Remove NTRN from ICS

‘Securities subscriptions’ is a substantive description, not a formal term, and have appeared in precedent cases for years; there are all kinds of inventive ways people have tried to get around securities regulation.

I’m afraid the auto-swap actually multiplies the surface area for regulatory action: not only is the source of profit still an unregistered security (hence staking ATOM is still subscription to an unregistered security), but now the Hub is an unregistered broker that is exchanging an unregistered security. Not to mention it creates a taxable event, and who will pay that? Auto-swapping adds three problems without solving the first.

It’s unfortunately a difficult situation, but since the stakers of the Hub are potentially on the hook as owners of the Hub, there needs to be more serious legal review for NTRN and all other ICS chains for Hub stakers to thoroughly understand the risks that projects are asking them to take.

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I’m not a lawyer, but this feels like a stretch.

First - the SEC’s understanding of Cosmos architecture is extremely limited. I think changing the strategy of a globally distributed network, especially that of the Cosmos Hub, due to a single regulatory body in the United States is the wrong move.

Second - Removing Neutron from ICS doesn’t solve anything. You can easily extrapolate this to say “everyone should unstake from the Hub because ATOM is a security and pays out ATOM yield to its holders.”

This is an overreaction to the current regulatory environment solely in the US. NTRN is no more greater a risk to ATOM holders than ATOM is.

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You present your argument in a logical way and there are some good points as it pertains to the U.S., however, Neutron has presented itself as a worldwide currency, and as such, does not need to acquiesce to one government, let alone any government.

Some would argue Atom and the Cosmos ecosystem as a whole are currencies. Not a security or a commodity. Not limited to the United States. VPN sees right past borders.

It would be “No” for me. You could wait for Gary Gensler to be removed from office, which is looking more and more likely as he enforces without any framework for cryptocurrencies. Senators are getting fed up and congress is taking minor actions. It could be big news. Hang tight.

I think there may be some overall confusion about “What is a security?”

Here’s a simple answer: a security is any means by which private groups/companies procure public funding for the development of their project, with expectation of profit to investors. The Howey test is:

  1. an investment of money
  2. in a common enterprise
  3. with expectation of profit
  4. derived from efforts of others

For example: ATOM’s ICO is potentially a security issuance for AiB and ICF, since the ICO fundraiser directly funded their work; however, ATOM’s subsequent operation as a decentralized network is unlikely to be a security—note how the ICF-backed ATOM 2.0 failed, because ICF does not control the Hub. In fact no one controls the Hub. The fourth prong of the Howey test, “the effort of others,” has been understood in case law to mean others who not simply make an effort to the project, but who have a “command and control” authority over the project.

So this is factually incorrect: “NTRN is no more greater a risk to ATOM holders than ATOM is.”

NTRN is controlled by its devs and insiders, not by a decentralized community. NTRN’s community airdrop was an anemic 5%, with the rest of the token given to devs, a foundation, VCs, and a “community pool” which is entirely controlled by devs, a foundation, and VCs. NTRN is almost certainly an unregistered security, where purchasing the token is funding the work of a private collective who entirely control the uses of NTRN; this is why NTRN team excluded US participants from their airdrop.

Here’s the problem, for both NTRN and the Hub: NTRN on ICS defeats NTRN’s defense of prohibiting US participants from the airdrop, since the Hub does not prohibit US stakers from receiving yield from NTRN. To understand why this is a problem, see the SEC case against Toshiba. If US participants are able to acquire the token, and the Hub is facilitating that acquisition, then not only is NTRN violating US securities laws, it is also implicating the Hub in facilitating unregistered securities in the US market.

NTRN turns ATOM staking into what SEC has called a “securities subscription,” a form of securities offerings made especially possible by crypto technology. In one swoop, NTRN on ICS opens both NTRN and the Hub to one government’s regulatory agenda, and it is not at all an “overreaction” to raise the issue.

The fact of the matter is: Hub stakers should not be taking on these risks without full legal disclosure from the teams involved and with the Hub’s own legal counsel providing an opinion; this means that the Hub, like an HOA or any other community project, needs to find and hire counsel. Stakers may still opt to host NTRN on ICS, but they should do so with full understanding of the risks and liabilities they are being asked to bear—I do not think stakers deserve to be held jointly and severally liable for the regulatory violations of the NTRN team.

