Black—Grey—Green: OpenRelay’s Token Vetting Paradigm


When the EtherDelta settlement was announced, many entrepreneurs operating decentralized exchanges and relayers were surprised, and not without good reason. When new technology and regulatory regimes collide, there is often uncertainty about how existing regulation is to be applied, and confusion about what that means on the part of both regulators and the regulated. In the context of EtherDelta and decentralized exchanges generally, the SEC has provided very little guidance about what tokens are likely to constitute securities, and the settlement between EtherDelta’s founder and the SEC didn’t do much to clear things up.

While in the intervening time, legislation to remedy the confusion at its source (by exempting most tokens from SEC oversight) has been proposed, until such legislation is enacted, it is the responsibility of companies that enable decentralized exchange to ensure they are not inadvertently on the wrong side of the law.

So how does OpenRelay plan to avoid becoming a target of adverse regulatory action? Read on to find out.

TL;DR—We will not permit anything remotely security-like to be listed on our order book.

Anyone who follows OpenRelay knows that our master plan isn’t to focus exclusively on supporting finance-inspired token trading platforms. (For those who don’t, check out this post.)

Put simply, when you hear an OpenRelayer mention ‘exchange’, what we mean is ‘medium of exchange’—the metaphorical train tracks on which the All-Human-Economic-Activity-on-Earth Express thunders along. This has always been at the core of our mission, and the uncertain regulatory environment hasn’t changed that. Now, we do see the immediate value of the securities exchange-inspired use case, and we have great respect for the talented teams building user experiences that facilitate it. Before EtherDelta’s travails became public, OpenRelay was sanguine about supporting all modalities of value-for-value exchange, including that one.

However, like all startups, we must adapt to the world around us if we are to achieve our mission.

The way we saw it, we had two options. On one hand, we could attempt to cohere with uncertain regulatory requirements and continue to facilitate the breadth of all possible implementations of a tokenized medium of exchange. On the other, we could restrict how developers are permitted to use OpenRelay, excluding uses that involve the exchange of tokens that are likely to be declared securities. Unfortunately, the only viable option for us is to restrict how OpenRelay may be used (for the time being).

As a small startup, we can’t justify exposing ourselves to uncertain regulatory risk to facilitate securities exchange-inspired use cases. As securities trading comprises a very small fraction of a much larger medium of exchange, we’re not about to risk the entire railroad for one locomotive (even though that locomotive is one of the few in heavy use today). We hate to do it, because we want our developer-friendly, powerful, stable, scalable infrastructure to be available to everyone—regardless of how they want to use it.

We will continue to explore avenues that will enable us to support the securities exchange use case in the future, including advocacy for legislation that clarifies and tailors the regulatory burden to fit the unique advantages and disadvantages afforded by public blockchains and decentralized systems—like OpenRelay—that help developers and entrepreneurs build useful things with it. But until we find a path that doesn’t potentially run afoul of the law, we will not permit anything remotely security-like to be listed on our order book.

So how do we plan to do it?

Excluding securities using terms, Howey-testing, and lists.

We’ve already implemented an updated Terms of Use mechanism that requires makers to cryptographically sign their assent to our Terms of Use, including our no-securities policy, before their account is permitted to create orders. (Learn more about that in this post.)

Our next step is to begin an exhaustive process of Howey-testing tokens to classify them according to a three-class, color-coded paradigm designed to exclude any token that may be deemed a security from OpenRelay. Tokens that are security-like will be blocked from our order book using a blacklist mechanism we are currently in the process of building.

Black-Grey-Green: The colors of our code, and what they mean.

Our classification strategy is to assign a color code to each token we analyze, based on a 3-color system: Black-Grey-Green.

Tokens coded ‘Black’ are those which are likely to be securities given a narrow reading of Howey, or those the SEC has publicly declared to be securities. ‘Grey’ tokens are those that aren’t securities according to a narrow reading of Howey, but might be deemed securities under a creative reading of Howey, assuming the regulatory authority is acting in bad faith. Grey tokens will not be added to the blacklist, but will not be explicitly supported by OpenRelay’s products and services. (For example, our widgets will not list them by default.) ‘Green’ tokens—defined as those that either do not fit an imaginative, bad-faith reading of Howey, or those that the SEC has publicly declared are not securities—will be fully supported by OpenRelay, including in our products and services.

It is important to note that we do not believe the SEC (or any regulatory authority currently trying to make sense of the current wave of decentralized techonology) has ever acted in bad faith, or that it has ever applied an overbroad, imaginative reading of Howey. Rather, we intend to use the abstract idea of a bad-faith regulator as a conservative analytic tool, ensuring that our greenlist contains only tokens that are not securities with a high degree of confidence and certainty.

Priority of Analysis, Publication, and Turnaround Time

Initially, we will classify all tokens as Grey unless they have already been publicly declared securities or not-securities by the SEC (these will go immediately on the appropriate list, Black or Green respectively). From there, we will begin analyzing presumed-Grey tokens, one-by-one, according to a variety of factors, including but not limited to popularity, first-blush likelihood that a token will be black- or greenlisted, and whether the token has been listed on OpenRelay’s order book.

As we have limited time available to conduct these analyses, turnaround times will depend on the quantity and complexity of pending analyses. New analyses will be posted once a month in a special section on our blog, and will also be announced on Twitter.


We’ll be closely watching the progress of pending legislation meant to bring clarity to the regulatory environment in which decentralized applications, including relayers and exchanges, now find themselves. OpenRelay unequivocally supports legislative efforts to ensure innovation in this space isn’t stifled by regulatory uncertainty, or by regulation that doesn’t properly account for the stengths and weaknesses imparted by blockchains, decentralized exchanges, tokens, cryptocurrencies and all the things in between.

Innovation has always found a home in the United States and an ally in her elected leaders. While we don’t expect that to change, at OpenRelay, we believe that the builders of tomorrow’s medium of exchange need the best tools—whether technological, regulatory or otherwise. It is in our DNA to do everything we can to ensure that today’s creators, developers, and dreamers have everything they need to make the most of it, for the benefit of all.

A quick note on what you can do to help.

If you believe as we do, and you want to help, please contact your elected representatives and tell them you support amending the 1933 Securities Act and the 1934 Securities Exchange Act, along with many other relevant statutes, to ensure the United States continues to lead the world by fostering tomorrow’s innovations and innovators.

You can get your elected representatives’ contact info at this website.