SEC Explained: Why MATIC, MANA, CHZ, SAND, and LUNA Are Classified as Securities?

Translation: Carol, Wu Says Blockchain

The crypto assets of Consensys have been targeted by SEC enforcement actions for being considered securities. These crypto assets include, but are not limited to, the following assets: AMP (AMP token, available since October 2020 via MetaMask Swaps), AXS (Axie Infinity Shards, available since November 2020), BNB (native token of the BNB Chain ecosystem, available since March 2021), CHZ (see below), COTI (COTI token, available since October 2020), DDX (DerivaDAO token, available since December 2020), FLOW (FLOW token, available since November 2020), HEX (HEX token, available since October 2020), LCX (LCX token, available since October 2020), MANA (see below), MATIC (see below), NEXO (NEXO platform token, available since October 2020), OMG (OMG Network token, available since October 2020), POWR (Powerledger token, available since October 2020), SAND (see below), LUNA (see below), RLY (Rally token, available since October 2020), and XYO (XYO token, available since October 2020).

Below are details of some crypto asset securities that Consensys has traded for investor accounts through its MetaMask Swaps platform (non-exhaustive list).

Each crypto asset security has been issued and sold as an investment contract since its initial issuance or sale, thus being considered a security. For each crypto asset security, the statements of the issuers and promoters reasonably lead investors to expect profits from the management or entrepreneurial efforts of these issuers and promoters (and related third parties). This reasonable expectation exists whether investors acquire these crypto asset securities through the initial issuance, from prior investors, or through crypto asset brokerage platforms, including the MetaMask Swaps platform.

A. MATIC

"MATIC" is the native token on the Polygon chain. Polygon, originally known as Matic Network, was renamed Polygon in 2021 and is a blockchain platform created in 2017 in Mumbai, India, by Jaynti Kanani, Sandeep Nailwal, and Anurag Arjun. Since its inception, the founders of Polygon have been actively involved in the work of Polygon through the entity "Polygon Labs" (Polygon) that they established for "the development and growth of Polygon."

According to information on Polygon's website, Polygon is an Ethereum scaling platform that claims developers can build user-friendly dApps with low transaction fees and scalability by hosting Ethereum sidechains, allowing users to process transactions and initiate asset transfers and technical development on Polygon's sidechain network.

Polygon has issued a fixed supply of 10 billion MATIC tokens. MATIC holders can earn additional MATIC by staking their MATIC on the Polygon platform and becoming validators, either by delegating their MATIC to other validators in exchange for a share of the fees collected for validating transactions or by staking their MATIC with third parties, such as crypto asset platforms that provide staking services.

According to MATIC's initial white paper, "Matic Tokens are expected to provide economic incentives on the Matic network [now Polygon]… Without Matic Tokens, there would be no incentive for users to spend resources to participate in activities or to provide services for the entire ecosystem on the Matic network."

Around 2018, Polygon raised $165,000 in two rounds of early sales at a price of $0.00079 per MATIC and raised $450,000 at a price of $0.00263 per MATIC. In April 2019, Polygon publicly sold 19% of its total supply at a price of $0.00263 per MATIC through an Initial Exchange Offering (IEO) on Binance, raising an additional $5 million to fund network development.

Since its initial issuance, MATIC has been issued and sold as an investment contract, thus being a security.

The price of all MATIC tokens rises or falls together.

Since July 2021, MATIC has been available for buying and selling through brokerage services provided by MetaMask Swaps.

The information disseminated by Polygon leads investors (including those who purchased MATIC since October 2020) to view MATIC as an investment. Specifically, MATIC holders reasonably expect that through the efforts of the Polygon team, the Polygon protocol will grow and develop, which in turn will increase demand and value for the MATIC token.

For example, Polygon publicly stated in its white paper that it would develop and grow its business through the investment proceeds from its private and public fundraising activities.

Additionally, after the IEO, Polygon conducted further MATIC sales, publicly stating that this was done to raise funds necessary to support its network growth. On February 7, 2022, Polygon reported on its blog that it raised approximately $450 million through a round of private sales to several well-known venture capital firms for its native MATIC token. Polygon reported, "With this funding, the core team can ensure that Polygon is at the forefront of driving the mass adoption of Web3 applications, a race we believe will ultimately see Ethereum surpass other blockchains."

