McDonald’s MacCoin is cryptocurrency and a security
The MacCoin is a cryptocurrency, and the promotion is arguably an illegal securities sale.
OPINION
Oscar Mayer released the bacon-backed Bacoin cryptocurrency last May, so crypto-sceptics may have greeted McDonald's announcement of the Big Mac-backed MacCoin with a certain degree of despair.
But their fears were quickly assuaged when people started erroneously saying that MacCoin is not a cryptocurrency because it foregoes digitisation and cryptography for a physical form instead. Some would also argue that cryptocurrencies technically have to be decentralised, but that rule has been broken and fallen by the wayside hundreds of times by now.
Functionally, the MacCoin is a Big Mac-pegged stablecoin cryptocurrency, issued by a Central McBank and preloaded onto an unsecured non-reusable hardware wallet. It's not necessarily the most flexible cryptocurrency, but the MacCoin developers probably made that design choice to encourage quicker adoption and facilitate token distribution at the point of sale.
The MacCoin is a crypto-McCurrency, and it looks an awful lot like an unlicensed McSecurity offering.
The McHowey Test
The Howey Test is used to determine whether something is technically classified as a security. If so, the sale must be appropriately registered and it can only be sold by a suitably licensed exchange.
The test lays out four characteristics that define a security:
- It is offered in exchange for money.
- There is an expectation of profits.
- The investment is in a common enterprise.
- The profits are dependent on the efforts of a promoter or third party.
It's not looking good for MacCoin.
1. The token is being offered in exchange for money
First, it's clearly being offered in exchange for money. McDonald's says it's being given away for free, but you're required to purchase a Big Mac to receive one of the tokens, and SEC commissioner Bill Hinman has previously suggested the agency wouldn't be swayed by those kinds of cheap tricks. It certainly doesn't earn an exemption for being appropriately decentralised either. Because the coin is arguably being offered with the intention of bolstering Big Mac sales and turning a profit, one might also argue that the cost of the MacCoin is baked into its price and therefore not being offered for free.
This can be supported with evidence that consumers may have been led to purchase Big Macs purely for the coin.
Exhibit Ayyy
2. Buyers have an expectation of profits
Buyers clearly have an expectation of profits. Some quick back-of-McDonald's-napkin calculations show that MacCoin traders can reasonably expect to approximately double their money through Big Mac investments during the promotional period. They're purchasing one Big Mac of value with fiat currency, and expecting that initial purchase to appreciate into a total of two Big Macs worth of value.
Exhibit A also suggests that potential MacCoin buyers are even perceiving value beyond the burger itself. This perception has been further enforced by the token issuer itself, who has described the token as "collectible" in material targeting purchasers, which some might perceive as implying that the coins will appreciate in value over time.
Exhibit B-Mac
Even setting aside questions of whether the token will appreciate as a collectible, it's generally reasonable to expect it to grow in cash equivalent value over time. It's redeemable for a burger until 31 December 2018, and between the time of the initial token sale and the final redeemable date, one might reasonably expect inflation to increase the value of the token relative to fiat currency.
Plus, the token opens up some clear McArbitrage opportunities. Hard-hitting investigative journalism has uncovered Big Mac price variations of up to 8.3% within Sydney, for example.
The promotion isn't running in Australia, but similar differences may exist in other countries where the promotion is running as well as internationally.
There's a lot of variation in Big Mac prices between participating McCountries based on the Big Mac Index, so the arbitrage opportunities are quite clear. For example, someone might participate in the MacCoin token sale in Sri Lanka, getting a free Big Mac with their token purchase for an average price of US$3.80 per token and then sell that token for a Big Mac in Canada for an average value of US$5.30.
The terms and conditions of the contest explicitly say the token has no cash value, but that's just factually incorrect. To be fair, the terms and conditions also say the "coin may not be auctioned, sold, or duplicated in any way," but here we are anyway.
So, if a McDonald's customer explicitly says they are purchasing a Big Mac for the accompanying coin, and that they intend to redeem the token for a Big Mac of higher monetary value than their initial purchase, would the cashier be legally obligated to refuse the sale?
3. The investment is in a common enterprise
This is more of a grey area and different courts will apply different interpretations. But one of the characteristics that can be used to define a common enterprise is a horizontal investment, where multiple traders are pooling funds.
For example, if a family walks in and buys multiple Big Macs with the expectation of receiving multiple tokens, they are arguably pooling their funds.
4. The profits are dependent on a promoter or third party
The value and appreciation of the Big Mac token is entirely dependent on McDonald's.
Double McStandards
It's strange (well, not really) that the MacCoin is getting a free ride while other cryptocurrencies are being held to such a high legal standard.
And by any reasonable definition, the MacCoin absolutely is a cryptocurrency, even if some publications are mistakenly just describing it as a "heavier-than-usual coupon."
The units of value might be permanently affixed to a small, metallic cold wallet, but those kinds of design and user interface choices don't change the nature of this Big Mac-pegged stablecoin sale. And regardless of what the terms and conditions say, the MacCoin does have a monetary value, can be bought and sold and is being purchased by people with an expectation of profit. Whether those profit expectations are chiefly denominated in Big Mac units, dollars, bitcoin or anything else is immaterial.
The MacCoin is a cryptocurrency, and there's a reasonable argument for it being an unlicensed security offering.
To be on the safe side, McDonald's should register its token sale, provide customers with all appropriate financial disclaimers, ensure that its counters are staffed by suitably registered and licensed brokers or other securities dealers and conduct AML/KYC checks on all customers purchasing Big Macs in participating locations.
Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VET, XLM, BTC and ADA.
We've trimmed some parts of this article for speed. See the full version.
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