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The way to fix it is through enforcement of the SEC laws. We aren't going to combat fraud without proper enforcement. The industry needs more regulation because

The way to fix it is through enforcement of the SEC laws. We aren't going to combat fraud without proper enforcement. The industry needs more regulation because right now most investors are getting fleeced and getting left with nothing because there is a large pool of unsophisticated investors. This solution would give SIA the ability to regulate these ICOs and that has even more issues (what makes SIA authoritative)? SEC regulation even though seems like a bitter pill for people who are in the cryptocurrency space is needed for things to actually get done since every fraud basically turns away investors that actually want to fund a real project.

Nazare 9y ago
Investors are acting out of greed. They are perfectly willing victims. Please no more regulation, or American influence/special position ("I can get my money back, because you sold me a security, and the price didn't went to the moon"). Fraudulent ICOs are written and warned about wide and far. It is easy to do due diligence. People who don't research any of their investments, need no more protection, than those who put everything on black, buy art that devaluates in value, or buy a second-hand Zune for their grand children.
- vkou 9y ago
  Participants in any investment fraud at doing so out of greed. The whole bloody point of investment is greed. If I wasn't greedily chasing returns, I'd keep my money in my mattress. That does not mean that fraud should be legal. Stealing from stupid people is still stealing. Stealing from greedy people is still stealing. I don't understand how this is controversial.
  - galaxyLogic 9y ago
    No I would say much investment is not about "greed". It is wise and prudent to invest in good things. A farmer invests in the seeds and time it takes to grow the crops. But yes I agree fraud should be illegal and misleading advertisement is a bit of a fraud already, mis-representation of facts. But informed people are hard to mislead, the question is who can you trust to give you correct information? I say that is best done by a democratically elected government. The job of government is to protect us, not only from hostile foreign powers, but also from fraudulent information. Sometimes the two go together. Not all governments will protect us against fraudulent information, only the representative, democratically elected ones will.
    - s73v3r_ 9y ago
      The entire point of investment is that you believe that you will have returned to you more than you put in. Otherwise they'd just give the money to the organization as a donation.
zherbert 9y ago
SEC enforcement does not fix the problems that we discussed in the post. Many projects have raised money through Reg D exemption filings (such as Blockstack and Filecoin), but they are still ultimately selling utility tokens. We are arguing that the incentives behind ICOs of utility coins are bad. I could easily devote more blog posts to the legal/regulatory side, but that is not our intention for this post.
wmf 9y ago
Note that the TCO structure proposed in the article is compliant with SEC regulations and is under SEC oversight; they're not proposing self-regulation. Ultimately, SEC regulations don't allow people to do what they want to do (and I don't think the limitations of SAFTs/TCOs have become obvious yet), so you're really just calling for ICO-like fundraising to be banned. That would be fine with me, but don't expect people who raised millions to just give that money back with no resistance.
- s73v3r_ 9y ago
  "Ultimately, SEC regulations don't allow people to do what they want to do" Because people did do the exact same thing before, and it turned out to be rife with fraud. That's why the regulations were put in place. "so you're really just calling for ICO-like fundraising to be banned." No, they're just calling for it to be called what it is: A Security.
  - Pyxl101 9y ago
    Agreed. Many ICOs have been securities offerings. Not all of them have been, however. Ethereum was arguably not a security. It's not necessarily a security offering if you are putting something up for sale that has a value of its own, or will have a value when the transaction occurs, such that people buying the thing are not expecting to get anything like a "return on investment", and are not expecting to somehow profit from the work of the company who is making the sale. Consider Kickstarter-style presales: the people who buy these offerings are buying a product, not investing in the company. If you were, for example, just selling a token where the token has some intrinsic value (such as enabling you to pay for distributed compute or storage), and where you're clear to buyers that there's no expectation of any kind of return, just the token's intrinsic value, then that's probably not a security. I believe I also read that there are requirements that the thing-you're-buying have value at the time the transaction takes place, though I'm less sure about this. If you take presales for a token that doesn't even exist yet, with a plan to fund actual development of the token off the presale funds, then that may be a security. If the token that you sell has value at the time you sell it, or will have value at the time the transaction takes place, then that's probably not a security. If you read the Ethereum project's presale materials, they were very careful to stay within all of these boundaries, from what I can discern. This is my layman's analysis of securities law - IANAL.
jimmy1 9y ago
> The industry needs more regulation because right now most investors are getting fleeced and getting left with nothing because there is a large pool of unsophisticated investors. I agree with the premise > The industry needs more regulation but not the reason, > unsophisticated investors If you are an unsophisticated investor trying to invest in an ICO and you lose out big, I think that is on you. I don't try my hand in algorithmic day trading, or long term value-based investing either because I know I am not informed enough to be able to make money, so I stay out.
- gruez 9y ago
  >If you are an unsophisticated investor trying to invest in an ICO and you lose out big, I think that is on you. I don't try my hand in algorithmic day trading, or long term value-based investing either because I know I am not informed enough to be able to make money, so I stay out. Like it or not, but there are plenty of "unsophisticated investors" that don't know to stay out.
  - mmirate 9y ago
    There's an old saying about fools and their money...
- Yizahi 9y ago
  It's like saying that anyone losing something in free market had only himself to blame and there should be zero regulation of markets of any kind. Yeah, that works out perfectly in the long run. /s
  - andrewflnr 9y ago
