Flux and regulatory compliance in the US and EU

Since its inception, Flux has diligently ensured compliance with regulatory bodies in the US and EU. Legal reviews conducted by external legal teams in the US and Liechtenstein have both concluded that Flux is neither a security nor an investment contract.

Blockchain is a disruptive and rapidly evolving technology and even more so with the recent advancements in AI and machine learning. When combined with Web3 and AI, it will usher in the fourth industrial revolution and profoundly impact the lives of everyone once the technology matures.

Flux is building the first truly decentralized cloud. It will deliver the essential infrastructure required to run Web3, the next iteration of the Internet that will be stewarded by the users instead of corporations. While being part of this magnificent technological journey is exciting, it also entails important responsibilities.

Acknowledging the importance and impact of blockchain, regulatory bodies within the US and the EU have increased their focus on regulating the blockchain industry and markets. One of the challenges faced by the tech industry is lawmakers that have a hard time keeping up with technological innovations and their societal impacts. This challenge certainly applies to both the blockchain and AI industries. Currently, lawmakers are very publicly scrambling to catch up to the reality of Web3, which has raised awareness and concerns regarding regulatory matters in the blockchain communities.

Regulations that are lacking, unclear or missing will only serve to hinder the overall growth and development of the blockchain industry. It will make it more challenging for individuals and businesses to participate in the development and use of blockchain. Most people who’ve had the pleasure of working out their ‘crypto’ taxes can attest to the many headaches caused by unclear regulations.

A society that fails to embrace and nurture new technology becomes stagnant and misses out on the potential to create new opportunities, increased growth, and better lives for its people.

This is why Flux welcomes and embraces any actions taken by regulatory bodies to develop and improve blockchain regulations, removing doubts and uncertainties. If lawmakers do not provide the industry with a better regulatory framework it will impede the technological development of blockchain and make it harder for people to participate and utilize the many benefits inherent to the technology.

Since its inception, Flux has worked hard to ensure regulatory compliance with current regulations. The design and decisions related to the creation and operations of Flux are always made with a keen awareness of any regulatory implications.

With the recent activities of the US Securities and Exchange Commission (SEC), it is an opportune time to provide the Flux community with insight into the regulatory status of Flux and why legal reviews have found that Flux is not a security.

The legal status of Flux

The legal frameworks in the US and EU differ, but in both regions, the most critical factor in determining the regulation of a particular blockchain coin or token is whether it is considered a security or investment contract.

Based on the definition of a security in the US SEC Act of 1933 a security is a financial instrument that represents a claim on the issuer, such as stocks, bonds, and derivatives. The person buying a security is led to expect profits in the form of the sale of the security, dividends, or interests solely based on the efforts of the promoter of the security or a third party.

As with all legal matters, interpreting how the definition of the security act applies to a specific blockchain asset can be tedious. In the US, the case of the SEC versus W. J. Howey Co. of 1946 is typically used to evaluate if something is considered to be a security or not. This practice is dubbed ‘the Howey test’.

The Howey test includes three criteria that must be met for an instrument to rise to the level of a security, or “investment contract”. An investment contract exists where there have been:

1. an investment of money,
2. in a common enterprise,
3. with an expectation of profits primarily from the efforts of others.

Flux has undergone two legal reviews by experts to determine whether or not it could be deemed a security or investment contract. In both reviews, Flux was found to fail the Howey test and not live up to these three fundamental criteria.

The first review was conducted by Bukner LLP in the US, their conclusion was:

“.. it is our belief that Flux would not constitute an investment interest or “security” in accordance with the Howey test”.

The second was done by Ochsner Law in Liechtenstein, their conclusion was:

“..it is our professional opinion that FLUX does not classify as a Financial Instrument or Electronic Money. Additionally, according to the ESMA/EBA token taxonomy, it would be considered a hybrid payment/utility token, hence further confirming FLUX as falling outside the scope of applicable traditional EU legislative frameworks..”

Some of the main thoughts around why Flux cannot be defined as a security or investment contract are:

• Flux operates on a ‘Proof of work’ system, which means that no newly minted Flux was ever sold directly to anybody by the Flux founders or team. Every Flux is earned by miners and node operators by providing resources to the network.
• There was no ‘Initial coin offering’ (ICO) ‘Initial public offering’ (IPO) or (IEO) “Initial Exchange Offering”. Flux was never ever sold to a third party or US resident.
• Flux has never had Venture Capital investments and the only way to acquire Flux was from mining, nodes, or the open market (much like Bitcoin).
• As with Bitcoin, owning Flux doesn’t guarantee a return on investment, no certain interest, dividend, or similar can be derived from Flux. Also, any fluctuation in Flux price is entirely outside the control of anyone in the community as it is entirely up to market forces.
• Flux is primarily a utility token used to participate within the Flux ecosystem, for instance, it is used to pay for deployments of applications on the Flux network.
• There is no “central” team that controls Flux. This is much like Bitcoin as anyone can develop and submit open-source code to the Flux network. Also, there are many developers, businesses, and community members already deploying and building on the Flux ecosystem, this is permissionless.
• All Flux Parallel Assets were mined with the Proof-Of-Work consensus mechanism, meaning all PAs may come back to the main chain should there be an issue with a PA chain and regulatory challenges for said projects.
• Flux does not pay out “dividends, rewards, or incentives” for participation in the network, other than the PoW block consensus mechanism reward. This ensures Flux stays aligned with the failure of the Howey test in the US and remains fully decentralized.

Flux is committed to prioritizing regulatory compliance and encourages lawmakers to engage in a constructive dialogue with the blockchain industry in order to create value-adding and lasting legal frameworks to support the growth of this important technology. Currently, we have a very active legal community dedicated to ensuring Flux is protected for all generations to come.

Want to know more?

Please visit the official Flux website hosted on the Flux decentralized network. Learn about the ecosystem and see what Flux has to offer.

You can also stay updated by following the official Flux Twitter @RunOnFlux for news and announcements.

Finally, you can meet the Flux community on the Flux discord. On Discord you can also meet the Flux team and discuss all things Flux, we’re always on the lookout for new community members, developers or potential partners.