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Institutions and RWAs
In 2023, there was an acceleration in institutional blockchain deployment and participation in Avalanche's DeFi ecosystem. However, the solutions for institutions have been divided into two camps, either utilizing private blockchains that offer permissions and controls or leveraging public blockchains through walled protocols that limit interoperability and composability. Avalanche has developed the Evergreen Subnets solution, which offers the essential permissions and controls associated with private blockchains while enabling the liquidity benefits of interoperability. This solution enables institutions to experiment with their controlled, out-of-the-box environment for R&D initiatives and production-ready use while accounting for company-specific and regulatory requirements.
Avalanche's Evergreen Subnets solution could significantly accelerate institutional participation in DeFi by providing a solution that solves the liquidity, composability, and interoperability issues associated with traditional enterprise blockchain deployments. Institutions that are more comfortable with transacting on-chain can now do so without waiting for additional capital, which could encourage further capital allocation on-chain. The initial cohort of institutional partners, including T. Rowe Price Associates, WisdomTree, Wellington Management, and Cumberland, will be leveraging the Spruce testnet to assess the benefits of on-chain trade execution and settlement across a variety of applications. The success of the initial cohort is expected to lead to subsequent cohorts, furthering the on-chain capital onboarding efforts.
In the future, Avalanche's Evergreen Subnets will have to compete with alternative solutions, such as Layer-3 blockchain deployments to the Ethereum network, which will leverage DeFi protocols and parameter customization to replicate the Evergreen solution. Overall, the development of innovative solutions such as the Evergreen Subnets is crucial for driving the growth and adoption of blockchain technology by institutions.
Regulation
While no official statements have been made regarding the AVAX token or Avalanche as a project, there have been comments from the U.S. SEC on Ethereum previously declaring it to not be a security.
The CFTC has made comments publicly that Ethereum is viewed as a commodity. However, with new U.S. administration and regulatory bodies, there’s always uncertainty regarding comments from past administrations being continued. Only time will tell how accommodating or restrictive they will be.
For the crypto market, regulation continues to be a largely gray area. As crypto continues to grow in popularity, so too does the attention being paid to it by governments and regulating agencies. In the U.S., crypto is at the mercy of the Financial Services Oversight Council (FSOC) and its 10 voting members. There’s the Federal Reserve (Fed), the Department of Treasury, the Commodities & Futures Trading Commission (CFTC), the Securities & Exchange Commission (SEC), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Commission (FDIC), the Consumer Financial Protection Bureau (CFPB), and a couple of others that are less directly relevant to crypto.
The FSOC’s duties include identifying risks and emerging threats to the financial system. This authorizes the FSOC to organize a policy response to emerging tech like cryptocurrencies. The committee, led by Treasury Secretary Janet Yellen, aims to create and enforce a “proper” U.S. financial regulatory framework. As the U.S. makes up ~40% of the global financial market, the FSOC’s impact is far-reaching and critically important.
AVAX can be deemed a security if it satisfies properties based on the Howey Test, the standard legal test applied to assets to determine whether or not they're securities to the U.S. SEC.
The questions governing the Howey Test are:
- Is there an investment of capital involved?
- Is there an expectation of future profits?
- Is the investment of capital in a common enterprise?
- Do any profits come from the efforts of a promoter or third party?
Note that many cryptoassets lack clear utility and purpose outside of price speculation or investing. AVAX has a clear use case on the Avalanche platform in the form of network payments, staking and securing the Avalanche network, and for atomic swaps.
According to the Howey Test questions above, it can seem that, in these early stages of Avalanche, the strongest argument for AVAX being classified as a security is its involvement and issuance from a “third party,” Ava Labs, whose efforts are around a “common enterprise.”
Therefore, at first glance, AVAX does seem to fit the description of a security, especially since Ava Labs is the sole developer and promoter of Avalanche and investors expect profits from the enterprise.
Note that Ava Labs is a Delaware-registered, U.S.-based company with an office in New York, founded by American cryptography experts, and funded by several U.S. investors. With Ripple’s 2020 legal battle with U.S. regulators, investors question whether authorities could pursue legal action against other cryptos with similar profiles. The Ripple lawsuit explicitly mentioned having offices in New York City as one factor for regulatory action.
However, Ava Labs has taken steps to mitigate regulatory involvement that makes it unlikely (but not guaranteed as legal advice) for U.S. regulators and courts to get involved. Note that during the AVAX public sale, AVAX was only offered to U.S. residents who were “accredited investors” as defined under Rule 501 of Regulation D or otherwise not “U.S. persons” as defined by Regulation S under the Securities Act of 1933, unlike for XRP, for whom U.S. individuals’ funds were involved in the initial sale. Avalanche also avoided more potential problems by having a vesting period for which all early investors had their coins locked.
The entire Ava Labs team has a four-year vesting period and early investors are on a minimum one-year vesting schedule. This was done to avoid regulatory risk similar to what's being claimed against Ripple in the SEC lawsuit. Avalanche also registered for Federal Exemptions under rule 506(b), which Ripple didn’t do. Under this safe harbor rule, Avalanche was allowed to raise an unlimited amount of money from accredited investors as long as a Form D was filed, which was successfully completed.
Unlike Ripple, anyone can technically run an AVAX node and verify transactions themselves so far as regulators are concerned. While Ava Labs is the formal issuer of the AVAX token, the technical operation of the Avalanche network doesn’t depend on a given legal entity, unlike with Ripple.
AVAX wouldn’t exist without Ava Labs, but AVAX can exist and function without Ava Labs as of this point given it’s now released and functioning with a decentralized model. Ava Labs, therefore, seems to have taken care to comply with U.S. regulatory issues that may arise