Polygon also reported funds raised from other well-known and celebrity investors.

Polygon stated that it would retain approximately 67% of MATIC to support the Polygon ecosystem, foundation, and network operations. An additional 20% of MATIC is further reserved to compensate Polygon team members and advisors, aligning their interests with investors' expectations for MATIC.

Furthermore, the Polygon blog frequently updates the growth and development status of the Polygon network, including weekly active wallet and daily transaction statistics prior to December 2022, as well as financial metrics such as daily revenue and total network revenue.

Polygon also frequently promotes when crypto asset trading platforms allow MATIC to be traded.

Polygon has also explicitly encouraged MATIC purchasers to view MATIC as an investment in other ways. For example, 14 months after the maximum price drop of MATIC, on February 5, 2021, a tweet from Nailwal compared the token to a boxer who returned from failure to become a champion:

Additionally, on November 3, 2022, Nailwal stated on Twitter, "I will not rest until Polygon gets its well-deserved 'top three' position (alongside BTC and ETH). No other project can come close to this goal." In a "Fireside Chat" published on YouTube with CNBC on May 24, 2022, Bejelic described "what makes Polygon different": "We as a team are very committed, taking a very hands-on approach to all projects, working around the clock to promote adoption, which is why we are currently the most popular scaling infrastructure platform." By 2023, the founders of Polygon continued to promote the platform through various social media. For instance, on February 21, 2023, Nailwal tweeted that Kanani had retweeted, "Polygon's growth is exponential. To maintain this amazing growth, we have clarified our strategy for the next five years to drive the mass adoption of web3 by scaling Ethereum. Our funding remains strong, with over $250 million in balance and over 1.9 billion MATIC tokens."

Since January 2022, Polygon has also promoted its plan to "burn" MATIC tokens accumulated as fees, indicating that the total supply of MATIC will decrease. For example, in January 2022, Polygon highlighted a protocol upgrade in a blog post titled "Burn, MATIC, Burn!" that made burning possible. Another blog post published on its website at the same time explained, "Polygon's MATIC supply is fixed at 10 billion, so any reduction in the number of available tokens will create a deflationary effect." As of March 28, 2023, Polygon has burned approximately 9.6 million MATIC tokens. The marketing of the MATIC burning mechanism in Polygon's "deflationary effect" leads investors to reasonably believe that purchasing MATIC has potential profits, as there is a built-in mechanism to reduce supply, thereby increasing the price of MATIC.

B. MANA

"MANA" is a digital token minted by Decentraland. Decentraland is a virtual reality platform developed in June 2015 but opened to the public only in February 2020. Decentraland was launched by an entity called Metaverse Holdings through a core development team that includes Ariel Meilich, Esteban Ordano, Manual Araoz, and Yemel Jardi. Decentraland operates on the Ethereum chain. According to information on Decentraland's website, Decentraland is a three-dimensional virtual reality platform where users can create, experience, and monetize their content and applications.

MANA is the crypto asset involved in all transactions within the Decentraland virtual reality ecosystem. On August 18, 2017, Decentraland held its Initial Coin Offering (ICO), during which MANA was exchanged for ETH, raising approximately $24.1 million. Currently, the total supply of MANA tokens is approximately 2.19 billion.

Decentraland offered discounted prices for early contributors to purchase MANA.

Since its initial issuance, MANA has been issued and sold as an investment contract, thus being a security.

The price of all MANA tokens rises or falls together.

Since October 2020, MANA has been available for buying and selling through brokerage services provided by MetaMask Swaps.

The information disseminated by Decentraland leads investors (including those who purchased MANA since October 2020) to view MANA as an investment. Specifically, MANA holders reasonably expect that through the efforts of the Decentraland team, there will be growth and development, which in turn will increase demand and value for MANA.

The funds raised from investors during the MANA ICO were concentrated on funding Decentraland's platform marketing, business expenses, and completion. For example, on July 5, 2017—just weeks before the MANA ICO—Jardi published a blog post detailing Decentraland's expected uses for the token sale revenue, as follows:

This blog post further explained that the "primary goal" of the revenue was to develop a virtual world, and even after Decentraland's creation, "the development budget will focus on continuously improving the user experience in the world browser."

