The U.S. Securities and Exchange Commission (SEC) took a small but important step forward in its regulation of the crypto industry by issuing for the first time a "no-action letter" for Ethereum token "Quarters", which is to be sold to gamers by crypto-based gaming rewards company Pocketful of Quarters (PoQ).
What is Pocketful of Quarters and What Are Quarters?
Pocketful of Quarters is the brainchild of George B. Weiksner, PoQ's CEO, who was just 11 years old when he came up with the idea of having Quarters, a universal virtual currency for gaming. Quarters can be "used across different video games and platforms." Game developers can exchange Quarters for Ether (ETH), but gamers cannot.
The other co-founder is George father, Dr. G. Michael Weiksner, who is also the company's CTO.e
In April 2018, George told Business Insider that he came up with idea for a cross-game coin one day in September 2017 while he was having a conversation with his dad about cryptocurrencies:
At the time, I was frustrated because whenever I quit playing a video game, I lost all of the coins I'd earned in the game. That meant that I was losing all of the work and effort I'd been putting into the games. So when my dad told me about cryptocurrencies, creating a cryptocurrency for games made sense to me.
What the U.S. Thinks About PoQ's Plans for a Public Sale of an ERC-20 Token?
Well, on Thursday (July 25), we got the answer when Jonathan A. Ingram, Chief Legal Advisor at Strategic Hub for Innovation and Financial Technology (FinHub), which is part of the SEC's Division of Corporation Finance, replied to an incoming letter from Pocketful of Quarters.
This no-action letter followed the usual format for "no-action letters", which is "describe the request, analyze the particular facts and circumstances involved, discuss applicable laws and rules, and, if the staff grants the request for no action, concludes that the SEC staff would not recommend that the Commission take enforcement action against the requester based on the facts and representations described in the individual's or entity's request."
In this case, it said:
Based on the facts presented, the Division will not recommend enforcement action to the Commission if, in reliance on your opinion as counsel that the Quarters are not securities, PoQ offers and sells the Quarters without registration under Section 5 of the Securities Act and does not register Quarters as a class of equity securities under Section 12(g) of the Exchange Act. Capitalized terms have the same meanings as defined in your letter.
Here were some of the main reasons for this decision:
- "PoQ will not use any funds from Quarters sales to build the Quarters Platform, which has been fully developed and will be fully functional and operational immediately upon its launch and before any of the Quarters are sold."
- "the Quarters will be immediately usable for their intended purpose (gaming) at the time they are sold"
- "PoQ will implement technological and contractual provisions governing the Quarters and the Quarters Platform that restrict the transfer of Quarters to PoQ or to wallets on the Quarters Platform"
- "only Developers and Influencers with Approved Accounts will be capable of exchanging Quarters for ETH at pre-determined exchange rates by transferring their Quarters to the Quarters Smart Contract"
- "to create an Approved Account, Developers and Influencers will be subject to KYC / AML checks at account initiation as well as on an ongoing basis"
In other words, the no-action relief was provided because the SEC does not consider Quarters to be a security (even though it is an Ethereum token) based on "the specific facts and circumstances set forth in the request."
How This the Crypto Twitter Community Feel About This Announcement?
Caitlin Long: a 22-year Wall Street veteran who is currently a strong advocate in the U.S. for more crypto-friendly regulations:
CONGRATS @BuyQuarters, @weiks & @NYcryptolawyer—this advances the ball for the #crypto industry in the US, one step at a time. Pocketful of Quarters was a key sponsor of the inaugural @wyohackathon—happy to see successes for our sponsor companies! https://t.co/pEyGyZ6Stu— Caitlin Long 🔑 (@CaitlinLong_) July 26, 2019
Chetan Phull, a lawyer at a Toronto law firm:
2/ This proves there's a way forward in the blockchain space, with sensible legal argument for sensible blockchain operations.— Chetan Phull (@SmartblockLaw) July 26, 2019
The CSA/IIROC will surely consider the SEC's two no-action letters carefully, while drafting Canada's upcoming rules for crypto-asset trading platforms.
Marco Santori, President and Chief Legal Officer at Blockchain:
12/ First, this is an important development from the SEC because it is actually a quantum more permissive than their last no-action letter for Turnkey Jet. 'member that one? A jet company sold coupons for private jet flights represented by tokens.— Marco Santori (@msantoriESQ) July 26, 2019
14/ While in Turnkey Jets the tokens were not transferable *at all*, here, the whole purpose of the token is transferability to third party developers. This is an important distinction, and in terms of regulatory baby steps, it's a great leap forward.— Marco Santori (@msantoriESQ) July 26, 2019
Featured Image Courtesy of Pocketful of Quarters