Image: ApeCoin DAO
These silly simians are going to be influential
You know what, I do think itâs nice that the Bored Ape Yacht Club is trying to do something more ambitious than just selling people code that says they own jpegs! But I am very interested in whether its ApeCoin is going to get shot out of the sky by regulators before it has a chance to [rocket emoji] to the [moon emoji].
Look, Iâve been told by a bunch of people with more money than me that Web3 is the future and that I should get in now. Maybe that is true! But how we regulate the future is going to matter, and I canât help but remember a craze in crypto token launches in 2017 that ended in tears (and fines) for the issuers. A lot of cryptoâs regulatory path is still in flux. That may not be good news for Yuga Labs, which originated the BAYC and Mutant Ape Yacht Club NFTs, but itâs great news for me, a person who loves drama.
Letâs start with what a security is: a category of financial instruments or interests, which include things such as stocks, bonds, options, and a whole bunch of other things. Legally, anyone issuing a security has to register it with the Securities and Exchange Commission â the idea is that this protects investors from fraud. So if Yuga Labs were trying to form a separate company to prop up the value of BAYC and MAYC, theyâd have to go register with the SEC before they sold shares, which divvy up ownership of the company.
Now $APE is trading on Coinbase and a bunch of other exchanges. Aesthetically, ApeCoin feels like a stock, what with the trading and speculation. Itâs just got, for lack of a better word, stock vibes.
But unlike a company selling its shares, the ApeCoin DAO â the decentralized autonomous organization supposedly behind it all â isnât registered with the SEC. Technically, this DAO isnât really a legally-recognized entity at all. ApeCoin seems like an attempt to remain in a legal gray area.
How to tell if something is a security
The standard test used for determining whether something is a security or not is from a 1946 Supreme Court case called SEC v Howey : a security represents âan investment in a common enterprise with the expectation of profit solely through the efforts of others.â Letâs say an investor buys a bunch of shares in Tesla, figuring heâll make some profit. Maybe heâs read something about how the US is moving away from fossil fuels; maybe he saw a hot tip in his weekly horoscope. Either way, he thinks heâs going to make money on this group effort made by other people. For the purposes of the Howey Test, it doesnât matter whether Tesla is incorporated, or whether its shares are trading on Wall Street, or even whether Tesla has made a car yet.
The very first DAO was distinctly a security, the SEC has said. Of course that organization was explicitly meant to invest in things, and ApeCoin DAO very carefully doesnât promise a profit to its coin holders.
The cryptocurrency world favors a different framework for evaluation, which it calls the âHinman test,â after a speech given by SEC regulator William Hinman in 2018. In it, Hinman suggests that if something is âsufficiently decentralized,â it might not be a security. This isnât meant to contradict the Howey test, but to supplement it â Hinman seemed to think that in order to expect profit from the âefforts of others,â the others in question have to have some kind of control over the enterprise. Bitcoin and Ethereum, Hinman noted, donât seem to have that going for them â and by his logic, wouldnât be securities.
ApeCoin DAO is awfully centralized, though. And its holders also seem to be relying very heavily on âthe efforts of others.â Although holders havenât been promised profits from any of the enterprises it might take on in the future, it seems like a lot of people are speculating on ApeCoinâs value in the many exchanges it was listed in at launch. At the end of the first trading day, March 17th, ApeCoin closed at $8.52, according to CoinMarketCap. It has since varied in value, surging as high as $17.75 per coin. Its total market cap, as of this writing, is more than $3.5 billion.
If ApeCoin is indeed an unlicensed security, the SEC will get involved. If it isnât a security, I expect the cryptocurrency community will widely copy its structure. Either way, these silly simians are going to be influential.
âBut itâs a utility token!â
ApeCoinâs first use is an in-game currency for Animoca Brandsâ Benji Bananas. The game, which was previously free to play, now has a play-to-earn tier that requires a pass that costs 25 ApeCoins (plus whatever Eth is required for the transaction fee). Then, theyâll earn tokens by playing the game, which can be swapped for ApeCoins.
Yuga Labs airdropped ApeCoin to people who own BAYC and MAYC NFTS. Stuff you get for free â well, minus some transaction fees â is not a security, say Moish Peltz and Kyle Lawrence, lawyers at Falcon Rappaport & Berkman. That partâs fine.
The ApeCoin page calls ApeCoin both a âutility tokenâ â crypto jargon that means itâs got a use case: the token serves as in-game currency. ApeCoin is also called a âgovernance token,â which means it gives the ApeCoin holders voting rights over the funds in the DAOâs treasury. Iâm not sure how legally enforceable that right is.
Who has these tokens, and how many?
A consistent problem with DAOs is that they are not as decentralized as they initially seem, making it easy for voting blocs to form (for instance, between Yuga Labs and Andreessen Horowitz, which led Yuga Labsâ latest funding round).
Letâs use the crypto industryâs preferred standard, the âHinman test,â extracted from a speech we talked about earlier. If something passes the Hinman test, it theoretically means itâs decentralized enough that it wonât be regulated as a security. Hinman outlined six questions for determining whether something is âsufficiently decentralized.â Some of those questions have to do with whether a group has âsponsored or promotedâ the digital asset and retained a stake, motivating it to increase the assetâs value. Are the purchasers seeking a return? Do people besides those who set the thing up have meaningful influence?
