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Initial Coin Offerings Horrify a Former S.E.C. Regulator
- tlb 9y agoThey horrify me too. Some are plain fraud. Investors will lose, scammers will profit and/or go to jail. Some are promising startups, that will raise far more money than is healthy for their stage, and will die from too much money. If you don't have enough money (true for nearly everyone) it might be hard to imagine, but I've seen it when VCs give a startup too much. It makes them grow before they've found product-market fit, and when they realize their fit isn't quite right they're too large to change course quickly. The second is more sad, because not only will investors lose their money but the world will lose an otherwise promising startup.
- ataturk 9y agoThe only thing that horrifies me about them is that the US and the UK both went through these kinds of stock swindles at the turn of the 20th century and on into the 1920s and the run up to the Great Depression and yet since nobody reads history anymore they are completely unaware of the lessons brought forward.
- jririri82838 9y agoI know you didn’t mean it this way, but that sounds like the economy as a whole Just replace “investors” with workers, and scammers with “moneyed special interests.” Some go to jail to satisfy the proles, but otherwise nothing really changes to help the workers And we keep talking about the pattern within itself, at a lower abstraction, ignoring the level where it matters to most
- Alex3917 9y agoThe key difference is that the companies raising money via ICOs are co-ops, not startups. The reason startups go bankrupt when they have too much money though is because they're forced to spend money before they have product-market fit. And in the same way that the value created by good software scales exponentially as more dollars are invested, the costs of bad software scale exponentially as more dollars are invested. Whereas money raised by co-ops is more akin to having money in your personal bank account, and it's not often that individuals go bankrupt as the direct result of having too much money. Sometimes they do, like with lottery winners, and I suspect we'll see that a bunch in the short term. But once we have better rules and norms, I think it's going to be less often that we see excess money killing co-ops.
- nostrademons 9y agoCo-ops disintegrate when the people involved can't agree on the way to spend the money. Fights break out, trust declines, and eventually the co-op breaks up in a series of acrimonious disputes (oftentimes including lawsuits and/or shady behavior). So far, this seems a common failure mode for ICOs as well. So yeah, like co-ops.
- Alex3917 9y ago> Co-ops disintegrate when the people involved can't agree on the way to spend the money. That's because currently most co-ops are either run by hippies, or else exist only as tax dodges. But there's no reason they can't be run as dictatorships, the only real requirement is that the majority of the wealth generated gets captured by the people creating it. As the tools for running co-ops get better, we'll see more examples of ones that are better run.
- nostrademons 9y agoIsn't a co-op that's run as a dictatorship basically a corporation? The whole point of having wealth is that you can choose how you spend it. If one person chooses how to spend it, you don't actually have the wealth, they do, and it's not much of a co-op. If multiple people choose how to spend it, then you run into all the coordination-of-disparate-interest problems common to co-ops, communes, clubs, and other social ventures.
- Alex3917 9y ago> Isn't a co-op that's run as a dictatorship basically a corporation? In double-entry land, the ownership of labor is diluted every time new capital is contributed. Obviously people contributing capital should get rewarded, but the fact that causality only runs in this direction is super broken. Whereas in triple-entry land, capital can get diluted every time you add new labor. This works because the technology allows labor to be viewed as an asset rather than as an expense. Accounting innovations like this are kind of boring, but economically it's probably still the most important invention since double-entry was popularized in 1494.
- LeoPanthera 9y ago"Some" - Most, surely.
- ybrah 9y agoAnyone who buys into ICOs tend to not do much research
- phkahler 9y agoMost ICOs look like fairly blatant fraud. We have laws to protect people from even subtler forms of fraud. The fact that they allow this stuff to continue is as amazing to me as some of the scams going on.
- jerf 9y agoBefore they can stop it, they need to learn enough to learn how to correctly characterize it, without hitting non-fraud in the process. That's easy to do in an HN comment box, with nothing at stake if you get something wrong, and all the ambiguity of English working for you. It's somewhat harder to do when you require legal precision and are interacting with trillions of dollars worth of existing market.
