The Legal Strategy Behind Crypto Exchange Backpack’s Token-to-Equity Program

Not lengthy after Backpack teased final Monday that its upcoming token would allow customers to earn fairness within the crypto alternate, folks from throughout the business started reaching out with the very same query, in response to co-founder and Chief Compliance Officer Can Solar.

Everybody wished to understand how the association was structured in a means that wouldn’t flip the token right into a safety, he instructed Decrypt. And the reply includes a strategic separation between the digital asset’s capabilities and Backpack’s enterprise, he stated.

Though regulators within the U.S. have traditionally scrutinized tokens that provide a direct declare on an organization’s success, Backpack is betting {that a} intelligent little bit of authorized engineering can preserve the regulators at bay. Solar argued that the conversion property gained’t truly be connected to the token itself. Fairly, it’ll be connected to an upcoming VIP program, he stated.



Turning into a VIP on Backpack will entail buying and selling on the alternate and utilizing the corporate’s different companies, Solar stated, along with locking the token up for a protracted time period.

“The token could possibly be floating on the market to anybody, however should you don’t use Backpack, should you don’t stake it for a yr, then it has none of these rights,” Solar defined. “It’s not a property of the token itself, it’s the property of a VIP program that we’re operating.”

Backpack is leaning into that method amid discussions to boost $50 million at a pre-money valuation of $1 billion, as reported by Axios earlier this month. In the meantime, Solar stated Backpack has generated curiosity amongst SPACs—publicly traded corporations arrange for the aim of buying non-public ones—and bankers that need to take the agency public.

“We’ve got lots of curiosity, however we need to discover the fitting time to do it,” he added, noting that the provision of Backpack’s token is predicted to unlock in relation to that timeline.

The corporate’s authorized technique might resemble an unprecedented transfer amid an more and more supportive regulatory backdrop within the U.S., however Solar stated the corporate has a backup plan that includes registering the tokens as securities throughout an anticipated public providing.

“The treatment for an unlicensed securities providing is registration,” he stated. “We’re simply going to register an extra class of securities on our IPO. That cures it within the worst-case situation.”

Solar, who beforehand served as common counsel at collapsed crypto alternate FTX, wagered that the token-to-equity conversion program would’ve been allowed underneath former SEC Chair Gary Gensler, who notoriously pursued lawsuits towards myriad crypto companies.

Solar pointed to a submitting that Coinbase submitted to the SEC in 2020, which he labored on at legislation agency Fenwick. Earlier than pivoting to a direct itemizing on the Nasdaq, the alternate tried to register a “Class T frequent inventory,” which might be tokenized, as a part of a public providing.

SEC paperwork present that Coinbase was requested to supply authorized evaluation on how tokenized shares weren’t a very completely different, and probably extra advanced, kind of funding than conventional inventory. In the end, Coinbase dropped the thought, citing “additional consideration.”