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Kik was the first social media company to offer a cryptocurrency—but now the SEC has questions

Ted Livingston, CEO of Kik, wanted to beat Facebook to crypto
Reuters/Brendan McDermid
On a crypto Kik.
By Matthew De Silva
Published Last updated This article is more than 2 years old.

Kik is a free messaging platform, available on iOS and Android. It surged to popularity among teenagers—and child predators—during the early 2010s, but growth has since stalled, purportedly at around 15 million users. CEO Ted Livingston may have obliquely revised that number downward when he said that the platform has “millions” of monthly active users, in an interview last year.

While Kik is nowhere near the size of its ostensible competitor Facebook (which boasts 2.3 billion users), the company tried to distinguish itself with a crypto strategy to gain users and seize control of the digital economy, including stickers and custom emojis. However, Kik’s hasty approach—slapped together during ICO mania—could prove its undoing.

Kik raised almost $100 million in 2017 to develop its own cryptocurrency, called Kin. But because of the way it raised funds, made promises, and distributed digital tokens to investors, Kik has drawn scrutiny from the US Securities and Exchange Commission. The stock market regulator believes Kik’s ICO constituted an unregistered securities offering, Livingston told the Wall Street Journal in January. The agency has not disclosed whether it’s authorized litigation against Kik, and Livingston did not respond to requests for comment.

In contrast, Facebook hasn’t raised money from the public for its forthcoming crypto. And why would it need to? The company has billions of dollars on hand. That financial cushion has allowed the social media behemoth to approach digital money with extreme caution. Little is known about CEO Mark Zuckerberg’s plans for “Project Libra“—the code name used internally for Facebook’s crypto-payments platform—but the project has been under development for more than a year and, reportedly, might be used for remittance transfers via WhatsApp in India. Said to be called “GlobalCoin” (that should give you a sense of the company’s ambitions), Facebook’s crypto may be pegged to a basket of traditional, government-backed currencies.

Kik has painted its crypto coin as the underdog, the alternative to a worldwide, Facebook-led digital money. But where Facebook has been reticent, Kik has been brash. And in its rush to be first out of the gate, Kik may have shot itself in the foot.

Kik contends that Kin is a currency and not a security. Today, the token trades for just $0.000042, and based on its circulating supply, the token has a market cap of $415 million.

In basic terms, a security is an investment contract, like a stock or bond. Investors purchase these financial instruments and expect a return of some sort, whether through growth, dividends, or coupons. Think of shares in Apple or municipal bonds.

To determine whether something is a security, the SEC uses a four-pronged assessment tool called the “Howey Test,” named for a Supreme Court case about an investment in orange groves. As explained by the commision, “[A]n ‘investment contract’ exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

Many cryptocurrency creators, including Kik, think their digital tokens are not in violation of securities laws. These tokens, they argue, can be used on crypto networks as currency or rewards, and they might be traded in exchange for goods or services. To the SEC, however, the circumstances of a crypto token’s creation matter, and considering that Livingston publicly touted an expected increase in the token’s value, Kin can begin to look security-ish.

It’s hard to say whether Kin will be deemed a security, experts say. “On the one hand, Kin currently has a currency-type role inside of the Kik app; typically that would NOT make Kin a security,” Gabriel Shapiro, a blockchain attorney for DLx Law said via Twitter direct message. “On the other hand, according to reports, about $100M of Kin were sold to the public when Kin had little use value. It would be highly unusual to sell $100M of an in-app currency all at once, and the circumstances might show that buyers bought because they had a reasonable expectation that the value of Kin would increase as Kik developed more use cases and technology for Kin.”

The critical question, says Shapiro, is “did people have a reasonable expectation of profit in buying Kin, or did they buy it primarily because they are fans of the Kik app and planned to use all the Kin they bought as part of their usage of the Kik app?”

Kik’s crowdfunding days aren’t behind it though. The company announced launched a legal defense fund this week, called Defend Crypto, to help the project fend off the SEC.

🔑🔑🔑

What you need to know—and why

Salesforce debuts Salesforce Blockchain

Salesforce, which sells customer-relationship management software, announced Salesforce Blockchain, built on Hyperledger Sawtooth, a modular blockchain platform,  yesterday (May 29). The product will allow users to build blockchain networks using low-code tools, such as point-and-click, instead of writing code. The company’s initial customers include health data company IQVIA, S&P Global, and Arizona State University, which will use the new product for drug provenance, know-your-customer checks, and academic records, respectively. Salesforce anticipates that its blockchain product will be available for all customers starting 2020.

Takeaway: Salesforce did not portray its new software as a panacea, explaining that blockchain networks aren’t always the right solution. But a company of Salesforce’s size and stature embracing blockchain indicates a growing embrace of distributed ledger technology, even in private, modified formats.

Please send news, tips, and messaging apps to privatekey@qz.com. Today’s Private Key was written by Matthew De Silva, and edited by Oliver Staley. The first half of our lives is ruined by our parents and the second half by our children.

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