Web3 Foundation claims Polkadot’s native token DOT is software, not a security

Web3 Foundation’s chief legal officer Daniel Schoenberger argued that Polkadot’s native token DOT has “morphed” and is software, not a security. Therefore, the token should not be subject to federal securities regulations in a Nov. 4 blog post.

He claims that Polkadot’s vision has not contemplated that DOT would be a security and has been in compliance with federal securities laws and has not delivered any digital assets to initial DOT purchasers. Meanwhile, Schoenberger acknowledges the U.S. Securities and Exchange Commission’s (SEC) view that it was likely to consider DOT would be a security at the time of launch.

Federal securities law

The Web3 Foundation has been engaged in talks with the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) since the enactment of the “Framework for Investment Contract Analysis of Digital Assets” to ensure compliance with federal securities laws in terms of offer and sale, marketing and delivery to initial purchasers, and treatment of retail purchasers in 2019.

The federal securities framework defines security as an investment contract, as well as other financial instruments such as stocks, bonds, and transferrable shares.  The framework subjects all offers and sales of securities and those involving digital assets to be registered or to qualify for an exemption from registration.

This means companies or persons offering securities for issue and sale are legally required to disclose certain information to investors and the information must be comprehensive and not materially misleading. Those who violate the federal securities law will face criminal prosecution and be charged a fine of $5,000 and/ or imprisonment of ten years maximum.

Crypto vs. SEC

The SEC has been cracking down on the crypto space. In Dec. 2020, the SEC filed a lawsuit against Ripple and its executives for allegedly raising $1.38 billion from selling XRP while failing to register as securities.

In October 2022, the government agency investigated whether Yuga Lab’s issuance of Bored Ape NFT collection and launch of its governance token, ApeCoin violated any laws. Yuga Labs is not accused of any wrongdoing to date.

SEC chair Gary Gensler has repeatedly labeled cryptocurrencies as securities and should be subject to the purview of federal securities law. As the legal battle between the SEC and XRP is still ongoing, Kim Kardashian was charged $1.26 million for allegedly touting a crypto asset security offered and sold by EthereumMax without disclosing she received $250,000 to promote the token on Instagram.