SEC Drops Investigation of Bitcoin L2 Stacks and Builder Hiro, Filing Says

The U.S. Securities and Exchange Commission dropped a three-year-old investigation into Hiro Systems, a blockchain software developer (formerly known as Blockstack) that raised $70 million in token sales from 2017 to 2019, according to a Friday filing.

The probe's conclusion is another win for the crypto industry in its years-long struggle with the regulator and follows news, reported by Fortune earlier this week, that the agency had ended an investigation into stablecoin issuer Paxos.

"Based on the information we have as of this date, we do not intend to recommend an enforcement action by the Commission against Hiro Systems PBC, formerly known as Blockstack PBC," the SEC's division of enforcement said in a letter to Hiro attached to the Friday filing.

The letter contained a boilerplate caveat that such a notice "must in no way be construed as indicating that the party has been exonerated or that no action may ultimately result from the staff's investigation."

Hiro makes tools for developers to build apps on Stacks, a layer-2 blockchain that supplements Bitcoin. Stacks is the brainchild of crypto industry veteran Muneeb Ali, who is now CEO of Trust Machines, another builder in the ecosystem, and a board member at Hiro.

In a tweet Friday after the filing came out, Ali wrote that the SEC's probe looked into the Stacks protocol, not just the Hiro entity.

The company, then known as Blockstack, launched the first version of the Stacks chain, with its eponymous token (STX), in 2018. Early on, the company treated the tokens it sold as securities.

It conducted a portion of its token sales under the SEC's Regulation A+, which allows issuers to sell limited amounts of securities to the public without registering. Other tokens were sold under the exemptions for securities sold only to accredited (Reg D) or international (Reg S) investors.

In January 2021, a new version of Stacks launched, with a new consensus mechanism (proof of transfer). To Hiro's mind, the network had become fully decentralized.

In an SEC filing that month, the company said it was no longer providing "essential managerial services to the Stacks Blockchain," and therefore it was no longer necessary to treat Stacks tokens as securities.

Apparently, the SEC was skeptical of that interpretation. In September 2021, Hiro disclosed that it was responding to an inquiry from the division of enforcement.

Friday's filing marks the end of that inquiry and, presumably, the removal of a sword of Damocles that had been hanging over the firm.

UPDATE (July 12, 2024, 14:10 UTC): Adds tweet from Muneeb Ali; adjusts headline to say probe looked at Stacks protocol, not just the Hiro entity.