Pangolin and Ava Labs Relationship

@xing asked me a question in another thread regarding the relationship between the Pangolin platform (currently decentralised) and Ava Labs so I think it’s worth exploring some of the issues related to that because they are not insigificant and will have long term implications for Pangolin that aren’t necessarily apparent to most people.

Last week I held a small presentation for some interested devs to go over the regulatory issues that I think Pangolin will face and how these regulatory challenges are affected by the involvement of Ava Labs staff, both in terms of their contributing code and technical support the the broader support and promotion offered by Ava Labs execs,

Before I dig in, I should say that this isn’t intended as legal or investment advice to anyone - it’s just my opinion having worked as a lawyer in the tech and crypto space for a long time. If you think this affects you or your investment, please seek out specialist legal, tax and accounting advice in your home country.

There are 2 main trends happening in this space that are relevant here:

  1. Greater pressure for capital formation and capital raising to be conducted in a regulated fashion in order to protect retail investors; and
  2. Increasing scrutiny into the ways crypto and decentralised projects enable money laundering, tax avoidance and terrorist financing.

Both 1 and 2 become a more serious concern when established businesses get tangled up with the platform in any way. The reason for the increasing risk is simple: it gives regulators a target.

  1. Securities Laws

There’s at least one good reason why Ava Labs didn’t market AVAX to the US market during the initial sale - they would have been justifiably concerned about having to register the sales under the Securities Act. Kik, Telegram, Ripple and dozens of other projects have been prosecuted for not registering token sales. There might be other reasons as well, but I’m pretty sure that’s a big one. Registration isn’t a bad thing per se but it’s costly and requires a prospectus as well as ongoing monitoring, reporting and compliance obligations. The recent explosion of SPACs in the US is part of this trend to side-step compliance because it’s a pain and costly too. And that’s before I get to the increased exposure to securities fraud class actions that usually follow many successful start-ups who go public.

Some of you might say - but Pablo, PNG isn’t sold by Ava Labs so why worry? There’s not much clarity in the space regarding governance tokens and DEXs and I don’t intend to conduct a deep dive into securities laws around the world but when we consider that (i) PNG is being purchased as an investment, (ii) there are elements of horizontal and vertical commonality between investors, devs and Ava Labs (iii) PNG relies today on the involvement of Ava Labs and (iv) Ava Labs still appears to hold the keys to Treasury, PNG starts moving into investment contract territory.

Moreover, the greater the role played by Ava Labs staff and the greater the reliance the community has on that support, the greater the risk PNG would be viewed as a securities offering in the US and other jurisdictions. Again, that’s not absolutely certain and fixed but the risk is not simply theoretical. We are heading in that direction and we, the community, need to address it.

  1. FATF

Some of you have probably seen the reporting of the Financial Action Task Force (FATF) attempting to extend VASP (Virtual Asset Service Provider) obligations to DEXs and DApps. I won’t analyse it completely here other than to say that the types of measures the FATF recommends platforms consider include the following:

  • How they might limit volume or size of transactions;

  • Developing KYC programs;

  • Considering how organizational and operational complexity enables money laundering and terror financing;

  • Where the VASP is registered and whether they are operating in a cooperative jurisdiction (instead of small tax havens with minimal oversight);

  • Whether VASP implements the ‘travel rule’ or not (i.e. being able to keep records of senders and receivers of transactions;

  • The specific types of tokens and services that a platform offers or plans to offer and any unique features such as embedded mixers or tumblers;

  • VASPs’ interaction with smart contracts that may be used to conduct transactions.

The FATF recommendations in relation to DEXs and DApps are only draft at this stage and not yet law in any country but they indicate what member nations anticipate the regulatory environment to look like in the near future (i.e. 12-18 months). Over 200 countries and jurisdictions are parties to the recommendations


We already know that it will be extremely difficult to regulate DEXs. But that won’t stop countries trying. I believe that most, if not all, DEXs that want to be recognised by institutional investors will need to get their houses in order. That could take many forms - industry self-regulation or codes of conduct or even a formal association of DEXs banding together to shape policy and increase awareness and recognition.