- CamelCaseName 9y agoI agree with you, however, why not stop it all immediately and then work through it case by case, creating a definition along the way? By allowing it to go on, the problem simply becomes worse and worse, and more money gets tied up. I ask this genuinely because I am not familiar with the philosophical aspects of law. I understand that regulators would rather not take an action to harm someone innocent, but it seems to me that they strongly prefer that over taking an action that prevents harm to many people.
- deleted 9y ago[deleted]
- phkahler 9y agoI can buy that 100 percent. They need to be precise but hopefully thorough so there's no quick work around after, and this is new territory. OTOH it's running rampant, so even a minor slam-dunk charge against one might slow things down a bit.
- brndnmtthws 9y agoDon't like it? Don't invest. No reason for you to go around poo-pooing it though.
- brians 9y agoFor the same reason that urban areas need tighter building codes than rural, tightly linked economies need to more closely regulate what our neighbors do lest we be caught in the consequences. ICOs externalize many consequences.
- seattle_spring 9y agoDid you feel the same way about MLMs that methodically put disadvantaged people into financial ruin?
- jerkstate 9y agoare MLMs illegal?
- thrill 9y agoOf course they horrify an American regulator - people believing they're free to do what they want with their property?
- giacaglia 9y agoHow would you differentiate fraud from a legit ICO? What makes a ICO not fraudulent? It's hard to determine
- brndnmtthws 9y agoThe same can be said for a lot of investments, there's nothing about ICOs that makes this unique aside from the fact that most people don't understand computers.
- MBCook 9y agoExcept we have entire sets of laws and systems to try to control and expose the risk of other investments. ICOs are the Wild West, with the added benefit that they’re totally intangible so you can’t even be stuck holding the bag.
- deleted 9y ago[deleted]
- brndnmtthws 9y agoAh, yes, and the government knows best, right? If there's a law, then it must be safe and good for everyone!
- MBCook 9y agoNo, clearly investments are not safe. That’s why those disclaimers exist on any investment commercial. But with laws at least I know that they met a base level of not ‘a cartoon mafia hiding under a table giggling at the idiots buying our scam’.
- emodendroket 9y agoWell, the obvious difference (IMO) appears in the article: > Coin offerings generally happen without the involvement of financial institutions or regulators because investors pay for the coins using Bitcoin and other virtual currencies, which can be sent outside the traditional financial system. Essentially it's a throwback to the days before any financial regulation existed.
- sschueller 9y agoI am horrified by what was/is allowed legally at wall street. Not that ICO's are any better.
- FreeRadical 9y agoWhat is allowed that horrifies you?
- sschueller 9y agoOne that bothers me the most is automated high frequency trading. They can cause the entire market to crash because of one mistake.
- kirillseva 9y agoautomated high frequency trading also does the important work of eliminating the question "Which exchange should I buy AAPL at?" HFT is mostly ultra-fast arbitrage programs, and the benefit of using them far outweighs the downsides. Maybe the problem is not with HFT but in the industry as a whole
- vostok 9y agoA human trader can also cause the entire market to crash because of one mistake. See Waddell trading 75k e-minis or PVM trading 7 million barrels of brent while drunk.
- jonmc12 9y agoRobert Reich's "Saving Capitalism" documentary on Netflix does a pretty good job to answer this question. TLDR; Wall Street is part of an industrial/political system that extols "free market" capitalism, publicly, when in fact, "free markets" and "free market meritocracy" is a myth, and they know it. Privately, these same people hire lobbyists and otherwise influence the political system to craft regulation & policy around property, monopoly, contracts, bankruptcy, and enforcement. These regulations protect and enhance the benefit of the few.
- gxs 9y agoWhat's old is new again - this is why the SEC was created if I'm not mistaken. People were losing their shirts investing in shady companies so the government stepped in to protect people from themselves. For this reason it won't be surprising at all when we start seeing some attempts to enact regulation.
- mrwong 9y agoWhy dont we regulate everything like that. Why do we allow people to spend 2M$ on a Car or 6k$ on a bag? Why do we allow people to buy unlimited lottery tickets or gamble everything away in the casino? Those examples have cleary less benefit for society then the dumbest investment strategy. Let people invest, sure tons if people will lose their shirt but they will learn from it and stay away. Everyone else in the society gets to Enjoy the increased liquidity in the society. Why does anyone think that its ok that we created this random gatekeeps in the society that block ordinary people from investing beciase they are to “stupid”. The accredited investors sheme is a fraud, the arbitrary number on 1m$ networth to be an accredited investor is a joke. Thats means that even a Business Prof. Can’t invest because the SEC deems him to be to stupid.
