The American ICO is Dead

Disclaimer: I’m not your lawyer, this is a blog, this is not legal advice, and I’m admitted only in England and Wales.

Before we talk about ICOs, let’s talk about marmots.

Writing last August, I predicted an event which I call the “Zombie Marmot Apocalypse” – a regulatory binge whereby the American federal authorities would decide that the whole “utility token” thing was cute but ultimately completely illegal. And whither America, whither the world.

At the time, this was an unpopular opinion, and not widely held. I argued that:

The list of enforcement actions in the various categories mentioned above (will be) a prelude to simultaneous dawn raids at the major exchanges and the homes and offices of the major ICO promoters, with a variety of agencies in a variety of countries co-ordinating their activities. Most liquidity (will dry) up; the few remaining legal on-ramps for liquidity (will) have nothing in which to put it. Billions in paper gains (will be) lost.

So why did I call this the “Zombie Marmot Apocalypse?”

Those who know me well will be aware that I use the word “marmot” in blog posts and elsewhere as a subtle dig at the overwhelming and everpresent Dunning-Kruger-fuelled sanctimony of blockchain entrepreneurs – the newer and more idealistic the entrepreneur is, the worse his affectation tends to be.

When I coined the term “Zombie Marmot Apocalypse” I was genuinely trying to convey some marmot imagery I encounter on a near-daily basis in marmot season in Connecticut. Close your eyes and imagine a horde of cute and fuzzy animals as adorable as they were unstoppable, advancing towards you, inch-by-inch, paw-by-paw, and gunning for your plants.

That is the true meaning of fear.

What I live with every day (not kidding, this is the actual marmot)

I don’t really mind that much, if I can be completely honest with you. I’m glad that my garden makes the marmots happy, and I enjoy their company, even if it means I have to work from home to shoo the little bastards away from my peppers for most of the summer.

Those of you without gardens will have an even more positive experience still. If you haven’t broken any securities laws and you’re just doing normal stuff, like taking a hike in the Pacific Northwest, being attacked by a marmot can actually be a fairly pleasant experience:

But we’re not talking about normal people today. We’re talking about coin fundamentalists. People who are willing to go on the record to the New York Times and say garbage like this:

“Sometimes I think about what would happen to the future if a bomb went off at one of our meetings… it would set back civilization for years.”

If you’re a creature without a central nervous system – such as the individual quoted above, a venture capitalist, a head of lettuce or some other form of vegetable – encounters with marmots can be far more harrowing. Imagine, if you will, that you are a tomato plant, luxuriating in the summer sun. All is well in your world; a gardener tends to you and you live in a pleasant little universe hemmed in by a fence, accompanied by many other legumes just like you, safely protected from a dangerous world beyond.

In other words, you live in San Francisco.

Suddenly, a large, furry, foreign, dark, blob from the east appears, scales the fence, and is inside your little bubble/enclosure. It surveys its terrain. Then it looks straight at you. It approaches. Closer. Closer. Oh god, it’s almost here. You stand there, rooted to the ground. You realize your world is about to change. You’re just not sure how.

Then it eats you.

That, my friends, is the Zombie Marmot Apocalypse.

From my vantage point, this is what is happening in Silicon Valley this month: a bunch of people floating around in a mania-induced vegetative state have suddenly found a hungry ground squirrel in their proverbial back yard, and this is such an unexpected change of pace that abject panic has ensued. People have been running around for the last four years thinking that just because flogging unregistered crypto-coins was something that other people were getting away with right now meant everyone could get away with it forever.

So if we’re being honest with ourselves, where are we now?

1) ICO v. 1.0, at least in America, is dead.

Long live ICO 2.0.

The public-presale-of-tokens-that-pretend-not-to-be-securities field appears to be well and truly dead following the issuance of 100-ish subpoenas to market actors big and small by the Securities and Exchange Commission. Why anyone thought it was a smart idea to market these things in the Southern District of New York is anybody’s guess.

I’ve said chapter and verse about why certain types of ICO are rubbish, but what I haven’t said so often – in part because the platforms only recently came into existence – is that the ICO 2.0 platforms like Prometheum, T-Zero, Templum and Harbor are super interesting since they acknowledge, right off the bat, that blockchain capital markets tokens will be regulated and assume that a distributed system will be more efficient than existing solutions (which are not “centralized” as much as they are “multiple-centralized” with separate independent stacks each confirming for their owners the work done by other transaction counterparties).

In the case of some of these projects there are very serious tech and investment heavy-hitters standing behind them (Chris Pallotta for Templum and David Sacks for Harbor, e.g.) which tells me immediately these companies will be doing things correctly from the start, unlike the 2014 blockchain set, and not be racking up a ton of legal-technical debt which they’ll have to pay down later.

