ICO

Skeptic’s lens: Not defending crypto anymore?

Quick Take

  • The SEC sued Kik yesterday for illegally raising $100 million in an unregistered securities offering in 2017
  • Likely knowing that the lawsuit was imminent, Kik launched a crowdfunding campaign last week “take on the SEC in court to make sure there is a foundation for innovation going forward”
  • Shortly after the SEC’s lawsuit, Coinbase and Circle withdrew support of Kik from the campaign’s website
  • Even though the CEO of Kik claims that Kik is used by “millions of people in dozens of apps”, there is very little evidence that a significant amount of real users actually use Kin

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The U.S. Securities and Exchange Commission (SEC) sued Kik yesterday, accusing the firm of illegally raising $100 million in an unregistered securities offering in 2017. The filing alleges that Kik, which has never been profitable, sold Kin tokens primarily because of concerns it would run out of money by the end of 2017. Kik was allegedly unable to raise more capital in traditional ways and the token sale was viewed as a “Hail Mary pass” by one of its board members. The SEC is seeking a permanent injunction, a penalty, and disgorgement with interest.

In response to the SEC’s filing, Kik CEO Ted Livingston, said, “We have been expecting this for quite some time, and we welcome the opportunity to fight for the future of crypto in the United States.” Likely knowing that the lawsuit was imminent, Kik launched a crowdfunding campaign last week, dubbed “Defend Crypto”, to “take on the SEC in court to make sure there is a foundation for innovation going forward.” 

Messari, Shapeshift, Circle, Fred Wilson, and William Mougyar contributed to the fund, according to Circle Research. Since launching the campaign a week ago, Kik raised 0.216 BTC and 4.17 ETH from the public, which is about $2,700 based on the evaluation of public Bitcoin and Ethereum addresses. It’s possible that there is more than one address for each but seems unlikely. 

When the fund was launched a week ago, Coinbase, Circle, Shapeshift and Messari were listed on the website under “Who’s Behind Defend Crypto.”

Following the lawsuit, Coinbase immediately withdrew its logo from the website. Last week, a statement that “The Defend Crypto fund is hosted by Coinbase” was changed to read “The Defend Crypto fund is held in a Coinbase account.” Shortly after Coinbase, Circle also removed its logo from the same section. It’s interesting that just last week both Coinbase and Circle were ready to “take on the SEC in court” and are now quietly covering their tracks. Was the lawsuit that convincing? And more importantly, which company will be next to drop support?

Livingston also said in response to the SEC’s filing, “We hope this case will make it clear that the securities laws should not be applied to a currency used by millions of people in dozens of apps” and that “Kin is being used by more people in more apps every day, and come trial, Kin may be the most widely used cryptocurrency in the world.”

Like most ICOs, Kin was launched as an ERC-20 token on Ethereum but then Kik announced in May 2018 that it decided to fork Stellar to create its own fee-less proprietary blockchain where nodes are run by services driving the Kin economy. The claim that Kin is used by “millions of people in dozens of apps” is impossible to verify because of the nature of Kin’s nearly-permissioned fee-less blockchain. Livingston knows this, of course, which makes it a somewhat effective obfuscation. Kin’s blockchain explorer and network stats are only available on its website.

Kin claims there are currently 44 monthly active apps using Kin and 428,000 monthly active spenders of Kin. The total unique spenders are allegedly above 1 million and total unique earners above 5.6 million. While these stats are likely correct (but still very hard to verify), in a blockchain where it costs nothing to send a transaction, any of the stats are nearly meaningless and the real people using Kin are likely magnitudes lower than what Kik’s CEO claims.

The best proxy to show real activity or interest are traded Kin volumes on cryptocurrency exchanges. If there was a lot of real activity on Kin, it’s also logical to assume that there would be a vibrant economy and significant trading volumes. Kin is currently trading at 20% of its ICO price (in terms of USD) and at 23% of its ICO price (in terms of ETH) but there is virtually no real liquidity.

More than 70% of the total Kin traded volume came from CoinTiger, Fatbtc, Mercabox, and YoBit, which all likely fake more than 99% of their volume. Meanwhile, HitBTC seems to have quietly delisted Kin about 15 hours ago. There is likely some real volume coming from the decentralized exchanges (Bancor and EtherDelta) but it’s very, very little — less than $250,000 in the last 24 hours. In comparison, BNB had at least $150 million of real volume in the last 24 hours, more than 600 times that of Kin.

In the lawsuit, the SEC alleged that at the time of the sale, the Kin infrastructure did not exist and there was nothing to purchase using the token. Now, there appears to be at least some infrastructure but there is very little evidence that a significant amount of real people actually use Kin.