The dYdX Foundation has made a sudden change in the token economy of its project. However, “Did dYdX violate the law by changing its tokenomics?” the question came up. Lawyer Ari Good, an expert in the crypto field, is looking for the answer to this question for the altcoin, which is also a favorite of Turkish crypto investors.
Altcoin project has changed tokenomics!
cryptocoin.comAs you follow on January 24, the dYdX Foundation, the body responsible for the dYdX decentralized crypto exchange, announced that it has made ‘changes’ to its tokenomic features. In this context, it has undergone a change in the way it distributes tokens to initial investors, employees and contractors, and of course the public. So what’s unusual about the situation?
The basis of the project is dYdX Trading Inc. and its initial investors, decided to change the tokenomics of the project and extend the time period during which the first batch of tokens of such investors will be locked from 1 February to 1 December. Whether this is a good or bad thing depends on which side of the trade the person is on. On the one hand, investors agreeing to hold their tokens longer means a vote of confidence that falls for their share in the long-term success of the project. On the other hand, anyone who shorts dYdX in anticipation of increased supply may be disappointed as the altcoin price skyrocketed after news of the change.
But why the delay? While dYdX is not officially available in the United States, the Securities and Exchange Commission’s recent victories in enforcement cases may have sparked a candid conversation between the foundation and its attorneys. Now, whether the DYDX governance token can ultimately be considered a ‘security’ under US law may fill the volumes. The point is, why would signatories to amend lockdown documents settle for a longer holding period? Why not unlock the tokens and let them hold?
In the US, all offers and sales of ‘securities’ are either registered, exempt or illegal. Certain rules apply not only to the initial offering and sale of securities, but also to resales, i.e. sales by existing token holders to others. As a general matter, it cannot serve as a conduit (legally “insurer”) between the issuer of the securities and the general public without following certain rules. Securities purchased in exempt offerings are referred to as ‘constrained securities’ and resale of securities is an illegal ‘distribution’ unless the safe harbor is enforced.
What is the purpose of dYdX’s change and is there a legal problem?
One such safe haven is Rule 144 of the Securities Act. To qualify for assistance and to sell without fear of being seen as an ‘insurer’, the restrictions of Rule 144 must be followed. There are classes of restrictions that apply to different types of rights holders. All sales, tied or unaffiliated, are subject to a one-year holding period. This holding period means that, in theory, securities are purchased for ‘investment purposes’, not for immediate dumping on the unsuspecting public.
Sales by affiliates are subject to other restrictions, including availability of ‘available public information’ about the issuer, limits on how many securities can be sold in a given period of time, form of sale restrictions and filing requirements.
While dYdX insiders are unlikely to be subject to the full scope of US securities law for a long time, perhaps they were inspired by its fundamental principles, especially if they have short holding periods in tokens. For example, a common tool used by altcoin projects to attract early-stage capital is the ‘simple deal for future tokens’ or SAFT. Such an agreement does not immediately transfer tokens. However, it undertakes to do so in exchange for an upfront investment. As noted above, if you are subject to a holding period on your restricted securities, you must first have them for the clock to start running. It’s unclear whether the foundation is using SAFTs for its investors, but if they did, some of the investors may be really new to ownership.
Perhaps the dYdX investors who participated in the decision to change their tokenomics wanted to show their confidence in the market by delaying their access to the tokens. It is possible that they guessed the pump following the news of the change. Or maybe they were inspired by US laws and are moving step by step towards eventual compliance with those laws. It will be interesting to see what other measures, if any, dYdX takes with regard to token emissions going forward.
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