Crypto Points Programs

Introduction

This report dives 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 open questions about the legality of points under U.S. law and regulations. An increasing number of blockchain-based applications are incentivizing user activity through points. Points are a gamification mechanism through which users can measure and be rewarded for their activity on decentralized application (dapp) or service according to criteria set by the dapp’s 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 bootstrap users and engagement for the application. Users are incentivized to collect points primarily because they anticipate a future conversion of their points into tokens.

To date, points issued by dapps have no monetary value, while often tokens do. Applications such as non-fungible token (NFT) marketplace Tensor and Blur have used the amount of points that a user holds to determine the amount of tokens they can expect to earn through seasonal token airdrops. However, the issuance of points has not historically offered any guarantee of conversion – or rate of conversion – into tokens or monetary value, which is one of the aspects creating legal uncertainty about issuing points in the U.S. Another reason why the legality of crypto points programs is unclear is because the policies and rules ensuring all points programs in general are conducted fairly in the U.S. remains unclear. This report will also explore the general legality of points programs largely driven by credit card networks and retail brands.

Points in a Nutshell

Points are the next evolution of “airdrop farming.” Airdrop farming refers to using dapps for the express purpose of being rewarded with future tokens for that engagement. Airdrop farmers are often not guaranteed that their usage will translate into token rewards, but years of surprise token airdrops (example: Uniswap and ENS) have led to a large number of individuals using protocols simply based on the assumption that there will be a future airdrop. The proliferation of this type of user activity has caused many crypto services and applications such as OpenSea, MetaMask, Obol, and others, to issue announcements reaffirming their intentions not to launch a token and warning their users against scams falsely advertising fake token launches. In spite of these announcements, there is no shortage of airdrop farmers on these platforms speculating on and demanding a token from dapps that have not yet issued a token.

Historically, airdrop farming has been a lucrative activity in the crypto industry that can result in high payoffs for farmers. Nearly all Layer-2 (L2) protocols on Ethereum have airdropped newly minted tokens to early users, such as those who bridge assets to the L2 or send transactions once there:

• Arbitrum airdropped 1.162bn ARB tokens to users of its platform on September 24, 2023.

• Starknet airdropped 10bn STRK tokens to early contributors of its platform on October 30, 2023.

• Optimism airdropped 10m OP tokens to NFT creators on its platform in a fourth round of airdrops on February 20, 2024.

Airdrops have become ubiquitous in crypto, and not just in the Ethereum ecosystem. The bridging protocol Wormhole and the data availability (DA) platform Celestia are examples of other high-profile crypto projects that conducted airdrops, awarding its users 678m and 60m tokens in native tokens, respectively.

When a project announces their airdrop, they often also unveil the eligibility criteria for the drop, which usually awards early users and/or contributors to the project. In the case of Celestia’s TIA airdrop, which concluded on October 17, 2023, the criteria also rewarded contributors and users of competitor data availability layers to incentivize these users to move away from existing DA solutions such as Ethereum and opt-in to using Celestia as an alternative DA solution. For more information on how the TIA airdrop was akin to a “vampire attack” on the Ethereum ecosystem, read this Galaxy Research newsletter.

Given that the eligibility criteria for an airdrop is usually announced in tandem with the airdrop itself, if a user has not met the criteria by the time the airdrop is announced, they are most likely ineligible for any rewards. To ensure eligibility, airdrop farmers will often engage in all types of activity for an early-stage crypto project which, depending on the nature of the project, may include joining a Discord channel, contributing to a GitHub repository, submitting an on-chain transaction, swapping, bridging, or locking assets on a dapp.

Engagement will usually taper off for a project the longer it goes without confirming an airdrop and unveiling eligibility criteria for the token distribution. This is also true for projects that launch points programs but delay announcements about how points can be redeemed or used on a dapp. Points farming can require users to follow guidelines created by dapp developers and engage with the dapp according to these rules. Through points, developers can explicitly encourage and discourage certain types of user behavior. The gamification of dapp engagement is one of the main benefits of points programs.

However, the main drawback of points programs is their opacity. Crypto points programs often first offer points to users before telling users important details such as how points can be redeemed, for what types of rewards, and when. This often creates even more speculation about a protocol and its potential airdrop than earlier forms of airdrop farming where users had no indication of their standing relative to other users. Further, due to the ambiguous nature of certain points programs, points farming can also be indistinguishable from the activity of airdrop farming.