    This is doubly a strawman. "Don't invest in things you don't understand" is pretty much rule 1 of investing, which is quite different from the general case of participating in a market. Anyway, GP already said they agree that regulation is needed.
  - mmirate 9y ago
    Your words are true at face value.
CryptoPunk 9y ago
People only have themselves to blame if they invest in something that is not vetted by credible parties. What you're suggesting is to make the entire market a safe space, where people are forcibly infantilized and have their contract freedom limited, to protect a small minority who don't use their freedom responsibly. Regulation just means banning an entire category of voluntary interaction and creating a centralized gatekeeper with the power to lift that ban on a case-by-case basis if a project meets its approval. Such an approach to dealing with complex social issues like fraud is lazy and flies in the face of a free society. Treating tokens like securities would mean treating token sales like IPOs. Right now it costs $6 million to do an Initial Public Offering of a stock. If you want to eliminate 99% of market activity, and exclude 99% of the population from having market access, that's how you do it. Anyway your regulations are unenforceable. Decentralized exchanges and the multi-jurisdictional nature of the market assure that. For the first time in history, you can list your financial asset on a globally accessible exchange without needing anyone's permission.
- Firadeoclus 9y ago
  If regulations are unenforceable, what reason does anyone have to believe that anything about these tokens can be enforced?
  - CryptoPunk 9y ago
    Personal rights are enough to protect token rights, because all that's required for someone to be secure in their possession of a token is for criminals not to be able to torture them into giving up their decryption key, and practically every country in the world enforces personal rights. The blockchain secures everything else in a censorship resistant way. Some governments may be able to go to some extreme lengths to control information flows on the internet and stop people from having unrestricted access to the blockchain, but I do not think this will be commonplace, both because there would be significant push back from most populations, and because the government would not want to create an illiberal environment that's unattractive for investment. As for what keeps token issuers honest: the value of reputation, and the fact that their reputation is at stake. The reason high-ranked eBay sellers deliver the goods they promise is not to avoid being charged with fraud. It's to maintain their 99% positive rating. And eBay has a strong incentive to maintain an honest rating system because they want to maintain their reputation as a trusted market. The world is filled with relationships that consist of iterative interactions, and iteration creates incentives for cooperative behaviour.
cornholio 9y ago
> right now most investors are getting fleeced and getting left with nothing because there is a large pool of unsophisticated investors Fret not, this situation cannot last.
robmay 9y ago
In parallel though, many entrepreneurs are staying on the sidelines because of fear of the regulatory bodies. I think the SEC should adopt something the like the proposed Arizona crypto laws.
- zherbert 9y ago
  That's definitely true. Going through this process has been extremely complicated and uncertain.
sagivo 9y ago
more regulation is not always the answer. it can lead to too much regulation and you'll end up paralyzed like what happens with banks today.
Taek 9y ago
My biggest concern for the whole crypto industry right now actually is strong regulatory action. The problem is that a lot of these things look, smell, and act like securities, and a lot of people think that all tokens should be classified as securities (including regulators). I can understand that position, because many of the tokens and ICOs today are structured like securities and as speculative investments, and are primarily used as a way to make fast money instead of as a way to move technology forward. And people are using them that way, and I agree that we should be regulating these types of structures. The problem when you start to believe that all tokens should be classified as securities. Tokens like bitcoin and siacoin have important uses and advantages that go beyond speculation and cannot exist absent a blockchain token. If the everyday consumer needs to comply with securities law in order to use bitcoin, you won't get to the future where YouTube videos are being streamed over a decentralized CDN, where WSJ paywalls use decentralized payment platforms, where various ecosystems can interact seemlessly and trustlessly thanks to the power of decentralization. I worry because more and more I am seeing posts that are skeptical of the actual utility of "the blockchain" (much like during the dotcom bubble we started seeing people who were more and more skeptical of the utility of "The Internet") when the utility does exist and with the blockchain legitimately is a world changing technology. But taking full advantage of this technology means allowing consumers to interact with it (buy, sell, trade, etc.) with as few barriers as possible, and that means that when we bring forward appropriate regulation, we need to make sure we carve out places for tokens to exist other than centralized, regulated exchanges. (though, perhaps only tokens following XYZ criteria)
woodandsteel 9y ago
Part of the problems, as I understand it, is that ICO's are different enough from traditional securities that present regulations in some important ways don't fit. I have read the SEC recognizes this and is working on new regulations. That said, the article says that if ICO's were designed the way they are recommending, a lot of the present problems would go away on their own.
- amygdyl 9y ago
  If you interpret the history of regulation as originating from the needs of the overseen organisations, then you end up with securities governance that fits the operational style of the incumbents, rather than laws that apply generally and effectivly for all business that's effectively equivalent. This is because the regulated organisations generally prefer to be governed by definitions that align with their procedures and operating functions. Firstly it reduces much if compliance to merely perfunctory tests of verisimilitude to procedures that are accepted as being protective of disadvantaged interests. Second challenger organisations are forced to replicate very expensive structures. Third, because operational verisimilitude to going governance is rooted in operations, the advantage of interpretation of the rules falls to the same incumbent parties. Regulatory agencies often seem oblivious to the fact that they are negotiating with back office support rather than outright principles. I understand the human inclination to see what we do as being what we mean, but the securities industry perennially confounds the notion.