In fact, Meilich explained in another blog post that after the ICO, Decentraland would implement a "continuous token model," where the supply of MANA would increase by 8% in the first year and then at a lower rate in subsequent years to allow Decentraland to "regularly expand to accommodate new users… The proceeds from tokens sold through the [continuous token model] will fund Decentraland in the long term, aligning it with the prosperity of the network."

In April 2020, the Decentraland team announced the establishment of the Decentraland Foundation, which currently holds the intellectual property for the products and services offered on the Decentraland platform (including virtual environments and tools). Meilich publicly stated that the initial supply allocation of MANA tokens issued during the ICO was as follows: 20% to the founding team, advisors, and early contributors; 20% to the foundation; 40% open for public purchase; and 20% reserved to "incentivize early users, developers, and partners who wish to build within Decentraland."

As Meilich explained in his public blog post, "To incentivize value creation within Decentraland, additional tokens will be allocated to development teams and organizations to accelerate community and partner engagement."

For example, Decentraland publicly released a white paper ("Decentraland White Paper") describing the architecture to be built within the virtual reality platform and the steps supporting Decentraland's growth. The white paper further clarified that the platform's development was still in its early stages and listed several "challenges" that needed to be addressed during development to ensure the platform's success.

According to Melich, even after the ICO, Decentraland was still preparing a land allocation policy and a method for groups to purchase larger contiguous parcels of land. "Since the ICO, Decentraland has developed tools used on its platform (such as 'Marketplace' and 'Builder'). In a public blog post released on March 19, 2018, the Decentraland team described the 'Marketplace' as the 'first in a series of tools.'"

Additionally, the Decentraland white paper explains how the foundation will "facilitate network development," meaning it will "host creative competitions for art, games, applications, and experiences, with prizes depending on the achievement of a series of milestones. At the same time, new users will be allocated allowances to enable them to participate in economic activities immediately." The Decentraland white paper further claims, "These financial incentives will help the network's utility value grow rapidly until it can independently attract users and developers."

The Decentraland white paper and website also promote how the protocol will "burn" MANA tokens when used within the Decentraland ecosystem.

The Decentraland white paper remains available on the Decentraland website.

C. CHZ

CHZ is a token on the Ethereum blockchain, marketed as "the native digital token of the Chiliz sports and entertainment ecosystem, currently supporting Socios," which is a sports fan interaction platform built on the Chiliz blockchain. The Chiliz blockchain was launched in early 2018 by protocol founder and current CEO Alexandre Dreyfus and is operated by a Maltese entity called HX Entertainment Ltd. The Chiliz white paper describes the Chiliz protocol as a platform "where fans can vote directly in their favorite sports organizations, connect, and help fund new sports and esports entities."

It is claimed that the CHZ token allows "fans to obtain brand fan tokens (Fan Tokens) from any team or organization partnering with the Socios platform and exercise their voting rights as fan influencers." For example, after purchasing CHZ tokens, holders of "Fan Tokens" can participate in votes that influence team decisions, including choosing player warm-up gear and team flag designs.

According to the Chiliz white paper from November 2018, it completed approximately $66 million in fundraising during the "Chiliz token generation event" in the second quarter of 2018, with approximately 3 billion CHZ tokens "executed through private placements." The CHZ token was initially minted in 2018, with a maximum supply of 8,888,888,888 tokens. However, it wasn't until the second quarter of 2019 that Chiliz offered "Fan Tokens" that could be purchased with CHZ on the Socios platform.

Since at least December 2020, CHZ has been available for buying and selling through the MetaMask Swaps platform.

From the initial private placement of CHZ tokens in 2018 to public statements in 2023, the information released by the Chiliz team, including statements during the period when CHZ could be traded on MetaMask Swaps, has led CHZ holders to reasonably believe that CHZ is an investment and expect to profit from the team's efforts to develop, expand, and grow the platform, thereby increasing the demand and value of CHZ.

