Author: Christine Kim, Galaxy; Translated by: Deng Tong, Golden Finance
Preface
This report delves into the history of crypto points, how they work, the major dapps that have used points to incentivize user activity over the years, and the unresolved questions about the legality of points under U.S. law and regulation. An increasing number of blockchain-based applications incentivize user activity through points. Points are a gamification mechanism through which users can measure and receive rewards for their activity on a decentralized application (dapp) or service based on criteria set by the dapp development team. Dapp developers can design a points system to encourage specific types of behavior and activity on their application, especially in the early days of launch, to onboard users and increase engagement with the application. Users are motivated to collect points primarily because they anticipate that their points will be converted into tokens in the future.
Until now, points issued by dapps have no monetary value, whereas tokens typically do. Applications such as non-fungible token (NFT) marketplaces Tensor and Blur have used the number of points a user holds to determine the number of tokens they can receive through seasonal token airdrops. However, points have historically been issued without a guaranteed conversion to token or monetary value (or conversion rate), which is one of the factors contributing to legal uncertainty surrounding the issuance of points in the United States. Another reason for the murky legality of crypto points programs is that the policies and rules that ensure all points programs are fair in the United States remain unclear. This report will also explore the general legality of points programs that are primarily driven by credit card networks and retail brands.
Summary of key points
Points are the next evolution of “airdrops.” An airdrop is when a dapp is used with the express purpose of receiving future token rewards. Airdrop recipients typically have no guarantee that their usage will translate into token rewards, but years of accidental token airdrops (e.g., Uniswap and ENS) have led to a large number of individuals using protocols simply on the assumption that there will be future airdrops. This surge in user activity has led many crypto services and applications (such as OpenSea, MetaMask, Obol, etc.) to issue announcements reaffirming that they do not intend to issue tokens and warning their users to beware of scams that falsely advertise token launches. Despite these announcements, there is still no shortage of airdrop recipients on these platforms speculating and claiming tokens for dapps that have not yet issued tokens.
Historically, airdrop mining has been a lucrative activity in the cryptocurrency industry, generating high returns for miners. Almost all Layer 2 (L2) protocols on Ethereum have airdropped newly minted tokens to early users, such as those who bridge assets to L2 or send transactions there:
Arbitrum airdropped 1.162 billion ARB tokens to its platform users on September 24, 2023.
Starknet airdropped 10 billion STRK tokens to early contributors to its platform on October 30, 2023.
Optimism airdropped 10 million OP tokens to NFT creators on its platform in the fourth airdrop round on February 20, 2024.
Airdrops have become ubiquitous in the cryptocurrency space, not just in the Ethereum ecosystem. Bridge protocol Wormhole and data availability (DA) platform Celestia are other examples of high-profile crypto projects that have conducted airdrops, rewarding users with 678 million and 60 million of their native tokens, respectively.
When a project announces an airdrop, they also typically announce the eligibility criteria for the airdrop, which often rewards early users or contributors to the project. In the case of Celestia’s TIA airdrop, which ended on October 17, 2023, the criteria also rewarded contributors and users of competitor data availability layers to incentivize these users to abandon existing DA solutions (such as Ethereum) and choose to use Celestia as an alternative DA solution.
Given that the eligibility criteria for an airdrop are usually announced at the same time as the airdrop itself, if a user has not met the criteria when the airdrop is announced, they will most likely not be eligible to receive any rewards. To ensure eligibility, airdrop recipients typically participate in all types of activities on early crypto projects, which, depending on the nature of the project, may include joining a Discord channel, contributing to a GitHub repository, submitting on-chain transactions, swapping, bridging, or locking assets on a dapp.
Projects that do not confirm an airdrop and announce eligibility criteria for token distribution often see participation in the project taper off over time. The same is true for projects that launch a points program but hold off on announcing how points can be redeemed or used on the dapp. Points issuance can require users to follow guidelines created by the dapp developer and interact with the dapp according to those rules. With points, developers can explicitly encourage and discourage certain types of user behavior. The gamification of dapp participation is one of the main advantages of points programs.
However, the main drawback of points programs is their opacity. Crypto points programs often offer points to users first, and then tell users important details such as how to redeem points, what type of rewards to redeem, and when to redeem. This often leads to more speculation about the protocol and its potential airdrops, while early airdrop announcements did not allow users to indicate their position relative to other users. In addition, due to the ambiguity of some points programs, points announcements may also be difficult to distinguish from airdrop announcement activities.
