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.
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.
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.
One thing that confuses me about securities is how vague the description is. Why isn't a concert ticket a security if the majority of purchasers are reselling them?
Can you be banned from being an accredited investor? AFAIK, the only requirement in the US is that you have a net worth of $1m or an income of $200k a year. It's not perfect, but it's the government's best way of determining whether you have the ability to suffer significant financial losses.
One is to say that the government want to protect people against themselves, to make sure they can withstand significant financial losses.
Another explanation is that those who match these conditions (I'd guess about 2% of the population) have successfully lobbied the government to maintain their advantage against the remaining 98%.
I do not understand why people downvote when I just say out loud the less palatable alternatives views. It seems to me we are not considering all the possibilities there.
Their advantage isn't that other people aren't allowed to make certain types of investments, though. It's simply that they have more money. Even if "accredited investor" weren't a thing, they'd still have access to better investment opportunities, because they can offer better terms. Compared to someone who has 1000x more money than you, all you can offer is the willingness to take on more risk — which is exactly what accredited investor rules are meant to protect people against.
> 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.
With the social and financial security nets we have, a person’s bankruptcy is on all taxpayers (as soon as they get food stamps, Medicaid, etc.). There’s an incentive to protect people from devastating financial mistakes, regardless of political slant.
I mean, I'm coming from a place where I don't think we should let people die because they are currently not economically productive.
If you think that people should die if they can't produce a surplus, you're free to have that opinion. Just don't hide it behind phrases like "we should cease to be so socialistic".
I also hope youre the first to stand up and refuse help when you find yourself in a situation where your skills are no longer valued
>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.
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
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.
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.
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)
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.
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.
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.
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.
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.
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.
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.
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.
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.