It’s been billed as the cryptocurrency trial of the century—the mother of all digital-asset disputes. And the outcome could determine the future of token-based fundraising, as well as the fate of hundreds of ICO-funded startups with coins already in the wild.

The U.S. Securities and Exchange Commission filed suit against the Canada-based messaging app company Kik on Tuesday over its 2017 ICO, which the SEC claims raised nearly $100 million in an “illegal securities offering of digital tokens.”

And though the move was expected, it’s what comes next that has left the $250 billion crypto industry with an unsettling sense of anticipation.

The Commission’s lawsuit against Kik marks the first time that the SEC has charged a company with violating federal securities laws through an ICO, alleging no act of fraud or other wrongdoing, without the accused opting to settle its case. Unlike Airfox, Paragon Coin, Gladius Network, or even Munchee (whose token sale was stopped before it started), Kik has vowed to fight the SEC’s charges until the bitter end.

At issue is the SEC’s interpretation of the Howey test—the nearly century-old, three-pronged measuring stick by which federal regulators determine whether an asset qualifies as a security—as it applies to the sale of digital assets pitched during ICOs.

If Kik stays true to its word, and the lawsuit goes to trial, the SEC’s position on blockchain-based token sales and ICO fundraising will at last get its big-stage courtroom debut.

Whichever way the litigation plays out, this is a watershed moment for the industry.

Lewis Cohen, attorney, DLx Law

This, in itself, is significant, says Drew Hinkes, an attorney at Carlton Fields and Athena Blockchain general counsel. “This is the first opportunity for a well-heeled defendant with sophisticated counsel to test the SEC’s positions in front of a sophisticated judge,” he said.

Whether or not Kik truly “welcomes the opportunity,” as its CEO Ted Livingston recently said in response to the SEC’s lawsuit, the company will get its chance to test the SEC’s stance on the law. “My expectation is that Kik will argue against every single legal interpretation that the SEC has taken in its various consent orders entered with others in the market (i.e. Munchee, Airfox, etc.),” Hinkes said, “and try to get the judge to interpret the law differently.”

Try is the operative word. But there is a growing sense of doubt among the crypto faithful that Kik will eventually prevail.

The case against Kik

In the weeks leading up to SEC’s lawsuit, Kik managed to galvanize a good portion of the crypto community behind its cause. Indeed, beginning in January, when Livingston first revealed to the Wall Street Journal that an SEC enforcement action against his company was probably imminent, Kik initiated a campaign to win crypto hearts and minds.

“If we want that innovation to include the United States we need to start talking about what is happening behind the scenes,” Livingston wrote in a Medium post at the time. “We are all in this together.”

Flash forward to mid-May and Livingston broke the news to CoinDesk that Kik had spent a staggering $5 million just in negotiations with the SEC since late 2017. Soon after, Kik, along with investors and other supporters, announced a crowdfunding campaign to beef up its legal fund by another $5 million called “DefendCrypto.”

The website for DefendCrypto was adorned by some of the biggest names in the business: global financial services company Circle, crypto exchanges Coinbase and ShapeShift, TechCrunch founder Michael Arrington’s XRP Capital, and many others.

The facts the SEC laid out, as long as they can be supported, which seems to be the case, will make this a long, uphill battle.

Marc Boiron, attorney, FisherBroyles, LLP

The SEC’s complaint against Kik would drop just one week later, and the facts alleged by the Commission were much more damning than many observers of the case initially realized. The SEC, as would be expected, painted a very different picture than the one Kik put forth in its public response to the Commission’s Wells notice.

And while some of Kik’s big-name backers continue to affirm their “ideological” support, the outlook now is far less rosy.

“The facts the SEC laid out, as long as they can be supported, which seems to be the case, will make this a long, uphill battle,” said Marc Boiron, an attorney and partner at FisherBroyles, LLP.

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Part of the problem for Kik, said Boiron, is that the company appears to remain focused on what its Kin token is today, rather than what it was when it was sold.

The brain-teasing logic that a digital asset can morph over time from security to non-security, depending on certain factors, stems largely from a speech delivered by SEC Director William Hinman in June 2018. In it, Hinman intimated that Ether and the Ethereum network—though launched through an ICO in 2014—do not currently meet the definition of a security or investment contract, because the network is now “sufficiently decentralized.”

