New Direction Under the Wave of Encryption Regulation: How Polkadot Skillfully Avoids the Regulatory Storm

Recently, the U.S. Securities and Exchange Commission (SEC) has significantly intensified its regulation of the cryptocurrency industry, largely influenced by last year's FTX incident. The SEC has not only filed lawsuits against certain trading platforms and their executives but has also classified the tokens of several well-known public chain projects as securities. However, amid this regulatory storm, Polkadot's native token DOT has successfully avoided this classification, being regarded as "software" rather than a security. This achievement is a result of the Polkadot team's proactive communication and strategic adjustments with regulatory authorities over the years.

SEC's Regulatory Actions

The SEC recently filed lawsuits against certain trading platforms and their CEOs, accusing them of providing unregistered securities trading services and concealing important information from investors. These allegations involve multiple aspects, including the illegal provision and sale of unregistered securities, false statements, and more. The SEC's demands include prohibiting the defendants from continuing illegal activities, recovering illegal gains, and imposing civil penalties.

It is noteworthy that the SEC has classified the tokens of several well-known public chain projects as securities in the litigation documents, including SOL, ADA, MATIC, FIL, ATOM, etc. This classification may have far-reaching implications for the entire encryption industry, potentially leading to these tokens being unable to trade on U.S. exchanges and even facing delisting risks.

Howey Test: Standards for Securities Determination

The SEC's main criterion for determining whether a token is classified as a security is the "Howey Test." This standard, originating from 1946, includes four conditions: investment of money, expectation of profits, investment in a common enterprise, and profits coming from the efforts of the issuer or a third party. The SEC believes that tokens deemed to be securities meet these conditions, particularly in terms of "expectation of profits."

The Unique Path of Polkadot

Unlike other public chain tokens that are recognized as securities, Polkadot's DOT has successfully avoided this designation. This is due to the proactive strategy adopted by the Polkadot team since 2019.

The Polkadot team noticed that the framework released by the SEC mentioned that digital assets initially offered and sold as securities may be reassessed later and no longer be considered securities. Based on this perspective, the Polkadot team began actively communicating with the SEC and making adjustments to themselves.

After three years of effort, the Polkadot team successfully explored a theory explaining how to achieve the "token nature transformation" of decentralized projects and digital assets. In November 2022, Polkadot announced that its native digital asset DOT had completed its nature transformation, no longer being regarded as a security, but recognized as software.

The Impact of Polkadot Experience

The success of Polkadot provides a reference compliance path for the entire encryption industry. This not only reduces the regulatory risks for Polkadot itself but also offers potential regulatory support for projects within its ecosystem. In addition, the Polkadot team has stated that it will launch the "Polkadot Yellow Paper" based on this experience to share its compliance experience with the industry.

Despite the current harsh regulatory environment, the case of Polkadot shows that through proactive communication and strategic adjustments, encryption projects can still achieve innovation and development on a compliant basis. This provides new ideas and hope for the entire industry when facing regulatory challenges.