To gain a deeper understanding of these pros and cons, we’ll examine the details of five crypto credits programs launched between 2022 and 2024, starting with Tensor Credits, the earliest of this period.
1. Tensor integration
Launched in July 2022, Tensor is a marketplace for non-fungible tokens (NFTs) built on the Solana blockchain. In September 2022, the Tensor team launched the Points Program, one of the first of its kind in the cryptocurrency space. Users can earn points in Season 1 of the Tensor Points Program if they have a minimum NFT trading volume of 500 SOL and do not engage in wash trading or high-priced trades to increase their trading volume. Season 1 ends on March 6, 2023, and eligible users can redeem their points for NFTs issued by the Tensor team, known as Tensorians.
In Season 2 of the points program, the Tensor team introduced the concept of “loyalty.” In order to increase the rarity of the NFTs that users earned through points, users were required to avoid listing their NFTs on markets other than Tensor. This standard of rewarding users for market exclusivity later prompted other NFT markets, such as Blur, to adopt similar requirements in their subsequent points programs. As with Season 1, Tensor users who participated in Season 2 were not given details on how to redeem their points, although there was speculation that points for this season might be redeemed for Tensor governance tokens.
Tensor Season 2 ends on July 29, 2023. Points cannot be redeemed for tokens. However, Season 3 of the Tensor Points program ends on April 2, 2024, and does result in an airdrop of the $TNSR governance token. As shown in the chart above, it was during this season that Tensor saw record high transaction volumes. Notably, also in Season 3, the Tensor team introduced additional criteria for user referrals by creating unique referral codes to track referral activity. Much like using points in exchange for loyalty, referral points have become a common standard for many crypto points programs.
To prevent participants from finding ways to exaggerate their earnings, the Tensor team also removed the ability for participants to view how many points they had accumulated in their accounts in real time during Season 3. The off-chain and private accounting model that the Tensor team uses to record user points is a universal norm for all crypto points programs. Points are different from airdrops because they are not issued or recorded on the blockchain, and therefore cannot be obtained, transferred, or redeemed without the permission of the point issuer. This is also why points should not have any monetary value, because technically, these points cannot be used for any purpose other than the purpose set by the issuer.
On April 2, 2024, the Tensor team launched Season 4 of the points program, which is expected to reward users with Tensorian NFTs and Tensor governance tokens. It is not clear when Tensor's fourth points season will end. However, it is important to note that changing the points accumulation criteria may have a negative impact on the project if the results do not meet user expectations. Due to the controversy caused by the TNSR airdrop, the Tensor team modified the criteria for Season 4 to appease the advanced users of its platform.
In summary, the Tensor Points Program describes common criteria for earning crypto points, which generally include but are not limited to:
Use the Platform;
Avoid using other competing platforms;
Direct other users to the platform through referral codes.
The Tensor Credits Program also highlights additional features commonly found in other crypto credits programs. They include:
Off-chain record of accumulated points;
Points redemption details are delayed;
The criteria for accumulating and redeeming points will change each season.
2. Blur Points
A month after Tensor launched its first season of points, Blur, another NFT marketplace built on Ethereum, launched a similar points program. Blur’s points program launched in conjunction with the marketplace’s debut and offers rewards to users who trade on its newly launched platform. Users of other rival NFT marketplaces like Opensea also automatically earn points, which they can add by completing trades on Blur. The Blur team said in the first season of its points program that these points will eventually be redeemable for BLUR tokens, but the team did not specify when or how the points will be redeemed for tokens.
The Blur platform immediately saw high usage in the first few weeks after its launch, with trading volume 4 times that of existing platforms such as OpenSea.
From the launch of Blur in October 2022 to the launch of the BLUR token in February 2023, a total of 360 million points were distributed. The end of the points program in February kicked off a new season of points, which the Blur team specified would focus on users’ “loyalty scores.” As with Tensor, one of the criteria for earning points in Season 2 of the Blur Points Program was that users must not list their NFTs for sale on any other competitor platform. After postponing the end of the points season twice, the Blur team ended Season 2 of the points program in November 2023. It is unclear how many points were distributed to users between February and November. However, at the end of Season 2, 300 million BLUR tokens (worth approximately $107 million at the time) were airdropped to users, with one user redeeming approximately $11.2 million worth of BLUR tokens from the Season 2 points program.
