
ICOs at the End of 2017: What We Think We Know and What We Don't Know - chollida1
https://www.wsgr.com/WSGR/Display.aspx?SectionName=publications/PDFSearch/wsgralert-initial-coin-offerings-1017.htm
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iamleppert
Honestly I can't wait until that filecoin ICO thing becomes an epic disaster.
Like most of the ICOs I've seen, it is flawed on basic principle and lacks a
clear business model, and is ill-positioned for the future. Just because you
can make a big splash and raise a bunch of money does not mean you have
created anything of value for the world.

ICOs seem to be a new way to raise from unsuspecting investors aka a way of
separating people who have too much money and not enough common sense from
their money. The fact that it is utilizing a blockchain technology has nothing
to do with the actual mechanisms at work here, focusing on the use of
blockchain in negotiating ownership and value is actually harmful here.

The real technology isn't glamorous at all and has been in operation ever
since Charles Ponzi "innovated" the concept in the 1920's.

~~~
api
That's one of the least questionable ICOs. Most of them are much more
vaporous.

~~~
hudon
It's the most questionable to me. The ones that are "vaporous", it's obvious
to everyone so not many questions need to be asked. But about FileCoin...

How can they compete with economies of scale? And how will they prevent data
centers of disks being created (centralizing forces)? If they manage to stay
decentralized, how will the very public team defend all the illegal and/or
illegitimate content that gets hosted on there? How will they defend against
the FBI ordering them to shut it down? Why would people pay more for a slower
or less reliable storage solution?

It's very questionable that they were able to make bold claims and get
millions of dollars from people who do not have a clue that FileCoin and
"distributed storage on the blockchain" is DOA unless you want to store your
3d printed gun designs in the cloud. But in that case, the team building it
should've been anonymous...

~~~
anonymous5133
I don't use filecoin's network but I do use a competitor that is basically
doing the same thing, storj. Also when I say I use the network I am talking
about actually uploading and paying for data storage.

To answer some of your questions, storj's network consists primarily of people
who are renting out their unused hard drive space. Economic of scale doesn't
really matter because the people renting the space are just trying to make a
few extra bucks per month and they have already paid for the hardware.

They have no way of preventing centralization of disks but the whole network
is decentralized. The file you upload is being hosted on thousands of
different disks.

Like all companies, they will probably comply with FBI/DMCA orders to the best
of their abilities. The issue for them and the FBI is that all data uploaded
to the network is encrypted at the point of upload so it is impossible for the
FBI/DMCA to find it. These decentralized file hosting systems don't allow
public sharing of the download links/keys (yet at least).

Also the reason I pay for storj over say google is because storj is cheaper
and has higher redundancy requirements. I have files that I absolutely can
never risk losing and storj allows you to pay for the service anonymously
while other services do not. In the world of data breaches everywhere, the
less information the company has about you, the better.

~~~
hudon
> Economic of scale doesn't really matter because the people renting the space
> are just trying to make a few extra bucks per month and they have already
> paid for the hardware.

OK so hypothetically, if this decentralized storage thingie made the sellers a
profit, there would be at least 1 rational and greedy seller who would take
that profit, invest it in more disks, and save on costs compared to other
folks, right? In other words, if I have 100,000 computers in a data center
with central cooling system, the total electricity costs will be less than the
total cooling costs of 100,000 individuals each with their own 1 computer.
Furthermore, the total bandwidth costs of the 100,000-computer data center
will be cheaper than the total bandwidth costs of 100,000 individuals with 1
computer each (economies of scale).

How can you say that "there is no way to prevent centralization" and then
follow up with "the whole network is decentralized", when the cost structure
obviously makes more sense for this distributed storage to all be controlled
by a handful of resourceful entities?

Then those 4-5 data centers just become an encrypted Dropbox, right? So like,
SpiderOak?

~~~
gfodor
It's Airbnb for disks. Maybe not the perfect analogy, but I think the idea
here is to just capture latent inventory that is otherwise being wasted. It's
not about competing on margins, but activating latent resources that are
sitting out there completely unused.

~~~
hudon
> It's Airbnb for disks

I haven't made the analysis but maybe Airbnb works because it is actually more
profitable for an entity to host 100 airbnbs then to have a regulated hotel
with 100 units, in which case the analogy doesn't work because that's the crux
of my argument.