However, in the meantime we have a more pressing and difficult question: what role can Ava Labs play in the ongoing development and growth of Pangolin that doesn’t expose them and/or Pangolin to regulatory consequences down the track? On a very basic level, I think that means solving the ownership of the Treasury keys. It also means that we need better rules of engagement with Ava Labs staff.

If that’s not acceptable, Ava Labs will probably end up being viewed as “owners” of the Platform along with the consequences that flow from that. I’m sure no one wants to see that either.

Regulations are coming so there’s no point sticking our heads in the sand. I am convinced that the better approach is to prepare for the coming regulatory environment as we enter widespread adoption. Not only is this a prudent business move but it provides Pangolin an important market differentiator and a significant competitive advantage.


@Pablo. Thank you. TL;DR
In essence, I copy paste one sentence of you:
…“On a very basic level, I think that means solving the ownership of the Treasury keys. It also means that we need better rules of engagement with Ava Labs staff.”…

I am sure that AvaLabs had the intention to support a community based approach for Pangolin from scratch but I understand your concerns and it is crucial to raise them if they do really exist or not. As I am not too much into these topics, are you able to dive deeper into the ownership of the treasury keys and depict the current relationship to AvaLabs. Cheers.

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One thing is for sure, the treasury keys should never ever be in the hands of an anonymous. Let’s leave them at AVA labs for now.

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I agree that having anon owners of the Treasury keys would be extremely problematic. But other really large DeFi projects have managed with multi-sig wallets that include anon devs. I’m thinking of people like Banteg and others in the space.

My point is that owership of the keys by Ava Labs is also deeply problematic. Not because I’m at all concerned with their use of the funds (I’m not) but simply the owernship and stakeholder links between Ava Labs and Pangolin will become important elements down the track should regulators or investors take action against Pangolin or the devs.

I actually don’t know who holds the keys today. I have to assume it’s someone at Ava Labs. They released the first version of the Pangolin code so they keys would have to be with them until a governance decision is taken to change the code and move the keys to multi-sig.

It’s probably best to simply burn the treasury.

That has been proposed before along with the proposal to burn the surplus from the airdrop. I am strongly against both proposals.

While one could argue that trading fees could be enough to sustain Pangolin, it would be utter madness to simply destroy any asset (in this case, the Treasury Fund). The better approach is to assess the risk and find a solution that allows the Treasury to be protected for long term development goals.

I think these are fair doubts and need to find a long term path @BobbyC @Pablo. On the other side, are we able as Pangolin community to move forward and do we have a strong leadership team? I have no clue who is working full time on this project and I assume that AvaLabs is dedicating its time helping Pangolin getting on its feets. Thus, I don’t get your doubts @Pablo. In other words, would Pangolin exist without AvaLabs first and second as long as a clear roadmap is described - as well possibly embedded in the smart contract - where is a real issue? Starting with these keys and access to them, who can we ask to find out? In case it would be AvaLabs, do you really want the community having them (@BobbyC I assume multisig exists)? Who is the community and what is its responsibility? Even more important who is working on the issues of Pangolin platform and do they have necessary support to make things happen? I think the claim is clear to be truly decentralized and a community driven project but any project in life has also a strong leadership team. Who is that?

I also believe that this factor is game changer.

Here is an idea; Let’s create a treasury topic and discuss with people.I will open ac discussion How to manage Treasury Funds? Let’s Brainstorm".

@Pablo I also want to ask a question to you since you’re experienced about regulations and I want to know that, what if we can start with USA but some other countries like Turkey? There are lots of CEX and they have regulated already via government as business. Thus they are legislated platforms via KYC. But, one can open account and trade without KYC with limited withdrawl permissions. Do you think is trying to legislate a DEX worth to dig in in other countries rather than USA?

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Even if there was a decision by the community to establish some form of organisation to support Pangolin, the only realistic alternatives to the US that I can see are countries like Switzerland, Singapore or the UK.

All have globally respected dispute resolution and arbitration forums, are all focal points for global finance and trade, they rank highly on the Transparency and Corruption Index ( and provide reasonably stable and predictable regulatory environments.

Each of these jurisdictions is well advanced in terms of their providing guidance in relation to cryptocurrencies and related projects. There are still gaps with regard to DEXs such as Pangolin so it’s too soon to say how countries are likely to respond given the lack of KYC and AML measures on a DEX.