After Season 2, Season 3 of the Blur Points program kicked off, which recently concluded on June 26, 2024. As of July 8, 2024, the platform is in the throes of Season 4. Blur’s development team announced that 500 million $BLAST tokens will be distributed to NFT traders at the end of Season 4. More on the Blast Points program later in this report.
The Blur Points program shares many of the same characteristics as the Tensor Points program. However, not all points programs explicitly state that points will eventually be redeemed for tokens, as we will discuss in the next section of this report on Friend.tech Points.
3. Friend.tech Points
The success of Tensor and Blur's points program has inspired other crypto projects to adopt similar models to encourage user participation. Friend.tech, a decentralized social media app built on the layer 2 (L2) protocol Base, launched in tandem with the points program. The Friend.tech team announced in August 2023 that users would receive airdropped points based on their activity on the platform every Friday for the first six months after the platform's launch. At the time, the team said they would distribute 100 million points between August 2023 and March 2024. The points are expected to have "future uses" on the platform, but it is unclear what the points are specifically used for on Friend.tech. The team said that the accumulation of points is recorded "off-chain" for users, and there is no specific way to earn points other than using their app "as normal."
There are two features of the Friend.tech points program that differ from the Tensor and Blur points programs. First, the Friend.tech development team did not initially indicate that the points earned by users could later be redeemed for dapp-issued tokens. This feature has been mimicked by a few other crypto points programs, such as the points programs of the crypto wallet Rainbow and the re-staking protocol EigenLayer. Both the Friend.tech and EigenLayer points programs eventually launched token airdrops for their users, which will be discussed in detail later in this report. As of July 8, 2024, the utility of points on Rainbow remains unclear. Second, the Friend.tech team did not specify any detailed criteria for earning points, which means that the Friend.tech developers did not use the points program to encourage or discourage certain types of behavior on their dapp, like the Tensor and Blur developers did. Points are primarily used to encourage general engagement with the app by gamifying any and all dapp interactions (i.e. buying/selling/holding other users’ keys or being active in your own Friend.tech chat).
Friend.tech’s growth after its launch in August 2023 has been impressive. Friend.tech’s user base grew 416x in 3 months, and the app generated over $27 million in revenue. However, as the Galaxy Research report states, the driver behind the initial surge in activity was the anticipation of the Friend.tech token airdrop. With no signs of an airdrop from the Friend.tech team in early 2024, user activity temporarily dropped before picking up in late April. On April 26, 2024, the team announced that it had completed a snapshot of user on-chain activity, indicating that the airdrop was imminent.
The FRIEND airdrop officially took place on May 3, 2024, alongside the app’s “V2 upgrade,” which introduced new features such as BunnySwap (a decentralized exchange for Friend.tech assets) and Clubs (a new type of Friend.tech channel that users can co-own with other content creators). According to reports, 81 million FRIEND tokens have been claimed by users since May 3. As shown in the chart below, the token’s price has fallen significantly since its debut:
Due to the opaque nature of crypto points programs, they often create anticipation and expectation for a dapp’s token launch, much like regular airdrops. Whether users are engaging with a dapp for points or airdrops, the motivation for on-chain activity is the same and often short-lived. Points programs do not typically increase user retention or token price stability after the token launch.
4. Blast Points
Blast is an L2 that participates in ETH staking and returns staking rewards to L2 users. Founded by Blur's anonymous creator "Pacman", Blast was announced on November 20, 2023. Along with the unveiling of the project, the Blast team also announced the criteria and timeline for "early access" users to earn Blast points. As the Blast team said in a tweet, "Early access is by invitation only, and everyone who joins will be rewarded with Blast points."
If you are invited to participate in the Early Access Points Program by the Blast team or an existing Early Access Points Program member, you can bridge assets to Blast L2 before the official Blast L2 mainnet launch. Early access users accumulate more points based on the number of times they bridge to Blast and the number of users they invite to the program using their unique referral link.
The Blast Points program shares many similarities with the Tensor and Blur Points programs. All three points programs reward users for engaging with dapps and user referrals. Additionally, all three points programs clearly state how points will be used as part of the criteria for future token airdrops. The Blast documentation states: "50% of the Blast airdrop will be allocated to Blast Points. Your wallet will automatically earn points every block based on your ETH/WETH/USDB balance. This will be reflected in real-time on your Blast.io Airdrop Dashboard."