Until such disclosures and counsel are made, NTRN really needs to be removed from ICS.

Many ATOM stakers are in the US and they do indeed “need to acquiesce to one government,” i.e., their own.

Whether ATOM is a currency is an entirely separate issue from whether NTRN is a security. Even if ATOM is deemed a currency, it in no way guarantees that “the Cosmos ecosystem” at large is also a currency.

What NTRN proclaims itself to be may not be what it is; what matters is not the proclamations but the substance. I encourage you to review securities case law to see what has been deemed a security even though its issuers have called it all sorts of other things. For example: in Howey, a private company was offering fractional plots of an orange grove to investors. Since these investors did not control what happened on the orange grove, SCOTUS ultimately ruled that these plots of orange grove were being sold as securities, even though they were proclaimed to be land/property. What matters in a securities designation is not the surface but the substance.

Gensler being removed from office will not change the fact that securities regulations prohibit NTRN from being on US shores. Even if we have a pro-crypto SEC and Congress (which we won’t until after next election, at minimum), what NTRN substantially is does not change: it’s an unregistered security and its use of ICS implicates the Hub in securities issuance.

NTRN should be removed from ICS until the Hub is able to procure legal counsel so that stakers can make a truly informed decision about the risks they are taking.

The question is really sensetive and needs to be carefully weighted. On the one hand ATOM is already targeted to be claimed as a security, but there was a really poor research behind as well as for the other suffered coins so there is a room for appeal. On the other side, Neutron has made a clear statement that they have excluded US residents from airdrops to avoid potential legal issues with the US government.

However, the issue of NTRN rewards for ATOM stakers does raise concerns about possible manipulation and the worsening of Hub’s position. Therefore, before launching new chains, conducting a thorough risk audit would be the optimal solution. If the audit identifies significant risks for the Hub and ATOM stakeholders, temporarily suspending NTRN and postponing the launch of new chains until the reward models are fixed and potential risks are addressed would be a reasonable option.

Why to not combine the current matter with another current suggestion? Hire A Lawyer for Gaia

I think it makes more sense to suspend NTRN on ICS until the Hub goes through an audit, not afterward. Otherwise the Hub continues to accrue potential liabilities.

One possiblity might be to disable the fee-sharing mechanism so that ATOM stakers receive nothing from NTRN, but since ICS validation increases validator costs, this does not seem feasible for the long-term.

I support “Hire a Lawyer for Gaia”—but there is an even earlier problem that needs to be addressed: How can the Hub do so? and to answer this question is to answer how the Hub can organize itself to speak as a single body, which can only be determined by an ATOM Constitution. Given that these are all long processes, and that NTRN on ICS significantly weakens—if not outright defeats—ATOM’s current status as a nonsecurity, it makes more sense to me to start by suspending/removing it, then going through constitutionalization, then getting legal counsel and starting in earnest. Just because we ran through a door into a burning building doesn’t mean we have to stand there and keep breathing the fumes—back out, fight the fire, and rebuild.

We disagree. The Hub’s econonic zone strategy should keep moving forward.

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These points you are making are valid. You seem well versed on the securities laws.

Would it be in the best interests of Atom stakers to remove Neutron from ICS? Not sold on that as it may do more harm than good. It would be bad optics at the least and possibly an open admission of wrong doing at the worst interpretation.

You propose an interesting solution by removing Neutron from ICS, but will that ultimately be viewed as a sign of weakness when strength is needed? Unjust laws that have not been updated to meet modern times should be the focus and doing damage control in advance, while laudable, may be directing the conversation in the wrong direction.

I think you are right as the U.S. laws are read, but I also think it is time to spill some tea into the harbor.

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Your point is clear but the laws should be executed no matter what do you think of them. And I’d not consider NTRN temporary excluding as a sign of weakness but rather as a prevention measure, which allows to sort out the current law issues without the room for escalation. Regarding strength demonstration - Joan of Arc showed fantastic fortitude however she was burned. To spill the tea to the harbor we need smth behind added to the sense of fairness e.g. a comprehensive audit with clear counter arguments.

