Security

The Securities and Exchange Commission (SEC) is breaking new, and hopefully positive, ground with its first Fin Tech Forum held on 31 June in Washington DC.

Issues on the agenda will clearly be related to cryptocurrency assets and DLT with key SEC officials being joined by various legal, financial and technical experts.

The key term is cryptocurrency “assets” as the Kin Foundation, defendcrypto.org launch is aiming to clarify the status of cryptocurrencies once and for all. The foundation is hoping that its recent lawsuit will eventually lead to a new version of the Howey test as a basis to determine when crypto tokens will be classified as securities. If successful, this will create a huge impact on the cat and mouse game of crypto regulation in the US perhaps even affecting the industry worldwide.

Circle, Kik, and others say a lack of clarity and leadership from the SEC about what is and are not a security have put the brakes on the industry moving forward. Kevin Werbach, a professor of legal studies and business ethics at the Wharton School of the University of Pennsylvania, has suggested that “It’s impossible to come up with an agenda for an event like this that represents everyone in the industry”. So, what direction the talks take at the SEC Blockchain Forum is uncertain, although Werback maintained:

“There will always be some perspectives that are insufficiently represented… I’m sure the SEC thought hard about whom to invite in order to get the best discussion of the issues they’re most concerned about.”

However, one analyst is not sure, maintaining that the panelists attending the SECs first Fintech Forum don’t include one broker-dealer or a qualified custodian commenting, “There’s no entity that would be subject to the regulations of the SEC at issue.”

Werback remains upbeat, arguing that anything which enlightens the regulators as the workings of the industry is likely to be a positive and productive step adding, “There is plenty of one-on-one contact between both sides, but a comprehensive public event like this provides an opportunity to evaluate the big picture.”

 

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Kik to Create Zero-Fee Crypto by Forking Stellar

The popular Kik messaging app has announced it will fork the Stellar blockchain to create its own zero-fee cryptocurrency. Kik provides free instant messaging by using WiFi, which is very useful for people without phone plans and has hundreds of millions of registered users.

Kik initially launched its native cryptocurrency, Kin, in a successful initial coin offering (ICO) which raised USD 98 million. Kin was issued with an Ethereum ERC-20 smart contract, where investors deposited Ethereum and received the newly-issued token in return. ERC-20 provides an easy mechanism to create new cryptocurrencies that use the Ethereum blockchain, making them highly secure since there is an immense amount of mining power maintaining Ethereum, as it is the second most valuable cryptocurrency by market cap.

However, the developers of Kin decided to move their cryptocurrency off the Ethereum blockchain due to high transaction fees and slow confirmation times. Kik CEO Ted Livingston said that “Ethereum is the dial-up era of blockchain”. To solve this problem it was originally decided that Kin would be moved to the Stellar blockchain, where transactions are confirmed in only a few seconds and fees are much lower.

Stellar transactions cost a tiny amount of money which is paid in its own digital currency, Lumens, so if Kin were a Stellar token it would require paying Lumens for each transaction. The Kin team originally planned on subsidizing the Lumens needed by users to send Kin, and this was not a problem since Stellar transaction costs are so low. However, malicious spammers could attack Kin by spamming it with unnecessary transactions to burn off the subsidized Lumens.

Kin developers have now decided to fork Stellar and create a new blockchain with zero fees to avoid any issues associated with subsidizing transaction fees. This would allow users to send each other micropayments of a penny or even smaller, stimulating the growth of a digital economy where photos and stickers are exchanged between users. Zero transaction fees could also promote a tipping culture like that seen on the Dogecoin subreddit.

The Kin Foundation has set aside a large amount of coins for the Kin Rewards Engine which will reward entrepreneurs on a daily basis according to how much economic activity its app produces.

Since there are going to be zero transaction fees, there will be no reward for maintaining and securing the Kin blockchain. However, nodes will still be required for the blockchain to function. The Kin Foundation will maintain the first node, and it expects business partners to run nodes out of the shared interest of seeing the Kik economy succeed.

 

Image Source:  https://commons.wikimedia.org/wiki/File:Kin_Logo.svg – Wikimedia Commons under MIT License

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