On June 19, 2022 a second vote was held by the governance board through its voting protocol to invalidate the previous days’ vote which permitted the board to seize control of and liquidate through the OTC markets, a certain whale account which apparently poses a systemic risk to the Solana protocol in the event that it is liquidated, which action may cause a catastrophic collapse in SOL price.
The question we are asking here is; is this actually legal and or advisable from an issuer’s point of view?
The second vote was held due to an outcry from the Solana community complaining that this type of seizure defeats the entire purpose of what cryptocurrency is and ideally should be, in addition to potentially being illegal. The second vote received nearly 1.5mn votes and did indeed invalidate the previous day’s vote to seize the whale account.
Would seizure of the whale account be legal, as in potentially a criminal act? In other words, would the seizure be potentially considered ‘theft’ which may be encompassed under ‘larceny’ ‘misappropriation’ or ‘embezzlement’. That would be unlikely, as the governance bylaws govern the relationship between token holders and the centralized governance board. If the private contract between the board and token holders permit the emergency seizure of accounts to prevent catastrophe, then any buyer/holder of SOL would be subject to that private contract. If there is no such disclosure, which this Firm has not looked at Solana’s governing documents, then there is an argument that criminal charges may be pressed against Solana’s board for the unauthorized taking of private property without intent to return it (Theft). Once issued and in a buyer’s possession SOL belongs to that party, and not to Solana management; the token becomes personal property. Just because a supposedly democratic vote has occurred approving seizure of tokens, even in a potentially emergency situation, does not mean that the taking and selling of an owner’s tokens is legal. American law requires that an Americans’ right to property may not be arbitrarily deprived without due process; which means notice, an opportunity to be heard and present his/her case in defense, and presentation of evidence before an impartial tribunal.
Would the confiscation of a private account and its liquidation subject Solana to civil liability? Again, it depends on the governing bylaw disclosures of the Solana protocol. If the bylaws permit seizure of account then private agreement would likely govern since purchasing SOL is a voluntary activity that subjects the purchaser to the user agreement, much like the user of any giver website is subject to the site’s TOS. There is potential that in any case, the whale can sue Solana in civil court for various conversion claims and Solana would likely fold after such a protracted litigation. This would certainly be a case of first impression and it would be years until a final court decision would be rendered as it winds its way through appeals, in the meantime Solana could still suffer catastrophic withdrawals by other holders who may become disenchanted with the promise of freedom from the banking system, and the fear/threat of seizure may doom the entire protocol to the same extent as actual seizure and liquidation would.
Solana management appears to be in a no-win situation and should have an emergency meeting, much like a corporate board, and implement some type of measures to safeguard the integrity of the SOL token. A solution could be anything such as insurance, asset backed collateral, more financing, increasing liquidity/interest rates, or any other number of creative measures such as encoded limitation of liquidation amounts. The point here is that seizure of private accounts is antithetical to the very idea of what crypto-assets are and if it actually occurred it might cause the entire market to lose trust in the industry, regardless of whether a given token is centralized or not. Solana would be wise to implement in its next vote a proposed protocol which would prohibit any seizure by Solana’s management of any user’s private property tokens.