Floki: doubts of the Hong Kong SFC on the crypto APY

The Securities and Futures Commission (SFC) of Hong Kong has officially included the staking of the crypto token Floki in its list of suspicious investment products. 

In the page published on the official website of the SFC, it is stated that the Floki Staking Program and the TokenFi Staking Program promoted by the administrators of Floki and TokenFi, The People’s Movement Corp, include token staking services, and these have been included in the official list of suspicious investment products.

These are investment products that have come to the attention of the SFC through requests or complaints, and that have characteristics of “collective investment schemes” (CIS) or “structured products” (SP). 

These products fall under the regulation of the Securities and Futures Ordinance (SFO), but they lack the necessary authorization from the SFC. In such cases, they should not be offered to the public in Hong Kong.

The response from crypto Floki and TokenFi 

Floki and TokenFi promptly responded to these accusations. 

Floki explained how APY is calculated. 

TokenFi has posted a response. 

The team behind the project states that since December they have been working with their legal consultants to clarify and address potential regulatory issues related to their staking programs.

It also states that it has already taken measures to mitigate concerns in those jurisdictions where the regulatory framework does not cover or specifically address staking programs.

Regarding specifically Hong Kong, they declare to have inserted highly visible warnings on the websites related to staking to notify Hong Kong users that they are not eligible to participate in the program, and to have taken measures to prevent residents in that Hong Kong territory from joining.

They also state that, as far as they know, to date there would be no trace of Hong Kong users who have joined the staking program.

The problem of high APY on Floki crypto staking

According to the Floki team, the issue raised by the SFC would be related to a misunderstanding about how staking rewards are generated. 

To tell the truth, however, the SFC had raised another issue, namely the lack of mandatory authorization, but what Floki’s team contests is the inclusion of their staking program in CIS or SP.

In other words, it argues that these investment programs do not fall under the regulated ones for which SFC authorization is required to be sold in Hong Kong. 

They claim to have diligently worked with their consultants since December to ensure that their services are aligned with regulatory standards, particularly regarding their staking programs.

The APY of FLOKI staking is variable: the longer it is left in staking (3 months, 1 year, 2 years, or 4 years), the higher the APY increases. 

The APY is the profit percentage calculated in FLOKI over the standard time period of one year (APY stands for Annual Percentage Yield). 

For a 3-month staking, FLOKI’s APY is 2% per year, for a 1-year staking it is 3%, for a 2-year staking it is 5%, and for a 4-year staking it increases to 10%. 

These percentages, calculated in FLOKI and not in dollars, do not seem at all unusual. 

The real problem

So despite what the Floki team claims, it is unlikely that the SFC has raised an issue related to the alleged excessive staking yield. 

Instead, it seems more like a problem of form, or rather compliance with local laws. 

If, as the SFC claims, this staking program falls within the definition of CIS or SP, then formal authorization is required to sell it in Hong Kong. Selling it without authorization would be illegal. 

So if Floki’s staking service doesn’t have any customers residing in Hong Kong, and if the team doesn’t promote it in Hong Kong, it’s difficult to imagine that they could be prosecuted for any wrongdoing committed in the Chinese special territory. 

However, although the Floki team claims to have stopped promoting the staking service in Hong Kong, the SFC maintains that it continues to be promoted through the websites floki.com, tokenfi.com, staking.floki.com, and staking.tokenfi.com. If these sites are still accessible in Hong Kong, the SFC may request their blocking. 

Is staking an investment product? 

It should be noted that not only in Hong Kong is it necessary to obtain approval from the authorities in order to promote and sell investment products. 

So the key point is: is Floki staking an investment product? 

The problem is that, although it is called staking, it is not real staking. 

In the crypto field, staking is the service that allows you to use your tokens to participate in transaction validation through Proof-of-Stake. 

This service is limited to native cryptocurrencies of Proof-of-Stake based blockchains, and FLOKI is not a native cryptocurrency. In fact, it is not even a cryptocurrency in the strict sense, as it is a token issued on the Ethereum and BSC blockchains. 

Staking on Ethereum is done only with ETH, and on BSC it is done only with BNB. 

The FLOKI staking service is therefore not a real staking service, but a type of investment that promises returns improperly called “staking”. This is a relatively common practice in the crypto field. 

According to the Hong Kong SFC, the service called “staking” by FLOKI is nothing more than an investment product, which involves delivering one’s own FLOKI to the manager in exchange only for a financial return paid out in FLOKI tokens.

To be honest, even ETH staking is considered an investment product by some, if provided by third parties. 

Or putting ETH at stake on your own validator node cannot be considered an investment contract, since there is no counterparty, but entrusting your ETH to a counterparty to put them at stake on your own node may seem like an investment contract. 

The issue, therefore, is more complex than it may seem at first glance, and it is not certain that the SFC in this case may be right.