Sober enthusiasm is the way I would describe a recent LAT Blockchain Economic Forum I attended in New York City. Most speakers at the event noted that we are in a crypto bubble referencing the gold rush mentality embracing the Initial Coin Offering (ICO) market.
Miko Matsumura of Pantera Capital and the ICO Governance Foundation even joked that right now the main thing you can buy with crypto is more crypto. Also, many are of the opinion that most ICO’s have little to do with the Blockchain and more to do with a novel and unregulated way to raise money.
The enthusiasm comes from the Blockchain technology, though again referred to as a “shitty database” by Matsumura, the potential is unquestionable. The ability to have a decentralized immutable public ledger when dealing with our most precious assets in a world where trust is scarce in theory seems invaluable.
Before we get started with the program content, let’s take a step back and make sure we are clear on the terms flying around, because there is a lot of jargon.
First up: Blockchain.
Blockchain is also called distributed ledger technology (DLT) and is a way to transparently track the ownership or other attributes of an asset using cryptography. (I am using “asset” in a general way and not as defined under tax law.)
Blockchain can be applied to anything and can simply be thought of as a giant database. The most notorious use of Blockchain is cryptocurrency and most prominently Bitcoin. In this case the asset is a coin or a token which serves as a proxy for some underlying value similar to the way a US dollar represents the ability to purchase a certain amount of goods and services.
These currencies are traded on online exchanges. Tokenization is when an entity (usually a company) creates a proxy called a token or coin which then represents some (usually future) value or utility related to the company. Often these tokens are exchangeable for cryptocurrency. An ICO is when a company issues these tokens or instruments exchangeable for such tokens to the public in exchange for traditional currency or cryptocurrency. To date, companies have raised over $3 billion globally using this ICO strategy.
Jalek Jobanputra of Future/Perfect Ventures described tokens and tokenization are just one use of the blockchain. She went on to describe one of her firm’s investments, a company that applies the Blockchain to diamonds as they are mined from the earth in order to prevent fraud and theft. She also noted that transactions taking place in third world countries that don’t have the legacy infrastructure of retail banks, escrow, ATMs, etc., can really benefit from Blockchain based financial services. Jobanputra feels a strong parallel between now and the late 1990s as everyone seems to be starting a blockchain/crypto related company. Remember back in the 90s when everyone and their dog (or sock puppet) was forming an internet company.
One sentiment that is circulating is that it is somewhat of a shame that the first major use of Blockchain was in the context of a currency, which is highly regulated and calls into question a whole host of laws and regulations. I think this is, of course, no coincidence. Areas of inefficiency call for such solutions and areas of extreme regulation are almost by definition inefficient.
Alex Mashinsky of Governing Dynamics and Celsius Foundation was extremely optimistic, likening Blockchain technology and pending human advancement to the Cambrian explosion when most major animal phyla appeared on earth. He also felt that Russia is supporting cryptocurrency because it is destabilizing to the US government. One of his points I agreed with is that Blockchain takes a lot of the roadblocks and toll collectors out of transactions.
Eran Eyal, serial entrepreneur and founder of ShopIN broke down the ICO market saying that a small portion of the companies are actually using Blockchain to innovate new or disrupt current systems and 90% of companies are just using it as a novelty to raise money.
Matsumura chimed in with the Elon Musk quote that;
“it is better to be optimistic than not.”
He also stressed the importance of developing disclosure rules around Blockchain, cryptocurrency and ICOs. He is currently working on a system that he claims will create a disclosure document the quality of an S-1 (which is the current disclosure requirement for a company conducting an IPO with the SEC) in one hour without the assistance of legal counsel or any outside advisors. I question the reality of this, but am looking forward to what he comes up with.
Reese Jones, associate founder at Singularity University analogized the internet which is a global network without real global regulation to the way he envisioned Blockchain eventually operating. Just like with the internet, individual countries can, and will, regulate in attempt to protect or control their citizens.
For the most part, the speakers agree that ICOs are out of control and need to be (and will be) regulated.
According to Carol Van Cleef, a partner at Baker Hostetler, the SEC has counted over 5,300 ICOs to date, the vast majority of which have been the unregistered or non-exempt sales of securities.
Amy Wan, founder of Bootstrap Legal and a Crowdfund Insider Senior Contributor, reminded the participants she led in a roundtable discussion of the multiple assumptions that ICO issuers are making and the need to question them, including the current practice of domiciling in foreign jurisdictions and accessing foreign investors.
[clickToTweet tweet=”the SEC has counted over 5,300 #ICOs to date” quote=”the SEC has counted over 5,300 #ICOs to date”]
To be clear, no one expects transactions to be unwound, but there is now a line in the sand based on the current guidance.
In addition, much will be settled by the plantiff’s bar and class action lawsuits, which interestingly, on aside note, may or may not be subject to the PSLRA, depending on whether the tokens are being deemed securities or not.
However, once the dust settles, there is still a valid use case and market for ICOs under an organized regime. There is a hope that the industry will be able to unite and have a voice in such regulation and also that the regulation will contemplate the global nature of this technology and marketplace.
Van Cleef mentioned that in the US the National Conference of Commissioners on Uniform State Laws, the group responsible for bringing us the Uniform Commercial Code, is actually working on a model code for virtual currency, so if the state regulators are actually being proactive, perhaps there is hope.
The SEC, CFTC and FinCen have recently provided a modicum of guidance. For the most part, we can expect regulation through enforcement actions such as Ripple and BTCE, which is not perfect, but is less ham handed than a blanket cease and desist.
Georgia P. Quinn is a Senior Contributor for Crowdfund Insider. She is also the CEO and co-founder of iDisclose, an adaptive web-based application that enables entrepreneurs to prepare customized institutional grade private placement documents for a fraction of the time and cost. iDisclose users may file Form C’s and Form C-AR automatically with the SEC. Georgia also serves as of counsel at a leading law firm in crowdfunding, Ellenoff, Grossman & Schole, specializing in facilitating financial transactions and compliance with JOBS Act regulations.