Nazare 9y ago

Investors are acting out of greed. They are perfectly willing victims. Please no more regulation, or American influence/special position ("I can get my money back, because you sold me a security, and the price didn't went to the moon"). Fraudulent ICOs are written and warned about wide and far. It is easy to do due diligence. People who don't research any of their investments, need no more protection, than those who put everything on black, buy art that devaluates in value, or buy a second-hand Zune for their grand children.

vkou 9y ago
Participants in any investment fraud at doing so out of greed. The whole bloody point of investment is greed. If I wasn't greedily chasing returns, I'd keep my money in my mattress. That does not mean that fraud should be legal. Stealing from stupid people is still stealing. Stealing from greedy people is still stealing. I don't understand how this is controversial.
- galaxyLogic 9y ago
  No I would say much investment is not about "greed". It is wise and prudent to invest in good things. A farmer invests in the seeds and time it takes to grow the crops. But yes I agree fraud should be illegal and misleading advertisement is a bit of a fraud already, mis-representation of facts. But informed people are hard to mislead, the question is who can you trust to give you correct information? I say that is best done by a democratically elected government. The job of government is to protect us, not only from hostile foreign powers, but also from fraudulent information. Sometimes the two go together. Not all governments will protect us against fraudulent information, only the representative, democratically elected ones will.
  - s73v3r_ 9y ago
    The entire point of investment is that you believe that you will have returned to you more than you put in. Otherwise they'd just give the money to the organization as a donation.

zherbert 9y ago

SEC enforcement does not fix the problems that we discussed in the post. Many projects have raised money through Reg D exemption filings (such as Blockstack and Filecoin), but they are still ultimately selling utility tokens. We are arguing that the incentives behind ICOs of utility coins are bad. I could easily devote more blog posts to the legal/regulatory side, but that is not our intention for this post.

