
Initial Coin Offerings Horrify a Former S.E.C. Regulator - SREinSF
https://www.nytimes.com/2017/11/26/business/initial-coin-offering-critic.html?hpw&rref=technology&action=click&pgtype=Homepage&module=well-region&region=bottom-well&WT.nav=bottom-well&_r=0
======
tlb
They 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.

~~~
Alex3917
The 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
Co-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
> 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
Isn'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
> 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.

~~~
arkades
You are making references - “triple entry” - that seem to take for granted
familiarity with certain concepts. Can you unpack that a bit?

~~~
thesehands
I would assume double entry land to refer to the current system we operate
today, and triple entry land would refer to a system where transactions
occurred in crypto currency. Triple entry is well laid out here:
[http://iang.org/papers/triple_entry.html](http://iang.org/papers/triple_entry.html)
And point to the fact that transactions between two parties are digitally
signed by a third party, thereby creating a third record

------
unabridged
The 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.

~~~
Chirael
I think the idea of accredited investors is that those investments are very
risky, and it limits them to people who can "afford" the risk. An accredited
investor may be able to bear the brunt of 9 investments being a total loss, to
get to the 10th that hits it out of the park, while a non-accredited investor
may have her/his life savings (or a substantial enough part of it) wiped out
on the first 1 or 2 deals. I'm not saying it's perfect - there's certainly an
element of "the rich get/stay richer" too - but just that there's some kind of
rationale for the rules (as I understand it anyway).

~~~
summer_steven
The point of accredited investing is to lock the middle class out of the
market.

If the law was really about "protecting people", then gambling and the lottery
would also be illegal.

Also, why can't I sign a paper saying I accept the risk of investing? Why
can't I become an accredited investor by passing a class? I can pass a series
of classes to become an EMT and be trusted with peoples lives, but no classes
are sufficient to educate me about investing in startups.

When you look at how the accredited investor laws are structured, its clearly
meant lock the middle class out of the market

~~~
vel0city
FWIW, in most of the US gambling is illegal and lotteries are often regulated
by the State.

~~~
maxerickson
There's loads of casinos though:

[https://www.worldcasinodirectory.com/united-
states/map](https://www.worldcasinodirectory.com/united-states/map)

And aren't states mostly the beneficiaries of lotteries? Here the revenue is
supposed to go to schools or something.

~~~
vel0city
That source is pretty questionable. I'm pretty familiar with Texas' gambling
laws so I was surprised to see so many "casinos" in Texas. Upon further
review, many of those points are improperly placed, with actual casinos being
out of state but simply matching a partial address. I'd take that map with a
massive grain of salt, as chances are a high percentage of points are probably
wrong. Of the three casinos near DFW, two are out of state with the third
being a horse racing track. The one outside Austin really exists in Indiana.
It also shows cruise ships, which usually don't begin gambling until they're
well offshore.

I'm not going to deny there are many casinos (there are plenty) but the OP's
statement of "gambling and the lottery would also be illegal" seems to miss
that in probably the vast majority of the US, gambling and operating lotteries
is illegal. For example, Texas recently had to have a constitutional amendment
to allow sports teams to hold charitable raffles.

[https://ballotpedia.org/Texas_Proposition_5,_Definition_of_P...](https://ballotpedia.org/Texas_Proposition_5,_Definition_of_Professional_Sports_Team_in_Charitable_Raffles_Amendment_\(2017\))

------
narrator
The 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.

~~~
conanbatt
Yes!

This is a great example of how costly regulation actually is. I am horrified
at the SEC, not at ICO's. Figure how all that moeny could be going, for
example, to YC startups, for a fraction of what they give investors.

~~~
emodendroket
The SEC came into being because without it a bunch of people were being
scammed. Which is exactly what we're seeing with ICOs. I don't see what's
horrifying.

~~~
summer_steven
So it used to be "only white, male landowners are responsible enough to
invest" and now its "only the very richest Americans are responsible enough to
invest".

The SEC is blatantly discriminating. Why can't I sign a piece of paper and
accept responsibility for myself? I'm a grown man with 200k+ in assets, I
don't need the government to protect me.

~~~
gamblor956
If you're a grown man with $200k+ in assets, you appear to qualify to be an
accredited investor and you don't need the government to protect you...which
is the point of the accredited investor rules. You have the financial
resources to absorb a few bad investments/scams. Most people don't have the
resources to absorb even one bad investment.

~~~
summer_steven
In the United States, to be considered an accredited investor, one must have a
net worth of at least $1,000,000, excluding the value of one's primary
residence, or have income at least $200,000 each year for the last two years
(or $300,000 combined income if married

------
Jd
Founder 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.

------
proc0
No 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.

------
jerkstate
Yet 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
I think the difference is scale. There are some exceptions but most
Kickstarter pledges are less than $200. ICO exposure can be much higher.

------
age_bronze
I 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
I 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
It isn't the government's job to "increase participation in the market".