The Ethereum Foundation, the Ethereum network, and ETH holders, it seems, need not fear the wrath of federal regulators for actions that may or may not have been illegal a half decade ago.

Kik, in a sense, is asking the public, the SEC and, soon, a federal court, to view its Kin token in the same forgiving light as Hinman views Bitcoin and Ethereum. Kin is a currency, says Kik, and though it launched through an ICO in 2017, it now plays a crucial role on a decentralized network that is used by “millions of people.” Livingston has gone as far as to say that Kin, in fact, “may be the most widely used cryptocurrency in the world.”

Say what you will about Livingston’s claim, none of it matters, says Boiron—not for this case.

The SEC’s complaint targets alleged violations over the offer and sale of Kin in 2017, he said. “The question is whether Kin was a security at the time of the offer and sale—2017. Therefore, any evidence of what Kin is now has no bearing on what Kin was in 2017.”

In other words, attempting to demonstrate that the Kik ecosystem is now “sufficiently decentralized” to the point where the “expectation of profit” on Kin is no longer based on the “efforts of others” has “no bearing on whether an expectation of profit on efforts of others existed in 2017,” Boiron explained. “The same goes for any other prong of the Howey test.”

If the judge decides to interpret the law differently than the SEC has […] it may impact how token sellers are able to raise funds.

Drew Hinkes, attorney, Carlton Fields

And based on the SEC’s complaint, which presented evidence drawn from social media posts and internal Kik emails that portray the company’s pivot to blockchain as a ploy to revive an ailing business, and the sale of Kin as a way for buyers to “make a ton of money,” it’s going to be hard to convince a court that Kin was sold as anything other than an investment opportunity.

Kin, the SEC alleges, had no purpose for buyers other than a tool for speculative gains. Kik’s only product for Kin owners at the time of the token’s launch, says the Commission, was less than the bare minimum and not quite viable: a decorative sticker of a honey badger donning a ball cap eager to jam.

Kik will argue the facts as presented by the SEC, to be sure, but it may eventually need to convince more than just a judge.

“Even if they can explain the nuances, this is currently slated to be a jury trial,” said Boiron. “Explaining those nuances to a jury could be extremely difficult.”

Desperately seeking clarity

Still, Kik will soon get its opportunity to respond to the SEC’s complaint, which will reveal much more about the precise defense it intends to mount. Based on its Wells response, we can expect Kik to argue that Kin is both a currency, and therefore excluded from securities laws, and that its sale nevertheless does not meet the Howey definition of an investment contract, Boiron explained.

In the end, a favorable outcome for Kik would likely do more for the future of token sales than would a victory for the SEC, said Hinkes. “If the judge decides to interpret the law differently than the SEC has—and it is sustained on appeal—it may impact how token sellers are able to raise funds,” he said.

But, either way it goes, if Kik decides to argue the legal issues that the SEC has drawn from in previous enforcement actions against ICOs, and the court rules on them, “we all win,” said Hinkes. “It will help bring certainty.”

The sentiment is echoed by Lewis Cohen, attorney and cofounder of DLx Law, who said that any definitive advance of the law regarding crypto is ultimately a “net positive.”

“Almost anything definitive is going to be better than just having no idea,” he said. “Whichever way the litigation plays out, this is a watershed moment for the industry, as we start to for the first time truly vet the most important questions concerning the application of securities laws to the sale of tokens and digital assets.”

Cohen cautioned, however, that the wait for such clarity from this case will likely not be a short one: “We’re potentially looking at years before even this one case reaches some final adjudication.”

But, even then, SEC v Kik—if the facts remain the same—will still likely not address the big questions that many observers initially believed were at sake: Do federal securities laws apply to decentralized networks like Bitcoin and Ethereum? Is an ICO token always a security, or can the sale of the token be packaged and marketed in a way that adequately demonstrates that the token is useful and not part of an investment scheme? Can a token experience a Hinman-esque transubstantiation, its essence changed through the sacrament of decentralization?

It’s all very complicated. No one could blame you for getting it wrong.

Except, of course, a judge—or a jury. One of them might.