The U.S. Securities and Exchange Commission (SEC) recently filed a complaint against Justin Sun and his affiliated companies, including TRON Foundation and BitTorrent Inc.
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The complaint alleges that Sun and the aforementioned entities have been engaged in the unregistered offer and sale of securities, specifically TRON (TRX) and BitTorrent Token (BTT).
While the SEC’s allegations may seem daunting, this editorial will outline key arguments supporting Justin Sun and his companies, asserting that TRX and BTT are not securities and how Sun will ultimately triumph over these charges.
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Understanding TRX and BTT
TRON is a decentralized platform founded by Justin Sun, designed to facilitate the creation of decentralized applications (dApps) and to provide a more efficient, scalable, and cost-effective solution for content creators and consumers. TRX, the native token of the TRON network, serves as the platform’s primary medium of exchange, allowing users to interact with dApps and participate in the network’s governance.
BitTorrent is a well-established peer-to-peer file-sharing protocol that has been in operation for nearly two decades. BitTorrent Token (BTT) is an extension of the BitTorrent ecosystem, designed to incentivize users to share files on the network by rewarding them with BTT tokens. The token’s primary function is to facilitate faster download speeds and provide a more efficient file-sharing experience.
The Howey Test and Cryptocurrency
To determine whether a token or cryptocurrency is a security, U.S. courts typically apply the Howey Test, derived from the Supreme Court case SEC v. W.J. Howey Co. (1946). The Howey Test stipulates that an investment is a security if it meets the following criteria:
- An investment of money
- In a common enterprise
- With an expectation of profits
- Solely from the efforts of others
TRX and the Howey Test
Investment of Money: While the purchase of TRX does involve an investment of money, this alone does not render it a security. Many utility tokens and cryptocurrencies require an initial investment, but their primary purpose is to facilitate transactions within a specific ecosystem, not to serve as an investment vehicle.
Common Enterprise: TRON is a decentralized platform, and the value of TRX is derived from the collective contributions of the platform’s users and developers, not from a centralized entity. This distinguishes it from a common enterprise, where the performance of the investment is tied to a single organization.
Expectation of Profits: TRX’s primary function is to enable transactions within the TRON ecosystem, not to generate profits. While some users may speculate on the value of TRX, this is not its intended purpose, and such behavior is not encouraged by the platform.
Efforts of Others: The value and utility of TRX depend on the collective efforts of the TRON community, rather than the efforts of a centralized entity. This decentralized nature precludes TRX from being classified as a security under the Howey Test.
BTT and the Howey Test
Investment of Money: BTT, like TRX, does involve an investment of money. However, its primary purpose is to incentivize users to share files on the BitTorrent network, not to serve as an investment vehicle.
Common Enterprise: BitTorrent is a peer-to-peer network, and the value of BTT is tied to the overall health of the file-sharing ecosystem. This decentralized structure separates BTT from a common enterprise, where the performance of the investment is reliant on a single organization.
Expectation of Profits: BTT’s primary function is to facilitate faster download speeds and improve the overall file-sharing experience, not to generate profits. While some users may speculate on the value of BTT, this is not its intended purpose, and such behavior is not encouraged by the platform.
Efforts of Others: The value and utility of BTT depend on the collective efforts of the BitTorrent community, rather than the efforts of a centralized entity. This decentralized nature precludes BTT from being classified as a security under the Howey Test.
Precedent Cases and Implications for TRX and BTT
SEC v. Kik Interactive Inc.
The SEC’s complaint against Kik Interactive Inc. centered around the company’s initial coin offering (ICO) of its Kin token. In this case, the court found Kin to be a security due to the company’s emphasis on potential profits for investors and its efforts to increase the token’s value. However, this case is distinguishable from TRX and BTT, as both tokens focus on their utility within their respective ecosystems, not on potential profits for investors.
SEC v. Telegram Group Inc.
In the case against Telegram Group Inc., the SEC alleged that the company’s sale of its Gram tokens constituted an unregistered securities offering. The court found that Grams were securities because they met the Howey Test’s criteria. However, the Telegram case differs from TRX and BTT as the primary purpose of Grams was to generate profits for investors, while TRX and BTT have distinct utility functions within their ecosystems.
The SEC’s allegations against Justin Sun and his affiliated companies may appear formidable; however, a careful analysis of the Howey Test and relevant case law demonstrates that TRX and BTT are not securities. The decentralized nature of both tokens, their emphasis on utility within their respective ecosystems, and the absence of a common enterprise set them apart from the investment contracts the Howey Test seeks to identify.
Furthermore, precedent cases like Kik Interactive Inc. and Telegram Group Inc. do not apply to TRX and BTT, as the primary purpose of these tokens is not to generate profits for investors but to facilitate transactions and improve user experiences within their ecosystems.
As such, Justin Sun and his affiliated companies have a strong legal argument that TRX and BTT are not securities, and they should be able to successfully defend against the SEC’s complaint.