On February 29, 2024, Blast went live on the mainnet and the early access phase of the points program ended. As shown in the figure below, new deposits to Blast L2 have dropped dramatically to near zero since the end of the early access points program, and there has been a lack of ongoing incentives for points recipients to continue participating in the dapp.
At the end of the Early Access Points Program, the Blast team did not immediately announce further details about the redemption of Blast Points for tokens, such as how many tokens would be issued and the distribution criteria for the other 50% that would be airdropped. On June 26, 2024, the Blast team finally launched the $BLAST token and allowed users to redeem their points for tokens. At the time of writing, Blast is in the throes of its second points season.
It is worth noting that the founders of Blast and Blur have created synergies between the points programs of the two protocols. For Seasons 3 and 4 of the Blur Points Program, Blur users can eventually redeem their points for a certain number of BLAST tokens. As the Blur team stated in a blog post, "Blur Season 4 is powered by the full-stack chain Blast. 500 million $BLAST has been allocated for Season 4. Season 4 will end in June 2025 (a total of 12 months)." Giving out points to users who participate in two different crypto protocols is a practice that we will cover in detail in the next section of this report, the EigenLayer Points Program.
5. EigenLayer integration
The latest points program to drive activity in the crypto space and create an opportunity for other crypto projects to launch their own points programs is Restaking Points. Created by the EigenLayer team, Restaking Points are points awarded to users who lock liquidity (i.e. assets) in the EigenLayer protocol, a restaking protocol built on Ethereum that is currently in the early stages of mainnet launch. Given that there are no tokens or staking rewards in the form of ETH as of April 17, 2024, stakers in EigenLayer are currently earning “Restaking Points.” Like the Friend.tech team, EigenLayer has not yet clarified what Restaking Points will be used for in the future. The team states in its protocol’s terms and conditions of use: “As you use the Services, you may earn certain reputation metrics, points, or other intangible rewards (“Rewards”). Rewards are not and will never be converted into, accumulated into, used as a basis for calculation, or become part of any other token or virtual asset or distribution thereof.” Even so, many speculate that re-staked points will eventually be redeemable for EigenLayer tokens.
EigenLayer, one of the most anticipated crypto projects on Ethereum, has accumulated a total value locked of $14 billion in assets since the protocol first opened deposits on its platform on June 14, 2023.
Over 16% of the total ETH supply staked on Ethereum is locked in EigenLayer. An estimated 131 billion credits have been distributed to stakers in EigenLayer, with over 99% of credits going to a small number of users, most likely third-party liquidity re-staking services. Activity on EigenLayer creates an opportunity for third-party liquidity re-staking services such as Ether.fi, Puffer.finance, and Kelp to create their own credit programs that allow users to earn not only EigenLayer credits, but also credits native to the liquidity re-staking platforms, namely Ether.fi credits, Puffer.finance credits, and Kelp credits.
Each of these additional points programs built on top of EigenLayer points has its own criteria, tracking systems, and conditions. Certain points, such as those earned from the liquidity re-staking protocol Kelp, can be traded directly with other users without the need for a secondary market like Whales Market. Yield tokenization protocols, such as Pendle Finance, also build rails so that users with liquidity re-staking points and other types of points can trade these assets and receive fixed yields in advance before redeeming them on EigenLayer.
Additionally, there are competing restaking protocols (such as Karak) that reward points to users willing to withdraw assets from EigenLayer and deposit them into their competing restaking protocols. The increasing complexity of tracking the points that users earn from various restaking, liquidity restaking, and points trading protocols creates an opportunity for crypto projects like Sentio to focus on new products to track users’ accumulation of points across multiple protocols.
In April 2024, the EigenLayer team launched the first set of node operators (NOs) and active verification services (AVSs) through which users can earn re-staking rewards. While NOs can choose to protect AVSs and users can choose which NOs to entrust their re-staked ETH to, no party currently earns re-staking rewards. In addition, the EigenLayer team also announced details about its token airdrop.
Users can claim EIGEN tokens between May 10 and September 7. It is expected that approximately 83 million tokens will be distributed to users in the first season of airdrops, accounting for 5% of the total initial token supply. The total supply of $EIGEN at launch will be 1,673,646,668.28466 tokens, of which up to 15% of the supply has been reserved for future seasonal airdrops.
