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Move Over Kickstarter, Crypto-Equity Is the Next Frontier (panampost.com)
119 points by MichaelAO on July 5, 2014 | hide | past | web | favorite | 72 comments

>What is the legal status of the investments promoted by your platform? How will they be treated by the Securities and Exchange Commission?

>Just like bitcoin, we’re launching it entirely outside the system.

That's very naive. The government doesn't regulate 'The Dollar', and it doesn't regulate 'The Stock Market' - it regulates transactions, exchanges & financial instruments. Just because you don't play within existing infrastructure doesn't mean you can play without any rules. As an idea this is really clever - but I don't think one should intentionally disregard the (often useful) existing boundaries. Nor say so in an interview.

Swarm founder here. We have a very unusual organizational model that allows people to represent the Swarm without having an "official" status within the organization, which means that we are always at risk of some degree of misrepresentation. After this specific interview I issued a "Legal Action Plan" that specifies the particulars of our near and long-term legal strategy, such that no one makes faux pas like "we’re launching it entirely outside the system."

That said, a lot of these subtleties are lost on non-native English speakers, which at the moment is probably the majority of the Swarm.

The full letter can be read here: https://docs.google.com/document/d/1b6krYF6rMECtTwmTjbcZWZ0l...

Are you familiar with the history of Bitcoin-denominated stocks? The history of various bitcoin stock exchanges which have been shut down by the SEC? Do you know exactly what the regulations are? Are you aware of how they've actually been applied to Bitcoin in the past?

Are you aware of the extensive fraud that has been perpetrated in the this space?

This is not a new field, it's got a couple years of history, and very little of it is pretty.

What are you doing that makes you think you'll be different?

As listed in the above document, cryptoequity is not simply a cryptotoken that ostensibly represents a stock, it encompasses all types of programmable rights that can potentially apply to a project. There are many potential applications of cryptoequity that fall into the realm of securities and equally many that do not.

Fundamentally what we are trying to do is stay on the right side of what is a very fuzzy line between what we can and can't do, while offering something that is incrementally but substantially better than all previous funding platforms. I think this is eminently possible because even a relatively simple feature like the distributed voting we are doing (http://www.cryptocoinsnews.com/news/swarmcoin-holders-vote-c...) provides a rather significant amount of benefits relative to existing offerings.

Of course, people hear "cryptoequity" and they immediately think "stock." The reality is far more complex... and interesting.

I feel like you've likely come across this regulation-related op-ed penned by Skype's previous COO, but just in case: http://www.coindesk.com/bitcoin-regulation-lessons-early-day...

> To put it bluntly – every bitcoin actor should be reading the law very carefully and finding the loopholes. You should all invest a great deal of time in this – it is hugely important. For example, are you really moving ‘currency’ or are you simply exchanging some sort of token?

> Companies need to just carry on doing what they are doing, if they can make a case for themselves that they don’t need regulation, they shouldn’t even go near it. ... [They] should read the rules, argue why they are not covered by the rules and use that analysis as a defence, but they should only ask for permission if they are sure it is necessary.

Regardless, great positions.

Yes, one of our legal counsels actually recommended that we read that article once. And then again. And again until it sank in.

It sank in. ;)

Any economic unit of value that moves, in any way shape or form, within the United States - and sometimes as an extension outside of it - the US Government claims dominion over. Period. It is exceptionally naive and will come back to bite them.

According to a Swarm founder comments above, their legal counsel may have advised that there are potential loopholes to exploit that may not make this a black and white case. Wondering how far they are willing to test this in court.

US courts don't look fondly on loopholes. For example, the Supreme Court just ruled against Aereo and stated that the legislature didn't even need to close the loophole, that the courts would do it for them.

It seems a business plan built atop loopholes is not, perhaps, the best long-term strategy. Particularly when then calling attention to this fact...

The government definitely regulates the dollar, even under the definition you're using.

Also doesn't the US view bitcoin like property, and so is liable for gains tax?

Hey, this is 2014, they're supposed to be 'disruptive.'

I feel sorry for the pre-sale investors, there is a very high probability that they will not see their BTC back. If you are considering investing, be careful.