wmf 9y ago

Note that the TCO structure proposed in the article is compliant with SEC regulations and is under SEC oversight; they're not proposing self-regulation. Ultimately, SEC regulations don't allow people to do what they want to do (and I don't think the limitations of SAFTs/TCOs have become obvious yet), so you're really just calling for ICO-like fundraising to be banned. That would be fine with me, but don't expect people who raised millions to just give that money back with no resistance.

s73v3r_ 9y ago
"Ultimately, SEC regulations don't allow people to do what they want to do" Because people did do the exact same thing before, and it turned out to be rife with fraud. That's why the regulations were put in place. "so you're really just calling for ICO-like fundraising to be banned." No, they're just calling for it to be called what it is: A Security.
- Pyxl101 9y ago
  Agreed. Many ICOs have been securities offerings. Not all of them have been, however. Ethereum was arguably not a security. It's not necessarily a security offering if you are putting something up for sale that has a value of its own, or will have a value when the transaction occurs, such that people buying the thing are not expecting to get anything like a "return on investment", and are not expecting to somehow profit from the work of the company who is making the sale. Consider Kickstarter-style presales: the people who buy these offerings are buying a product, not investing in the company. If you were, for example, just selling a token where the token has some intrinsic value (such as enabling you to pay for distributed compute or storage), and where you're clear to buyers that there's no expectation of any kind of return, just the token's intrinsic value, then that's probably not a security. I believe I also read that there are requirements that the thing-you're-buying have value at the time the transaction takes place, though I'm less sure about this. If you take presales for a token that doesn't even exist yet, with a plan to fund actual development of the token off the presale funds, then that may be a security. If the token that you sell has value at the time you sell it, or will have value at the time the transaction takes place, then that's probably not a security. If you read the Ethereum project's presale materials, they were very careful to stay within all of these boundaries, from what I can discern. This is my layman's analysis of securities law - IANAL.

jimmy1 9y ago

> The industry needs more regulation because right now most investors are getting fleeced and getting left with nothing because there is a large pool of unsophisticated investors. I agree with the premise > The industry needs more regulation but not the reason, > unsophisticated investors If you are an unsophisticated investor trying to invest in an ICO and you lose out big, I think that is on you. I don't try my hand in algorithmic day trading, or long term value-based investing either because I know I am not informed enough to be able to make money, so I stay out.

gruez 9y ago
>If you are an unsophisticated investor trying to invest in an ICO and you lose out big, I think that is on you. I don't try my hand in algorithmic day trading, or long term value-based investing either because I know I am not informed enough to be able to make money, so I stay out. Like it or not, but there are plenty of "unsophisticated investors" that don't know to stay out.
- mmirate 9y ago
  There's an old saying about fools and their money...
Yizahi 9y ago
It's like saying that anyone losing something in free market had only himself to blame and there should be zero regulation of markets of any kind. Yeah, that works out perfectly in the long run. /s
- andrewflnr 9y ago
  This is doubly a strawman. "Don't invest in things you don't understand" is pretty much rule 1 of investing, which is quite different from the general case of participating in a market. Anyway, GP already said they agree that regulation is needed.
- mmirate 9y ago
  Your words are true at face value.

CryptoPunk 9y ago

People only have themselves to blame if they invest in something that is not vetted by credible parties. What you're suggesting is to make the entire market a safe space, where people are forcibly infantilized and have their contract freedom limited, to protect a small minority who don't use their freedom responsibly. Regulation just means banning an entire category of voluntary interaction and creating a centralized gatekeeper with the power to lift that ban on a case-by-case basis if a project meets its approval. Such an approach to dealing with complex social issues like fraud is lazy and flies in the face of a free society. Treating tokens like securities would mean treating token sales like IPOs. Right now it costs $6 million to do an Initial Public Offering of a stock. If you want to eliminate 99% of market activity, and exclude 99% of the population from having market access, that's how you do it. Anyway your regulations are unenforceable. Decentralized exchanges and the multi-jurisdictional nature of the market assure that. For the first time in history, you can list your financial asset on a globally accessible exchange without needing anyone's permission.