The Chiliz website introduces the Chiliz team, which "consists of nearly 350 cross-industry professionals from 27 different countries and is still growing." The Chiliz team operates the Chiliz protocol and Socios.

In fact, the Chiliz white paper and other public statements also introduce several members of the Chiliz leadership team, publicly sharing the resumes of these "leaders" or "advisors" and their past successful entrepreneurial experiences. The Chiliz website claims that the Chiliz team is "building web3 infrastructure for sports and entertainment."

The Chiliz team also publicly states that they will use the proceeds from CHZ sales to fund the development, marketing, business operations, and growth of the Chiliz protocol, thereby increasing the demand for CHZ associated with the protocol. For example, the white paper explains that the funds raised through token sales will be allocated as follows: 58% for operational expenses (most of which will be passed from the issuer to affiliates for developing the Socios platform, ensuring partnerships, and achieving the platform's digital infrastructure); 20% for user acquisition (funds will be used to acquire new users for the Socios platform and increase participation in its voting features); 10% for corporate restructuring; 5% for security and legal; and 7% for ecosystem support.

Additionally, 5% and 3% of the allocated total amount of CHZ tokens are respectively allocated to the Chiliz team and the advisory board, both of which are responsible for the creation and development of the platform, aligning the fate of management with that of CHZ investors.

The CHZ white paper further clarifies the alignment of interests (fate alignment) between the initiators and investors when it warns, "If the value of BTC, ETH, or Chiliz fluctuates, the company may not be able to fund development to the necessary extent or may not be able to develop or maintain the Socios platform as expected."

The Chiliz team also frequently promotes the growth potential of the sports and esports industry and hopes to monetize this by expanding its platform through the efforts of the Chiliz team. For example, the CHZ white paper emphasizes the scale of the gaming industry and the potential for esports revenue, as well as the use of CHZ to drive and monetize traditional sports fan engagement. Regarding the "token generation event" in June 2018, the white paper states, "We are no longer pursuing fundraising measures but focusing on leveraging accumulated resources to realize the vision of Chiliz/Socios." The white paper continues, "Once the infrastructure is established, Chiliz and its supported Socios platform will benchmark against football and extend our tokenized fan voting model to other sports to cater to global markets, where different competitive verticals dominate—such as cricket in India and baseball in Japan."

Public statements from the Chiliz team and its executives indicate that the CHZ token is primarily used to purchase "Fan Tokens" on Socios, and the demand and price of CHZ tokens directly depend on the demand for Socios fan tokens and their benefits.

The Chiliz team has also made other public statements emphasizing the economic reality of relying on CHZ in the design of the Chiliz blockchain— as Chiliz expands its platform by collaborating with more teams, these teams provide attractive opportunities for token holders, and the corresponding value of "Fan Tokens" will increase, thereby increasing the value of CHZ.

For example, the FAQ section on the Chiliz website (publicly available at least from December 2021 to December 2022) states, "As more esports teams, leagues, and game titles join the platform, more fans will seek voting rights, leading to a growing demand for Chiliz tokens."

The CEO of Chiliz has also expressed the same sentiment in other public statements. In February 2020, he stated, "Thousands of ordinary football fans have started using cryptocurrency, buying $CHZ to purchase Fan Tokens, and as we continue to add more partners, expand our reach, and enhance our brand, we expect even more people to do so in the future." In March 2021, he tweeted, "The monthly active users (MAU) of the Socios app, powered by $CHZ. You can see the explosive growth in demand for $CHZ (exchanges, Etherscan wallets, etc.). Everything is interconnected. We are building a product for mainstream consumers, powered by the Chiliz blockchain." In February 2023, he tweeted, "I may be biased, but I am very confident that the Chiliz ecosystem will bring a lot of value to fans, sports assets, and innovation."

The Chiliz team has also promoted CHZ's secondary trading by providing tokens on crypto asset trading platforms. For example, early versions of the white paper emphasized the "ongoing discussions" about providing CHZ on Asian trading platforms, and there is a "listing content and Q&A" document on the Chiliz website reflecting the proposal to offer CHZ on the Binance platform.