The platform charges 2% fee to all projects funded, 1% to investors, 1% to founders. The investors hold a total of 100,000,000 swarmcoin and the presale is at a rate of 5250 SWARM/BTC. At that rate, the platform would need to do over $1 billion in sales to just get a ROI, something that took kickstarter over 5 years.

I do too. In the history of Bitcoin public offerings, never has a single company outperformed holding BTC itself over a modest time frame. SwarmCo is raising a boatload of BTC up front for a risky venture, and taking 1/3 of the funds to pay salaries.

Startups are all incentivized to do BTC public offerings, but no one is incentivized to actually deliver products. IPOs are the easiest way to "earn" BTC. It's cringeworthy how so many of these pseudo-IPOs focus on the marketing and the limited time buy opportunity without so much as producing a working prototype. I'm always astounded by the amount of BTCs that get raised. It just reeks of unsophisticated investors getting sheered.

From the perspective of SWARMCO, once you raise thousands of BTCs, you're golden. Your investors shoulder all the risk, because the moment they irreversibly send you the most liquid and stable crypto asset, you can effectively disappear, or keep delaying "two weeks" as Butterfly Labs is infamous for doing. If anything goes wrong, just ask Mark Karpeles for advice.


Satoshi dice outperformed holding btc, and that was during the period when btc skyrocketted from 10 to 100. Also, but I may be wrong here, asicminer did a similar trick.

Over a very short time frame, you mean? Show me a single example of a Bitcoin stock price chart that looks anything like this: http://bitcoincharts.com/charts/bitstampUSD#rg730zczsg2012-0...

ASICMiner is in the gutters, as is literally every other Bitcoin stock. Who benefited from the company going public? Over a short time frame, those who exploited the pump and dump; over a modest time frame of 1-2 years, the company profits at the expense of investors, every single time, without exception.

I held ASIC miner and I got huge dividends AND it increased in value while I held and ended up selling

There are very specific laws regarding the hawking of shares to the general public without variously being registered securities or having an offering document. While I could see this take off, I doubt it would be used by legal companies unless it could fit within some crowd funded equity carve out.

If the actual business is still centralized, what prevents the operators from simply ignoring the crypto-shareholders and keeping all profits and assets for themselves?

The problem with these tokens is that at the end of the day there is no direct link between a token and the asset they're linked to- Unlike a stock, which gives you voting rights and other privileges.

Mind you, there is nothing wrong with a completely "unlinked" asset per se (Bitcoin has proven that) but an unlinked asset's price will, all things being equal, quickly undergo a price-discovery process that will capture the majority of future expected returns. Hence, the price for these equities at any moment in time has no expected return beyond the early floating exchange rate. Therefore, its true future returns should be modest (the same as equivalent cryptocurrencies) and it will have only modest potential as an investment.

Bottom line: If the coin doesn't give me any "special powers" like a stock certificate does, it has little upside potential compared to any other cryptocurrency- Hence, it makes more sense to invest any capital I have in a more established currency, like Bitcoin.

(And for those arguing "Yes, hempcoin/newcameracoin/etc DOES have value and special powers beyond Bitcoin because my hempshop/newcamerashop/etc doesn't take bitcoins but does take this specialty coin" then it should be obvious that you'd be able to perform a JIT purchase this coin using bitcoins through an exchange, which means Bitcoin holders have access to the same "special power", without needing to be long-term holders of the asset.)

These types of coins will only become interesting once cryptocurrency contract technology becomes more developed, so that these coins can give holders more extensive special rights regarding the asset/project the coins are linked to.

This would almost certainly fall under the definition of security under the '33 Act.

Besides this, the questionable practice of calling this coin "equity" and representing that it entitles holders that gives them some kind of ownership stake in companies funded with this coin on the website, while putting the disclaimers within another document, creates the impression that the issuers want people to think this is equity so they can raise BTC. As the founder has said in a comment, the majority of the swarm consists of non-native speakers at the moment, so this distinction would be lost on them. There seems to be demand for something like this, but the lack of details or research into relevant laws give me plenty of pause.

Can the founder (Joel) clarify his affiliation as well? His swarm bio at http://swarmcorp.com/team.html lists "#Harvard #Brown #Penn" but his LinkedIn profile seems to indicate that he did not actually get a degree from all of these institutions.

