Polkadot Development Organization Claims DOT Is “Not a Security”

A key supporter of Polkadot has asserted that the DOT token should not be classified as a security under U.S. law.

In a Twitter post on the evening of November 4, the Web3 Foundation—the organization that initially funded the development of Polkadot—stated that DOT is no longer considered a “security” by the U.S. Securities and Exchange Commission (SEC).

Daniel Schoenberger, CTO of the Web3 Foundation, argued that DOT has now “merged” with the Polkadot software and no longer retains the characteristics of a security.

Schoenberger further revealed that Web3 Foundation has been engaging with the SEC for the past three years to reassess digital assets that have been classified as securities. The SEC’s stance is that projects involving Initial Coin Offerings (ICOs) or future token sale agreements (SAFTs) indicate a security offering. Web3 Foundation conducted DOT sales via SAFT to investors in October 2017 and March 2019, well before DOT began trading in August 2020 and the blockchain network went live in December 2021.

However, after discussions with the SEC, Web3 Foundation believes there is sufficient basis to argue that DOT has fully integrated with the Polkadot software. Consequently, DOT transactions should not be regarded as securities. Schoenberger stated:

“Over time, we have developed a robust hypothesis that a token must merge with the project to contribute to the decentralization of projects like Polkadot and assets like DOT, beyond its initial fundraising purpose, without possessing any additional security characteristics.”

It’s important to note that this is a unilateral statement from Web3 Foundation. The SEC has yet to issue any official announcements regarding the classification of cryptocurrencies or tokens as securities.

As of the time of writing, DOT’s price is experiencing significant gains, largely driven by the overall market recovery on November 5.

1-hour Chart of DOT/USDT on Binance as of 10:30 AM on November 5, 2022

Currently, the SEC continues to use the Howey Test, a criterion established in the 1930s. Many in the crypto community argue that the Howey Test is outdated for evaluating securities. According to the Howey Test, an asset is considered a security if it meets the following four criteria:

1. An investment of money.
2. The investment is made in a common enterprise.
3. There is an expectation of profits from the investment.
4. The profit comes from the efforts of the promoter or a third party.

In 2022, under the leadership of SEC Chairman Gary Gensler, the SEC has intensified its scrutiny of the cryptocurrency sector, targeting projects showing signs of fraud or security offerings. Following Ethereum's transition to a Proof-of-Stake consensus mechanism and the introduction of staking, Gensler has suggested that ETH's model might exhibit characteristics of a “security.”