- JumpCrisscross 9y ago> Those examples have cleary less benefit for society then the dumbest investment strategy They also carry less risk. Few people who "lose their shirt" say "oh well, I didn't do my diligence." Instead, they blame the system. Their anger becomes political capital. Moreover, inept investment combined with leverage can decimate an economy in a way frivolous personal spending does not. If you want to learn about why these regulations appeared, in more or less similar form, many times independently across the world, start by reading on the history of free banking, the Panic of 1907, the post World War I securities market and the debates surrounding the Securities and Exchange Acts of '33 and '34. Disclaimer: I am not a lawyer. This is not legal nor securities advice.
- summer_steven 9y ago>> Why dont we regulate everything like that. Why do we allow people to buy unlimited lottery tickets or gamble everything away in the casino? > They also carry less risk. Few people who "lose their shirt" say "oh well, I didn't do my diligence." No they don't. Plenty of people lose their entire life savings in casinos, and plenty of poor people spend money on lottery tickets when they should be spending money on food. You have not sufficiently explained how gambling is less risky than investing.
- mrwong 9y agoThere will be enough marketplaces in the world that will provide a solid legal structure for ICOs. The US certainly wont be a part if them. Switzerland, Singapore and Japan already moved ahead with the legal structure. The world is global, money is global.
- wpietri 9y agoNot as much as you'd think. The US stock market is 39% of all publicly traded stocks. The US market is bigger than the next 8 countries put together. [1] This is in part due to the US's stringent regulations on stock market listings and accounting for publicly held firms. The more transparent and effective the market, the safer it is for investors to put their money in. [1] https://www.indexmundi.com/facts/indicators/CM.MKT.LCAP.CD/rankings https://www.indexmundi.com/facts/indicators/CM.MKT.LCAP.CD/r...
- mrwong 9y agoYou assume there would be no capital flight if there would be a superior finance place in the world?
- emodendroket 9y agoI think what he disagrees with you about is what constitutes a "superior finance place."
- wpietri 9y agoYeah. My point is that a lot of capital comes to the US (and definitely stays in the US) because of our tight regulatory regime. It's the same way that having a vigorous health department boosts the business of all restaurants: the safer people feel, they more willing they are to throw money around.
- wolco 9y agoBut they are not the leader in cryto currency
- rjknight 9y agoThe interesting unasked question here is why he seems to like FileCoin (the reference to decentralised storage markets) - what does he think that FileCoin gets right that others are getting wrong?
- JumpCrisscross 9y ago> what does he think that FileCoin gets right that others are getting wrong? FileCoin retained a reputable law firm [1], restricted their applicable marketing to accredited investors [2] and used a template agreement designed by lawyers to comply with the law [3]. [1] https://www.nytimes.com/2017/08/07/business/dealbook/initial-coin-offerings-sec-virtual-currency.html?_r=0 https://www.nytimes.com/2017/08/07/business/dealbook/initial... [2] https://techcrunch.com/2017/08/10/filecoins-ico-opens-today-for-accredited-investors-after-raising-52m-from-advisers/ https://techcrunch.com/2017/08/10/filecoins-ico-opens-today-... [3] https://saftproject.com https://saftproject.com Disclaimer: I am not a lawyer. This is not legal nor securities advice.
- stale2002 9y agoFile coin requires you to be an accredited investor. Grandmas and Joe smoes are not being scammed. You can only lose money from file coin if you are in the top 1% already, and therefore probably don't need the government to protect you.
- rjknight 9y agoIf only accredited investors can buy FileCoin then only accredited investors can access the storage market. This does not seem feasible! And, indeed, it isn’t. FileCoin has only done a pre-sale so far, selling securities (SAFTs) to accredited investors. They haven’t explained (afaik) how the tokens will be issued and make their way into the hands of the public. That’s why I was curious to see Grundfest citing them.