Firadeoclus 9y ago
If regulations are unenforceable, what reason does anyone have to believe that anything about these tokens can be enforced?
- CryptoPunk 9y ago
  Personal rights are enough to protect token rights, because all that's required for someone to be secure in their possession of a token is for criminals not to be able to torture them into giving up their decryption key, and practically every country in the world enforces personal rights. The blockchain secures everything else in a censorship resistant way. Some governments may be able to go to some extreme lengths to control information flows on the internet and stop people from having unrestricted access to the blockchain, but I do not think this will be commonplace, both because there would be significant push back from most populations, and because the government would not want to create an illiberal environment that's unattractive for investment. As for what keeps token issuers honest: the value of reputation, and the fact that their reputation is at stake. The reason high-ranked eBay sellers deliver the goods they promise is not to avoid being charged with fraud. It's to maintain their 99% positive rating. And eBay has a strong incentive to maintain an honest rating system because they want to maintain their reputation as a trusted market. The world is filled with relationships that consist of iterative interactions, and iteration creates incentives for cooperative behaviour.

cornholio 9y ago

> right now most investors are getting fleeced and getting left with nothing because there is a large pool of unsophisticated investors Fret not, this situation cannot last.

robmay 9y ago

In parallel though, many entrepreneurs are staying on the sidelines because of fear of the regulatory bodies. I think the SEC should adopt something the like the proposed Arizona crypto laws.

zherbert 9y ago
That's definitely true. Going through this process has been extremely complicated and uncertain.

sagivo 9y ago

more regulation is not always the answer. it can lead to too much regulation and you'll end up paralyzed like what happens with banks today.

Taek 9y ago

My biggest concern for the whole crypto industry right now actually is strong regulatory action. The problem is that a lot of these things look, smell, and act like securities, and a lot of people think that all tokens should be classified as securities (including regulators). I can understand that position, because many of the tokens and ICOs today are structured like securities and as speculative investments, and are primarily used as a way to make fast money instead of as a way to move technology forward. And people are using them that way, and I agree that we should be regulating these types of structures. The problem when you start to believe that all tokens should be classified as securities. Tokens like bitcoin and siacoin have important uses and advantages that go beyond speculation and cannot exist absent a blockchain token. If the everyday consumer needs to comply with securities law in order to use bitcoin, you won't get to the future where YouTube videos are being streamed over a decentralized CDN, where WSJ paywalls use decentralized payment platforms, where various ecosystems can interact seemlessly and trustlessly thanks to the power of decentralization. I worry because more and more I am seeing posts that are skeptical of the actual utility of "the blockchain" (much like during the dotcom bubble we started seeing people who were more and more skeptical of the utility of "The Internet") when the utility does exist and with the blockchain legitimately is a world changing technology. But taking full advantage of this technology means allowing consumers to interact with it (buy, sell, trade, etc.) with as few barriers as possible, and that means that when we bring forward appropriate regulation, we need to make sure we carve out places for tokens to exist other than centralized, regulated exchanges. (though, perhaps only tokens following XYZ criteria)

woodandsteel 9y ago

Part of the problems, as I understand it, is that ICO's are different enough from traditional securities that present regulations in some important ways don't fit. I have read the SEC recognizes this and is working on new regulations. That said, the article says that if ICO's were designed the way they are recommending, a lot of the present problems would go away on their own.

amygdyl 9y ago
If you interpret the history of regulation as originating from the needs of the overseen organisations, then you end up with securities governance that fits the operational style of the incumbents, rather than laws that apply generally and effectivly for all business that's effectively equivalent. This is because the regulated organisations generally prefer to be governed by definitions that align with their procedures and operating functions. Firstly it reduces much if compliance to merely perfunctory tests of verisimilitude to procedures that are accepted as being protective of disadvantaged interests. Second challenger organisations are forced to replicate very expensive structures. Third, because operational verisimilitude to going governance is rooted in operations, the advantage of interpretation of the rules falls to the same incumbent parties. Regulatory agencies often seem oblivious to the fact that they are negotiating with back office support rather than outright principles. I understand the human inclination to see what we do as being what we mean, but the securities industry perennially confounds the notion.