In its battle against the SEC, messaging app Kik likes to paint itself as an aggrieved victim of the agency’s regulations. The app has conducted a public battle with the agency since receiving a Well’s notice last year and even started a website to raise funds to file a lawsuit. Defendcrypto.org claims the SEC is charging an “innovation tax” and shaping the future of crypto “behind the scenes” by settling with private players. “For the future of crypto, we all need Kin to win,” exhort Kin’s founders.
But a close scrutiny of the state of affairs at Kin reveals a different picture.
Five years after its launch, Kik was among the top ten messaging apps in the world. It had positive press and an enviable market share in the coveted teen market. Then competitors emerged and the app lost its way. News reports catalogued the child exploitation problem on its platform. That its ambitions were constantly shifting did not help matters. In 2014, it aspired to become a “Twitter of messaging apps”. Next year, founder Ted Livingston declared that the app wanted to become a “Wechat of the West” after raising $50 million from Chinese messaging behemoth Tencent.
As the startup scrambled to find direction and revenue, operational losses mounted. The SEC’s filing claims that Kik has never reported profits and its losses rose by approximately $4 million between 2016 and 2017, the latter being the year that the startup held its ICO in a “pivot” towards blockchain.
Future of Crypto or VC Firm Returns?
Kik’s high moral ground against the SEC is suspect on a number of fronts. For one, it has failed to embrace the decentralization and transparency ethos of blockchain and cryptocurrencies.
Whether as a Twitter-like messaging app or a Wechat avatar, Kik always carved out a place for itself as a centralized platform. The Kin token is also designed to be “at the center of a new economy”, according to its whitepaper, and its distribution is controlled by a rewards engine. Information about board members of the Kin Foundation, which will decide future distribution of Kin tokens, is absent on its website. This is critical information since private investors hold Kin tokens worth $49 million from the ICO offering. Monetizing the Kik platform using Kin will increase the startup’s value and boost returns for its VC shareholders and accredited investors. During one of his conversations last year, CEO Livingston also openly alluded to the possibility of Kin becoming “very valuable.”
What’s more, a quick comparison between the backers of defendcrypto.org and Crunchbase yields the following table of conflicted relationships.
Essentially, the initiative is backed by a bunch of venture capitalists (and a smattering of their portfolio companies) who stand to profit from Kin’s success. In other words, the future of cryptocurrency does not depend on Kin’s winning. But future returns of VC firms invested in Kik do depend on Kin’s success. (At last count, Kik had raised $220.5 million from various firms).
A Better Candidate
This is not to say that existing cryptocurrency regulation is perfect. To say that regulation for the crypto ecosystem is a mess would be an understatement. Even supposed innovations, like SAFT, are mere modifications of term sheets from prominent firms like YCombinator. In the absence of clarity about regulations, the SEC can cherry-pick winners and losers with its actions.
For example, Ethereum’s Ether, had the hallmarks of a security, as defined by the famous Howey test. But SEC commissioner William Hinman suggested that its network had become decentralized enough over the years to not be considered a security. Bitcoin, the original cryptocurrency, is also in the clear. A regulatory regime that depends on interpretations over varying period of time, some immediate and others over several years, can only mean bad news for innovation within the cryptocurrency ecosystem.
That said, the crypto community needs to find a better representative of its interests than Kin.