To take a closer look at these benefits and drawbacks, we will examine the details of five crypto points programs launched between 2022 to 2024, starting with the earliest to launch in this period, Tensor points.

1. Tensor Points

Launched in July 2022, Tensor is a non-fungible token (NFT) marketplace built atop the Solana blockchain. In September 2022, the Tensor team unveiled its points program, one of the earliest of its kind to launch in the crypto space. Points could be earned in Season 1 of the Tensor points program if users achieved at least 500 SOL in NFT trading volume and did not engage in wash trading or high price trades to bulk up their trade volume numbers. Season 1 ended on March 6, 2023, and eligible users could redeem their points for NFTs called Tensorians issued by the Tensor team.

In Season 2 of their points program, the Tensor team introduced the concept of “Loyalty.” To increase the rarity of the NFTs a user could receive from their points, users needed to refrain from listing their NFTs on other marketplaces outside of Tensor. This criterion of awarding users for marketplace exclusivity would later prompt other NFT marketplaces such as Blur to adopt similar requirements for their subsequent points programs. Like in Season 1, Tensor users participating in Season 2 were not given details about how exactly their points could be redeemed, though some speculated that this season the points may be redeemable for Tensor governance tokens.

Tensor Season 2 ended on July 29, 2023. Points were not redeemable for tokens. However, Season 3 of Tensor’s points program ended on April 2, 2024, and did result in a token airdrop of the $TNSR governance token. As indicated by the chart above, it was during this season that Tensor reached new all-time highs for trade volume. Notably, also in Season 3, the Tensor team introduced additional criteria for user referrals through the creation of unique referral codes to track referral activity. Like the use of points for loyalty, points for referrals have since become a common criterion in many crypto points programs.

In an effort to prevent participants from finding ways to inflate their earnings, the Tensor team also removed the ability for participants to see in real-time how many points they were accruing to their accounts in Season 3. The off-chain and private accounting model used by the Tensor team to record user points is a ubiquitous norm across all crypto points programs. Points are distinct from airdrops in that they are not issued or recorded on blockchains, and therefore, cannot be earned, transferred, or redeemed without the permission of the points issuer. This is also why points are not supposed to have any monetary value, seeing as these points cannot technically be used for any purpose outside of the uses set by the issuer.

On April 2, 2024, the Tensor team kicked off Season 4 of their points program, which is expected to award users both Tensorian NFTs and Tensor governance tokens. It is unclear when Tensor’s fourth point season will end. However, it is important to note that changing the criteria for points accrual can create backlash for a project if outcomes do not align with user expectations. Due to controversy about the TNSR airdrop, the Tensor team revised their criteria for Season 4 to appease power users of their platform.

In summary, the Tensor points program illustrates common criteria for earning crypto points which most often include but are not limited to:

• Using the platform

• Refraining from using other competing platforms

• Onboarding other users to use the platform through referral codes

The Tensor points program also highlights additional features that are common across other crypto points programs. They include:

• Off-chain recording for points accrual.

• Delayed unveiling of details for points redemption.

• Changing criteria for points accrual and redemption each season

2. Blur Points

One month after the launch of Tensor’s first season of points, another NFT marketplace built atop Ethereum called Blur launched a similar points program. Blur’s points program coincided with the marketplace’s debut and awarded users for making trades on their newly launched platform. Users of other competitor NFT marketplaces such as Opensea were also automatically awarded points that they could increase by completing trades on Blur. The Blur team was forthcoming in the first season of their points program that these points would eventually be redeemable for BLUR tokens, though the team did not specify when the redemptions would happen or how the redemption from points to tokens would work.

The Blur platform immediately saw high usage in the initial few weeks after its launch, surpassing the trading volumes of incumbents like OpenSea by 4x.

360m points were distributed between Blur’s launch in October 2022 to the launch of the BLUR token in February 2023. The end of the points program in February kicked off a new season for points that the Blur team specified would be focused on a user’s “loyalty score.” Like Tensor, one of the criteria for earning points in Season 2 of Blur’s points program required users not to list their NFTs for sale on any other competitor platforms. After delaying the end of the points season twice, the Blur team ended Season 2 of their 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, 300m BLUR tokens, worth roughly $107m at the time, were airdropped to users, with one user redeeming an estimated $11.2m in BLUR tokens from the Season 2 points program.

