Intercoin continues its multidisciplinary approach of combining technology, regulations, and economics to forge solutions that bring crypto to mainstream adoption by regular people.
Purpose of a Contest
The idea is simple: when there’s a job that must be done, a community of interested consumers can stake some tokens in a contest, with multiple stages and prizes, and judges to award those prizes. Pooling money in one place like this requires careful cryptoeconomic analysis, since there is an incentive to corrupt judges, or bribe contestants to throw the contest, or coordinate to make someone the winner. We often hope for the largest participants to be mutually distrusting parties who compete instead of coordinating, but we can’t always rely on it.
The Smart Contract
ContestContract is a smart contract that lets people come and pledge some tokens to be paid out in one or more stages of competition, to the winners. The pledged tokens can be anything (including securities, but see below for regulations).
Here is a quick overview of how the contract would work:
- A contest is set up, with a given
externalToken(ERC20) contract address, stages, prizes per stage, etc. all spelled out ahead of time.
- Anyone can come and
pledge()their tokens to this contract, earning some
weight(which is the internal token). Once a minimum amount has been pledged, the next contest stage begins.
- They can then
delegate()their weight to some judges, who will actually select the winners in each stage.
- Contestants can
enter()the contest, and
leave(), forfeiting. In the meantime, they can produce a bunch of results off-chain.
- After a certain predefined time period, the contest stage ends, and the judging begins.
- After the judging period, there is a period where pledgers can
revoke()their pledge, because they think the contest was rigged. They lose a penalty, such as 20%, but the others don’t get any of their tokens. Studies show this happens a lot in group interactions where cheating cannot be prevented by other means.
- In every stage, winners proceed to the next stages, and the process repeats. Losers (who didn’t win any prizes) may have the rest of the pledged money distributed equally, to compensate them for their work.
- The internal tokens can be exchanged for some portion of the pledged external tokens.
Perhaps the most interesting pairing is when winners receive tokens that can be used to claim utility tokens issued by our
UtilityTokenContract. Because then, this is really about a community of people getting together, encouraging skilled people to form teams, compete and build the very network in which they will get tokens. And all of this can be done in ways that regulators should find reassuring.
Both FinCEN and the SEC have safe harbors for people earning money for providing actual products and services. That includes building a new solution or network, and authoring and curating digital content for it.
FinCEN has maintained since 2012 that the Integral Exemption applies here Last year, it issued a comprehensive guidance to interpreting its regulations with respect to cryptocurrencies, which says, among other things:
Second, FinCEN regulations exempt persons from the definition of money
transmitter under certain identified facts and circumstances, the most relevant of
which is when the acceptance and transmission of value is only integral to the sale of
goods or services different from money transmission. Thus, if the person involved
in the fundraising activity as an issuer, intermediary, or investor is not a bank, foreign bank, or a person registered with, and functionally regulated or examined by the
SEC or CFTC, then any money transmission connected to the fundraising activity
performed by the person generally will fall under the integral exemption,
unless the asset is issued to serve as value that substitutes for currency.
Presumably, “the asset” here refers to the goods and services just mentioned. That means, people contributing goods and services, even to build a network, can earn the very tokens that the network would run, while falling under the integral exemption.
The current landscape of state regulators and money transmission licenses is varied as well, but even the ones that have aggressively regulated digital currency have (almost?) all exempted the activity of earning cryptocurrency in exchange for goods and services, from having to obtain a license.
This is good news for an industry that has strived to provide alternative ways of funding projects, alongside the dominant model today: venture capital that buys shares in startups to capture a market, control a platform and extract rents indefinitely.
Meanwhile, the SEC has long had a safe harbor for consultants, contractors and advisors being compensated for their work, without having to register it as a securities transaction. It’s called Rule 701, and even if the tokens being awarded are considered securities, the rule would presumably allow the contestants (and the judges) to be paid in transactions exempt from SEC registration. Naturally, the EVM code could be paired with legal contracts that clearly set out the rules for each participant, and their status as a consultant or advisor to the enterprise.
UtilityTokenContract takes advantage of care of secondary trading, and may even obviate the need for using Rule 701, if the tokens being awarded are not considered securities by the SEC at the time they are awarded. But
Launching Intercoin DeFi
Soon, clients could download the Intercoin app (or visit the website), fill out a form to configure the parameters of a contest, and our back end would generate the Ethereum smart contract, and the regular contracts, to be sent out and digitally signed by all pledgers, judges, participants. In this way, Intercoin is able to combine solutions from the worlds of crypto, blockchain, regular web, digital signatures, fundraising, and regulations. All of this, wrapped in one package or service that can be accessed, through the Intercoin portal.
(And if you need a lawyer or tax specialist for something more detailed or exotic, we can do lead generation for our growing network of professional firms who understand this sort of new DeFi.)