- empath75 9y agoOnce there is an active storage market, it’s no longer a security, you’re paying for a service.
- narrator 9y agoThe funny thing about ICOs is that anyone in the world can invest anonymously AND GET PAID BACK anonymously even if they have no money, don't have a bank account, are a fugitive, in Iran or North Korea, are in prison, have unpaid child support obligations, have large unpaid IRS tax liabilities, or government fines and penalties or are using stolen funds. All the little knobs and levers that governments use to financially control people are rendered useless. The guys taking the money don't know who their investors are, so they can't discriminate. This is probably why they are so popular even though the risks are ludicrous.
- leereeves 9y agoThat's certainly one big reason why they're popular. Many of the most popular uses for cryptocurrencies are strictly illegal.
- brndnmtthws 9y agoI really doubt that. It's definitely a thing that people parrot around, but it's not likely to make up more than 5% of the actual use. Transacting in cash USD is still the preferred currency of the cartels.
- emodendroket 9y agoThe question isn't what percentage of black-market sales are BTC; it's what percentage of BTC sales (excluding speculation) are black-market.
- CamelCaseName 9y agoPosted earlier: https://news.ycombinator.com/item?id=15784520 https://news.ycombinator.com/item?id=15784520 But I'm very glad this article is getting more attention.
- lanius 9y ago>I.C.O.s represent the most pervasive, open and notorious violation of federal securities laws since the Code of Hammurabi Can someone explain this statement to me? Is he saying I.C.O.s are the most flagrant violations occurring since the Code of Hammurabi was written, or is the Code of Hammurabi itself a violation?
- alextheparrot 9y agoYou can substitute “since the Code of Hammurabi” for “in all legal history”. He’s simply using more flowery language.
- deleted 9y ago[deleted]
- dpiers 9y agoI believe the intention is the former; the Code of Hammurabi is one of the oldest known sets of written laws, and almost half of it deals with contracts.
- unabridged 9y agoThe idea of accredited investors horrifies me. The only way to get rich by investing is to get in early when the valuation is very low. These type of rules guarantee that only people already rich will be able to get in early. The reason cryptocurrencies & ICOs are popular is they let anyone speculate and day trade.
- conanbatt 9y ago+1000 This is right on the mark. Remove accredited investor requirements, and all that money will go to better options, like for example, YC startups. Nothing could do more damage to the investor monopolies of the world than opening this funding venue.
- notyourday 9y agoAccredited investors requirement is what allows one not to be a subject to Blue Sky laws. We did not have it before Blue Sky laws were added. Let me assure you civilized societies need to have a separation between 82 year old grandma Suzi and Paris Hilton.
- conanbatt 9y agoAre you account for the damage done by restricting investment into this? They say as much money moved into ICO's in the last 6 months as VC funding in the valley. To the very least, thats double the funding for tech startups: higher wages, more founders and higher absolute investment returns. The tragedy is that scam ICO's make it because they cant put it into better investments due to regulation. Its the classic case of a damaging restriction.
- notyourday 9y agoYes, I do. ICOs are scams.
- conanbatt 9y ago
- Breefield 9y agohttp://whatthefuckisethereum.com/#scammer http://whatthefuckisethereum.com/#scammer
- chinathrow 9y agoEvery ICO page looks the same. Every ICO promises the same stuff. Support staff even promise future gains in their intercom driven chats. This will not end well.
- ltr_ 9y agoLet the people decide if they want to get ripped off or not, you cant regulate this, and you cant do nothing about people asking for crypto currencies in the internet. This is the old wild west and you cant do nothing about it. If the people buying tokens are not smart enough to see that ICOs are a scam 99% of the time, that is their own problem. This is wallstreet trying to stick their nose where they cant rip off people under their "law".
- jerkstate 9y agoYet Kickstarter, with all of the same risks of never getting what you paid for, and none of the potential benefits of becoming a stakeholder, is still perfectly fine.
- aeternus 9y agoI think the difference is scale. There are some exceptions but most Kickstarter pledges are less than $200. ICO exposure can be much higher.
- andreygrehov 9y agoThey're always horrified when they start losing control.