[Joel Dietz's] swarm bio at http://swarmcorp.com/team.html lists "#Harvard #Brown #Penn" but his LinkedIn profile seems to indicate that he did not actually get a degree from all of these institutions.

UPenn's 257th commencement program lists one Joel Dietz among their 2012 Master of Arts recipients [1]; and Brown's undergraduate East Asian Studies 2012 alumni newsletter mentions one Joel Dietz '04 having "just finished his M.A. in the East Asian Languages and Civilizations department at the University of Pennsylvania" [2].

The founder's affiliation with Harvard is less clear-cut: apparently he took an introductory Sanskrit course through the Summer School in 2012 [3,4], but it is unclear if he was affiliated in any other more substantive or relevant capacity.

For what it's worth, the founder's swarm bio now lists "#Brown #Penn #SalesforceMVP" instead; and an article from less than a month ago listed two different core team members than today [5].

Either way, it is paramount that business leaders be forthright about their academic credentials --remember Scott Thompson?--, especially in such a confidence-tricked industry, and especially when they purposedly cite them as a signal of technical ability and experience [6] --pointless credentialism, if you ask me.

[1] http://www.archives.upenn.edu/primdocs/upg/upg7/upg7_2013.pd...

[2] http://brown.edu/academics/east-asian-studies/sites/brown.ed...

[3] https://github.com/fractastical/Sanskrit-at-Harvard

[4] http://archive.summer.harvard.edu/courses/sans.jsp Apparently this is the only intro course Witzel teaches.

[5] http://www.followthecoin.com/digital-currency-crowdfunding-s...

[6] http://www.coindesk.com/swarm-take-bitcoin-crowdfunding-new-...

There are lots of reasons for pause and our choice of the term "cryptoequity" was certainly because it does evoke the fuller idea of the potential behind these cryptoassets, something that you don't get with the weaker but more accurate "cryptotoken."

Although we've issued various statements clarifying the issues including a manifesto, cryptoequity whitepaper, and legal action plan, it remains fairly complex and something that is probably not approachable to the ordinary user. I'm hoping that changes with the video explanation that we are launching on July 10th.

As for me, I have my B.A. from Brown and M.A. from Penn and a smattering of various other institutions including Harvard.

> The crypto-equity platform is enabled through bitcoin 2.0 technology

Oh, please tell me this isn't going to start becoming a thing people say. Please. I can't bear the thought of another "Web 2.0" buzzword bubble.

I'm afraid it's already a thing people say, and has been for a while. But unlike "Web", Bitcoin may actually reach a version 2.0, and at that point, the confusion will probably be a constant source of amusement.

I personally strongly dislike the term "Bitcoin 2.0" although I still use it quite frequently, primarily because I don't know of any other succinct way to describe all of the second generation functionality that is currently being built on top of the blockchain.

... "Bitcoin-based"?

There's nothing particularly revolutionary about this concept. It existed for nearly two centuries before the SEC locked down rules on investing.

The sole reason it hasn't existed the last 20 or 30 years is due to the SEC, not the lack of someone 'inventing' it. Their rules restrain the ability to do it.

Anonymous investing was extremely common prior to the SEC taking over full control of investing laws. It was trivial to set up anonymous shell entities and hide who owned what, making it practically untraceable.


Is this Legal?

"We believe this falls into section 1(d) of our Cryptoequity whitepaper, meaning it is allowable under U.S. law and is probably not problematic elsewere"

This is 1(d): People can redeem cryptotokens at some point in the future for some service in the network. [Legal assessment: Probably fine, may limit upside of “equity” growth]

So it's "probably legal" which doesn't instill much confidence

The basic legal rule is that you can't issue "equity" in any venture unless (a) it's registered with the SEC (and certain state authorities) or (b) you fall within exemptions (accredited investors only, etc.)

Swarm obviously doesn't fall under either category, so what they're basically trying to do is claim that they're not actually issuing equity in the traditional sense. Best guess as to what they're arguing is that by making the cryptotokens redeemable for a service (as opposed to actual cash), they're really issuing something closer to gift cards than traditional equity. Gift cards have their own legal issues, but it's not equity. That said, gift cards have limited upside relative to real equity. When the next Oculus is purchased by Facebook, I might be able to redeem by crypto-shares for a free Rift headset, but that's not the same thing as getting X% of the proceeds from the sale of the company.