It is worth noting that the criteria set by the Eigen Foundation for the distribution of EIGEN do not explicitly mention points. The criteria for claiming $EIGEN are the same as those for earning Eigen points, which means that users with Eigen points will be able to claim a certain number of $EIGEN tokens, but the specific amount is not yet clear. The FAQ for the $EIGEN token also states that for users who stake EigenLayer through certain decentralized finance protocols (such as Pendle and Equilibrium), they will need to wait for Phase 2 of the Season 1 $EIGEN airdrop, and the percentage of the total Season 1 airdrop allocated will be smaller than participants who stake EigenLayer directly and through LRT. This may indicate that the Eigen Foundation is straying from the practice of exclusively using its points program to distribute $EIGEN tokens, and may not distribute them in the same way to all points providers associated with EigenLayer.
Due to strong criticism of the EigenLayer airdrop criteria, the Eigen Foundation modified the details of the airdrop on May 3, 2024. They announced that they would reward 100 tokens on top of the base amount of 10 tokens for eligible users. This is just like the Tensor team modified the details of the Season 4 TNSR airdrop due to unhappy users. As of July 22, 2024, users have claimed 86 million EIGEN tokens through the airdrop. Currently, all tokens are non-transferable.
In addition to the five crypto points programs mentioned above, there are a ton of other crypto points programs. Here’s a summary of other crypto points programs that are set to launch between 2022 and 2024:
For points programs that have not yet enabled redemption tokens, due to applications such as Whales Market and Aevo creating pre-launch points markets, there are cases where points earned on these dapps can be traded on secondary markets for monetary value. Given that Margin.fi and Grass, as well as the other dapps listed above, have not yet released details about the rewards that can be redeemed with points, users can speculate on Whales Market about how much these points may be worth.
Given that points are not on-chain assets and cannot be transferred between blockchain addresses, users are required to deposit collateral equivalent to the value of the points they are trying to buy or sell. Once points are redeemable, sellers on Whales Market transfer the redeemable assets to buyers, who in turn transfer funds to sellers. These transactions are executed through the Whales Market smart contract. After the sale is verified, the collateral of both the buyer and seller is unlocked and transferred to the seller. The value of points on the Whales Market ranges from $0.00 to $6.23.
Points liquidity is extremely poor, and the asking price does not accurately reflect the ultimate market direction after points are converted into tokens. Most of the points products on the whale market are ultimately not filled by bidders, as shown in the share of buy and sell orders executed on the whale market in the table above.
Pros and cons of points
Crypto points programs are a popular way for dapp developers to attract user activity and engagement, especially in the early months after launch and before airdrops. As shown in the case studies above, each crypto points program is unique, albeit with similarities. The criteria for earning points will vary from protocol to protocol, but two common criteria for points are loyalty and referrals. While some crypto points programs explicitly state that points will eventually convert into tokens, others do not. Some have specific criteria for earning points, while others do not. Some will enable users to see how many points they have earned through a custom dashboard that users can link to their crypto wallet address, while others will obfuscate this information until the end of the points season.
Points releases are a more gamified version of airdrop releases, allowing recipients to calculate and measure their participation in blockchain-based protocols. However, points have not achieved much. All the behaviors of airdrop releases are still present in the points program, and little has been done to reduce the uncertainty about when an airdrop will occur and what is required to participate in that airdrop. The process of earning points is as opaque and unpredictable as the process of earning token airdrops.
So while points do further gamify the act of airdrop farming, they do not change the motivations for such activity. Points programs are not popular because they bring new users to the app or engage existing users in new ways. Points primarily take an existing behavior, the airdrop release, and repurpose it to produce more specific behavior on-chain. The underlying motivations for participating in the app have not changed. Users primarily earn points in order to eventually earn tokens, which is part of the reason why the legality of crypto points programs remains unclear.
Legality of points
Part of the reason the legality of crypto points programs is unclear is that the legality of issuing tokens with monetary value to dapp users remains unclear in the United States. While regulators have mentioned Bitcoin as a commodity, and the Securities and Exchange Commission (SEC) said Ethereum was also a commodity in 2018, the SEC has repeatedly refused to confirm Ethereum’s status, nor has it stated that any other cryptocurrency or dapp token is a commodity. Even with the upcoming launch of spot Ethereum ETFs (which will themselves be commodity-based trusts), the SEC has refused to explicitly confirm Ethereum’s commodity status. While the SEC has achieved some clarity for Bitcoin and Ethereum, the SEC has taken increasing enforcement actions against several crypto project founders for conducting unregistered securities sales by issuing new tokens on public blockchains.