- proc0 9y agoNo shit, right? SEC Regulator is intrinsically a position that exists in human controlled, centralized trust networks, so of course it violates their archaic human contracts. Precisely what blockchains aim at reforming.
- age_bronze 9y agoI don't get why regulation is needed. The whole thing is by definition very high risk investment, and I think it'd be silly for any "scam-victim" to claim he didn't know he's entering a high risk, and also high chance of scam, deal. In the end of the day, why is it the government's job to protect idiot people's money? And that's coming from the country where gambling is legal? The whole thing is based upon get-out-of-our-way-government exactly because of these ridiculous regulations. If someone got money to waste, and decided to bet on some ICO horse, I wish him luck. If he doesn't have money to waste, it doesn't stop him from gambling on a real horse (which is still legal, and yet has 0 meaning whatsoever), so why are we so bothered about him gambling on this new virtual horse? Sure, arrest those ICOs that are actually 100% clear scam because they left misleading expectations which they never had an intent of fulfilling.
- regulation_d 9y agoI mean, we need regulation because 1929. We need regulation because regulation promotes confidence in the market which increases participation in the market. Security regulation is among the easiest government regulation to justify from a market perspective.
- mindcrime 9y agoIt isn't the government's job to "increase participation in the market".
- Taniwha 9y agoGovernments are political beasts, if they are working correctly they respond to the will of the people, and if the people decide that "something must be done about financial scams" they make laws. It's how democracies work
- mindcrime 9y agoIt's how democracies work And? "Democracies" aren't inherently good, just, noble or virtuous. As the old saying goes "Democracy is two wolves and a lamb voting on what to have for dinner. Liberty is a well-armed lamb contesting the outcome".
- basicplus2 9y agoA fool and his money are easily parted
- microcolonel 9y agoIf you don't trust ICOs to provide the desired effect, don't participate in them. An ICOs has the same trust dynamic as a Kickstarter, and as long as somebody is okay with that, then I don't see why they should be protected from themselves preemptively.
- scotty79 9y ago> But Mr. Grundfest said it was clear that almost everyone buying tokens at this point was buying them with the hope that their value would go up, not because the buyer wanted to use them on some future computer network. So beanie babies were securities too? This is just silly. Surely there's some better definition of what a securities are. In some countries security is either equity or fixed income instrument. As I understand ICO-s are neither.
- Bromskloss 9y agoLot's of things horrify me.
- Jd 9y agoFounder of the first ICO platform here (April '14, SWARM) and early contributor to the Ethereum project. I half-left the industry for a few reasons: (1) Current crypto-markets highly favor "smoke and mirror" hype-driven approach to product as opposed to a user and product centric approach. (2) Most "businesses" in the space are basically about skimming money off the top of a frothy market and effectively encouraging the scammy parts of the system. I suppose I could be making a lot of money this way right now but would highly violate my personal ethics to do so. (3) It is exceedingly difficult to tie any sort of standard value to a blockchain-issued token, partially because of the complex regulatory framework around such offerings (4) The libertarian bias of the industry effectively forces a massive head on collision between the incumbents (e.g. the SEC) and folks trying to circumvent their control, also effectively guaranteeing some version of "blood on the streets." That said, as someone who founded the first platform dedicated to these topics I obviously think there are a lot of positive elements that are possible. Including: (1) Streamlining and adding efficiency to capital markets by removing middlemen (2) Funding novel highly sophisticated technological projects that would be difficult to get funding for in the VC world (Ethereum, DASH) (3) Creating broader incentivization than exists in traditional funding models such that users of a product are directly incentivized by its success (4) Allowing for novel forms of governance and organizations that are not bound by the legal system of any specific legal jurisdiction (e.g. DAOs) All of these ultimately have high value. However, I think what we are likely to see is a major phase of consolidation after the current hype cycle wears off (much as what happened with "the DAO"). The reality is that ICOs are mostly scammy and useless projects at the moment with a few shining examples. DISCLOSURE: I don't mean to critique any particular political philosophy in this post. If I have criticism it is more directed to tactics and strategy.
- googletazer 9y agoNo shit - by the time a company hits a public market, accredited investors are the ones who cash out. ICOs, invested in with some research and diligence can finally spread the wealth to the rest of us.