Here's the take-away though: The reason these laws exist is to prevent con artists from selling shares in some fly-by-night operation and disappearing with the money. There's nothing about crypto-equity that makes fraud any less likely than traditional equity. So if you're the SEC, and you see someone selling something that acts like equity, looks like equity, is actually described as equity, and poses the same risks for the buyer that regular equity does, the fact that it might not fit neatly in the traditional definition of equity isn't going to deter you from putting a stop to this.

That's not quite correct. Our model includes a "Decentralized due diligence" aspect (https://bitcointalk.org/index.php?topic=664071.0;topicseen) that we believe greatly reduces fraud potential. Our full plan consists of a variety of fairly novel features, including crowdsourced project screening and fund-locking such raised funds are programmatically unlocked as founders achieve certain milestones.

> including crowdsourced project screening and fund-locking such raised funds are programmatically unlocked as founders achieve certain milestones.

Both great ideas to get something into production, but how does this provide equity?

Specifically, when I hear equity, I think two things: dividends and shareholder voting rights.

Both can be coded in on a bitcoin 2.0 DAO platform of your choice, but there's the (unsolved, afaik) question of physical-world enforcement. I've unlocked all my protocol-escrow'd milestone funds, shipped a product, but I now choose to ignore the dividend or voting feature of all the token holders. See you later!

One of the benefits of operating within the legal system rather than outside is the investors have a last-resort: they know who you are and can sue. If you operate outside the system in DAO-land, what recourse do I have when facebook buys my cryptoequity-funded CryptoRift Co. and says, "sorry, crypto-tokens aren't equity under US security laws, you get nothing"?

Trustless consensus-unlocking escrow for project milestones is a great game-theory trick to get to ship, but it stops short of true equity. To honestly call it equity (guarantee of dividends and shareholder voting rights under threat of legal action), you need to operate within the law, not find loopholes. Or at least have the law legally recognize the voting will of the cryptotokens, which I haven't seen mentioned either.

I agree. It's on our roadmap to build the appropriate tie-ins to the existing legal system to provide benefits that are not only pledged but also enforceable.

Among other things we are actively attempting to hire a lawyer (ideally a brilliant younger one) to help figure out how to integrate these cryptoassets with the existing legal system.

I doubt the SEC would buy that argument. Due diligence is orthogonal to equity structure. That is, you could have ventures built around traditional equity structures but with crowd-sourced due diligence, and you could have ventures built around crypto-equity but without any due diligence requirement at all.

Put another way, the fact that a publicly traded company permits any shareholder to inspect its books at any time does not eliminate the company's obligation to make regular filings with the SEC.

Completely agree with what you say, so not sure what argument you think I'm making. I'm only pointing out that our system does have fraud prevention mechanisms that do not exist with standard cryptotoken offerings.

Point is the same one made two posts ago: High probability that SEC will try to shut this down.

I don't think Kickstarter was clear-cut legal, either, was it? I think they needed to have a law passed that essentially legalized "crowdfunding".

The law you're referring to (JOBS Act) didn't legalize crowdfunding, but the process of selling equity via crowdfunding. The Kickstarter model is very clear-cut: it's either a donation or you're buying something (rewards or product), as opposed to buying equity.

kickstarter doesn't allow you to offer equity, but the JOBS act + the SEC did change this year to allow non-accredited investors (people with less than $1M in assets) to buy into a company directly; and for a company to market equity in the style of kickstarter.

Here are the new rules: For income below $100,000, invest a max of $2,000 or 5% of income or net worth For income over $100,000, invest a max of 10% of income or net worth Investments made in a Title III crowdfunding transaction can’t be resold for a period of one year

Note people, these laws are not yet in effect and are still liable to change. Equity Crowdfunding for the public (non-accredited investors) is ILLEGAL, unless done through a intrastate crowdfunding exemption.

Kickstarter's "perks" model was not clear cut in the beginning. It became clear cut over time as the legal space was established. We are probably one step further than Kickstarter in that we offer things like programatic voting, but it's quite infeasible for us to offer "equity" at present and attempting to offer something like this is not even in our roadmap.

when joining a kickstarter campaign, you're donating money or paying for (the pre launch of) some product, not taking some form of equity in a company

There are existing laws covering pre-orders in order to prevent the kinds of scams we've seen on Kickstarter. It's not entirely clear that Kickstarter is actually compliant with them.

