Cryptocurrency startup Swarm announced its new product two days ago. Today the company is facing a cease-and-desist letter from Coinbase, reports CCN.
Swarm bills itself as the “first security token blockchain”. Through Swarm’s tokenized model of fractional ownership, retail investors would be allowed to tap into assets of prominent tech startups such as Ripple, Robinhood and Didi, in addition to Coinbase, without trying to qualify as an equity investor with those companies directly.
CCN reports that Swarm obtained shares of San Francisco-based Coinbase, the largest digital asset exchange in the US, from “approved secondary market transactions to acquire vested employee shares, or from venture capitalists who have directly acquired equity from these companies.”
Swarm is repackaging the equity in the form of Swarm tokens (SMV).
The Swarm tokens are based on the Ethereum blockchain. They effectively upend the traditional equity investment model by allowing investors to buy, sell and trade private equity in an open-source, decentralized, tokenized environment. The goal is to democratize investments, cut out middlemen, kick out gatekeepers and open up equity-ownership to consumers who don’t or can’t operate as venture capitalists.
Coinbase, which is privately-held, has been funded by accredited investors only. It served a cease-and-desist letter to Swarm’s offices, claiming that Swarm has no agreement with Coinbase to sell its equity.
Swarm believes it has the right to tokenize equity of private companies and claims it remains compliant with the SEC because its tokens are only available to accredited investors who are approved under its KYC/AML verification process.
Swarm’s initiative and the swift reaction from Coinbase represent the complex dynamic between innovators and disruptors. As blockchain drives optimization and efficiency in the cryptocurrency ecosystem, it’s pushing boundaries and exploring new options that toss out legacy tech and every layer of restriction.
New crypto creations, from ICOs to hybrid coins that can transmit value, as well as utility, often go beyond the narrow scope of yesterday’s financial framework. More and more often, defined terms such as “security” and “currency” no longer clearly explain or adequately reflect the objectives of the new digital economy. Developers and initiatives are redefining terms, challenging regulators and vexing companies as they promise more functionality, freedom from borders and financial liberation from centralized institutions.
If Swarm is to grow its promise of a frictionless and decentralized environment that is more transparent, more democratic and less prone to corporate controls it will first have to survive Coinbase. It will have to demonstrate how and if it has the legal right to sell equity that has been sold.