The end of Season 2 kicked off Season 3 of Blur’s points program, which recently ended on June 26, 2024. As of July 8, 2024, the platform is in the throes of Season 4. Blur’s development team has announced that 500,000,000 $BLAST tokens will be allocated to NFT traders at the end of Season 4. More on the Blast points program will be explained later in this report.

The Blur points program shares many of the same characteristics as the Tensor points program. However, not all points programs are as explicit about the eventual redemption of points into tokens, as we’ll discuss in the next section of this report examining Friend.tech points.

3. Friend.tech Points

The success of the points program for Tensor and Blur has inspired other crypto projects to adopt a similar model for encouraging user engagement. Friend.tech, a decentralized social media app built on the Layer-2 (L2) protocol Base, was launched in tandem with a points program. The Friend.tech team announced in August 2023 that users would be 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 100m points from August 2023 to March 2024. The points were expected to have “future uses” on the platform but it was unclear what the exact utility of these points will be on Friend.tech. The accumulation of points, the team said, is recorded for users “off-chain” and there are no specific methods for earning points, other than using their app “as you normally would.”

Two characteristics of the Friend.tech points program are unique from both the Tensor and Blur points programs. First, the Friend.tech development team initially made no indication that points earned by users would later become redeemable for tokens issued by the dapp. This is a characteristic that a few other crypto points programs also mimicked, such as the points programs for the crypto wallet Rainbow and restaking protocol EigenLayer. Both the points programs for Friend.tech and EigenLayer did end up unveiling a token airdrop for its users, which will be discussed in greater detail later in this report. As of July 8, 2024, the utility of points on Rainbow remains ambiguous. Second, the Friend.tech team did not specify any detailed criteria for earning points, which means that Friend.tech developers were not using a points program to encourage or discourage certain types of behavior on their dapp like Tensor and Blur developers. Points were primarily used to encourage general participation in 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 was impressive. Friend.tech’s userbase increased 416x in 3 months and the app generated over $27m in revenue. However, as stated in this Galaxy Research report, the driving force behind the initial surge in activity was due to anticipation for a Friend.tech token airdrop. With no sign of an airdrop from the Friend.tech team in early 2024, user activity temporarily dropped off before picking back up in late April. On April 26, 2024, the team announced that a snapshot had been completed of users’ on-chain activity, indicating that an airdrop would soon be forthcoming.

The FRIEND airdrop officially occurred on May 3, 2024 alongside a “V2 upgrade” for the application that introduced new features like BunnySwap, which is a decentralized exchange for Friend.tech assets, and Clubs, which is a new type of Friend.tech channel that users can co-own with other content creators. A reported 81m FRIEND tokens have been claimed by users since May 3. The price of the token has dropped drastically since its debut, as indicated by the chart below:

Due to the opaque nature of crypto points programs, they often create anticipation and expectation for a dapp’s token launch like that of a regular airdrop. Whether users are farming points or engaging generally with a dapp for an airdrop, the motivation for on-chain activity is the same and often short-lived. Points programs do not usually improve user retention or token price stability in the aftermath of a token launch.

4. Blast Points

Blast is an L2 that participates in ETH staking and returns staking yield to L2 users. Founded by “Pacman”, the pseudonymous creator of Blur, Blast was announced on November 20, 2023. With the unveiling of the project, the Blast team also announced the criteria and timeline for which “early access” users could earn Blast points. As stated in a tweet by the Blast team, “early access is invite only and everyone who joins will be rewarded with Blast Points.”

If you were invited to participate in the early access points program either by the Blast team or an existing early access points program member, you could bridge assets to the Blast L2 before its official mainnet launch. Early access users accrued more points based on how much they bridged to Blast and the number of users they invited to join 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 interacting with the dapp and user referrals. Also, all three points programs are explicit about how points will be used as part of the criteria for a future token airdrop. The Blast document states: “50% of the Blast Airdrop is allocated to Blast Points. Your wallet will earn Points automatically every block based on your ETH/WETH/USDB balance. This is reflected in real time on your Blast.io Airdrop dashboard.”