Indeed. "We believe" is a shaky legal foundation. In the best case scenario they've found a loophole. Exploited loopholes have a nasty tendency to get closed.

It may work, it may not. I have my doubts but I'm very happy this exists. We need more radical thinkers like this.

@corpselord420: your interesting comment is unreadable by most HN readers, because you appear to be hell banned. Only people who have enabled "show dead" can see it (or any of your other comments--looks like you got banned with your first comment).

We unkilled that comment.

We think there's a place for unkilling comments on a case-by-case basis and will probably implement a way for users (like, in this case, tzs) to indicate when to do so.

If you do that, how about also changing the style for killed comments made visible by the show dead option so that they are readable? Right now, they are given the .dead style, which has color #dddddd, making them hard to read.

If someone turns on show dead, presumably it is because they want to read the dead comments. Making them visible but hard to read seems kind of obnoxious.

Seems like a fair suggestion. I'll add it to the list.


This is something that I've thought about extensively. I'd be interested to hear your thoughts.

My thesis is thus: In the Information Age, data is subject to a kind of reverse economies of scale. That is to say, the more data you have, the more difficult it becomes to secure.

A website like MTGox is always going to fail. Period. Entropy is a thing, and there's no way to prevent 100% of security leaks. You can see the credit card economy leaking constantly as well.

What I imagine happening as time goes on is that businesses will start hiring someone to manage their public keys. Businesses already trust accountants with their finances. It's not a huge leap to imagine a specialized service industry catering to small business and dealing with private key management.

I feel as though trusting one person with only your company's data is going to be much, much more feasable from an economic perspective than trusting a large company with yours and 5000 other business's private keys.

This obviously won't work with the current "Payment Processing" infrastructure. It has drawbacks, certainly. But it seems like a world that can actually legitimately exist, in contrast to the MTGoxes and Moolahs of today.

I hope this makes sense. I'm not a infosec guy, so I'd love to hear criticisms of this paradigm/theory.

I've come to the same opinion. Reading /r/bitcoin, people are losing their coins every week. And these are enthusiasts. The security just doesn't exist for mass adoption.

6.6% of all bitcoins have been stolen. When you consider around 60% of coins have never moved, that means a lot of the coins in circulation have been stolen.

Wouldn't specialized computing devices ("hardware wallets") carefully designed with limited communication capabilities and requiring physical user confirmation for the transactions fix the most issues?

If you put most of your assets in a "cold storage" wallet, it will be more secure than any cash, gold, or financial instrument that you own.

You put only an amount that you're willing to lose on one of today's machines, for convenience, and it works just fine.

Infrastructure doesn't need to change, and it only takes a small amount of effort to learn how to be security-minded.


Could you explain what you mean by security primitive?

Currently security related things are implemented not only as libraries, but as libraries written in memory/type unsafe languages like C.

A more principled approach to security might be to bake the relevant security features in to the semantics of our languages. There is work being done on languages with type systems that enforce security guarantees.

http://www.pl-enthusiast.net/?p=11 and the pl-enthusiast blog in general covers this topic.

Wow. Fascinating.

Thaks for the read.

We already do traditional banking with computers and mobile apps. Why can't we do the same with Bitcoin? Besides, you can have your hardware wallet in your pocket or safe, which will actually have to be physically stolen for someone to get your funds.

Electronic transactions with traditional banking are generally reversible. If I hack into your bank account and transfer all the funds to my account, your bank can usually track the funds down and have them returned to you. Moreover, most bank accounts are linked to real-world identities in some way, so there's a high risk that I'll be caught and prosecuted for aforementioned hacking attempt.

Not so with Bitcoin.

This is a business opportunity to create that infrastructure.

Many have tried and failed. This undermines credibility.

I want to like Bitcoin but so much moves against it. Including the enthusiasts.

I really am a fan of the idea of all these crowd-sourced equity ideas that are getting hatched.

As a boots on the ground business guy, however, the potential for fraud and abuse is staggering. I have seen things go down with 'accredited investors' trying to get into the startup gold rush that are unbelievable. To me, at least. And these same guys are on kickstarter right now, where there's no accountability whatsoever, cleaning up.

