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

Hiro and Stacks, two startups specializing in building Bitcoin Layer 2 smart contracts and infrastructure tools, are companies centered around the technical needs of developers. Stacks has been expanding its development over the past few years and now constructs L2s that cover Ordinals, BRC-20, Runes, Stacks, and the soon-to-be-launched new sBTC Bitcoin asset.

Stacks stands out in that it extends the functionality of Bitcoin beyond just being a cryptocurrency, becoming the foundation for decentralized applications (DApps) and smart contracts. As Stacks is an ecosystem anchored to the first layer of Bitcoin, the smart contracts it brings to Bitcoin do not alter 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 unattainable. Additionally, since Stacks utilizes Bitcoin as its underlying layer, everything that occurs within the Stacks ecosystem is supported by the most secure blockchain.

SEC’s regulatory standards remain ambiguous and slow-moving

On July 9th, 2024, SEC Assistant Director Amy Gwiazda sent a notification to the Hiro team informing them that the investigation had concluded and she would not recommend the SEC to take any legal action against Hiro and Stacks.

The letter reads as follows:
“We have concluded our investigation of Stacks Blockchain SF4470, and based on the information we have as of now, we do not intend to recommend that the SEC Commission take any enforcement action against Hiro Systems PBC (formerly known as Blockstack PBC).
We are making this determination based on the results of the investigation under Securities Act Section 5310, which states in its final paragraph, ‘Nothing in this section shall be construed as indicating that the person has been exonerated or that no action may ultimately result from the staff’s investigation.’ For more information on Securities Act Section 5310, please refer to the following link: http://www.sec.gov/divisions/enforce/wells-release.pdf.”

After three years of investigation, SEC has seemingly given up on treating technology companies as securities and filing lawsuits against them, despite the existence of securities laws.

Regarding this investigation outcome notification, Hiro stated on X:
“On July 9th, 2024, the SEC Commission notified us of the conclusion of the investigation and their decision not to recommend enforcement action by the SEC. Given the current state of blockchain technology regulation in the United States, this is the best possible outcome that any company in our space can hope for. This outcome reaffirms our commitment to faithfully comply with regulatory compliance and fulfill our mission of supporting developers in innovating on Bitcoin.
Since January 2021, following the launch of the Stacks Mainnet, 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 been continually evolving over the past few years.
We stand by the belief that a clear path and regulatory framework for Bitcoin L2 are necessary in the United States, and we look forward to continuing to have opportunities to help shape policies that 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.”

Prominent Bitcoin commentator Nathaniel Whittemore said on the show, “The U.S. Securities and Exchange Commission has dropped its three-year investigation into the Stacks ecosystem. It’s a good outcome, but the cost is absurd, highlighting how the SEC’s enforcement and regulatory strategies are counterproductive and sluggish.”

SEC has multiple standards regarding whether blockchain is a technology or a security. This time, they have taken a lenient approach to the Bitcoin Layer 2 ecosystem of Stacks, even though it could have been subject to the same interpretation of Securities Act Section 5310. This is in stark contrast to SEC’s relentless pursuit of XRP, which claims to be a blockchain technology company. The litigation between the two parties is still ongoing, but it is evident that SEC cannot define a consistent scale and standards for their actions.

Hiro, SEC, Stacks, Bitcoin Layer 2