On-Chain voting working group - status, October 2019

Dear community,

Earlier this summer, a working group named “On-Chain voting working group” was created with the mandate of exploring how to add FCT holders as a Standing Party in the Factom governance system. The working group has 10 members from the community.

There have been a lot of robust discussion, and they have included whether we should go full on-chain, add additional standing parties to the factomize voting system (as an interim solution), or going down a hybrid-route.

A viable path forward was identified and put into a proposal. A poll was created for the standing parties that got support from the standing parties.

However, before we could move forward with formalizing the proposal into governance, Circle - the company that owns Poloniex - put out a blog post where they stated that tokens providing voting rights are deemed securities in their eyes.

Relevant quote from blog post.
“The heart of our argument for a clear, forward-looking regulatory framework for crypto has long been that digital assets represent a fundamentally new class of financial instruments, which defy simple classification as security, commodity, or currency. Many digital assets occupy several classifications at the same time depending on their context and use. For example, imagine a token created for a game. The initial sale could fund development of the game. Then the token may be distributed to users as a reward in a game (utility), traded on an exchange (commodity), used to purchase virtual goods in an online story (currency), and used to confer holder voting rights in the project (security).”
Around the same time, Poloniex started geofencing/delisting assets as well as removing margin trading for some assets.

Due to the difficult exchange situation, an informal decision to pause the implementation was made in the working group, as we did not want to risk Factom being delisted from Poloniex. Factomize also stated that they would not implement an enhanced voting system on the protocol forum until there was clarity from Circle or regulators if it included FCT voting due to the legal risk this posed.

Adding EC-burn as a standing party was also discussed to some extent, but due to very few current EC-users this has not been pursued by the full committee at this stage.

In order to move ahead with adding FCT staking/voting, we believe that either of the following items must come true:
  • Regulatory clarity.
  • An update from Polo stating that they would not delist projects with tokens used for voting.
  • Factom added to more and bigger exchanges to lower the risk.
The Legal Working Group has tried to get clarity from Poloniex with no luck so far and does not expect to receive any guidance from Poloniex on this issue.

This working group’s current view is that we should postpone adding FCT-staking as standing parties for now, but revisit this at a later time. Some members of the committee are however open to pursue adding EC-creation as a standing party as this would incentivize usage of the protocol.

We welcome input and comments, and would like to know if this is something the community would like to explore going forward.

-- The On-Chain Voting Working Group
 
Thank you for a comprehensive report on what is an obviously complex, delicate and changing situation which poses a threat if mishandled. I would like to give the working group credit for identifying and responding to this risk.

Turning this from a threat to an opportunity is our challenge.

Is it possible for us to focus on enabling on-chain voting for the current standing parties so that as appropriate other standing parties could be added once the uncertainty is resolved?
 
Is it possible for us to focus on enabling on-chain voting for the current standing parties so that as appropriate other standing parties could be added once the uncertainty is resolved?
Thanks for sharing your thoughts Mike. In my opinion, the ecosystem doesn't have the resources to focus on such an undertaking at this point. It would be nice to have, but isn't critical. It's the goal, but not a priority.
 
From Discord:
FCT doesn't make someone money. So there's really no reason to buy it unless one likes to speculate on small-cap coins, of which are there are approx. 2000. There's no scarcity / supply shocks. I can't earn interest off my FCT. I can't earn any new FCT to begin with. I can't use it for other money-generating systems like dapps or games. It's literally only there to pay for ANO costs and grants at the moment, which is a failing system without addressing the above.
As both Polo and Bittrex geo-fenced US, I think we should push forward token holders votings.
It would:
  1. partially stop market sells, cause ANOs will have an incentive not to se
  2. increase value of token in community eyes
  3. parties (both ANOs and external ones) will even have an incentive to buy additional tokens from exchanges/other parties
I urge all standing parties to discuss this and if agreed — move fast.
IMO voting with tokens can not hurt us right now, cause we were already hit hard by both Polo and Bittrex.
 
