SEC ends three-year investigation into Bitcoin L2 Stacks and its developer

The U.S. Securities and Exchange Commission (SEC) has concluded its investigation into Stacks, the Layer 2 network based on bitcoin, and its developer Hiro Systems without enforcement action, said Muneeb Ali, co-developer of Stacks. The investigation lasted three years and focused on whether Stacks tokens in early offerings were securities.

Hiro Systems, formerly known as Blockstack, is a company that develops blockchain technology. In 2018, it launched the first version of the Stacks chain with its eponymous token (STX).

Initially, the company treated the STX tokens it sold as securities. A portion of the tokens were sold directly to the public in a limited offering under SEC Regulation A+. Other segments of the offering were targeted at accredited investors or international investors.

In early 2021, Hiro upgraded the Stacks network to a new version with an updated consensus mechanism. Hiro believed that the Stacks blockchain was now fully decentralized because the company no longer provided “essential governance services” to the network.

Due to the change, Hiro Systems claimed that the STX tokens no longer had to be treated as securities. However, the SEC did not accept Hiro’s explanation and launched an investigation against the company.

The SEC has since closed its investigations into Hiro Systems and Stacks and indicated that it will not take any enforcement action.

Ali expressed relief that the Stacks investigation was over, but he believes the U.S. needs a better system to regulate the crypto industry.

“We are pleased that the SEC has closed the investigation after so much time and effort. This is the best outcome a company in our industry could hope for, but the U.S. can do better,” Ali said. “We need a regulatory system that meets the developers of innovative open protocols where they are. We will continue to work with policymakers and developers to make this possible.”

The decision is the crypto industry’s second legal victory against the SEC this week. It follows the SEC’s recent announcement that it has closed its investigation into Paxos and no securities charges have been filed against BUSD, a stablecoin issued by Paxos.

However, the legal battle between the SEC and the crypto industry continues. The SEC still has ongoing lawsuits against major crypto exchanges such as Coinbase, Binance and Kraken. In addition, blockchain infrastructure builders such as Consensys and Uniswap Labs remain in the regulator’s sights.