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This should be quoted to history students

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Strength and weakness are irrelevant. Compliance is needed—NTRN excluded US residents from their airdrop for a reason, namely, that they are complying with US securities regulations…

But now NTRN on ICS has violated those regulations, and it has done so by implicating the Hub and all of its stakers in the arrangement. That needs to be suspended/reversed until the Hub can acquire professional legal review of the situation and the recommendation of a qualified attorney.

Regarding NTRN’s status as a security—and I would extend this also to STRD, which is currently seeking to be added to ICS, and also the Atom Accelerator DAO—I provide a quote from Alan Palmitter’s text Securities Regulations:

"Applying a framework developed by the Fifth Circuit in Williamson v Tucker, 645 F.2d 404 (5th Cir. 1981), many lower courts permit a nominal general partner to claim that his interest is an investment contract by demonstrating that he was so dependent on the promoter that he actually could not exercise meaningful control. To establish that a general partner interest is a security, the investor must show either

  • No legal control. The partnership agreement leaves so little power in the investor’s hands that the arrangement in fact distributes power as would a limited partnership, or
  • No capacity to control. The partner is so inexperienced and unknowledgeable in business affairs that he cannot intelligently exercise his business powers, or
  • No practical control. The partner is so dependent on the unique managerial ability of the promoter that he cannot replace the manager or otherwise experience meaningful partnership power." (Securities Regulations, p55)

NTRN’s airdrop gives 5% control to “the community”—NTRN offers no meaningful control to investors. It is almost certainly an unregistered security and its revenue should not be distributed to ATOM stakers.

STRD’s airdrop gives 6.4% control to “the community”—STRD offers no meaningful control to investors. It is almost certainly an unregistered security and its revenue should not be distributed to ATOM stakers. In addition, since liquid staking providers like STRD delegate tokens to validators in ways that are disjunct from how users would directly delegate themselves—either through a “whitelisted” subset of validators, or at the discretion of STRD voters (though note that “STRD vote” is controlled not “the community” but STRD devs and their VCs)—such liquid staking providers deprive investors of control of their investment and put chains under obscure networks of influence, further weakening any nonsecurity claim.

The ATOM Accelerator DAO has virtually no community oversight and deprives investors of control. The community member Ray Raspberry recently uncovered conflicts of interest in AADAO’s approvals. AADAO securitizes ATOM and weakens ATOM’s nonsecurity standing. That Youssef Amrani was on a recorded Twitter Space bragging that AADAO is backdooring ATOM 2.0, which was pointedly rejected by the community, is a sign that AADAO has taken control as the promoters of ATOM.

These all point to a broader question/problem within ATOM: is ATOM a commonwealth/polity or a company? If it is a company, it needs to comply with legal requirements of doing business with people in jurisdictions all over the world. Being on blockchain does not create special exemptions to the law, nor should it.

I don’t think that Hub stakers should be forced into such positions without full disclosure of the risks they are exposing themselves to.

NTRN clearly understood, and perhaps had legal counsel explain, that their model would raise concerns with regulators. That NTRN did not share this information with ATOM stakers when applying for ICS is potentially negligence/a failure of NTRN’s fiduciary obligations in a commercial exchange.

It is better to suspend ICS for any chain until professional legal review can be provided. Literally any company with the market capitalization of ATOM would have legal wrappers and attorneys reviewing all commercial decisions.

It is negligent, not revolutionary, for the Hub to continue without such services. Suspending NTRN (plus other ICS additions and AADAO) until legal review minimizes damages; allowing NTRN (and other ICS additions and AADAO) to continue just digs a deeper grave for the Hub to climb out of.

You do not change the law by breaking the law. The suspension does not “weaken” the Hub. What weakens the Hub is ongoing regulatory violations.

Hey lil d,

thing is we aren’t a company eh?

HOAs, nonprofits, etc., at the scale of ATOM’s market capitalization all have legal counsel.

