Has SEC Just Killed The Only Funding Method For Open Source Projects?

Firefox, WordPress, Linux, Zip, and countless of other projects that you have probably used which power the internet as we know it today, are completely free for anyone to do with them whatever they wish, including packing them up or modifying them to sell for profit.

Unlike Windows OS, the $500 Photoshop, Facebook, Google, or like many other for-profit corporations, these open source projects have no one in charge, have no share-holders, have no employees, have no incorporation, and do not really exist as legal entities.

They are produced by individuals across the world for name and fame, on ideological grounds, as a side project or as a hobby, for some to learn coding, or are simply gifted to all.

The most interesting projects tend to attract many coders. They might simply find it intellectually satisfying, they might perhaps be altruistic, perhaps it gives them meaning in some way, or maybe they can see how their free voluntary contribution might turn into for-profit activities later on.

One way it can turn into a profitable activity, if the open source project turns out to be successful, is by being hired by the companies that rely on that open source code or by indeed forming a company to provide a service that utilizes that open source code.

But communism, as we know, doesn’t work very well. So for critical code, which might even be a breakthrough and much infrastructure might run on top of it like with linux, for it to rely solely on volunteers has weaknesses.

The invention of digital money promises to change that. Open source code, globally accessible, by anyone, can have a business model through tokens.

SEC looks at that token aspect in isolation and says utility tokens is just words. In a Questions and Answers session SEC personnel said that if there is a secondary trading market for the token, then it is a security.

As tokens run on top of a global open network, with Decentralized Exchanges now attracting some liquidity, it appears to us that SEC is concluding all tokens where there has been a public or private fundraising are securities.

In a somewhat revealing statement, a SEC official said whether it falls under equity or debt doesn’t matter, it’s a security. But it does matter, because tokens do not fall under either equity or debt, and thus clearly reveal their very different nature from actual securities.

“We are not going to innovate for you,” another SEC official says somewhat dismissively. Yet they are innovating for themselves by claiming jurisdiction over a completely new area and thus giving themselves justification to ask Congress for more money.

Yet why taxpayers should pay them to kill the only current funding method for open source projects is very unclear. Imagine a competitor to Photoshop, for example, that is open source. It already exists, it is called GIMP. But lack of incentives means GIMP isn’t as convenient to use as Photoshop.

In a world where GIMP is tokenized, there would be the incentives. Now if you are SEC, you look at this world and you say well we have people here, they are doing work, they are coding stuff, these are same as company directors.

If you are Trustnodes you look at this world and you see people from all over the world contributing code in a permissionless manner and in a commons way are improving the world with the addition of a new incentivizing method through tokenization.

There is a clear difference here between a for-profit company with a hierarchical structure and permissioned employment, compared to a somewhat flat open platform with fluid “employment” where anyone can see all aspects and contribute to them if they wish.

The former for-profit company structure can work fine in many ways, but it can also have plenty of problems. Take Photoshop. Who can afford to pay $500 to download Photoshop? Or take Facebook where their secret proprietary algorithms can cause many problems, as they can in Google.

You could not previously have an open source version of Facebook or Google as the technology for it is very new and still not quite refined, but now we are at a stage where we can start having such platforms.

Yet SEC is saying you can’t do so if you are in America because the token is a security. Something which is nonsense by any common sense because although there may be a development team that initially can register such security, if they vanish or pass away or whatever then who would comply with the securities laws?

A token is not a fixed paper share that does not change or move, a token lives and breaths as open source code develops in a way no company can develop.

While for a stock, the only reason you want one is to keep it and do nothing with it until you can sell it to someone else, that is the only reason you’d want a stock is for speculative reasons, a token can have use. You might have access to some computer storage through it, you might have access to a movie, to some art, or to a car, or a document and so on.

Moreover, we have no idea how these tokens will develop. Only recently we realized that dapps can be platforms for other dapps to build on top of them. What will we realize in five months or a year?

SEC certainly doesn’t know, yet they’ve decided to involve themselves without public consultation and in a talking down manner when this space is in a very innovative stage and constantly evolving with no one knowing just where it will settle.

Meaning that in effect America has given entrepreneurs no option but to leave or to ignore the SEC if they want to take risk because you can not possibly have an open source project comply with securities laws as then you might as well have a for-profit company.

Imagine if Linux had been developed today and had a token aspect, imagine then all Samsung phones run on top of Linux as they do currently, and imagine all that infrastructure that runs on Linux has to deal with all these securities laws.

There would be continuous obligations on open source developers coding Linux to give quarterly reports, financial statements, maybe have a board, explain why a decision is made or isn’t made on top of library length requirements that take years of law school studying to understand.

In short, SEC is saying you can’t have a tokenized open source project. There needs to be a company with an army of lawyers that is responsible for all this open source code. It can’t be a commons.

So making compliance pretty much impossible, or tokenized open source projects impossible, because securities laws are designed for hierarchical corporations, while open source is designed for flat collaboration.

Suggesting SEC has no clue whatever just how their statements actually apply in practice and just how much they interfere with the trajectory of innovation in US where entrepreneurs may have now been left with little choice.