Is token holder voting something that would prevent a future coinbase listing? Although I'm doubtful that would happen any time soon its something to consider: the possibility of a US based exchange adding it in the future. Don't think decisions that potentially block off all future US exchanges should be made just because two of them dropped FCT.

Especially for a feature with marginal (IMO) benefit. Blockchain voting participation is historically low across even the most active of projects and probably the only people with real sway are going to be the ANOs which have (non-token based) voting power already.
 
That's also just some random guy's blog post to beginner crypto speculators vs. a statement made by a sizable company with (presumably) legit legal research capabilities. Just saying its probably better to look into the future implications of this decision further before assuming "voting with tokens can not hurt us right now, cause we were already hit hard by both Polo and Bittrex."
 
Is token holder voting something that would prevent a future coinbase listing? Although I'm doubtful that would happen any time soon its something to consider: the possibility of a US based exchange adding it in the future. Don't think decisions that potentially block off all future US exchanges should be made just because two of them dropped FCT.

Especially for a feature with marginal (IMO) benefit. Blockchain voting participation is historically low across even the most active of projects and probably the only people with real sway are going to be the ANOs which have (non-token based) voting power already.
@Julian Fletcher-Taylor could the exchange committee comment regarding this?
 
Have anyone explored SEC's FinHub Token Guidance?

https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets
According to this, I have strong opinion that FCT has multiple properties of security token.

When a promoter, sponsor, or other third party (or affiliated group of third parties) (each, an "Active Participant" or "AP") provides essential managerial efforts that affect the success of the enterprise, and investors reasonably expect to derive profit from those efforts, then this prong of the test is met.



  • Does the purchaser reasonably expect to rely on the efforts of an AP?
  • Are those efforts "the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise,"[14] as opposed to efforts that are more ministerial in nature?



An AP is responsible for the development, improvement (or enhancement), operation, or promotion of the network,[15] particularly if purchasers of the digital asset expect an AP to be performing or overseeing tasks that are necessary for the network or digital asset to achieve or retain its intended purpose or functionality.[16]



  • There are essential tasks or responsibilities performed and expected to be performed by an AP, rather than an unaffiliated, dispersed community of network users (commonly known as a "decentralized" network).


  • An AP creates or supports a market for,[17] or the price of, the digital asset. This can include, for example, an AP that: (1) controls the creation and issuance of the digital asset; or (2) takes other actions to support a market price of the digital asset, such as by limiting supply or ensuring scarcity, through, for example, buybacks, "burning," or other activities.


  • An AP has a lead or central role in the direction of the ongoing development of the network or the digital asset. In particular, an AP plays a lead or central role in deciding governance issues, code updates, or how third parties participate in the validation of transactions that occur with respect to the digital asset.


  • An AP has a continuing managerial role in making decisions about or exercising judgment concerning the network or the characteristics or rights the digital asset represents including, for example:
    • Determining whether and how to compensate persons providing services to the network or to the entity or entities charged with oversight of the network.
    • Determining whether and where the digital asset will trade. For example, purchasers may reasonably rely on an AP for liquidity, such as where the AP has arranged, or promised to arrange for, the trading of the digital asset on a secondary market or platform.
    • Determining who will receive additional digital assets and under what conditions.
    • Making or contributing to managerial level business decisions, such as how to deploy funds raised from sales of the digital asset.
    • Playing a leading role in the validation or confirmation of transactions on the network, or in some other way having responsibility for the ongoing security of the network.
    • Making other managerial judgements or decisions that will directly or indirectly impact the success of the network or the value of the digital asset generally.
Combine it with SEC's statement, that "security tokens may have utility functions, but it does not make them an utility".
https://www.sec.gov/ICO

1572274337869.png


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So, what are we waiting for?
 