All I can say about the regulation of equities is that it's an ugly solution to a very real white collar crime problem.

For anyone interested in micro-equity I found a site called http://crowdcube.com recently. It doesn't have any cool crypto aspects but it is basically kickstarter with real equity (rather than just a speculative pre-order).

It's UK only at the moment. I guess that must be because regulations make it difficult in the USA.

But there's no blockchain aspect so I guess it can't be as cool as SWARM...

Do you think that SWARM would operate easier in the UK?

As I understand it, in the USA you can only attract public investment either by gong fully public and being regulated as a public corporation, or by attracting individuals of high net worth. From what I understand this is considered a consumer protection mechanism, such that you can't lose the farm (literally) by investing in private equity schemes.

So far as I know, this restriction does not exist in the UK. So yes, if SWARM operated in the UK with UK investors it might have an easier time.

Personally I don't really see the need for the crypto aspect, and AFAICT investment regulations are usually a good thing, but whatever floats your boat.

As it turns out, Swarm's first legal entity is in the UK.

Without some force of law to ensure dividend distribution back to shareholders, equity doesn't really exist except at the pleasure of management.

Pretty sure it's illegal in most countries. So it can only work for businesses that are themselves illegal.

> Susanne Tarkowski Tempelhof on SWARM, a Revolutionary Crowdfunding Platform

I've learned to skip any article that has 'revolutionary' in the title or subheading.

this reminds me of a metafilter comment from 2012 (because it's literally what is described in the comment): "There are very interesting things you can do with bitcoin that nobody is doing yet.

Bitcoin is fundamentally a globally synchronized ledger. Think of it this way, every single bank in the world has their entire transaction history available for the public, live. You can use that ledger for more than just exchanging a single currency on that ledger.

Because you can accurately trace the transaction history of coins, as everything is logged, you can overload the coin to have other contractual properties, simply by creating a document that says the 0.00000100 coins derived from this single transaction counts as 100 shares of freely tradeable common stock (you'd need something like a last-in-first-out order specified in the contract).

By tracing who owns individual shares, you can then give voting rights to those addresses (and because they have crypto signature built in, you can vote on board members, etc. Further, since you know the addresses for bitcoin ownership, you can issue dividends. The dividends can be priced in bitcoin, or more interestingly, the dividends can be denominated in US DOLLARS. You can specify 0.00000001 bitcoin as 1 share of an ETN, making 1 share equal to 1 USD backed by a bank.

Because bitcoin supports complex transactions, you can conduct a single transaction of 1 share for 1 USD in a single atomic transaction, with no need for complex clearinghouses as we do today.

Here's where things get crazy: by using distributed hash tables, such as what people use to find peers in bittorrent DHT, you can build a trading floor. The trading floor can have bid-ask spreads (although only the ask side can run without escrow), this means you can build an entire stock exchange with functionally no actual middlemen beyond the distributed bitcoin transaction ledger. All you would need to do is broadcast on the DHT peer-to-peer network an open bitcoin transaction that says "I will accept any transaction that pays me 3 bitcoin for this specially marked 0.00000001 bitcoin that is 1 share of stock in ABC Corp.", which is supported in bitcoin's protocol.

Here's also where things get creepy: if you had a nation-state that recognized this as a valid corporate structure, you could build a company in which ownership is completely unknown. Also, if a hedge fund that invested in these companies, and created a machine learning algorithm that invested successfully and bid on computing power (paid for in bitocoins), and the hedge fund owner was ran over by a truck, you'd have an independent entity surviving on the network with complete agency, with no human control.

There are a lot of creepy things that can happen, a lot of possibly good things (reducing middlemen in banking), either way, we've only begun to scratch the surface of what bitcoin means. If you think it's exclusively the domain for a bunch of wackjob gold bugs hating on the Federal Reserve, I think you're underestimating what bitcoin may be able do in the future." some other points: -undetectable stealth takeovers; this is a huge part of the sec's job and it will be fucking chaotic -- stealth sell shares to yourself to artificially depress the prices and boom. but that doesn't really matter because: -no legal accountability to shareholders woops! -stealth collusion and market manipulation across different corporations by stealth monopolists -like someone else said this literally only has utility for criminal enterprises because its baldly illegal in the US and probably every other country

No its not.

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