The Chiliz team has also informed investors that they plan to support the price of CHZ through a mechanism of "burning" CHZ tokens by reducing its total supply. For example, in 2020, the Chiliz team announced through its "Fan Token" exchange that it would burn 20% of net trading fee revenue, 10% of "Fan Token" sales revenue, and 20% of net proceeds from NFTs and collectibles. Like the other crypto asset securities described in this article, this market-driven CHZ burning leads investors to reasonably believe that purchasing CHZ has profit potential.

D. SAND

"SAND" is the native token of The Sandbox platform, created on the Ethereum blockchain. The Sandbox was initially released in 2012 as a virtual gaming platform by Pixowl, Inc. ("Pixowl"), originally as a downloadable game on mobile devices. Pixowl is headquartered in San Francisco and was founded in 2011 by Arthur Madrid ("Madrid") and Sebastien Borget ("Borget"). In 2018, Animoca Brands, Inc. ("Animoca"), based in Hong Kong, acquired Pixowl and announced plans to leverage blockchain technology to build a new 3D version of The Sandbox. Following the acquisition of Pixowl, the intellectual property of The Sandbox, along with other assets of Pixowl, was transferred to Animoca's wholly-owned subsidiary TSB Gaming Ltd ("TSB"). Madrid serves as the CEO of TSB, while Borget is the COO.

According to The Sandbox's website, SAND is the token required to access the Sandbox platform, participate in platform governance, and earn rewards through staking programs on the platform.

Before minting SAND in July 2019, Animoca raised approximately $2.5 million in cash and crypto assets through TSB by issuing Simple Agreements for Future Equity ("SAFEs") and SAND tokens on May 23, 2019, to "fund the development of the upcoming blockchain version of The Sandbox." According to a press release from Animoca on May 23, 2019, most investors allocated their investments to purchasing SAND tokens and obtaining future TSB equity through the SAFE agreement (amounting to $2 million), while some investors specifically allocated their investments to SAND tokens ($500,000). The round was led by Hashed, with an amount of approximately $1 million, along with participation from other crypto venture investors.

TSB minted a total of 3 billion SAND on the Ethereum blockchain around July 2019 and raised $3 million through private sales and an IEO on Binance.

Since October 2020, SAND has been available for buying and selling through the MetaMask Swaps platform.

The information disseminated by TSB leads SAND holders (including those who purchased SAND since May 2022) to reasonably believe that SAND is an investment and expect to profit from TSB's efforts to expand the Sandbox protocol, thereby increasing demand and value for SAND.

In a blog post announcing "exchange listings," The Sandbox promoted its achievement of "listing" and the liquidity of SAND tokens in the secondary market. For example, in a Medium blog post on September 21, 2021, The Sandbox stated, "$SAND has been listed on over 60 cryptocurrency exchanges globally, including some of the top exchanges by market capitalization."

Additionally, The Sandbox stated that it would pool the proceeds from private token sales and the IEO to develop and promote the platform. For example, a press release from May 23, 2019, noted, "The funds raised from this transaction will be used to expand the development team and infrastructure of The Sandbox gaming platform, support marketing efforts through acquiring creators and intellectual property licenses, and provide security, legal, compliance, and general administrative expenses." The Sandbox white paper similarly describes the same uses for the $3 million raised through the IEO.

According to The Sandbox white paper, of the initially minted 3 billion SAND tokens, 19% will be allocated to the founders and team of The Sandbox, and 25.8% will be allocated to company reserves.

In a Medium blog post on July 25, 2019, TSB stated, "An interesting feature of the SAND token is that due to its scarcity, its value may increase over time. The supply of SAND will be limited to 3 billion."

TSB publicly stated that it would take measures to manage the market for SAND, including the Sandbox team controlling the supply of SAND tokens and implementing "controllable supply mechanisms, such as purchasing SAND from multiple exchanges," and that "while the total supply of SAND is fixed, the initial amount of SAND provided will create a scarcity effect, reducing the per capita supply of SAND, thereby promoting demand."

