I first looked at bitcoins in the Spring of 2017 because a friend asked me for my thoughts. The price of a single bitcoin had run up sharply and the ICO craze was proceeding at full speed. Up until that point I knew very little about either blockchain or cryptocurrency.
I spoke with people who were actually developing blockchain projects for the big tech companies. I read a lot of articles which they thought would help me and a lot of other articles that I found through my own research. I spoke with traders, regulators, and with a lot of people who thought that they had cryptocurrency all sorted out. There seemed to be a wide spectrum of thought about cryptocurrency, how it might be regulated (if at all) and whether it would augment or supplant the established financial order.
I concluded that the bitcoin market was in a classic bubble, the price rising only because of hype, and the new money that hype always attracts. I was not alone in that opinion. Still some intelligent sounding people were making an argument for continued price appreciation to ridiculous levels. And that was what a lot of people wanted to hear.
I wrote an article about my research, my thoughts and predictions for bitcoins. http://laweconomicscapital.com/2017/06/the-bitcoin-bubble/ The article got the attention of a lot of people who were also trying to understand cryptocurrency and ICOs.
The article ends with an invitation to the securities lawyers who were writing the disclosure documents for ICOs to contact me for a professional conversation. I would have had difficulty preparing those documents. I confessed my professional curiosity to any and all that might satisfy it.
A lot of lawyers and other professionals did contact me. Many of the lawyers were doing what lawyers are supposed to do, marshaling the facts and applying the law as they saw it. But it was clear that there was not a unified position as to what the facts regarding any cryptocurrency actually were.
Some lawyers approached ICOs as if they were issuing securities and some as if they were issuing anything but securities. Before the SEC issued its DAO Report, (July 2017) I was of the mind that a token offering might be structured so as not to be a security. Once the DAO Report was issued, it was clear to me that the SEC saw tokens as securities and would look at an ICO as the sale of securities with all that entailed.
The DAO Report led to a robust discussion, on line and off, with those same lawyers and professionals and more. The discussion became somewhat convoluted as many non-lawyers often in other countries felt comfortable discussing the finer points of US securities law. A great many of those commentators had interesting takes on the Howey decision that no competent US lawyer would ever present to a judge. Many of those “experts” just ignored the dozens of other cases cited by the SEC in the DAO Report and many other cases that should have been germane to the discussion.
There was an interesting undercurrent of lawlessness in the cryptocurrency world. It was impossible to search for articles about cryptocurrency without coming across many quoting regulators around the world who were reporting cases of money laundering and fraud. That has not changed. Fans of cryptocurrency were often happy to ignore these transgressions even though it was obvious that regulators would not.
By now I have read several hundred white papers for ICOs. Some were written by lawyers; other white papers were written by either monkeys or idiots. Some of the latter were using templates because the thought of actually hiring a lawyer to prepare documents for a multi-million dollar financing did not make sense to them.
These white papers are supposed to tell potential investors what they needed to know so they could make an informed decision whether or not to send their money. That was rarely the case. I recall one white paper where the principals of the firm refused to disclose their last names.
People were claiming to have advanced degrees they never completed and to have worked at firms where they were never employed. Quite often, outrageous claims were made about the size of the market to be served and the profits to be made. If these same founders had been sued by investors in a prior company for fraud, investors in this new company would never hear about it.
I had my bio and picture hijacked and included in a white paper. So did many other people. There was no way for any investors to know if what they were being told was true. Very often, it wasn’t.
These ICOs were being sold by networks of unregulated, self-validating crypto “experts and advisors”. They traveled in packs to frequent crypto conferences around the world. They cross-validated each other in articles on websites that had popped up and which reached many thousands of people around the world. Some crypto “experts” developed 6 and 7 figure lists of social media followers.
An issuer could engage any number of these crypto gurus and just pay them in the tokens to be issued. The “advisors” would notify their followers about the token sale and urge those followers to cough up real fiat money to buy them. Along the way the advisors were selling tokens that they had gotten for nothing in exchange for their sales efforts.
Several otherwise intelligent people tried to convince me that this was not just a dressed up pump and dump scheme playing out over and over again. The results were certainly the same because most people who bought the tokens in these ICOs were left holding the bag.
