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The Ledger: Free Money in the Age of Airdrops

Nothing in life is free. Or is it? A blockchain project called Dfinity this week announced it will give away $35 million worth of digital tokens. The recipients can wait to use the tokens on Dfinity’s network—which the company is touting as a “Cloud 3.0″—or, as many will do, they can slip them to speculators and cash out in real money.

Welcome to the age of “airdrops,” where entrepreneurs disperse crypto coins to prospective users for no cost. The tactic has come to be seen as the most viable way for blockchain projects to get off the ground. They’re like the Initial Coin Offerings that were all the rage last year but, instead of selling digital tokens, the project’s masterminds simply give them away. In addition to Dfinity, there are murmurs the journalism-on-a-blockchain project Civil and Everipedia, a would-be competitor to Wikipedia, will soon conduct airdrops of their own.

It’s not hard to see the strategy here. In the wake of the fraud-a-palooza that accompanied many of last year’s ICOs, regulators are set to pounce on any outfit that starts selling tokens to the good people of the Internet. That’s why just giving the tokens away feels like a safer strategy. While it doesn’t bring the same cash windfall, it creates an opportunity to sell reserve tokens on the secondary market. Of equal importance, airdrops offer a way for blockchain projects to distribute tokens far and wide, and build up the network effects that are essential for success.

A harder question is whether the airdrops are legal. The answer, according to attorneys familiar with securities law, can be summed up as “not really.” Under the first prong of the legal test for determining whether something is a security (and must be registered with the SEC), regulators will look at whether there has been an investment of money—a term that is much broader than just cash.

“There’s a line of cases saying it’s not limited to money. It can be something of value, or goods or services. From the SEC’s perspective, the [token recipient] might be giving the issuer something of value by becoming part of network,” said Sam Waldon, an attorney with the firm Proskauer.

And according to Blake Estes of Alston & Bird, the SEC has frowned in the past on companies’ attempts to juice investor interest through giveaways. In 1999, for instance, the agency cracked down on firms offering “free stock” as a way to attract investors to Internet ventures.

The SEC itself hasn’t specifically addressed airdrops but, based on recent comments from the agency’s Chairman Jay Clayton, any U.S. venture dabbling in tokens had better tread carefully.

All of this puts blockchain projects in a bind: If they can’t sell or even give away their tokens, how can they get any traction? In the case of Dfinity, the company found a workaround by firmly excluding U.S. citizens from its airdrop.

But excluding Americans may not be a viable option for the likes of Civil, whose blockchain journalism project is focused squarely on U.S. towns and cities. The project now faces a dilemma: Tokens are essential to its success and, for now, the group has no easy way to distribute those tokens to its target audience.

The upshot is the SEC’s recent crackdown is helping to shield gullible investors from token scams, but it could also hurt U.S. blockchain innovation if legitimate projects have no way of getting off the ground. Here’s hoping the agency’s gnomes are hard at work creating a safe harbor of sorts that will let U.S. companies and consumers join the age of airdrops. Or else that precious cargo will only end up in foreign hands.

Thanks for reading and enjoy your weekend. Memes, mumbles and more directly below.

Jeff John Roberts
@jeffjohnroberts
jeff.roberts@fortune.com

THE LEDGER’S LATEST

Electronics Maker Asus Unveils Crypto-Specific Motherboard by Monica Rodriguez

Bitcoin Could be the “Napster of Digital Assets” says Ripple CEO by Polina Marinova

Crypto Hackers Are Stealing from EOS’s $4 Billion ICO Using This Sneaky Scam by Jen Wieczner

‘Uber of China’ Founder Plans to Create Blockchain-based Ride-Hailing App by Lucinda Shen

Frank Abagnale of ‘Catch Me If You Can’ Fame Says Blockchain is the Future by Polina Marinova

What AI Will Do to the Financial System by Jeff John Roberts

DECENTRALIZED NEWS

To the moon… Sequoia Capital partner Matt Huang has heard the siren song of crypto and is starting a fund with Coinbase co-founder Fred Ehrsam. Crypto nerds are seceding from the U.S. to set up the United States of Bitcoin in the desert. Paxos (née itBit) raised $65 million to expand its blockchain consulting shop. Binance announces $1 billion Community Influence Fund to back startups. Headphone maker Monster plans $300 million (!) ICO to turn things around. Crypto holy wars?

.…Rekt: Bitcoin Gold is reeling from a 51% attack and the hacker could come back for more. Scammers gonna scam, scam, scam—”maybe it is time to create a CryptoCop“. Another $100 million up in ICO smoke. Poloniex alarms investors (again). SEC charges “Blockchain Evangelist”. Wired made $100,000 on a Bitcoin miner review device—and lost the private key. UK man who threw away a hard drive with Bitcoin millions in 2010 is still talking to the press about it. Ben & Jerry’s scoops up blockchain to make you feel better about eating their Cherry Garcia ice cream.

BALANCING THE LEDGER

☝Click to view the show.

Amber Baldet, former blockchain lead for J.P. Morgan Chase, stopped by Balancing The Ledger to talk about her new startup Clovyr, EOS’s $4 billion ICO, and why the current state of blockchain development resembles the early days of the Internet.

BUBBLE-O-METER

If you’ve got an empirical insight on Bitcoin, it’s a safe bet you’ll end up on CNBC. Here is Robert Sluymer—head of technical strategy at Fundstrat Global Advisors—explaining why he believes Bitcoin has bottomed out. Key numbers per Sluymer:

  • $7,000: The price floor on which Bitcoin is bouncing as it gets set to recover.
  • 40: The current figure for Bitcoin’s relative strength index, a measure of momentum. “A level close to 30 typically indicates oversold conditions.”

MEMES AND MUMBLES

Mumble: You knew this would happen sooner or later. A one-time token CEO, not content to treat crypto as like a religion, wants to make it an actual religion:

Called 0xΩ, the religion, [is] inspired by the way blockchain helps groups reach consensus … To jumpstart that process, [Matt] Liston last week handed out 40 hard copies of what he calls a “flame paper” describing both how the religion governance model might work.

In case you want to join, here’s a pic of the glorious leader:

 

Meme: Ripple (and many others in the crypto community) were quick to seize on an image of Cleveland Cavaliers basketball star LeBron James berating teammate JR Smith for a foul-up that likely cost the Cavs the first game of the NBA finals. Expect to see this meme over and over:

 

FOMO NO MO’

Don’t miss out: The team behind the blockchain protocol EOS is poised to raise a mind-boggling $4 billion. EOS doesn’t have a product yet and, for now, the biggest beneficiaries include scammers who are making out like bandits. The Ledger co-editor Jen Wieczner has a nice look at one of the more sophisticated hustles:

The ruse is easy to fall for, and often takes the form of a sophisticated-looking email, four of which were sent directly to my Fortune inbox […]

The button takes you to a website that is identical in color, background, font and other design elements to the EOS homepage. The only problem is the scam site’s web address is “eȯs.com,” a nearly imperceptible dot above the o—a diacritic mark only found in the dead language of Livonian, once spoken in parts of Latvia.

We hope you enjoyed this edition of The Ledger. Find past editions here, and sign up for other Fortune newsletters here. Question, suggestion, or feedback? Drop us a line.