In 2018, the primary individuals the SEC charged for securities law violations were those who conducted initial coin offerings (ICOs) before the project launched. In 2018, more than a dozen successful enforcement actions were brought against teams that conducted token sales. These public pre-sales raise obvious regulatory concerns and increase the likelihood that dapps will face SEC scrutiny. However, if a dapp avoids an ICO and instead issues tokens for free to dapp users via an airdrop, it is unclear whether this would also lead to the SEC charging the dapp creator with facilitating an unregistered securities offering. Notably, in SEC v. Ripple, Judge Torres ruled that Ripple’s airdrop of XRP tokens to employees did not constitute a securities offering, as we wrote in our July 14, 2023 newsletter.
On the surface, airdrops appear to fail the first of the three prongs of the Howey test. The Howey test is a framework developed by the U.S. Supreme Court in 1946 to help determine whether a transaction qualifies as an investment contract and should therefore be regulated by the SEC. The three prongs of the Howey test state that a transaction must include:
Money investment.
Common cause.
Reasonable expectation of profit from the efforts of others.
Unlike many ICOs, airdrops are distributed to users for free and do not immediately achieve the first goal, which is the investment of funds. However, as the SEC has stated in multiple filings, including its case against Tomahawk Exploration LLC, the DAO Report, and the DLT Framework Report, tokens distributed to users for free may still constitute a sale or an offer to sell securities.
In its DLT framework report published in April 2019, the SEC stated:
“The lack of monetary consideration for digital assets, such as those distributed through so-called ‘bounty programs,’ does not mean that the investment of funds has not been satisfied. As the Commission explained in the DAO Report, ‘the investment of ‘funds’ need not necessarily be in the form of cash in determining whether an investment contract exists,’ and ‘although Howey refers to an ‘investment of funds,’ it is well known that cash is not the only form of contribution or investment that may create an investment contract.’ … In addition, the lack of monetary consideration for digital assets, such as those distributed through so-called ‘airdrops,’ in which one digital asset is distributed to holders of another digital asset, generally for the purpose of facilitating its circulation, does not mean that the investment of funds has not been satisfied; therefore, an airdrop may constitute a sale or distribution of a security.”
The SEC's above guidance has since been challenged in court. On July 13, 2023, Judge Analisa Torres of the United States District Court for the Southern District of New York ruled that Ripple's airdrop of tokens to employees did not constitute a securities offering because no funds were invested. While this ruling specifically addresses the legality and securities status of airdrops, its applicability is currently limited to the SDNY jurisdiction, and we are not aware of any directly relevant rulings in other jurisdictions. Therefore, it is unclear to what extent airdrops affect the legal status of tokens in the United States, which is why some crypto projects prohibit users with US IP addresses from participating in airdrops or points programs. Once points can be redeemed for tokens through airdrops, the tokens and the points programs used to distribute them may be subject to SEC scrutiny for unregistered securities sales.
Points only have monetary value if they have monetary value. Once points can be redeemed for tokens, there are concerns that these tokens and issuers may violate U.S. securities laws. Issuing tokens under a points program could extend the time between a project announcement and the issuance of the project’s tokens. However, it is unclear how or why implementing a points program before the tokens are issued would change the SEC’s view of the token.
TurnKey Jet No Action Letter
An interesting case of token offerings is that if the value and utility of a token is narrowly defined, it may be possible to circumvent regulatory scrutiny, at least based on violations of securities laws. In this case, the legality of points programs specifically designed to gamify user behavior is a little clearer than the legality of airdrops and ICOs, thanks to guidance provided by the U.S. Securities and Exchange Commission (SEC) to a cryptocurrency-based travel startup back in 2019. In a “no action” letter to TurnKey Jet, Inc., the SEC clarified that tokens issued by the company that met the following conditions were not considered securities:
Funds generated by the Tokens cannot be used to develop the Company’s platform technology (such as its applications).
The tokens will be immediately useful.
The price of the TKJ token will remain fixed at $1.
Buybacks will only be made at a price below the token price.
TurnKey Jet makes no claims that the Tokens have profit potential.
Most points programs do not meet the above criteria. The utility of points is not immediately clear before they are issued on most dapps, and their value cannot be determined until they are redeemed, instead the value of points tends to be highly volatile and speculative on secondary markets. However, for the few points programs that may exist in this industry that do not violate these guidelines and attempt to issue a token that complies with a version of these guidelines tailored to their protocol, they may successfully avoid SEC scrutiny but may cause dissatisfaction among airdrop and points recipients. In addition to securities laws, there are additional consumer protection laws that all points program creators, both crypto and non-crypto, need to be aware of.
