This episode reveals how a shifting US regulatory landscape is dismantling the era of opaque offshore foundations, creating a clear, legally-sound path for launching network tokens with direct value accrual.
The Shifting Tides in Washington D.C.
- Legislative Progress: Miles highlights significant progress in Congress, noting that multiple bills have passed. He specifically mentions the Clarity Act, which addresses the regulation of intermediaries and token classification (security vs. commodity), has passed the House and is being taken up by the Senate.
- Regulatory Engagement: The most significant shift is on the regulatory front, particularly with the SEC. Miles points to the SEC's "Project Crypto" as a landmark initiative acknowledging that blockchain technology will revolutionize capital markets. This marks a turn from a hostile stance to one of constructive engagement.
- Expert Perspective: Miles, with his deep legal and policy expertise, expresses unprecedented optimism. He frames the current environment as one where regulators are finally recognizing the technological benefits that the industry has long championed, creating a more stable foundation for innovation.
The SEC's New Stance: "Commercial Viability is True North"
- A Bullish Signal: Miles emphasizes this is not a "run-of-the-mill policy statement" but a foundational shift. The SEC's recognition of the technology's benefits at such a high level provides powerful support for moving assets and markets on-chain.
- The Ethos of "Commercial Viability": Eddie Lazarin, CTO at A16Z Crypto, provides a nuanced interpretation of the new ethos. He explains it's not about anarchy but finding a balance between having enough rules to prevent fraud and not so many that innovation is stifled.
"It's supposed to be that beautiful space in the middle between like just enough rules to prevent a highwayman from intercepting the wagon on the way to the market, but not so many rules that the market is a complete uh completely stagnant, you know, uh wasteland."
- Strategic Implication: For investors and researchers, this signals a move away from a purely enforcement-driven regime to one that supports constructive, value-additive innovation. The focus is shifting to building commercially viable and trustworthy systems.
The End of the Foundation Era: Escaping "Lawyer-Designed Products"
- The Rise of Offshore Foundations: Miles explains that projects created offshore foundations (e.g., in the Cayman Islands) as a defensive measure against US regulatory hostility. While initially conceived to enforce credible neutrality, they became a legalistic loophole.
- Decentralization Theater: These structures often resulted in centralized control being handed to a few professional directors offshore, creating opacity and complexity. Eddie calls this a "lawyer-based solution as opposed to an engineer-based solution," which created legal roadblocks that hindered true technical decentralization.
- Actionable Insight: The move away from these structures is critical. Investors should be wary of projects that still rely heavily on opaque offshore foundations, as this model is becoming obsolete and was often a sign of "decentralization theater" rather than genuine, robust architecture.
A New Path Forward: Dunas and Borgs
- Introducing the Duna: A Duna (Decentralized Unincorporated Nonprofit Association) is a legal wrapper for on-chain, token-based governance. It legitimizes a DAO as a legal entity in the US, allowing it to pay taxes, manage a treasury, and offer limited liability to participants without the opacity of an offshore foundation.
- The Role of Borgs: Borgs are systems that move decision-making on-chain, increasing transparency. Together, Dunas and Borgs offer a pathway to manage protocol functions that cannot be fully automated (like treasury decisions or security council actions) in a transparent, legally recognized manner.
- Strategic Consideration: The adoption of Dunas is a key trend to watch. Projects like Towns are already launching with this structure. For researchers, this represents a new model for on-chain governance, and for investors, it's a sign of a project's commitment to transparency and US compliance.
Rethinking Token Classification: Network vs. Company Tokens
- Network Tokens: A network token derives its value from a decentralized marketplace or network where value accrual is automated at the protocol level, independent of a central company. The key feature is that the network's use directly drives the token's value (e.g., through a fee-burn mechanism). Ethereum (ETH) is the classic example, but this can apply to any application-layer protocol with a decentralized, value-accruing marketplace.
- Company-Backed Tokens: These tokens derive their value from the efforts and promises of a centralized company. Eddie uses FTX's FTT token as a prime example: its value was dependent on Sam Bankman-Fried's promise to use company profits for buybacks. The token's value is tied to the company, not an autonomous network.
- Investor Takeaway: This framework provides a clearer lens for analysis. A true network token's value is tied to on-chain activity and network effects, making it a fundamentally different asset class. A company-backed token carries the risks of a centralized entity and should be scrutinized as a proxy for equity.
The Unregistered Security Trap: Why Centralized Companies Can't Just Launch Tokens
- Substance Over Form: Miles clarifies the legal reality using the principle of "substance over form." If a token is marketed with the promise that a company's efforts will increase its value, it functions like a security, regardless of its formal label. Launching it without proper registration is an unregistered securities offering.
- The Kaito Example: The discussion references the Kaito token launch. Miles argues that when a centralized company launches a token as a "proxy for equity," it falls squarely under securities law. Disclaimers like "for fun only" (as seen with Zora) are often legal gamesmanship that ignores the economic reality.
- Actionable Warning: Founders and investors must understand this distinction. A token launch is not a loophole to bypass securities law. If a token's value proposition relies on a central team's future work, it is likely a security.
The Fee Switch: Turning on Protocol Revenue
- From Legal Risk to Strategic Decision: Historically, turning on a fee switch was seen as a major legal risk that could classify a token as a security. Miles argues that the new SEC finds these mechanisms compelling, as they actually enhance decentralization by creating a self-sustaining, autonomous network.
- When to Flip the Switch: Eddie and Scott's analysis suggests turning on fees when it's "worth it"—meaning the revenue generated can be used for growth without dampening user activity. The initial goal shouldn't be extraction but to prove the model works.
- Passing Value to Holders: The Duna structure provides a compliant pathway for distributing this revenue, either directly or indirectly through buy-and-burn mechanisms, which are often cleaner and more tax-efficient.
Conclusion
The regulatory environment is finally enabling a shift from convoluted legal structures to transparent, on-chain models. For investors and researchers, this demands a re-evaluation of projects, prioritizing those with clear value accrual mechanisms, engineer-led decentralization, and a commitment to transparent, legally compliant governance structures like Dunas.
