Join thousands of others who receive this daily analysis of crypto markets & news in their inbox every morning - subscribe now.

Kik Messenger is preparing for a legal battle with the SEC.

The popular messaging app is best known for its privacy and anonymity features, has been downloaded by hundreds of millions of people, and is backed by top-tier investors, such as Tencent, Union Square Ventures, Spark Capital, and RRE Ventures. After the initial launch in 2009 by students from the University of Waterloo, Kik exploded in growth and was valued at over $1 billion within the first 6 years.

The key features that led to the initial growth were the ability for users to sign up without providing a phone number, along with Kik’s promise to quickly dispose of a user’s content shortly after being sent. This privacy-first approach has obviously created headaches for law enforcement over the years.

The company is very public about their inability to locate user accounts by a user’s email, first name, or last name, but rather only have the ability to search their database by the exact username that a user has selected during the signup process. Additionally, when the company is able to locate a username, the texts, photos, videos, and other content that were sent are usually already erased.

This default environment of privacy-first was uncommon over the last decade but is quickly gaining popularity with users after numerous Kik competitors (Facebook, etc) have struggled with data and privacy scandals. As if Kik wasn’t already pushing the envelope enough, the company also decided to find a more sustainable revenue stream than the traditional advertising models.

This pursuit of an alternative, innovative revenue model is what eventually brings us to the current legal battle. In 2017, Kik raised $98 million from a Token Distribution Event (TDE), which is a fancy phrase for an ICO. The ERC-20 token was created on the Ethereum blockchain (and since moved to a private blockchain), is called Kin, and was intended to serve as a common unit of value for transactions within the Kik platform.

You can think of Kin as a digital currency that was native to the Kik platform, before eventually being used in more than 30 apps across the iOS and Google app stores. According to Kik’s CEO, hundreds of thousands of people have been using Kin as a currency to buy goods and services on these digital platforms. This Youtube video gives a great overview of Kik’s vision for Kin (watch here).

Unfortunately for the company, the SEC has been investigating the token sale and recently gave notice that they intend to pursue legal charges against the company for allegedly violating US securities law. Here are a few key points to understand:

• Kik’s token distribution event raised $98 million after the creation of 1 trillion Kin tokens. 10% of the tokens went to investors in the ICO, 30% went to the Kik team, and 60% of tokens went to a newly formed non-profit foundation.

• The 90% of tokens not going to investors was definitely a higher percentage than most ICOs, but the plan was to slowly give tokens from the non-profit foundation to users and developers for participation in the application/market. You could think of this as a way for Kik to pay users with a digital currency for using the service.

• Kik CEO Ted Livingston recently published a Medium post (read here) that explains why he disagrees with the SEC’s argument. His main point is that Kin is a currency, not a security.

• In the company’s response, they highlight specific language from the 1934 Securities Exchange Act (which created the SEC as an organization) that says “the definition of a security ‘shall not include currency.’”

• Previously, the SEC has stated that Bitcoin and Ethereum are not securities because they are sufficiently decentralized (obviously Kin/Kik is not), but they have also stated that having a pre-existing network where the digital asset will be used makes it less likely to be a security (Kik has the pre-existing product/network).

It is important to remember that the SEC doesn’t have final say on whether something is a security or not. Recently, the regulatory body was dealt a setback in an enforcement case against Blockvest, another ICO project accused of issuing an unregistered security. In that case, the judge ruled that the SEC had not provided enough evidence to prove that the team violated the law (read more here). The case isn’t over, so the SEC may still prevail, but the development sheds light on the possibility that Kik could win if they debate regulators in court.

No one knows what the outcome of Kik’s situation will be. Either way, this will be one of the most important legal cases to watch in crypto. The company is well funded, well connected, and you get the sense that they are fighting these potential charges as a way to say “enough is enough” for the entire industry.

Every regulator I’ve ever spoken with has been kind, thoughtful, and well intended. They are simply trying to do their job — encourage innovation, while provide a safe market for investors. Unfortunately, the existing rules are based on a court decision over an orange grove more than 70 years ago.

Regardless of the outcome, the crypto industry will benefit from increased clarity of the rules and regulations. As I always say, once you tell entrepreneurs what is legal/illegal, they will find a way to build valuable companies.

It sounds crazy to say, but Kik looks like they’re gearing up for a legal fight that will finally give us that answer.

-Pomp

The “Off The Chain” podcast has been downloaded 400,000+ times in 160 countries. You can listen to the latest episode with Tom Shaughnessy, Founder of 51 Percent Research here: Click here for Off The Chain podcast

THE RUNDOWN:

Can Blockchain Solve the Mess of Medical Records? IBM Announces Tie-Up With Healthcare Providers: Even as U.S. healthcare spending grew by 3.9% in 2017, the system remains riddled with waste, inefficiencies and data silos. In response, a consortium of healthcare giants that include Aetna and Anthem are testing out blockchain technology as a possible fix. IBM announced that the consortium, which also includes PNC Bank and Health Care Service Corporation, will experiment with a version of blockchain known as Hyperledger Fabric in a bid to reduce administrative errors and streamline record keeping. Read more.

2 Executives Are Leaving Blockchain Startup R3 in Management Shake-Up: Distributed ledger technology provider R3 has carried out an extensive internal reorganization, resulting in the departure of two members of its management committee. Brian McNulty, a managing director and head of global services, and Lauren Carroll, chief administrative officer, are leaving the company. An R3 spokesperson confirmed the internal reorganization, which he said will include an expansive hiring program for 2019, but declined to comment on individual staff departures. Read more.

Van Eck Associates CEO: Bitcoin Investors Are Moving to Gold: Signs show that bitcoin investors are moving toward a more traditional commodity, says Jan Van Eck, CEO of Van Eck Associates. “I do think that Bitcoin pulled a little bit of demand away from gold last year, in 2017,” Van Eck told CNBC’s “ETF Edge ” on Wednesday. “Interestingly, we just polled 4,000 bitcoin investors and their number one investment for 2019 is actually gold. So gold lost to bitcoin and now it’s going the other way.” Read more.

Security Token Startup Polymath Locks up 75 Million Tokens: Despite chilly market conditions, one startup is locking up approximately $9 million worth of its tokens for five years. Polymath, a company best known for advancing the idea of security tokens (those designed explicitly to fit under current securities laws), revealed it is locking up 75 million of its POLY tokens. That’s 7.5 percent of the total supply, and a quarter of the current circulating supply. “A lot of projects have shut down or done major layoffs lately due to lack of funds,” Polymath cofounder Chris Housser told CoinDesk in an email. Read more.

Fifteen Alleged Operators of $8 Million Crypto Scam Arrested in Taiwan: Police in New Taipei, Taiwan, have arrested fifteen suspects for allegedly running a cryptocurrency scam that earned them millions of dollars, English-language local media Focus Taiwan reports on Jan. 26. According to the article, the chief of the Criminal Investigation Bureau Li Chi-hsun said at a press conference that the fifteen suspects — including the alleged leader surnamed Lin — have been arrested in two separate raids carried out on Jan. 9 and Jan. 17. The arrested suspects have been reportedly charged with fraud, and the case has been handed over to the Taipei District Prosecutors Office. The group allegedly defrauded over 30 people in the country of nearly NT$250 million (equivalent to about $8.16 million). Read more.

If you enjoy reading “Off The Chain,” click here to tweet to tell others about it.

Nothing in this email is intended to serve as financial advice. Do your own research.