Legality of the points program
Another major reason for the murky legality of crypto points programs is that the policies and rules that ensure all points programs are fair in the U.S. remain unclear. Points programs have existed long before crypto projects were introduced. In fact, much of the legal language used by dapp developers to create points program terms and conditions is borrowed from long-standing points program terms and conditions from credit card companies, airlines, and major retail brands.
In recent years, credit card reward programs have been the subject of regulatory scrutiny in the United States. In 2023, the Consumer Financial Protection Bureau (CFPB), the top consumer financial protection agency in the United States, ordered Bank of America to pay more than $100 million to customers because the company withheld bonuses that were clearly promised to credit card customers, among other violations of consumer rights. In March 2024, the CFPB announced that it would once again investigate credit card reward programs to look for evidence of unfair, deceptive, or abusive financial practices.
In announcing the investigation, CFPB Director Rohit Chopra reportedly highlighted the "dark side" of credit card points programs, saying the fine print of these points programs could allow card issuers to revoke rewards or make points difficult to redeem. Chopra said a large number of customer complaints prompted the CFPB to conduct the investigation. Users of crypto points programs are also concerned about withholding points rewards, changing or revoking points criteria, and making it difficult for users to redeem points.
Crypto points programs are more opaque than credit card or retail points programs. When participating in crypto points programs, users often have no guarantees about what rewards points will be awarded or when they will be awarded. In addition, the criteria for crypto points programs change frequently, and sometimes points issuers miscalculate. In these cases, the speculative interest in points generated by the program can lead to disappointment and dissatisfaction among dapp users at the end of the points program. If the points rewards do not meet the expectations of dapp users, it may attract the attention of regulators such as the CFPB, which is already investigating major cases where rewards programs have led to a large number of customer complaints.
The number of dapp users participating in crypto points programs is small compared to the number of participants in credit card rewards programs. However, given the growing number of points programs in the crypto industry and the growing adoption of blockchain-based technologies in general, it is important to carefully consider the legal implications of crypto points programs and their impact on dapps and dapp users.
Based on the legal analysis of points programs in this report, increasing transparency into how points are used in dapps could have a positive impact on such activities in the industry. Requiring users to earn points before they can use them, and hinting at “exciting plans” for points coming soon without mentioning a timeline or committing to sticking to it, could lead to user dissatisfaction and regulatory scrutiny.
Points issuers that do not intend to launch tokens should be particularly wary of the expectations of point recipients who participate in dapps solely for token purposes. Points issuers that have not yet confirmed a points program should consider that points without tokens can be traded on secondary markets such as Whales, Pendle, etc. for monetary value, despite the points issuer's advice otherwise. However, points issuers that are forced to issue tokens at the end of a points season must also consider that doing so may attract scrutiny from the U.S. Securities and Exchange Commission.
Regardless, the legality of points programs (regardless of whether they qualify as airdrops) is uncertain, which is why some points issuers, such as Marginfi, intentionally ban users with US IP addresses from participating in their programs. Regulatory uncertainty has led to a variety of approaches to token issuance and points, so dapp developers and points issuers should proceed with caution when running such programs.
Conclusion
Without the need to confirm the release of tokens, points can be used to encourage user participation in a dapp without the dapp development team having to release details about their tokens, or, if not tokens, to provide alternative reward programs for point holders. One of the earliest examples of a points program in crypto was the Tensor Points Program in 2022, which resulted in users airdropping tokens. Since 2022, points programs have become very common in the crypto industry, used to incentivize user participation and activity in dapps, especially in the early stages of a release. Despite their ubiquity, crypto points programs can vary widely in terms of standards, length, and types of rewards. Most are designed to encourage user loyalty and referrals to a dapp, but some, like Friend.tech Points, are designed to encourage general dapp participation. While all crypto points programs are recorded by the points issuer rather than issued on-chain, some do not even allow participants to know how many points they have accumulated until the end of the points season, such as the third Tensor Points Season. Crypto points programs offer slightly more gamification to airdrop farming activities. However, as with airdrops, it is unclear how U.S. regulators such as the SEC and CFPB view crypto points programs and their legality. Even so, the number of crypto points programs launched by dapp developers is increasing. Even without clear guidance from regulators or lawmakers, innovation and development in the crypto industry are still struggling to move forward.
