Cryptocurrencies: Obscure Perth business Powerledger could shape crypto’s future

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The crypto industry has vowed to fight new rules, but suffered a major loss on Tuesday, when the European Union introduced the world’s first comprehensive crypto trading regulations. In Britain, a parliamentary committee said crypto investing should be regulated like gambling because the highly volatile assets had “no intrinsic value”.

Contracts or tokens?

POWR has been cited in two SEC lawsuits which attempt to settle a question that lawyers and regulators haven’t been able to agree on: are cryptocurrencies issued by companies just a new form of ownership?

Last July, the SEC filed an insider trading lawsuit in a federal court in Seattle against an employee of the Coinbase trading platform and two of his associates. The three men allegedly made $1.1 million by misusing the employee’s insider knowledge about upcoming listings of tokens on Coinbase.

The SEC argues that the POWR token and eight other cryptocurrencies that were the subject of the tip-offs are subject to insider trading laws because they are “investment contracts”.

The SEC is using the POWR token offering, and others, as evidence against the Coinbase defendants.

The SEC cites Powerledger’s explanation to investors in 2017: “Token holders create a network which gives the platform value, and in return, they receive ownership of the network. Users will acquire a unique asset token, and they will receive a portion of revenue.”

Entitlement to a share of profits is the basic definition of a share. The SEC asserts POWR investors are participating in a “common enterprise” and have a reasonable expectation of profits based on the efforts of others, which are attributes of a pooled investment.

Two defendants have asked the court to dismiss the SEC’s case, and are supported by Coinbase, which said: “The SEC has it wrong – Coinbase does not list any securities on its platform. And equally mistaken is the SEC’s pursuit of this case while simultaneously refusing to promulgate any rules for the crypto industry at all.”

Powerledger is not a defendant and has not been contacted by the SEC, according to a lawyer for a company executive.

“In 2017 Powerledger expressly excluded US resident retail purchasers from participating in the ICO, so regardless of how SEC seeks to classify the POWR now, they were not offered in the US to retail purchasers by Powerledger during the ICO,” the lawyer said, referring to an initial coin offering.

In the other case, the SEC sued an exchange known as Bittrex and its former chief executive, Bill Shihara, for allowing customers to trade POWR and other tokens. The lawsuit, which alleged they were operating an illegal stock exchange, triggered Bittrex’s bankruptcy on May 8.

The lawsuit cited Powerledger’s initial token sale, which was the focus of a successful defamation lawsuit against The Australian Financial Review in 2021. The SEC revealed that Bittrex staff raised concerns about the legal status of the newly issued tokens.

“In an email to the committee on or about October 11, 2017, a Bittrex employee told Shihara that there were ‘some controversial statements for [the POWR] offering,’ including the ‘Asset Germination Events’ described in the Power issuer’s whitepaper, which defined such events as: ‘the sale or crowdfunding of an autonomous renewable energy asset which allocates ownership and distribution of income.’” the SEC lawsuit says.

“Shihara acknowledged but ignored the issuer’s ‘controversial statements,’ and Bittrex subsequently made the crypto asset security POWR available for trading on the Bittrex Platform.”

The Powerledger executive’s lawyer said the Bittrex employee misread the document that set out POWR’s structure and objectives. “It is notable that Bitterex [sic] Platform was a platform for the trading of 100s of different crypto assets,” he said.

If ASIC doesn’t know …

In Australia, even the Australian Securities and Investments Commission, which is closely following the SEC cases, doesn’t know if the country’s most prominent cryptocurrency is a share, a managed investment scheme, or something else.

“ASIC is unable to make any definitive comment about POWR’s status,” a spokesman says. “Determining whether a crypto asset is a financial product under Australian law is often not straightforward, and can be contested.”

The lawyer for the company’s executive said: “Powerledger agrees with the statement made from ASIC.”

Financial Services Minister Stephen Jones has crypto regulation on his to-do list. When or if he will act is unclear. A spokeswoman did not respond to a request for comment.

Meanwhile, the industry is exposed to legal uncertainty. “If the regulators don’t know, how are the players in the industry expected to know?” said John Bassilios, a partner at Hall & Wilcox and director of Blockchain Australia.

Powerledger, according to its lawyers, is a “software development business” and publishers should be wary of speculating about what may happen in the US.

“I understand this to be a complex legal topic which I would expect to be beyond the scope of expertise of an Australian journalist without US legal qualifications such that he or she should not be purporting to make or provide their assessment of what POWR is or is not under US laws until a final determination has been made,” he said.

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