~~~
Taniwha
Governments 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
_It '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".

~~~
Taniwha
Not really an old saying, unless I guess you are really really young, the
first part, often misattributed to Franklin first turned up in the popular
literature in the 90's, the last sentence was tacked on later BT someone else

~~~
mindcrime
That has absolutely nothing to do with the point at hand.

~~~
Taniwha
You claimed an aphorism, implying it was valid because it was old,it isn't,
it's made up poppycock by some American survivalist twit

------
lanius
>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
You can substitute “since the Code of Hammurabi” for “in all legal history”.
He’s simply using more flowery language.

------
gxs
What'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
Why 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.

~~~
stale2002
The problem is not people spending money on "worthless/ frivolous" things.

Investor protection are about Fraud protection. NOT, because it is good or bad
to spend money on something.

If you spend 2 Million dollars on a car, you are getting exactly what you were
sold. If you buy a lottery ticket, you are getting exactly the odds that were
promised to you.

But investments are a different story. Someone is trying to promise you that
your investment will go up. They are making claims that they cannot guarantee.

That is why investments are regulated.

~~~
alphydan
> promise you that your investment will go up.

I challenge you to find a single ICO which says that (or something very
similar) in their terms and conditions, homepage, or white/yellow papers. So
far, every single one I have read about said it was a risky investment with no
guaranteed return.

Now check out lottery advertisement for a different message:
[https://i.pinimg.com/736x/c8/95/f6/c895f66260e1517e2b2437d8a...](https://i.pinimg.com/736x/c8/95/f6/c895f66260e1517e2b2437d8a0d93206
--winning-lottery-numbers-national-lottery.jpg)

------
mrwong
There 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
Not 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/r...](https://www.indexmundi.com/facts/indicators/CM.MKT.LCAP.CD/rankings)

~~~
mrwong
You assume there would be no capital flight if there would be a superior
finance place in the world?

~~~
emodendroket
I think what he disagrees with you about is what constitutes a "superior
finance place."

~~~
wpietri
Yeah. 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.

------
giacaglia
How would you differentiate fraud from a legit ICO? What makes a ICO not
fraudulent? It's hard to determine

~~~
brndnmtthws
The 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
Except 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.

~~~
brndnmtthws
Ah, yes, and the government knows best, right? If there's a law, then it must
be safe and good for everyone!

~~~
MBCook
No, 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’.

------
rjknight
The 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?

~~~
stale2002
File 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
If 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
Once there is an active storage market, it’s no longer a security, you’re
paying for a service.

------
Breefield
[http://whatthefuckisethereum.com/#scammer](http://whatthefuckisethereum.com/#scammer)

------
andreygrehov
They're always horrified when they start losing control.

------
sschueller
I am horrified by what was/is allowed legally at wall street. Not that ICO's
are any better.

~~~
mrwong
Wallstreet has a monopoly on IPOs, they are clearly threatened by the ICO
boom. Its just the internet all over again. Candlemakers wanted to ban light
bulbs. Newspaper wanted to regulate online media. They all failed. So will
wallstreet. Its just a matter of time, the forcing function is way to strong.

~~~
JumpCrisscross
> _Wallstreet has a monopoly on IPOs, they are clearly threatened by the ICO
> boom_

For a longest time, Wall Street had three tricks: securitization (breaking
cash flows into securities), portfolios (putting securities in a box) and
leverage (borrowing and lending). (One could argue swaps are a fourth.) That's
it! IPOs? Securitise a company. CDO? Portfolio mortgage securities. Mortgages?
Securitise them!

Now there are blockchains. A whole new thing! If there's a group thrilled
shitless about blockchains and ICOs, it's Wall Street. Best part: when the
whole thing goes south, they get to blame Silicon Valley.

~~~
xadhominemx
Even if blockchains/cryptocurrencies replace fiat currencies and ICOs replace
IPOs on a stock exchange, little about Wall Street does will actually change.
Securitizing and aggregating securities into portfolios, lending, marketing
and pricing securities, advising issuing entities, etc., the things investment
bankers occupy themselves with every day, do not go away because of
cryptocurrencies and ICOs.

~~~
JumpCrisscross
> _the things investment bankers occupy themselves with every day, do not go
> away because of cryptocurrencies and ICOs_

Pardon me, I was being facetious. We agree. I was responding to a comment
claiming investment banks "are clearly threatened by the ICO boom" [1]. Wall
Street is more likely to coöpt, as opposed to be replaced by, blockchains.

[1]
[https://news.ycombinator.com/item?id=15790978](https://news.ycombinator.com/item?id=15790978)

~~~
xadhominemx
Your parody is very good!

------
microcolonel
If 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.

------
googletazer
No 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.

------
chinathrow
Every 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.

------
scotty79
> 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.

------
basicplus2
A fool and his money are easily parted

------
thrill
Of course they horrify an American regulator - people believing they're free
to do what they want with their property?

------
Bromskloss
Lot's of things horrify me.

------
CamelCaseName
Posted 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.

------
ybrah
Anyone who buys into ICOs tend to not do much research

~~~
phkahler
Most 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
Before 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
I 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.

------
ltr_
Let 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".

------
brndnmtthws
Don't like it? Don't invest. No reason for you to go around poo-pooing it
though.

~~~
seattle_spring
Did you feel the same way about MLMs that methodically put disadvantaged
people into financial ruin?

~~~
jerkstate
are MLMs illegal?

