SEC issues its second no action letter for cryptocurrency token sale
No action requests are a great place to explore token use cases and how they benefit from blockchain.
The US Securities and Exchange Commission has issued its second no action letter for a cryptocurrency token sale. The first was for Turnkey Jet, while this one is for Pocketful of Quarters (POQ). What this basically means is that the SEC has recognised that a given cryptocurrency token sale is not a security sale, and it therefore does not need to be registered as such.
The main differentiator between these types of token sales, and the ICO mania of yesteryear (other than a sharply reduced likelihood of scams) is that these tokens are being issued for practical purposes while ICOs, even when carried out legally, are often primarily for the purposes of fundraising.
As such, anyone looking for examples of practical, useful cryptocurrency applications can find some inspiration in the incoming letters from applicants, as these neatly lay out exactly what problem it's solving, how the token system works and why it uses blockchain.
The digital arcade
POQ, which to date has probably been best known as "that cryptocurrency with a 12-year-old founder and CEO" is trying to solve the problem of fragmented gaming economies, where people spend real money on in-game currency for one game and then are unable to spend it all when they move to a new game.
The idea is that if you can create a single currency for use across multiple games, the players can enjoy a currency for use in multiple games, while businesses have a new way of pleasing their customers and another way of reaching and maintaining an audience across multiple games.
The system is envisioned as follows:
- Players acquire Quarters. They can buy them directly with real money and Ether (ETH), from the POQ website itself as well as from participating distributors. The proposed price is 400 Quarters per dollar. It's suggested that wholesale distributors, such as the Apple and Google app stores, be able to buy quarters at slightly more than half price (775.5 Quarters per dollar) to profitably re-sell through their own distribution channels. Players can also earn Quarters by winning them through e-sports tournaments in participating games.
- Players can spend Quarters on in-game items in various games within the ecosystem. Initially, there will be 30 games in the Quarters ecosystem. The POQ letter likens them to arcade tokens, in that they "can be used on a variety of unrelated games but cannot be used outside the arcade." The Quarters wallets themselves are designed to prevent the transfer of tokens to anyone else except eligible whitelisted wallets.
- These eligible wallets include those of developers who might get paid by players purchasing in-game items and others, such as influencers who might get paid partly in Quarters by POQ itself. Developers can send Quarters to players as rewards. Both developers and influencers can also redeem Quarters for ETH via a POQ smart contract, assuming their wallets have been whitelisted. Influencers and developers in this system will be subject to initial and ongoing AML/KYC checks.
Breaking it down, POQ is a straight-up cryptocurrency company, manufacturing and selling digital tokens as a product.
Its semi-closed system is also of note, with wallet controls to prevent players from sending or spending Quarters outside the "arcade", and the only Quarters to ETH off-ramp being safely guarded by a smart contract which prevents anyone except the whitelisted, KYC'd wallets from using it.
So, why does such a centralised system call for a blockchain and cryptocurrency? What is Quarters doing that it can't do without blockchain?
Quite a lot, it turns out.
POQ notes that trust and transparency are essential if it wants to rope together largely unrelated entities, including players, developers and influencers, in a system where there's money at stake. Everyone wants to know that they're paying a fair price, and that POQ isn't playing favourites, and blockchain lets them get that assurance.
"The ability for all parties - Gamers, Developers and Influencers - to view and audit all transactions is critical to gain the trust needed for large-scale adoption of a new gaming token
accepted for use in multiple otherwise unrelated games," POQ says.
This is aided by the Quarters smart contracts, which also bring a healthy degree of cost-cutting automation to the whole thing. The money moves throughout the ecosystem with minimal manual handling.
When a player buys Quarters, the spend is converted to ETH, which serves as the background store of monetary value for the system. This ETH is sent to a POQ smart contract, which does the following:
- Sends the correct amount of Quarters to the gamer's wallet
- Distributes 15% of the ETH to a fund set aside for the project's investors
- Sends the remaining 85% of the ETH to the smart contract where influencers and developers can redeem their Quarters for ETH
The end result is that anyone can get a clear look at the POQ circulatory system. You can see players buy Quarters and then spend the funds across different games and see how the money wends its way back to developers and influencers who can then cash it back out for ETH.
If anything, it might almost be too transparent.
Disclosure: The author holds BNB and BTC at the time of writing.