I’ve commented before that when the Libra Foundation decided to set up, they chose Geneva over other all the options. That was noteworthy in my book.

I will admit that I haven’t followed Turkey’s regulatory environment closely and while there are rumours that the Turkish Government is expected to introduce laws covering crypto, this has not yet occured: Will Cryptocurrencies Be Regulated In Turkey Soon? - Technology - Turkey

Even if Turkey did introduce laws, they are likely to sidestep the issue of DEXs and DApps until the FATF guidance is finalised and ratified and that’s going to be a problem for the other jurisdictions as well…

This may be a naive question but can DEXs be regulated? A DEX with truly decentralized development and governance (I know Pangolin is not there yet)?

Or do governments have to impose restrictions on their citizens using the DEX instead?

Also, not to get on a tangent, but is anyone familiar with how the UniSwap Company interacts with and supports the UniSwap dex? I was thinking the answer could be pertinent to this discussion.

Maybe someone can give an example, but I’m not familiar with any dapp that didn’t have some company or foundation backing it and supporting its early development. And, of course, without Ava Labs, Pangolin would not exist.

That said, I think @Pablo has brought up an important topic for discussion. If Pangolin is going to be run by community governance then there needs to be autonomy from Ava Labs at some point. But then, we as a community need to figure out what “community governance” even means.

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This is not about community governance, this is about getting control of the millions of PNG that were left over from the airdrop. In my opinion it’s a huge risk to transfer control to a few anonymous internet users. Best to burn them and remove the risk.

Not really. But they can regulate companies and individuals that operate those DEXs. Which is why I’m asking the question about the relationship. It’s this type of relationship between Ava Labs and Pangolin that the regulators will be looking at very closely over the next 12-18 months.

Even if you believe there is a special risk here, what are we to do with the not insubstantial trading fees being generated and added to the Treasury? That will amount to millions of dollars over the next few years. Whether the funds are from the airdrop or transaction fees, they are in the same boat which is why I don’t think anything is solved by burning the windfall from the airdrop.

Got it. That’s why I asked about UniSwap, being the biggest DEX in the space, they will almost certainly come under some scrutiny first.

Whether you’re talking about deciding what to do with the airdrop funds or how dispense the fees made by the Dex, isn’t it all about governance? As @Pablo said the fees will eventually be substantial. Not only will the community need to decide what to develop, it will also need to decide who to hire to do the developing, and how much to pay them.

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Perhaps - but if there are going to be prosecutions, the way the regulators work is to pick off smaller, easier targets and build up the “fear factor” and chain of precedents as they prosecute bigger and better funded operations.

The SEC prosecutions of ICOs since 2017 gives you an idea as to how this might play out. They started with scam artists, then small ICOs, then Kik/Telegram. They didn’t lose a single case along the way and most folded as soon as the SEC came knocking.

Now they’re taking on Ripple which is the biggest alpha-male gorilla in the forest and Ripple is beating them up pretty bad in court. It would have been worse if they had done it in reverse order…

At the moment, there is nothing being added to the treasury. That still has to be voted on and the amounts involved are much smaller, most likely not exceeding 0.01% or so. They can be diverted on a needs basis. Swap fees are earned assets and will be payed in all the currencies currently traded. The airdrop stash is unearned and 100% PNG and any use of them will dilute PNG holders.
Most importantly, if something goes wrong with the swap fee contribution the loss will be small in size and easily manageable. If something goes wrong with airdrop stash it will be a disaster and PNG holders will get wiped out.

Yeah, I’ve been following it somewhat, a Ripple win is good for crypto. But as with the 2017 example, if the SEC makes DEXs their new hobbyhorse, and starts going after them like they did with ICOs it’s good for no one, and the more decentralized a Dex is the stronger it is against regulatory attacks, which I assume is why you started this thread.

@BobbyC I understand the concern. I assume this will be voted on. Also, I’m not advocating an immediate relinquishment of the treasury keys. To who? There’s nothing in place to ensure the proper security and use of any size treasury, is there?

I just think there needs to be a framework for making these decisions. A framework that can exist autonomously regardless of who is in the community at any given point. Something more robust than open discussions on a forum (which I think is vital as well, don’t get me wrong)