On February 29, 2024, Blast went live on mainnet, and the early access phase of the points program ended. As indicated in the chart below, new deposits into the Blast L2 decreased dramatically to near zero since the end of its early access points program and the lack thereafter of continued incentives for points farmers to continue engaging with 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 into tokens such as how many tokens will be issued and the allocation criteria for the other 50% of the forthcoming airdrop. On June 26, 2024, the Blast team finally launched the $BLAST token and allowed users to redeem their points for the token. At time of writing, Blast is in the throes of its second points season.

Notably, the founder of both Blast and Blur created synergies between the two protocols’ points programs. For both Season 3 and 4 of the Blur points programs, Blur users could expect an eventual redemption of points into some amount of BLAST tokens. As stated in a blog post written by the Blur team, “Blur Season 4 is powered by Blast, the Fullstack Chain. 500,000,000 $BLAST has been allocated to Season 4. Season 4 ends in June 2025 (12 months total).” The issuance of points to users for their participation in two different crypto protocols is a practice that we will discuss in more detail in the next section of this report detailing the EigenLayer points program.

5. EigenLayer Points

The most recent points program that has fueled activity in crypto and created opportunities for other crypto projects to launch points programs of their own is restaked points. Created by the EigenLayer team, restaked points are points awarded to users that lock in liquidity (i.e. assets) into the EigenLayer protocol, a restaking protocol built on Ethereum that is in the early phases of mainnet launch. Given that there are no tokens or staking rewards in the form of ETH to earn as of April 17, 2024, stakers in EigenLayer are presently earning “restaked points.” Like the Friend.tech team, EigenLayer has not explicitly stated what utility restaked points will have in the future. The team states in the terms and conditions of using their protocol, “In your use of the Services, you may be attributed certain reputation indicators, points, or other intangible rewards (“Rewards”). Rewards are not, and may never convert to, accrue to, be used as basis to calculate, or become any other tokens or virtual assets or distribution thereof.” Even so, many speculate that restaked points will eventually become redeemable for EigenLayer tokens.

As one of the most highly anticipated crypto projects being built on Ethereum, EigenLayer has amassed $14bn worth of assets in total value locked since launching on June 14, 2023, when the protocol first opened deposits into its platform.

Over 16% of total ETH supply staked on Ethereum is locked in EigenLayer. An estimated 131bn points have been distributed to stakers in EigenLayer and more than 99% of this points supply has been issued to a small handful of users, most likely third-party liquid restaking services. The activity on EigenLayer has created opportunities for third-party liquid restaking services such as Ether.fi, Puffer.finance, and Kelp to create points programs of their own that not only earn users EigenLayer points but also points that are native to the liquid restaking platform, i.e. Ether.fi points, Puffer.finance points, and Kelp points.

Each of these additional points programs built atop EigenLayer points has their own criteria, tracking system, and conditions. Certain points such as the points earned from liquid restaking 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 has also set up rails so that users with liquid restaking points, among other types of points, can trade these assets and receive a fixed yield for them in advance before they become redeemable on EigenLayer.

Also, there are competing restaking protocols to EigenLayer such as Karak that are awarding points to users willing to withdraw their assets from EigenLayer and deposit it into their competing restaking protocol. The compounding complexity of tracking points earned for users from various restaking, liquid restaking, and points trading protocols has created opportunities for crypto projects like Sentio to specialize in new products to track a user’s points accumulation across multiple protocols.

In April 2024, the EigenLayer team unveiled the first set of Node Operators (NOs) and Actively Validated Services (AVS) through which users can earn restaking rewards. While NOs can opt-in to securing AVS and users can choose to which NOs they delegate their restaked ETH, no parties are currently earning restaking rewards. Further, the EigenLayer team also announced details about their token airdrop.

The token, EIGEN, is eligible for users to claim between May 10 and September 7. Roughly 83m tokens, 5% of initial total token supply, are expected to be allocated to users in the first season of the airdrop. The total supply of $EIGEN at launch will be 1,673,646,668.28466 tokens and up to 15% of this supply has been reserved for distribution through future seasonal airdrops.

It is important to note that the criteria set out by the Eigen Foundation for the distribution of EIGEN does not explicitly mention points. The criteria for claiming $EIGEN do include the same criteria for earning Eigen points, which suggests that users that have Eigen points will be able to claim some amount of the $EIGEN token, but it is not clear exactly how much. The FAQ for the $EIGEN token also states that for users who had staked to EigenLayer through certain decentralized finance protocols such as Pendle and Equilibrium will need to wait for Phase 2 of the Season 1 $EIGEN airdrop and will be allocated a smaller percentage of the total Season 1 airdrop than participants who staked directly with EigenLayer and via LRTs. This may suggest that the Eigen Foundation is taking liberty to deviate from exclusively using their points program to distribute the $EIGEN token and may not distribute it in the same way to all EigenLayer-related points providers.

