Hong Kong Web3 firm Animoca's bet on non-US markets offers buffer from SEC's labelling of Sand token as security

Hong Kong-based blockchain unicorn Animoca Brands said it is focusing more on markets outside the US after the Securities and Exchange Commission (SEC) labelled the firm's Sand cryptocurrency token an unregistered security in lawsuits against the exchanges Binance and Coinbase Global.

Sand is the native crypto token used by Animoca's metaverse platform The Sandbox, and it was one of more than a dozen such tokens to have been explicitly named by the SEC as securities, with others including Solana, Polygon and Mana, the token used in the Decentraland virtual world. The SEC action raises legal risks for any companies selling these tokens.

"Animoca Brands is not focused on a single territory but operates globally," company co-founder and chairman Yat Siu said via email. "The SEC focuses on the US, so that should not have an impact on Animoca Brands in broader markets where Sand is widely available and accepted, including in more progressive jurisdictions like Hong Kong and Japan."

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Animoca has already "started to take steps to place more emphasis on other markets", Siu added, because of the recent "blockchain-hostile" approach in the US.

Coinbase CEO Brian Armstrong has said that Coinbase has no plans to delist the tokens named by the SEC, setting it up for a legal fight over what types of crypto constitute a security.

However, the move can have a chilling effect for other exchanges that are not so invested in selling those tokens. Dan Gallagher, chief legal compliance and corporate affairs officer for US brokerage Robinhood Markets, told a congressional committee this week that the company could not simply list tokens through its registered broker, in part because of rules regarding "issuer disclosure", since many crypto tokens are created by organisations outside the US that do not follow SEC rules.

"We are actively reviewing the SEC analysis to determine what, if any, actions to take" regarding Robinhood's current crypto offerings, Gallagher said.

In August last year, Binance.US said that it would delist a token called Amp "out of an abundance of caution" after the SEC identified it as an unregistered security in a separate lawsuit.

At the heart of the issue for the SEC is whether a token was used for fundraising and buyers expected a return on their investments. The SEC complaints against Binance and Coinbase say Sand purportedly raised US$3 million through private sales on Binance.com and that holders were led "reasonably to view Sand as an investment in and to expect to profit from [the company's] efforts to grow the Sandbox protocol".

Labelling cryptoassets as securities is a strategy for the SEC that "supports their enforcement proposition against those exchanges", and is "not particularly fatal" to their operators because there has yet to be a judgment from the legal proceedings, said Padraig Walsh, a partner at Tanner De Witt in Hong Kong. But the allegations do raise the legal risk for firms in the US, he noted.

"What it does constitute is a public statement in public enforcement proceedings that a regulator in a particular jurisdiction believes that the tokens may be securities," Walsh said. "So that would attract a degree of legal risk."

Since it could take years to get a definitive judgment from these cases, a more imminent consequence might be that crypto firms continue to move away from the US because it is perceived as "too uncertain", Walsh added.

The Sandbox's co-founder and chief operating officer Sabastien Borget told crypto-focused outlet Decrypt on Thursday that the SEC's claim does not change the platform's business "on a day-to-day basis", and that the company does not "necessarily agree with the characterisation" that its token is a security.

The Sandbox's Erich Wong (left), head of growth in Greater China, and Sebastien Borget, co-founder and chief operating officer, speak at the company's HK Partner Day held in Hong Kong's Quarry Bay district on April 3, 2023. SCMP / Matt Haldane alt=The Sandbox's Erich Wong (left), head of growth in Greater China, and Sebastien Borget, co-founder and chief operating officer, speak at the company's HK Partner Day held in Hong Kong's Quarry Bay district on April 3, 2023. SCMP / Matt Haldane>

Other companies targeted by the SEC have also sought to continue their growth outside the US. Ripple, which the SEC sued in 2020 in a case over its XRP token that is still ongoing, has mainly been expanding in Asia, according to Brooks Entwistle, APAC managing director and senior vice-president of global customer success at the blockchain firm.

"The result is we are building our business outside the US," Entwistle said in an interview with the Post on May 24. "We have added the majority of our people in the last period of time outside the US, the majority of our businesses outside the US, and ... the bulk of that is in this dynamic Asia region."

Animoca, which is based in Hong Kong, announced in March that it was planning a major push into the Middle East, looking to put "significant investment" valued "in the tens of millions of dollars" into the region.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

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