On many occasions, Animoca has highlighted the background of Pixowl, TSB, and core members of The Sandbox (including Madrid and Borget) when describing the success and future development of The Sandbox:

· After acquiring Pixowl, Animoca co-founder and director Yat Siu stated in a press release on August 27, 2018, "Pixowl's experienced developers will greatly enhance our development capabilities. Its founders are respected veterans in the gaming industry who have developed million-dollar game projects. We believe the blockchain version of The Sandbox has tremendous potential… We look forward to leveraging the many growth opportunities this acquisition brings."

· In a press release in 2018, Madrid also commented, "Animoca Brands is a perfect fit for Pixowl, and we are excited to add our brand relationship to its portfolio while accelerating the growth of our key intellectual property, The Sandbox…"

· A press release from 2018 also promoted that "Ed Fries, founder of Microsoft Game Studios and co-founder of the Xbox project, is a special advisor to Pixowl, the original game developer of The Sandbox, and will continue to serve on the advisory team."

· The Sandbox white paper further states, "We have a strong product roadmap and a top-notch team to execute a powerful vision of building a unique virtual world gaming platform where players can build, own, and monetize their gaming experiences and promote blockchain as the dominant technology in the gaming industry."

The Sandbox white paper describes the role of the "Sandbox Foundation" as supporting the Sandbox ecosystem by providing funding to incentivize high-quality content and game production on the platform. It further states, "The overall valuation of the metaverse grows through the valuation of all games funded by the foundation, creating a virtuous cycle that can fund larger games." The Sandbox's Gitbook also notes that the Sandbox Foundation supports competitions and cross-game events to earn game tokens to encourage broader adoption of SAND; supports marketing campaigns to promote awareness of NFT, metaverse, and SAND adoption, including joint marketing with exchanges and influencers.

E. LUNA

LUNA is the native token of the Terra blockchain, created by Terraform and its founder Do Kwon. The Terra blockchain launched in April 2019, simultaneously creating 1 billion LUNA tokens.

Throughout all relevant periods, Terraform and Kwon retained hundreds of millions of LUNA tokens for themselves.

There is a "bridge" called "Shuttle" that allows LUNA holders to create "wrapped" versions of LUNA ("wLUNA"). The wLUNA tokens are the same in all significant respects as LUNA, except that they can be traded on the Ethereum blockchain instead of the Terra blockchain.

From the time of their issuance until May 2022, LUNA and wLUNA were offered and sold as investment contracts, thus qualifying as securities.

Investors could pay fiat currency or crypto assets to obtain LUNA and wLUNA.

The prices of LUNA and wLUNA are the same and can be exchanged on a one-to-one basis. Any wLUNA holder has the right to redeem wLUNA for LUNA at any time.

Thus, investors in LUNA and wLUNA share the same risks in price increases and decreases, meaning if one investor profits, all investors will profit proportionally based on their total holdings of LUNA or wLUNA.

LUNA and wLUNA began trading through MetaMask Swaps in January 2021.

Terraform repeatedly disseminated information about LUNA or wLUNA and the efforts Terraform planned to undertake to make these assets more valuable, leading investors (including those who purchased LUNA or wLUNA since January 7, 2021) to view LUNA and wLUNA as investments in Terraform's efforts. Specifically, holders of LUNA and wLUNA reasonably expect to profit from Terraform's efforts to expand the Terra blockchain, as this growth will in turn increase demand and value for LUNA and wLUNA.

Terraform and Kwon informed investors that Terraform would use the proceeds from LUNA sales to fund operations and help build and expand the Terra ecosystem. For example, in a token sale agreement in July 2018, Terraform indicated to potential investors that this financing was "to establish and operate" the system developed by Terraform.

In a public interview in 2021, Terraform's head of business development stated that LUNA is "the 'equity' of our company."

On April 7, 2021, Kwon posted on X, "In the long run, the value of $Luna is viable—growing as the ecosystem grows."

Terraform's special projects director similarly stated in a video presentation in June 2021, "Owning LUNA is essentially owning a part of the network's equity and betting that its value will continue to grow over time."

In marketing materials, Terraform further promoted the expertise of its team, claiming that Terraform is led by "serial entrepreneurs" and is a team with "deep relevant expertise."

Based on these facts and other factors, on December 28, 2023, the federal court in the Southern District of New York ruled that both LUNA and wLUNA were offered and sold as investment contracts.