Due to intense criticism over EigenLayer’s airdrop criteria, the Eigen Foundation revised details about their airdrop on May 3, 2024. They announced they would award an additional 100 tokens to the base amount of 10 tokens for eligible users. This is like how the Tensor team revised details for their Season 4 TNSR airdrop due to disgruntled users. 86m EIGEN tokens have been claimed by users through the airdrop as of July 22, 2024. For now, all tokens are non-transferable.

Aside from the five crypto points programs mentioned above, there are a plethora of other crypto points programs. Below is a summary of other crypto points programs launched between 2022 and 2024:

For points programs that have not yet enabled redemptions into tokens, there are instances where points earned on these dapps can be traded on secondary markets for monetary value thanks to the creation of pre-release points markets by applications like Whales Market and Aevo. Given that Margin.fi and Grass among other dapps listed above have not released details about the rewards that can be redeemed from points, users can speculate on Whales Market about what these points may be worth.

Given that points are not on-chain assets and cannot be transferred between blockchain addresses, users deposit collateral equivalent to the value of points they are trying to buy or sell. Once points become redeemable, sellers on Whales Market transfer the redeemable assets to the buyer, and the buyer transfers their funding to the seller. These transactions are executed through the Whales Market Points Market smart contract. After the sale is verified as complete, both the buyer's and seller's collateral are unlocked and transferred to the sellers. Points on Whales Market range from a value anywhere between $0.00 to $6.23.

Points are highly illiquid and asking prices are not an accurate reflection of where the market may eventually go if points do convert to tokens. Most points offerings on Whales Market do not end up being filled by bidders, as indicated in the table above by the share of buy and sell orders filled on Whales Market.

The 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 an airdrop. As illustrated by the case studies above, each crypto points program is unique, though there are similarities. The criteria to earn points will differ depending on the protocol, though two common criteria for points are loyalty and referrals. While some crypto points programs are explicit about the eventual conversion of points into tokens, others are not. Some have specific criteria for earning points, while others do not. Some will enable users to see how much they are earning in points through customized dashboards that users can link to their crypto wallet addresses, while others obfuscate this information until the end of a points season.

Points farming is a more gamified version of airdrop farming that allows farmers to calculate and measure their engagement in a blockchain-based protocol. However, points do not achieve much beyond this. All the behaviors of airdrop farming still exist with points programs and almost none of the uncertainty about when an airdrop will occur and what is needed to participate in that airdrop is reduced. The process of earning points is equally as opaque and difficult to predict as the process of earning token airdrops.

Thus, while points do further gamify the behavior of airdrop farming, they do not change the motivation for this activity. The reason why points programs are popular is not because they bring in new users to applications or engage existing users in new ways. Points are primarily taking an existing behavior, airdrop farming, and repurposing it to result in more specific behaviors on-chain. The underlying motivation for engaging in the application has not changed. Users are primarily earning points to eventually earn tokens, and this is part of the reason why the legality of crypto points programs remains unclear.

The Legality of Points

Part of the reason why the legality of crypto points programs is unclear is because the legality of issuing tokens with monetary value to dapp users remains unclear in the U.S. Though regulators have mentioned that Bitcoin is a commodity, and the U.S. Securities & Exchange Commission (SEC) suggested ether was also a commodity in 2018, the SEC has repeatedly declined to confirm ether’s status and has not stated that any other cryptocurrency or dapp token is a commodity. Even with the impending launch of spot-based Ether ETFs, which themselves will be commodity-based trusts, the SEC continues to refuse to explicitly affirm Ether’s commodity status. Despite some clarity, though, for Bitcoin and Ether, the SEC has brought an increasing number of enforcement actions against several crypto project founders for conducting unregistered sales of securities by issuing new tokens on public blockchains.

