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Web3 Foundation:Polkadot DOT Token Has Morphed Into Software

Web3 Foundation Team· 6 min read

Daniel Schoenberger, Chief Legal Officer, Web3 Foundation

Three years ago, in November 2019, Web3 Foundation made a decision that changed its trajectory and led to a transformation in business processes, people management and communications to the general public. We chose to take the U.S. Securities and Exchange Commission (the “SEC”) up on its offer to “come in and talk to us.” Today, we will tell you why. Web3 Foundation is pleased to announce a landmark achievement towards the realization of Web 3.0: the Polkadot blockchain’s native digital asset (DOT) has morphed and is no longer a security. It is software.

Web 3.0

In 2014, Dr. Gavin Wood, the founder of Web3 Foundation, coined the term “Web 3.0” to describe a decentralized, trustless, serverless internet where users control their own data, identity and destiny. He presented this new vision because he believed that the current internet infrastructure (i.e., Web 2.0) encouraged and facilitated the consolidation of power by a dominant group of for-profit entities, many of which were instrumental in building such infrastructure. In Dr. Wood’s view, the Web 2.0 internet failed to meet basic human expectations of privacy and authenticity, and not by accident, but by design. Many, if not most, of those well known entities that are central to the average person’s Web 2.0 experience rely upon advertising as their sole method of making money. In addition, and closely related to advertising, robust online tracking and data mining may obfuscate the truth. Far from being a public utility, Web 2.0 is a business. The customer, seeking an online experience, may, unwittingly, become the product, potentially even without his or her knowledge of being monitored and influenced.

The Web3 Foundation’s official mission contemplated a web that would remove the human conflict of interest that exists between creators and consumers of online content and applications. The goal of Web 3.0 was to create a new internet infrastructure that could provide citizens with a meaningful alternative to Web 2.0 — an internet that would continue to provide the features and benefits that they expected from the Web 2.0 world, but in a more secure, decentralized, privacy-protecting format. Ideally, Web 3.0 would enable individuals, not simply a cluster of powerful, for-profit, advertising-driven entities, to control their own personal data, including home addresses, cell phone numbers, healthcare histories and many other forms of personal identifiable information.

One way to create such a decentralized internet was by using blockchain technology, with Polkadot as the optimal design implementation. The vision of Polkadot was to contribute a base layer of vertical, use case-agnostic, coordinating software that would ultimately help create a viable alternative to Web 2.0 for citizens. Much like HTTP provided rails for communication in Web 2.0, once built, Polkadot could enable blockchain interoperability and cross-blockchain communications in Web 3.0. Yet, rather than invoking the well known “blockchain trilemma,” the Polkadot developer team set the bar higher, making clear that decentralization and security are not optional in the search for scalability.

The aim was always high, because the goal mattered. Interoperability and cross-chain messaging are not marketing gimmicks. They are critical to achieving Web 3.0.

Over the past several years, the blockchain space has developed into a diverse ecosystem, with many independently valuable communities, with varying cultures and goals. However, the individual elements of the blockchain industry continue to lack the benefits of a more mature, coordinated system. In other words, the whole is not greater than the sum of its parts. Rather than functioning as an accessible online world, there remains a zero-sum aspect to it, as blockchains largely have remained siloed.

Come In and Talk to Us

In November 2019, three years after the release of the Polkadot white paper, Web3 Foundation was still six months away from beginning the Polkadot network launch process, which would start in May 2020 and conclude with the final launch of parachains in December 2021. Yet we were at a crossroads.

Only months before, in April 2019, the staff of the SEC’s Strategic Hub for Innovation and Financial Technology (“FinHub”) had published its Framework for “Investment Contract” Analysis of Digital Assets (the “Framework”). The Framework’s factors suggested that nearly every digital asset offered and sold for fundraising purposes, initially, was highly likely to constitute a security in the hands of initial purchasers. Yet the Framework also contained factors that indicated the existence of a compliant path forward — one that would permit a digital asset initially offered and sold as a security to be re-evaluated at a later date. A path that, under certain circumstances, would allow a digital asset, for purposes of U.S. federal securities laws, to no longer be a security. In other words, to morph.

Beginning in 2017, prior to the release of the SEC’s landmark 21A Report of Investigation: The DAO (“The DAO Report”), the Web3 Foundation had fundraised, in compliance with U.S. federal securities laws, but, as of November 2019, we had not yet delivered any digital assets to initial purchasers. While the Polkadot vision had not contemplated that the blockchain’s native token would be a security, we understood that the SEC’s view was likely to be that the to-be-delivered token would be a security, at least at the time of delivery.

As we saw it, the stakes were high, and the margin for error was slim. Whatever it took in order for DOT, the native token of the Polkadot blockchain to be — or to become — a non-security, we were willing to do it. And so, we decided to try to take the SEC’s FinHub staff up on the offer to “come in and talk to us.”

November 2022 marks the three year anniversary of our engagement with the SEC. For three years, we have met regularly with the FinHub staff. In doing so, we have adopted an approach to compliance that is similar to our approach to technical development: head down and dedicated, while setting the bar high. Since the outset, we have attempted to break new ground in our interactions with the SEC, complying with U.S. federal securities laws, including with respect to the offer and sale, marketing and delivery to initial purchasers of tokens as securities, and the treatment of retail purchasers, generally in line with public companies.

Our experience has been a positive one. The SEC has welcomed meetings with the Web3 Foundation, and there has been a spirit of open communication and dialogue. Those ongoing interactions have given us a deeper understanding of some of the SEC’s concerns and have helped us to develop solutions to address them.

Over the years, we have developed what we believe is a workable theory of how token morphing may be achieved for an increasingly decentralized project, like Polkadot, and a digital asset that, other than having been offered and sold initially for fundraising purposes, does not, itself, bear security-like characteristics. We have shared this theory many times with the SEC. (For further reference, please see here.)

In the meantime, we mark three years since the date of our initial outreach to FinHub and nearly one year since the completion of the Polkadot launch process, which includes a truly decentralized governance mechanism and on-chain treasury. Consistent with the views that we have shared with the SEC staff, we are pleased to announce that DOT, the native digital asset of the Polkadot blockchain, has morphed. In our view, current day offers and sales of DOT are not securities transactions, and DOT is not a security. It is merely software.

Disclaimer: Nothing in this statement is intended to be, and it is not, the offer or sale of any digital asset or security. Similarly, nothing in this statement is intended to be, and it is not, legal, investment or tax advice.

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