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@Julian Fletcher-Taylor could the exchange committee comment regarding this?
This isn't something that I think I could realistically give input on. There are projects on these exchanges that have such voting, there are regulatory indications that such voting could be problematic in some instances, and also that such voting can be beneficial as it distributes the project further. Mixed signals. I can say though that from my perspective, EC based voting may be a better start than FCT based voting.
 
Have anyone explored SEC's FinHub Token Guidance?

https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets
According to this, I have strong opinion that FCT has multiple properties of security token.



Combine it with SEC's statement, that "security tokens may have utility functions, but it does not make them an utility".
https://www.sec.gov/ICO

View attachment 2145
This is a well-know piece of info for some of us yes.

You are missing the provides essential managerial efforts that affect the success of the enterprise. That talks about a common enterprise. Which to me we certainly aren't. And hence one of the reasons we have guides with non-executive power; So no essential managerial efforts as well. We do everything based on consensus. And also why for instance in the minimum conversion rate proposal for grants done informally the other day, the guides take that type of "direction/management" into account. We thus give some push back on that type of proposal(s), as you could easily get into common enterprise territory.

So no do not agree with your take.
 
@Niels Klomp you take this phrase out of context.

Btw, see on voting from the other side, which makes it good for utility use case:

1) If system is decentralized, and everyone is able to receive tokens (like everyone can start mining in PegNet or Bitcoin), then it’s utility token

2) If there are some active participants (which means everyone is not able to become AP), then the token is more likely security

We have second.
Let’s compare having token holders voting or not combined with 2.

A. Without tokenholders voting
— AP decide how grant funds in Factom are spent
— AP decide who will become AP
— AP decide who will be excluded from AP
It’s all security token system features.

B. With tokenholders voting
— Whole network decided how grant funds are spent with their votes
— The same for ANO elections/removals
It’s all utility token system features.

Therefore, having token holders voting instead of standing parties (active participants) voting system will move us closer to utility, than we are now. Currently we close to security.

I am not even saying that token holders voting will bring an incentive to buy and hold tokens (it’s being discussed in another thread).

As for me it’s pretty clear and we should implement token holders voting asap.

@Factom Inc. @The Factoid Authority @Factomize @Cube3 @Stamp-IT @DBGrow @factomatic @LUCIAP @Go Immutable
 
Don’t change the topic of discussion and tell me that you sincerely think that standing parties voting is more utility-like than entire ecosystem voting.

Entire ecosystem voting is better, and it’s the main argument to move further with implementing token holders voting.

The only reason I see, why some parties may refuse to admit obvious things and try to slow down implementation of token holders voting, is that they already sold a big part of their FCT stakes and don’t want to lose the influence, preferring to keep worse system of standing parties voting.
 
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@Anton Ilzheev I am really confused now. You bring up the topic and ask questions about the possible securities aspect of Factom . You quite literally ask about whether people know about it and say you think we hit several items in the securities list.
I respond to you and say I as well as others are aware of it and that you have to see it in context and now you are say I am changing the topic?

With regards to token holder voting. I have always been of the opinion it should happen as I have been the guide pushing that. But the Circle/Polo situation put everything to a grinding halt. I have also been saying that EC voting is needed as well. In this topic I have mentioned that we might want to pick it up, since the Polo/Circle issue is out of the way to begin with. There still is the uncertainty about both Polo and Bittrex for me that even though it might not be a US issue anymore, they are taking the conservative approach last few months. So we need to be really clear that implementing it is not gonna hit us because they are more conservative for other jurisdictions as well.

I am not gonna respond to your last part, because that is not really helping in moving this discussion along IMO.
 
For what it is worth @Anton Ilzheev , The more we distribute control and participation the less of a security we become. But the SEC guidelines cannot be read as defining what is a security and what is not. Some attributes of a secrurity may be present in a project and it still not be a security. And the other way around.

So I'd say the more we move in the direction we want to move in, like allowing the full range of standing parties participate, the better off we are.
 
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