In 2018, the primary individuals charged by the SEC for violating securities laws were those who conducted initial coin offerings (ICOs), sales of tokens before the launch of the project. More than a dozen successful enforcement actions were made against teams conducting token sales in 2018. These public pre-sales raise clear regulatory concerns and increase the likelihood that a dapp will face scrutiny from the SEC. However, if a dapp avoids an ICO and instead issues tokens for free to dapp users through an airdrop, it is not clear whether this may also lead to charges against the dapp’s creators by the SEC for 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.

At face value, airdrops do not appear to fulfill the first prong of the three prongs of the Howey test. As background, the Howey Test is a framework outlined by the U.S. Supreme Court in 1946 to help determine whether a transaction qualifies as an investment contract and should therefore be regulated as such by the SEC. The three prongs of the Howey test state that the transaction must include:

1. An investment of money.

2. In a common enterprise.

3. With reasonable expectations of profits from the efforts of others.

Unlike many ICOs, airdrops are distributed to users free of cost and do not immediately appear to fulfill the first prong, an investment of money. However, as stated by the SEC in multiple documents including their case against Tomahawk Exploration LLC, the DAO report, and DLT framework report, tokens distributed free of cost to users may still constitute a sale of or an offer to sell securities.

In the DLT framework report published in April 2019, the SEC states:

“The lack of monetary consideration for digital assets, such as those distributed via a so-called ‘bounty program’ does not mean that the investment of money prong is not satisfied. As the Commission explained in The DAO Report, ‘[i]n determining whether an investment contract exists, the investment of ‘money’ need not take the form of cash’ and ‘in spite of Howey’s reference to an “investment of money,” it is well established that cash is not the only form of contribution or investment that will create an investment contract.’ … Further, the lack of monetary consideration for digital assets, such as those distributed via a so called ‘air drop,’ does not mean that the investment of money prong is not satisfied; therefore, an airdrop may constitute a sale or distribution of securities. In a so-called ‘airdrop,’ a digital asset is distributed to holders of another digital asset, typically to promote its circulation.”

The above guidance by the SEC has since been challenged in a court of law. On July 13, 2023, Judge Analisa Torres of the U.S. Southern District of NY Court ruled that Ripple’s airdrops of tokens to employees did not constitute securities offerings because there was no investment of money. While this ruling specifically addressed 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. Thus, it remains unclear the extent to which an airdrop impacts the legal status of tokens in the U.S., which is why some crypto projects bar users with U.S. IP addresses from participating in an airdrop or points program. As soon as points are redeemable for tokens through an airdrop, the tokens and the points program used to distribute them may result in scrutiny by the SEC for being an unregistered sale of securities.

Points have no monetary value until they do. As soon as points can be redeemed for tokens, there are concerns that these tokens and the issuer may be violating securities laws in the U.S. The fact that a token is distributed based on a points program may extend the period between when a project is announced and when a project’s token is launched. However, it is not clear how or why a points program preceding the issuance of a token would change the SEC’s view on said token.

TurnKey Jet No Action Letter

One curious example of a token distribution that may circumvent scrutiny from regulators, at least based on violations to securities laws, is if the token’s value and utility is narrowly defined. In this case, the legality of points programs exclusively designed to gamify user behaviors is somewhat clearer than the legality of airdrops and ICOs due to guidance shared by the SEC back in 2019 to a crypto-based travel startup. In a “no-action” letter to TurnKey Jet, Inc., the SEC explicitly states that tokens issued by the company that fulfill the following conditions are not considered securities:

• Token-generated funds cannot be used to develop the company's platform technology (such as its app).

• The tokens will be immediately useful.

• The TKJ tokens will remain at a fixed price of one U.S. dollar.

• The tokens can only be used for air charter services.

• Repurchases will only be made at a discount to the token.

• TurnKey Jet will not represent the tokens as having profit potential.

Most points programs do not fulfill the above criteria. The utility of points is not immediately made clear before they are issued on most dapps and their value before they can be redeemed is not fixable, rather the value of points is oftentimes highly volatile and speculative on secondary markets. However, for the minority of points programs that may exist in this industry that do not violate these guidelines and seek to issue a token that fulfills a version of these guidelines tailored for their protocol, they may successfully sidestep scrutiny from the SEC, but likely to the disgruntlement of airdrop and points farmers. Aside from securities laws, there are additional consumer protection laws that all points program creators, crypto and non-crypto, need to be aware of.

