SEC will not take legal action against Bitcoin layer-two ecosystem Hiro and Stacks.

The foundational development tool for Bitcoin L2, Hiro, announced on X on July 13 that the U.S. Securities and Exchange Commission (SEC) will not take any further legal action against Hiro and Stacks.

The startup companies Hiro and Stacks specialize in constructing smart contracts and infrastructure tools for the Bitcoin layer 2, and are companies that focus on the technical needs of developers. Stacks has been expanding over the past few years, with the L2 it is building covering Ordinals, BRC-20, Runes, Stacks, and the upcoming new sBTC Bitcoin assets.

Stacks stands out in that it extends Bitcoin's functionality beyond just cryptocurrency, becoming the foundation for decentralized applications (DApps) and smart contracts. As Stacks is an ecosystem anchored in the first layer of Bitcoin, the smart contracts it brings to Bitcoin do not change any of Bitcoin's functionalities, including the security and stability that make it so popular.

Stacks dApps are open and modular, allowing developers to build on top of each other's applications and generate functionalities that would otherwise be impossible. Furthermore, as Stacks uses Bitcoin as its underlying layer, everything that happens in the Stacks ecosystem is supported by the most secure blockchain.

SEC Simulates Ambiguous Regulatory Standards

On July 9, 2024, Amy Gwiazda, Assistant Director of the SEC, sent a notice to the Hiro team informing them that the investigation had concluded, and she would not recommend the SEC to file a lawsuit against Hiro and Stacks.

The contents of the letter are as follows:

"We have concluded the investigation into Stacks Blockchain SF4470, and based on the information we currently have, we do not intend to recommend any legal action by the SEC against Hiro Systems PBC (formerly known as Blockstack PBC).

We made this decision based on the results of the investigation under the final paragraph of Securities Act No. 5310, which states 'cannot be interpreted as meaning that the party is innocent or will not ultimately take any action.' For more information on Securities Act No. 5310, please visit the following URL:http://www.sec.gov/divisions/enforce/wells-release.pdf."

After a three-year investigation by the SEC, it is evident that the SEC has given up on treating tech companies as securities for litigation purposes, despite the existence of securities laws.

Bitcoin Layer 2 Development Tools Strive for Compliance

In response to the investigation results, Hiro stated on X:

“On July 9, 2024, the SEC notified us that the investigation had concluded and they do not intend to recommend enforcement action by the SEC. Given the current state of blockchain technology regulation in the United States, this is the best outcome that any similar tech company would hope for. This outcome reaffirms our commitment to faithfully comply with regulatory requirements and fulfill our mission of supporting developers to innovate on Bitcoin.

Since the launch of the Stacks Mainnet in January 2021, the SEC has been investigating Hiro and Stacks blockchain technology. Over the past three years, the Stacks team has provided all relevant information to the SEC and worked to explain how the Stacks network operates and Hiro's role within it.We are proud to be a company centered around Bitcoin developers, and our tools have continued to evolve over the past few years.

We support the belief of developers, and we firmly believe that a clear path and regulatory framework are necessary for Bitcoin L2 development in the United States. We look forward to continuing to have the opportunity to help shape policies to meet the needs of builders of open innovation protocols. The outcome of the Hiro and Stacks investigation fills us with hope for a bright future for Bitcoin and the next-generation internet.”

SEC's Standards Remain Ambiguous, Progress Slow

Renowned Bitcoin commentator Nathaniel Whittemore stated in a program: “The U.S. Securities and Exchange Commission has dropped its three-year investigation into the Stacks ecosystem. While this is a good outcome, the cost is absurd, highlighting how counterproductive and slow the SEC's enforcement regulatory strategy is."

The SEC's standards regarding whether blockchain is a technology or a security are always multi-faceted. This time, with the Bitcoin Layer 2 ecosystem of Stacks network, they have adopted a lenient policy, even though the same interpretation of Securities Act No. 5310 has been passed by the reviewers. The contrast between the SEC's relentless pursuit of XRP, which claims to be a blockchain technology company, and its leniency towards Stacks, is stark. The ongoing litigation between the two parties shows that the SEC cannot grasp a consistent standard in its enforcement and regulatory measures.