While I would like to agree that “we aren’t a company,” the thing is: Atom Accelerator DAO, like ATOM 2.0 before it—both of which had appallingly little community oversight or control—is a securitization of the ATOM token, meaning that, in terms of economic reality, we are tilting toward, if not already now running as, a company. This is why we need to suspend and unwind these things until we can re-establish their purpose through clean and clear models.

In addition, in saying “Hub stakers” I should lay special emphasis on the place of validators.

With ICS, validators are not only distributing these chains’ tokens and/or revenue, they are also materially participating in the business of these chains. This makes validators parties to these chains, brokers of their tokens, and potential exchanges (in case of Zaki’s auto-swap proposal)—how many validators have registered with SEC to perform these functions?

This means that the validators, even more than individual stakers, are assuming extraordinary liability for the regulatory exposure of ICS chains. The question they must ask themselves is whether the rewards of ICS validation for any particular chain outweigh the risks of “disastrous” (Palmiter, p 52) personal loss and legal fees that securities enforcement can entail.

The Hub too should pause to reflect on whether it wants its Community Pool drained by the courts on behalf of NTRN or other ICS chains, or if it wouldn’t rather sidestep that issue as much as possible.

~

It is sometimes said that Web 3 is the Wild West, and this makes good sense. But it is also sometimes the case that Web 3 is like Jurassic Parks: devs have thought so much about what they can build, that they’ve forgotten to think about whether (and how) they should build.

ICS is beautiful technology. Liquid staking is a profound accomplishment. But when you are engaging in commercial transactions with other people’s money, it doesn’t matter how radical or innovative the technology is—in most jurisdictions (not just the US, though US financial laws are generally a blueprint for global standards) there are restrictions to be aware of and obligations to meet, some of which are best understood by professionals. The Hub should seek to establish these relationships and I am in full support of the proposal to hire a Gaia attorney.

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I want to say that I really support the Hub funding people to do this analysis and come up with a compliance model.

It’s probably worth seeing if ICS applications can actually succeed in parallel to a compliance model.

The goal should be to push compliance to the edge of the system rather than core and I think the current design does too much pushing compliance to the core which leads to the call for a pause.

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I want to say that I really support the Hub funding people to do this analysis and figure out the options.

We have no idea if ICS has product market fit or not so we probably need to know if any of this actually makes any sense as feedback into the the compliance analysis.

But we can spin these efforts up in parallel and I really want to commend @Lil_D for bringing this up.

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You’re making very eloquent cases on all points. I oppose a knee-jerk reaction to remove neutron or halt ICS, and I very much support the move to get the hub community some advice.

What will it take for Hub developers and validators to realize they are self-inflicting potentially disastrous regulatory exposure through ICS?

Without professional legal review of AEZ/ICS proposals and their associated projects, the Hub is raw-dogging reality (pardon my language).

I am afraid there is a “sunk cost fallacy” at play in the reluctance to get legal counsel on ICS and the projects that want to use it. Teams and devs have spent so much time and capital building these systems that they do not want to acknowledge there may be externalities they have not prepared for (or perhaps that they never intended to prepare for)—“Pride goeth before destruction, and an haughty spirit before a fall.”

The Hub needs to suspend ICS and pending additions until we can establish professional legal review for these projects and their implications on ICS for the Hub/ATOM staking.

Even bracketing concerns about securities, NTRN’s devs are anonymous, their early VCs are anonymous, and the price those VCs paid for their tokens is unknown. There is no way for the Hub to meaningfully evaluate a merger without these disclosures.

Even at the very opaque level of disclosure for NTRN that we currently have, this is 100% risk for the Hub and its stakers, and 100% reward for NTRN and whoever is behind it.

I support ICS for projects that are genuinely decentralized and that can pass legal muster. Anything else, however, is the Hub gambling the ecosystem’s central source of liquidity to enrich some insiders who have questionable commitments to protecting their business partners.

I got a disagree with you buddy, they have pseudonyms and they’re absolutely totally totally totally real people I have met them in real life and I just think that they’re great.

I do agree with you on the legal thing and I think that I actually came up with a scope for what a hub lawyer should do, with the help of Sean O’Reilly.

I do not view neutron as more risky than the Cosmos hub itself.

I also just want to say though I appreciate the rigor that you’re bringing to this.

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