A significant number of the ICOs were out and out scams which, sadly, many people refused to see. Fifty million dollars raised here; one hundred million there, all going down the toilet of financial history. It got so bad that several of the large social media platforms banned ads for ICOs. Several countries banned the sale of ICOs altogether.
Many of the ICOs claimed that they were not selling securities but “utility” tokens instead. That died down significantly after the SEC published its Cease and Desist v. Munchee toward the end of 2017. http://laweconomicscapital.com/2017/12/sec-v-munchee-will-the-crypto-currency-community-listen/
Along the way some really bright lawyers thought that ICO offerings might be structured as SAFTS. I saw it as an attempt to solve a valuation problem by promising to set the value down the road. They were touted as making the ICO market less risky. To me they looked to be a riskier “derivative” and began to write an article that said so. But I never finished that article.
In short order one of the NYC laws schools published their research and pulled back the curtain on SAFTS. After that most securities lawyers stopped talking about them. SAFTS were a financial flash in the pan and not a very good one at that.
I also had conversations with a number of groups that wanted to develop a realistic scheme to regulate ICOs and cryptocurrency trading across borders. Each failed because most of the participants had never worked at or had dealt with any market regulator. I wrote e-mail after e-mail trying to explain that transparency is only useful if everyone in the market was honest and that without significant penalties for dishonesty no regulatory scheme can work. All that fell on deaf ears and each of those groups disbanded.
I also spoke with several people who wanted to create trading platforms for cryptocurrency but most of whom had no idea what a trading platform does or how it operates. I would ask questions like: What would be the minimum standards for listing on your trading platform? It was apparent that they had not even worked out that simple, basic and necessary issue. When I asked about market-makers and liquidity I got a series of blank stares.
Today, at least in the US, most lawyers have accepted the fact that any ICO sold here will be the issuance of a security and that US securities laws will have to be followed.
To sell securities to investors in the US the securities must be registered with the SEC or specifically exempt from the registration requirement. Registration is an expensive and often lengthy process. By mid-to-late 2017 a number of lawyers were reporting that they were filing registration statements for ICO offerings with the SEC. Apparently, many never got approved.
Securities offerings in the US do not have to be registered if they comply with regulations which provide guidelines for un-registered offerings. Un-registered offerings are generally sold only to institutions and wealthier investors who have no real interest in owning crypto currency. These unregistered securities are not intended to be traded.
More than one lawyer has reminded me in the last few months that unregistered securities can be transferred after 12 months if the company is putting financial information into the market or if the tokens are listed on a crypto exchange outside the US. I am not certain that they have thought that idea through.
Investors in an unregistered offering in the US are usually required to attest to the fact that they are making a long term investment and not intending re-sale. That is why most companies in the US that sell unregistered securities provide those investors with income from dividends or interest. So if you are selling unregistered securities with the promise of liquidity and re-sale, you are likely to confuse everyone, except perhaps the judge who will ultimately set you straight.
Companies from around the world have always wanted to tap the US for capital investment. It is often a difficult process for any company and especially for start-ups and smaller companies. In the ICO market, it became apparent that political borders and local regulations were not considered to be important by the issuers.
Investors who should have seen the shoddy disclosures as a problem seemed happy to invest, convincing themselves that if the offering “complied” with the laws of the country of origin, then protections afforded to them by US law were unnecessary. A lot of people who were touting blockchain because it was supposed to promote transparency were willing to invest in crypto offerings that provided none.
Today, people are spending money to “tokenize” real estate, fine art and many other tangible items as if there was a market for those tokens or if it made any sense to create one. If I can buy 1/10,000,000 of a Picasso, do I get to hang it over my fireplace for 20 minutes?
If you are selling shares in a building that you call “tokens” and tell me that you believe that all of the laws pertaining to real estate syndications would not apply, I would suggest that you really need to re-think what you are doing. There are established rules for selling “asset backed” securities in the US. Not surprisingly, most of the articles I read about “tokenizing” this or that fail to mention those rules and most of the people with who I am now speaking who are preparing to “tokenize” this or that offerings do not seem to be considering them.
Back in 2017 a lot of regulators told me that the ICO boom came upon them suddenly and that they did not have the staff or budget to deal with them. They do now and there is every indication that the leniency some regulators have exhibited is about to come to a screaming halt.