The Legality of Points Programs in General

The other major reason why the legality of crypto points programs is unclear is because the policies and rules ensuring that all points programs in general are conducted fairly in the U.S. remains unclear. Points programs have existed long before they were introduced by crypto projects. In fact, much of the legal language dapp developers used to create the terms and conditions for their points programs is borrowed language from the terms and conditions of longstanding points programs by credit card companies, airlines, and major retail brands.

In recent years, credit card rewards programs have been the subject of regulatory scrutiny in the U.S. In 2023, the top U.S. agency for consumer financial protection, the Consumer Financial Protection Bureau (CFPB), ordered Bank of America to pay more than $100 million to customers for withholding reward bonuses explicitly promised to credit card customers, among other violations of consumer rights. In March 2024, the CFPB announced that it would be once again investigating credit card reward programs for evidence of unfair, deceptive, or abusive financial practices.

When announcing the investigation, Rohit Chopra, director of the U.S. CFPB, reportedly highlighted the “darker side” of credit card points programs, saying that the fine print of these points programs can allow card issuers to revoke rewards or make points difficult to redeem. An influx of customer complaints is what has led the CFPB to conduct this investigation, according to Chopra. The concerns about withholding rewards for points, changing, or revoking the criteria for points, and otherwise making points difficult for users to redeem, could be equally valid concerns raised by users of crypto points programs.

Crypto points programs, more so than credit card or retail points programs, are opaque. When participating in a crypto points program, users often have no guarantees about what rewards will be given for points or when. Further, the criteria for a crypto points program is often in flux and at times, erroneously calculated by the points issuer. In these cases, the speculative interest in points created by the program may lead to disappointment and disgruntlement in dapp users when the points program ends. If the rewards for points fall short of the expectations of dapp users, it may catch the attention of regulators like the CFPB who are already investigating major cases where rewards programs have resulted in large numbers of customer complaints.

Compared to the number of participants in credit card rewards programs, the number of dapp users participating in crypto points programs is small. However, given the rising number of points programs in the crypto industry and the growing adoption for blockchain-based technologies in general, carefully considering the legal implications of crypto points programs, their impact on dapps, and dapp users is important.

Based on the legal analysis of points programs in this report, increased transparency about how points will be used in a dapp may be a positive improvement for this type of activity in the industry. Requiring users to first earn points before they can use them and suggesting that “exciting plans” for points is coming up without any mention of a timeline or commitment to keep that timeline may lead to disgruntled users and regulatory scrutiny.

Points issuers that do not intend to launch a token should especially be wary of the expectations of points farmers that get involved in a dapp solely for tokens. Points issuers that have yet to confirm plans for their points should consider that points without tokens can be traded on secondary markets such as Whales, Pendle, and others for monetary value, despite recommendations otherwise by points issuers. However, points issuers that are compelled to issue a token at the end of a points season must also consider that doing so may encourage scrutiny from the SEC.

Either way, the legality of points programs, whether they become airdrops or not, is uncertain, which is why some points issuers like Marginfi have intentionally barred users with U.S.-based IP addresses from participating in their programs. The lack of regulatory clarity has led to a wide variety of approaches to token issuances and points, so dapp developers and points issuers should use caution when conducting such programs.

Conclusion

Instead of confirming the launch of a token, points can be used to encourage engagement in a dapp before the dapp development team unveils details about their token or, if not a token, an alternative rewards plan for rewarding points holders. The Tensor points program in 2022 was one of the earliest examples in the crypto space of a points program leading to an airdrop of tokens for users. Since 2022, points programs have become prolific in the crypto industry for incentivizing user engagement and activity in a dapp, especially in the early stages of launch. Though ubiquitous, crypto points programs can differ drastically in terms of criteria, length, and types of rewards. Most are designed to encourage user loyalty in and referrals for a dapp, though some like Friend.tech points are designed to encourage general dapp participation. While all crypto points programs are recorded by the points issuer and are not issued on-chain, some points programs do not even allow participants to know how many points they have accrued until the end of a points season like in the case of the third Tensor points season. Crypto points programs offer slightly more gamification to the activity of airdrop farming. However, like airdrops, it is unclear how U.S. regulators like the SEC and CFPB view crypto points programs and their legality. Even so, the number of crypto points programs launched by dapp developers is rising. Even without clear guidance from regulators or lawmakers, innovation and evolution in the crypto industry trudges onward.