So I’m actually optimistic about the prospects of the ICO 2.0 space. Which isn’t really going to be “ICO 2.0” as much as it’s going to be “Automated Securities Issuance 1.0.” Assuming these outfits get legal right, the demand for high-risk investment is as great as it’s ever been. ICO 2.0 has the potential to be 10x what ICO 1.0 was.

The European Union is another ball game. Although for the moment the EU/EEA jurisdictions are apparently friendlier to the ICO 1.0 schemes, as my friend David Gerard points out, European authorities appear appallingly poorly-advised and are failing to apply a even a modicum of skepticism to the claims presented to them by blockchain technologists. It’s not hard to understand how they could make this mistake; there is a blockchain echo chamber of sorts which is slowly eating the world, on account of the fact that there is a ton of money to be made in selling and promoting “blockchain,” and almost no money to be made in telling people to ratchet back their expectations.

2) Money Transmitter laws are back.

Back in 2014, when “coins” were all the rage rather than “DApps” or “smart contracts,” I remember attending panel after panel of “Bitcoin law” where the lawyers would constantly ram home KYC/AML and very little else. That aspect of compliance has been fairly comprehensively dealt with by big firms like Coinbase. As the market consolidated, the need for de novo legal opinions on that question surely subsided (as, no doubt, did the demand for lawyers to write them). KYC/AML lawyers thus became less popular on the conference circuits as securities lawyers were more in vogue.

Being a securitization bod, I enjoyed my profession’s fifteen minutes in the sun, and had waited for that moment for a long time – I was raising the securities law issue years before it was cool. And for the last 18 months or so, as the attention of developers everywhere has been focused squarely on the securities aspects of token issuance, a lot of expertise has spent a lot of hours considering the application of public offering rules in relation to tokens.

Different law firms adopted a range of different answers. Some firms operating in the EU and the US appear to have been willing to opine that ICO tokens are more akin to a kickstarter and not an investment (a conclusion so unreasonable I have trouble understanding how they reached it). Other firms endorsed a two-step issuance process using a contract called a “SAFT,” which I’ve written about before, and which is reportedly now under the regulatory microscope. Still others refused to provide favorable opinions of old-school ICO schemes and instead recommended treating the token as a security from day 1 (assuming for the purposes of this discussion that “ICO token” means companies pre-selling tokens as an investment product rather than a coupon tradable 1:1 for some physical asset or licence). For what it’s worth I fall into the latter camp.

What a lot of people have missed is that it’s possible for an ICO operator to be both a money transmitter and a securities issuer at the same time. As put here on the marmot blog in August and October, KYC/AML rules still apply if you’re issuing a crypto-token.

But, as usual, nobody listened to the half dozen or so good crypto-lawyers who saw this maelstrom coming a year ahead of time:

Following the decision of a very senior federal judge yesterday, we know that multiple federal agencies can have very broad jurisdiction where cryptocurrencies are concerned. Nor should we expect jurisdiction to be exclusive to one agency or another, even w/r/t the same conduct. Ergo we could see enforcement occurring on multiple prongs at the same time:

So goodbye securitizers, hello Bank Secrecy Act and Proceeds of Crime Act once again! The KYC/AML lawyers will be thrilled.

3) Exchanges, wallets, and more… Hoooo boy.


And not just trading venues. Per the SEC’s announcement:

Some online trading platforms may not meet the definition of an exchange under the federal securities laws, but directly or indirectly offer trading or other services related to digital assets that are securities.  For example, some platforms offer digital wallet services (to hold or store digital assets) or transact in digital assets that are securities.  These and other services offered by platforms may trigger other registration requirements under the federal securities laws, including broker-dealer, transfer agent, or clearing agency registration, among other things.  In addition, a platform that offers digital assets that are securities may be participating in the unregistered offer and sale of securities if those securities are not registered or exempt from registration.

4) Lawsuits

Investors in ICOs are kind of like gremlins. They’re cute now, but if you don’t handle them with the utmost care they will transmogrify on you into these vengeful and extremely dangerous critters called “plaintiffs.”

I could list a number of class-action lawsuits here regarding ICO issuances or insider dealing which have been filed in the last 60 days, but will refrain from doing so. If you’re really keen to find out who’s suing whom Google is all the resource you need.

Summing up


  • the ramping up of enforcement actions against non-compliant ICOs; and
  • the emergence of compliant “ICOs” using blockchain back-ends which are actually taking aim at legacy infrastructure,

it’s shaping up to be a very interesting year in blockchain tech.