When is CFTC's Infinity Gauntlet Coming? I'm Legit Scared for Crypto Startups

My two cents on crypto from the latest SEC hearing

Cannot be further away from being even remotely legally savvy here, but I want to share my 2 cents after watching the debrief on the latest SEC hearing, purely from an investor’s vantage point.

I'm legit scared for the majority of the tokenized crypto startups.

The tagline that Gary Gensler (gonna abbrev him to GG) calls most cryptocurrencies unregulated security is old news, but what struck me this time is when GG explicitly clarified that "it doesn't matter if a crypto is sufficiently decentralized, if there are one or more entities driving the expectation of profit, then it is a security in SEC's eyes"

Let's unpack this. Historically, the golden shield to protect many crypto projects against infringing on the Security Law is the Howey Test. It has four key pillars - basically, if you meet all four criteria below, you are a security.

1. An investment of money: ✅ for crypto projects

2. In a common enterprise: ✅ for crypto projects

3. With the expectation of profit: ❓a question mark

Basically, if a token has revenue/profit sharing mechanisms, or is in the "fractionalization of X" category, it meets this criterion

4. To be derived from the efforts of others:

This is why people keep debating about why decentralization matters - if a project is not "sufficiently decentralized" (the criteria for which have been ambivalent so far) -> you can then pinpoint the identifiable third party to drive profit.

Previously a token needs to meet 1+2+3+4 above to be called a security but was GG implying that now they just need to meet 1+2+3?

If that's the case…

VCs need to be a lot more judicious when evaluating tokens that have the "utility" of revenue/profit/royalty share, fractionalization of an underlying security, pseudo governance tokens that give holders yields out of project treasury, etc.

Founders need to be very careful in designing monetization models, specifically

• Will you have both equity entity + token entity in form of a DAO? or purely token without the entity?

• How will you drive revenue split between entity vs. token?

• What are you doing with your revenue? Buyback & burn could be a good way to drive revenue/value back to token holders without infringing on security laws - stay tuned here might do a web3 monetization deep dive on this topic.

Possible cavalry?

1. GG's retirement (not gonna happen in the next few)

2. CFTC gets the Infinity Gauntlet to magnify its regulatory power: looks like this one is WIP

In any case, I’m bracing myself for a storm.