I cannot speak for TF, but I can shine some light on why TF might not be able to fund/be a liquidity provider, and it starts with the SEC Digital Framework Guidance via Howey Test (yes, it’s about securities regulations). I would hope TF stays away from being a liquidity provider and the reason why will be explained below.
First, keep in mind that SEC Digital Framework is just guidance, it’s not U.S. law per se, but it holds a lot of weight in terms of whether you draw the ire/attention of the SEC. The last thing any of us want, is to get an SEC action/target letter. For reference to the Digital framework, please see this: https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets
A quick primer on Howey’s 4 factors on how it interprets what an “investment contract” is (if it’s an investment contract, then it’s a security → this is law):
- An investment of money, 2. In a common enterprise, 3. with an expectation of profit, 4. solely from the efforts of others (SEC v. WJ Howey, 328 U.S. 293).
Next, we look at the SEC’s Digital Framework Guidance. The part of the framework that we need to focus on is “1. Reliance on the Efforts of Others”, specifically when it says "although no one of the following characteristics is necessarily determinative, the stronger their presence, the more likely it is that a purchaser of a digital asset is relying on the “efforts of others”.
One example they give in their factors that they evaluate under this prong is “An AP (AP = active participant, in our case TF, or the issuers of the tez) creates or supports a market for, 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.” How this could apply to TF if they were to provide liquidity, is that a case can be made they would directly be affecting the market price of tez by providing liquidity.
Yes, it’s a little bit of a stretch, but that argument can certainly be made. Now, this isn’t really the factor I want to focus on, but the next example the SEC gives, which is "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 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. Here, if TF was providing liquidity, you can make a very strong argument that this prong would be fulfilled because TF is providing liquidity for a secondary market (dexter or some DEX).
Now, just because we fulfill one of the factors, still doesn’t mean we’re a security yet, because you have 3 other factors, namely 1. investment of money, 2. in a common enterprise, 3. with an expectation of profit. For the sake of brevity, I don’t believe the other 3 factors need analysis as they are easily satisfied for example: 1. Investment of money (money contributed to the fundraiser), 2. In a common enterprise (Tezos network), 3. With an expectation of profit (people who contributed to the fundraiser more likely than not are expecting some sort of return).
Now, we might be asking ourselves, why hasn’t TF said anything or responded to any of this? Well, there’s an old adage, “let sleeping dogs lie” and in our case here, it means, TF as a billion dollar + entity, there are many eyes watching their every move as opposed to a single person and why draw any possible attention from US regulators? We all know TF is not new to litigation, and as I have discussed in many articles covering the previous private litigation, it’s a big time and resource consuming endeavor that no one should be fond of, especially given the history of Tezos. As a US lawyer, our job is always to be consulting our clients to be more risk averse, so in this case, I pose to you, why should TF take an unnecessary risk? It would seem the risk vs reward in this situation would lean more towards there being more risk and little reward, especially given the SEC’s regulatory climate in that the game has changed especially after the fact that they went after XRP. Now, why won’t TF come out and say they can’t provide liquidity, well, there also an argument to be made that by making a statement you could be indirectly affecting the market by the statement itself, think Elon Musk and why regulators are not happy with his btc and doge tweets. We now also know the possible consequences of what happens when the SEC comes after you in light of XRP, you get a cascade of US CEXs delisting you. In my opinion, it’s just not a battle worth fighting for at this point. I’m not trying to downplay the idea, but until you evaluate the legal risks associated with becoming a liquidity provider as such a large entity, then this is not an idea that should be approached lightly or without much careful legal analysis before any action is undertaken.