In the case of decentralized storage, this is not the case, as we've seemed to
have agreed. Which means this:

1- The 4 data centers will host 99% of the available storage because it's so
profitable for them

2- Because the supply of storage on the network is so high, the reward given
to the hosters goes down (this is how FileCoin works I'm guessing, the reward
needs to come down to close to the overall cost of the suppliers, like
difficulty adjustments in Bitcoin)

3- Because the costs of the data centers which now have millions of disks all
under centralized electricity/infrastructure is so low, the reward becomes
_lower than the cost of being an individual storage supplier_.

4- At this point, the individuals with "latent resources" have no incentive to
put these on the network, and actually are incentivized to _sell the disks
instead_ , because at least that way they'll make money.

5- Who is incentivized to BUY these disks? See #1

That's how economies of scale work and why they will make FileCoin useless.

~~~
drawnwren
And yet I am sitting here with about 500GB of free space on my disk that is
worth $0 to me.

The answer is that there are other factors outside of the scope of your
defined economy at play.

~~~
hudon
Your argument is "maybe not", which isn't adding much. So can we agree that if
the reward you would get is actually _less_ than the electricity+bandwidth
costs of you leaving your computer on all day, then you're better off keeping
the 500GB free?

Just like in Bitcoin, my free CPU cycles are better kept free because if I try
to mine Bitcoin I would have to leave my computer on 24/7 and it would cost me
more than the BTC rewards I'd very rarely receive?

We've literally just swapped free CPU cycles for free disk space, and we both
know PoW is centralized and it's not worth individuals with a laptop to mine,
but somehow the free disk space won't suffer the same fate?

~~~
gfodor
Prior to AirBnB property owners left their homes unoccupied while they
continued to pay property tax and upkeep on them during those times.
Similarly, there are people with computers powered on all day that have disk
space unused while they continue to pay for the electricity costs. If you
assume these are the people who are going to make up the majority of the
FileCoin network, this is effectively "found money" for those folks. (Albeit
probably not much money.) This might not be the way it plays out, but if it
does, your arguments about margins and electricity bills are moot: these costs
are not increasing after the network is connected.

edit: Also even if FileCoin doesn't throw off a ton of ETH, presumably there
will eventually be a wide array of services like the FileCoin network that you
can transparently trade your liquid crypto assets into. For example, consider
a person who happens to have 50TB of disk they don't need for the next month
but would like to perform some low latency rendering jobs on the RenderCoin
network during that time instead. They could easily just trade one for the
other, increasing market efficiency for those resources. This example would be
a small transaction in terms of ETH, but multiply that across the entire set
of all computing resources, across all services, and it is a potentially
tectonic shift in effective allocation of resources.

------
TaylorGood
Posted this in a different thread:

A quick chat with an attorney who is an SEC specialist basically said "if it
breathes" i.e. involves money that ICO is seen as a security. The SEC putting
together the digital division which covers cryptocurrency tokens is part of
what led to him saying this. Basically fish in a barrel.

It is in my opinion that any US-based ICO is now in a lottery as to whether
they get the SEC visit.

Not legal advice at all, just sharing an excerpt from a coffee chat.

~~~
olegkikin
By that logic Linden Dollars (from Second Life) and PLEX (Eve Online) are
securities too.

~~~
ringaroundthetx
I saw your analogy got downvoted because people didn't like it.

But I've talked with prominent lawyers about this distinction and securities
laws are flexible enough to include practically any product in their purview.

The Howey Test isn't the only test that courts and regulators have created.

There are several tests floating amongst the states and various federal
circuits, which can and have deemed otherwise benign products and services as
things that should be registered as securities with the most onerous costs and
distinctions.

A California country club's member fees were deemed securities under one
framework.

And every kickstarter and centrally issued product can under other frameworks.

There is nothing wrong with your analogy. The securities regulators generally
don't try to stifle all commerce so far.

The idea that all ICOs will experience this form of securities discrimination
- just for the mere fact they are using cryptographic hashes and get a lot of
revenue/capital - is just as logically unsound.

But they could. Just like almost every product or service could. When they do
it will quickly evolve securities law towards a more apt framework. Its not
about "securities or not" its about consumer and investor protection, and this
is currently the tool available.

