The SEC has issued its second non-action letter for ICO tokens to gaming startup Pocketful of Quarters (PoQ). The venture, started by eleven-year-old sixth grader George B. Weiksner, intends to use utility tokens called Quarters. The tokens are based on the ERC-20 protocol, the most popular smart contract protocol for developing tokens on Ethereum. They will be used as in-game currencies to trade goods and services. Quarters are transferable between games, ensuring that the balance of currencies from one game can be transferred to the next.
“The most important thing for a teenage boy is playing videogames and this might be the first financial product they have and it will be a crypto wallet,” Michael Weiksner, CEO of PoQ and George’s father, told Coindesk. The startup has already raised money from investors by issuing Q2 – an investment token. Q2 will offer regular dividends to investors in Ether.
A Utility Token
The SEC uses the Howey Test to determine whether an ICO token is a security and subject to mandatory disclosure and regulatory requirements. The test outlines four criteria – the existence of a common enterprise, expectation of profit by investors, an investment of money, and the use of third party services to promote the enterprise – as tests to ascertain status. Quarters will not be traded on exchanges nor can they be resold by players for profits. Its price is expected to remain stable.
Only developers and so-called influencers (or popular players) will be able to earn revenue from Quarters by exchanging them for Ether, Ethereum’s cryptocurrency. The exchange will occur using a smart contract that will hold value from the purchase of prepaid tokens. The adoption of Quarters also does not depend on marketing by a third-party; instead, their popularity depends on their utility to players.
A Great Leap Forward
Amid growing uncertainty about the status of ICO tokens and a crackdown by regulators, the SEC issued its first no-action letter to TurnKey Jet, a private aviation company that offered tokens to customers for use on its platform, earlier this year. Unlike Quarters, TurnKey’s tokens were to be used only within its platform.
In a lengthy tweetstorm, Marco Santori, chief legal officer at Blockchain – a trading platform, commended the development and called them “a great leap forward.”
But the status of Quarters within PoQ’s ecosystem is subject to revision. “…this response expresses the Division’s position on enforcement action only and does not express any legal conclusion on the question presented or on the applicability of any other laws, including the Bank Secrecy Act and anti-money laundering and related frameworks,” wrote Jonathan Ingram, chief legal advisor to Finhub, the SEC’s fintech division.