SEC, Inc. and Algorand is(n't) security

A few points:

  • How decentralized a blockchain is in terms of running nodes, network ownership and software updates seems to have a real impact on considering a token or security or not. That’s why ETH is classified as a security in some legal cases but not others.

  • The same rule can be applied to the recent SEC- bittrex case which listed the offered Algos on bittrex as security.

  • If Algorand becomes decentralized enough it is much less likely to be considered a security.

  • The foundation decentralization is happening with the Govs/XGovs program.

What else needs to be done?

  • Network self-sustainability: The network should be able to run with no major software change/upgrade or a central entity involvement for years. It is not currently the case and there is no timeline for fixing it yet. This should be a high priority. Examples of areas that need to be addressed:

    • Running relay nodes should be decentralized.

    • The network should be resilient to all sorts of attacks and load. For example, relay nodes seem susceptible to coordinated DDoS attacks buy and large adversary (say state sponsored) entity. Also, it is unclear how much load (both tps and number users which impact reads/queries from relay nodes) can the network handles. For example most relay nodes have a very limited storage (a few TB) which is enough for much lower tps than the current advertised 6K tps). There could be other limitations that I’m not aware of.

  • Network software updates should be requested and approved by Govs/XGovs. Currently inc. frequently upgrades the software. The story is being told by the inc/foundation is that requirements are coming from the foundation but the truth is that inc. has a big influence (and I believe that should be the case as they understand the product, possibilities and trade-offs much better). So there can be some collaboration, etc. But what’s missing? The network upgrades should be approved and permitted by Govs/XGovs and any upgrade should always leave the network in a reliable self-sustainable state with no absolute necessity for any additional upgrade for years. As a consequence any stagede upgrade (when a change happens in several upgrades) should be applied only to a portion of network or be fully rollback-able. This is not easy to achieve and not only adds to the complexity and required effort but also slows down the progress however necessary for decentralization. This is similar to what’s happening with ETH upgrades.

  • There should be other capable organizations that contribute to the Algorand software. At minimum running any such org will be costly and there should be enough natural incentives for that.

A few other points:

  • We just heard about congress passing a crypto law in the next two months. That may reduce the necessity or priority of the above actions.

  • Calling Algo a security is not the end of the world for Algo usage in the US. Even if its trading becomes more limited, people would still use it for various use-cases. Remember, one of the most important use-cases of Algo is using it as digital collateral (didn’t exist before crypto) in DeFi on its own chain something that even BTC doesn’t’ have.

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The blockchain market is very competitive. Some upgrades are needed to keep up with expectations. You need to be significantly better in something to get new projects. If you don’t move, the initial advantage will diminish.

Decentralization effects the analysis of whether an asset is a security insofar as it effects whether there is a common enterprise, one of the key elements of the Howey Test. One project on Algorand that I have worked on, Choice Coin, is developing automated software for digital asset securities compliance. You can view some of our work and learn more on the Choice Coin Compliance GitHub.