Wyoming-based American CryptoFed DAO has had a brutal year at the hands of the Securities and Exchange Commission, which suspended its registration earlier this year. But it’s feeling buoyed by a recent court ruling that struck down part of the SEC’s 2020 lawsuit against Ripple.
Ripple is a digital payment network for money transfers across foreign borders using the cryptocurrency token it developed, which is called XRP. While developed by Ripple, the token is an open source digital asset independent of the technology company that initially developed it.
The intended use was primarily as a digital settlement intermediary for banks, but individuals have been buying the token as well, to speculate on the price of XRP.
The Securities and Exchange Commission filed suit against Ripple in 2020, accusing them of selling unregistered securities, both to initial investors and to the general public on secondary digital asset exchanges.
Judge Analisa Torres in her ruling last week, however, found that some sales of XRP tokens were not securities as the SEC had alleged after all.
Under the Howey test, securities are any contract or scheme bought by people hoping to profit from the efforts of those selling the product.
While the initial sale of XRP tokens to institutional investors to raise capital did meet the Howey test, Judge Torres ruled that those buying tokens on secondary public exchanges did not know who the seller was, and thus could not have had any clear expectation that any particular Ripple efforts would turn them a profit.
That has Wyoming DAO American CryptoFed hoping that its Locke and Ducat tokens would be viewed similarly, the company’s CFO Xiaomeng Zhou told Cowboy State Daily in an email.
American CryptoFed DAO won’t have any institutional sales of its tokens, Zhou said. It would only have programmatic sales and other distributions, both of which Toress said weren’t securities in the Ripple case.
“American CryptoFed does not sell tokens to institutions to raise funds,” Zhou said. “MShift itself provides all necessary funds for American CryptoFed’s operations.”
MShift is a mobile payments company founded in 1999 by American CryptoFed DAO’s CEO, Scott Moeller, for the banking industry. It serves the five largest banks in the United States, as well as many smaller banks and credit unions.
A Frictionless Payment System
American CryptoFed DAO was the first decentralized autonomous organization to set up shop under Wyoming’s new suite of digital asset laws.
Wyoming’s law makes DAOs a type of limited liability corporation, or LLC.
Like Ripple Labs, American CryptoFed DAO was envisioned as a means of improving the existing payments system. Ripple Labs focused on improving international, cross-border payments, while American CryptoFed DAO is focused on a frictionless payment system for retailers to avoid paying credit card fees when consumers buy their products.
American CryptoFed DAO already has the backing of the Merchants Advisory Group, a coalition of retailers that between them is responsible for $4.8 trillion in annual sales to consumers at more than 580,000 locations across the nation.
American CryptoFed DAO has two tokens at issue, which it has tried unsuccessfully to register with the SEC.
One is a transactional token called the Ducat. The other is a governance token called the Locke.
The sole holder of the Locke token is MShift, the mobile banking payments company set up by Moeller in 1999.
Zhou has previously told Cowboy State Daily that neither of the company’s tokens meet the Howey test.
Instead, American CryptoFed’s idea is that the ducat would simply hold a particular value, just as non-digital currency does now. Those using them would realize no profit or loss.
Still A Long Legal Road
The SEC has been arguing that any utility token available for cash or other assets can still be classed as a security, even if the purpose of a particular transaction isn’t to turn a profit.
The Ripple ruling — if it stands — throws a little cold water on that idea, but there’s a long legal road still ahead and, in her ruling, Torres also makes the point that the Howey Test is applied on a case-by-case basis.
That leaves things still a bit murky for the future of American CryptoFed DAO and other Wyoming DAOs.
The SEC is undoubtedly mulling the risk-benefit of an appeal at this point, as well as whether its efforts are better spent focusing on its cases against Binance and Coinbase.
In either eventuality, U.S. Sen. Cynthia Lummis, R-Wyoming, has suggested the ruling itself points to the need for a comprehensive framework that’s written specifically for crypto assets sooner, rather than later. That would provide clear guidance to digital asset companies and strong consumer protections.
Lummis and Kirsten Gillibrand, D-New York, have recently reintroduced their Lummis-Gillibrand Responsible Financial Innovation, with some revisions.
“Crypto assets are constantly evolving,” Lummis said, “and as the industry changed during the last year, Sen. Gillibrand and I worked to improve our legislation to ensure it appropriately balances consumer protections while allowing innovation to continue. Make no mistake, bad actors exist, but we cannot lose sight of the potential of crypto assets and distributed ledgers to modernize our financial industry. I’m proud to join my friend Sen. Gillibrand in reintroducing the Responsible Financial Innovation act to ensure the United States remains the global financial leader.”
Renée Jean can be reached at renee@cowboystatedaily.com.