Yuga Labs has been adamant that they are not running the DAO, though they were obviously instrumental in setting it up and are likely to benefit from it. Yuga Labs does indeed have a stake in the DAO and does stand to profit on their ApeCoin if it increases in value. The answers to the rest of the questions are murkier.
Letâs consider the token distribution and see if that clears anything up. There are 1 billion tokens in total. Hereâs who gets what:
150 million to BAYC / MAYC members
150 million to Yuga Labs
80 million to Yuga Labsâ founders
140 million to âlaunch contributors,â such as Andreessen Horowitz and Animoca
10 million to charity
So Animocaâs contribution here is obvious. What did Andreessen Horowitz do? âThey helped in designing the ApeCoin DAO,â says John OâBrien, an outside spokesman for Yuga Labs. Okay, but how? Andreessenâs Mike Manning didnât respond to a request for comment.
So Yuga Labs, Yuga Labsâ founders, and its âlaunch contributorsâ together own 370 million tokens, or almost 70 percent, of the 530 million Iâve accounted for here. There are another 470 million tokens reserved for the DAO treasury to be unlocked in stages over the next 48 months.
In practical terms, how much control does Yuga Labs have over this entity? It kind of seems like a lot. Yuga Labs also owns seven Bored Apes and 10 Mutant Apes, OâBrien confirmed. If this effort is about community, the question is: which one?
The foundation that definitely does not control ApeCoin
The legal entity that exists to implement the ApeCoin DAOâs decisions is something called the Ape Foundation, which is based in the Cayman Islands. âWrappingâ a DAO in a legal entity so it can interact with off-chain assets isnât that unusual, says Erich Dylus, a lawyer who helped create a similar foundation for API3 DAO. The DAO itself isnât really a legal entity, but the foundation is.
âThe Foundation does not control ApeCoin or the ApeCoin DAO,â the website explaining ApeCoin says. It exists to âoverseeâ decisions, as well as to be a âmanagement team in charge of ensuring ApeCoin DAO decisions are implemented.â The foundation also engages in âday-to-day administration,â âbookkeeping,â and âproject management.â So itâs both overseeing decisions at a high level and executing details on a day-to-day, but not controlling ApeCoin? Got it.
Ape Foundation board member Maaria Bajwa, a principal at Sound Ventures, said in an emailed statement that âgovernance happens at the DAO level. The Ape Foundation acts solely on behalf of ApeCoin DAO community proposals.â
The Ape Foundation is overseen by its board, which, according to a DAO proposal, are each compensated with $125,000 in ApeCoin per 6-month term. That proposal wasnât written by the community but by the Cartan Group, which is a Caymans-based consulting firm. They were posted by user btang, who CoinDesk identifies as Brian Tang, the Cartan Groupâs co-founder.
When I emailed to ask, Tang declined to say whether the posts were his. He also didnât say if the Cartan Group was a launch partner or whether the group has been compensated yet. Instead, he referred back to the DAO proposals (specifically the ones named Ape Improvement Projects 1, 2, and 3), saying âour engagement is fully transparent.â He then said the group would provide operational and project management support.
According to the AIPs, the Cartan Group will be paid $150,000 a month over a 6-month term to, among other things, moderate AIP proposals.
Implementation of proposals will be managed by the project managers employed by the Foundation and may be âimmaterially or materially alteredâ for a variety of reasons, including security or usability.
The ApeCoin DAOâs common enterprise doesnât seem to be executed by the actual DAO â voting on ApeCoin proposals isnât done on-chain, and both the Foundation and the Cartan Group seem to be handling a lot of infrastructure. While this saves members on gas fees, this is not quite the decentralized future I was promised.
In conclusion, it kind of looks like the people who actually run the Ape Foundation, on a day-to-day basis, are the board members and the Cartan Group â which, I mean, is not exactly decentralized or autonomous. Maybe ApeCoin is just an O, not a DAO.
Rampant speculation
Some think the setup will hold up under scrutiny. âI donât think this wanders into securities territory the way the law is presently applied,â says Lawrence. Still, he says he wouldnât be surprised if the project âgot some attentionâ â at the very least, regulators may just want to know how it works.
âEven with the microscope level scrutiny that everyone puts on tokens, itâs a coin flip what gets enforced,â says Dylus, the DAO lawyer.
But as ApeCoin gets bigger, so does the target on its back. As of this writing, more than 85 percent of all airdropped ApeCoin has been claimed by NFT owners, according to a dashboard put together by a Dune analytics power user. ApeCoin is the most traded token by the biggest 100 wallets in the Ethereum ecosystem, according to WhaleStats.
Maybe there are lots of people holding onto their governance tokens for the voting power or spending their tokens as in-game currency. Who knows! What we do know for sure is that there is lots of buying and selling ApeCoin as a speculative asset.
Some very recent history: in 2017, there were a lot of initial coin offerings, or ICOs. These were attempts to raise money for a venture, kind of like cryptocurrencyâs version of an IPO. Now, when the Securities and Exchange Commission is unhappy about an ICO, it uses words like âfraudulent,â âdefrauding investors,â and âscamâ and files charges. Calling a token a âutility tokenâ is not enough to deflect the wrath of the SEC.
Depending on how the Biden Administration chooses to treat cryptocurrency, Yuga Labs and its collaborators might be on the hook for millions in fines. If they arenât, though, this is a nice tidy profit for Yuga Labs and Andreessen Horowitz, among others.
Thatâs part of why Iâm watching ApeCoin so closely. Usually, you have to actually create a business to turn a profit. Just starting a DAO seems much, much faster.