China’s decision to ban all ICOs September 4 shook the world of cryptocurrency to its core. As a result, by Monday afternoon in the U.S., nearly 20 percent of the combined asset value of all cryptocurrencies disappeared, with total losses approaching $38 billion.
While the speed and severity of that decline suggests many in the cryptocurrency market were surprised by China’s move, the harsh reality is, it should have been expected. Afterall, China’s decision came on the heels of Canada’s ruling last week, which in turn echoed what the United States and Singapore said earlier this summer: ICOs, in many cases, are securities and should be regulated as such.
As the repercussions of China’s ban echoed down the blockchain, one could almost hear companies scrambling to adapt or contort their business models, especially those with upcoming ICOs. It was as if people were realizing, perhaps for the first time, that one can’t just blissfully ignore the rapidly changing regulatory environment surrounding cryptocurrencies if the objective is to build a real company in the space.
But at Swarm Fund, where we are busy getting ready for our own initial coin offering that begins on Thursday, September 7, the atmosphere was anything but one of surprise. In fact, we’ve been counting on a moment like this to happen for quite some time.
Three years ago, we started re-imagining Swarm Fund’s mission to bridge the gap between traditional finance and the world of cryptocurrency. We envisioned a decentralized capital marketplace to give smaller investors access to high-return, private equity and hedge funds by bundling their currency together on the blockchain.
But while the blockchain has always been central to Swarm Fund’s technology, we also knew then that we would have to go far beyond the code to create a real-world, decentralized organization to keep up with – and even anticipate – the evolving regulatory landscape around cryptocurrencies.
That’s the reason why Swarm Fund’s organizational structure consists of seven different legal entities today, operating in six jurisdictions:
- Quantum Holonic Swarm Systems (USA)
- Swarm Operations (Germany)
- Swarm IP (Singapore)
- Swarm Research Foundation (Panama)
- Ethereum Alpha Fund (Cayman)
- Bitadel Master Fund (Cayman)
- Swarm Asset SPV (Estonia)
In addition to this geographically distributed structure, Swarm Fund will be owned by members on the platform, similar to a co-operative, and governed directly by those members through a liquid democracy framework. That means the owner-members will be doing much of the work on the platform, versus a third party. We’ll also have a tiered, two-token architecture. These elements allow us to pass several aspects of the Howey Test, the applicable legal benchmark in the U.S. pertaining to security regulation.
In other words, long before China’s move, we put in the time and thought to create a legally compliant framework for distributed networks. Our model traces back to 2014, when we participated in workshops at Harvard and Stanford, and helped produce the seminal paper on the topic, Distributed Networks and the Law.
Our model then, which we believe offers a path toward compliance in the ever-changing regulatory environment, consists of these structural elements:
- Decentralized ownership of the platform, by members, in a co-operative framework
- Self-governance of the platform by members
- A geographically-distributed legal structure that spans multiple jurisdictions
- A multi-tiered token structure that draws a clear line between “utility” tokens (which give a member access to a platform) and “security” tokens, which are used for investment.
In the wake of the China announcement, the suitability of this legal and structural framework couldn’t be more apparent. It’s Swarm Fund’s legal structure, as well as the open dialogue we’ve had with the U.S. Securities and Exchange Commission (SEC) and the U.K.’s Financial Conduct Authority (FAC) over the last three years, which differentiates us from so many blockchain ventures, especially today.
The reason why is because the China announcement goes beyond the question of whether ICOs are securities. It underscores a broader truth about the blockchain regulatory environment. Namely, it is sure to evolve further, in ways that no one can anticipate, including Swarm Fund.
And that’s where our legal and organizational structure will serve our members in the future, too. Because we are distributed across multiple jurisdictions in the real world, we are also integrated with multiple evolving regulatory standards. Through our open dialogue with regulators in these jurisdictions, we’ve tried to offer knowledge and support as they work diligently to structure regulatory frameworks to incorporate the relatively new world of blockchain technology.
This collaborative – as opposed to confrontational – approach with regulators is yet another factor that sets Swarm Fund apart. At the same time, our broad physical footprint provides a degree of self-healing capability, should the regulations of any one jurisdiction prove overly prohibitive for our model.
While many in the market will continue to try to bend their existing and planned IPOs in convoluted ways to fit into the still-evolving regulatory framework, especially in the wake of China, we’ve been putting in the legal legwork over the past three years to make sure we were ready and positioned well for this moment, not just with our technology, but from a legal perspective, as well.