Nothing in life is free. Or is it? A blockchain project called Dfinity last 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.
A version of this article originally appeared in the The Ledger, Fortune’s weekly newsletter on the intersection of finance and tech. Subscribe here.