~~~
AlexCoventry
I agree, many things which could be deemed securities are not. The SEC's
mandate is to protect small investors and public faith in investment markets,
and they will hopefully focus their power on instruments where that faith is
being challenged.

If they do, the best strategy for an organization raising money through an ICO
is to use that money in as transparent and ethical a manner as possible.

------
Alex3917
> When do tokens that are securities stop being securities? This is a central
> question in the token community right now. Our current view is that once the
> value of the tokens is primarily driven by their commercial usage, rather
> than by the efforts of the token sponsor or other developers, the tokens
> should no longer be deemed to be securities. The SEC has not yet addressed
> this question.

This has been settled law for 70+ years.

When one of the biggest law firms feels the need to preemptively issue a
public statement pretending they don't understand how the law works, you know
shit is about to get crazy.

~~~
drcode
I was saying the same thing when Uber launched- "An Uber is just a Taxi and if
they don't follow taxi regulations they will be shut down quickly."

I'm still not sure exactly why this didn't happen, but if people can agree
that Uber isn't a Taxi, then I think they can also come to the conclusion that
an ICO token isn't a traditional security... the world just isn't as black-
and-white as we often like to think, and legislators are human beings that
have a lot more flexibility around enforcement than people imagine.

~~~
notyourday
> I was saying the same thing when Uber launched- "An Uber is just a Taxi and
> if they don't follow taxi regulations they will be shut down quickly."

The difference is that Uber was not created to fleece the masses via
investment pump and dump scheme.

As of now, ICOs are purely pump and dump. They are modern day unregistered
securities, promoted via modern day version of faxes

~~~
iblaine
Tell that to the taxi drivers who are now selling their once coveted
medallions at a loss.

~~~
notyourday
Thank you for proving my point:

 _taxi drivers_ are selling their medallions that they used to offer service.
They are selling these medallions at a loss because a competitor is eating
their lunch.

------
noddy1
The unintended consequences of the SEC forcing ICOs away from representing
equity towards "use tokens" is that investors lose any rights at all.

The SEC is fucking up pretty hard at the moment and doing real damage. Their
actions in the IPO market, meant to protect advisors, have resulted in only
pump-and-dump crap like snapchat and blue apron going public, while all the
gains from real growth tech companies are being retained by VCs, sovereign
wealth funds and investment banks, while retail investors holding index funds
miss out.

I think this is a major factor contributing to widening gap between the super-
rich and everyone else. There are a lot of ICO scams, however giving vague
guidance and forcing ICOs out of their own jurisdiction when clearly people
are still investing in tokens as a speculation/profit vehicle is worse than
useless. Token-holders need the ability to change management, dissolve
companies and reclaim cryptocurrency investment if companies are mismanaged or
scammy, and they need to have the right to see how funds invested are being
spent.

------
grabcocque
Regulators move at the speed of government, not the speed of technology.

However, if you think financial regulators are _at all happy_ with the nature
of ICOs you only have to read between the lines of what they have said.

------
lawlessone
How does buying an ICO link me to a company? does it entitle me to a dividend
for investing in them? Are the company under any obligation to share their
success with me?

~~~
drcode
Speaking as the world's biggest ethereum believer: ICO have pretty much have
zero obligation to share their success with you and it seems crazy to me that
anyone would buy into an ICO.

~~~
vladimirralev
Well they have as much obligation as you when you read TOS/EULAs and click
"Agree". So there is an actual obligation in most cases when it was specified
in the terms on their website. It's very hard for most top ICO teams to deny
their ties to the ICO and it's terms.

------
woah
> Simple Agreements for Future Tokens (SAFTs), as used today, almost always
> are securities.

Does this mean that SAFEs are also securities? I imagine so, and they are
usually given to accredited investors. I have also seen them being given to
contractors and employees as partial payment in equity.

Is paying a non-accredited contractor in SAFE a possible issue with the SEC?
If not, how are SAFTs different?

~~~
dragonwriter
> Does this mean that SAFEs are also securities?

Well, obviously, stocks and future interests in stocks are the basic textbook
examples of securities. On SAFEs specifically, see, e.g.,
[https://www.sec.gov/oiea/investor-alerts-and-
bulletins/ib_sa...](https://www.sec.gov/oiea/investor-alerts-and-
bulletins/ib_safes)

“Some issuers have been offering a new type of security as part of some
crowdfunding offerings—which they have called the SAFE.”

