For the last time, Ripple Labs created XRP

There has been a meme propagated in recent months by the folks over at Ripple Labs. That meme is that the cryptocurrency token known as “Ripple” or “XRP” has absolutely nothing to do with Ripple Labs the company, that XRP pre-existed Ripple Labs the company and was gifted to it, and that the protocol that runs XRP is totally decentralized, à la Bitcoin.

See, e.g., this blog post:

Screen Shot 2018-09-23 at 8.54.47 PM.png

Or, in the alternative, Ripple’s testimony to Parliament (pay particularly close attention to the text in red):

“XRP is open source and it was not created by our company, so that existed as an open source technology. We created a company that was interested in modernizing payments and then began using that open-source tech to do so … We didn’t create XRP… What we do have is we do own a significant amount of XRP, it was gifted to us by some of the open-source developers that created it. But there’s not a direct connection between Ripple the company and XRP.”

– Ryan Zagone, Ripple Director of Regulatory Relations

I disagree.

Why Ripple Labs has elected to push this line of reasoning, I cannot say. If I had to venture a guess, I should think that running a company that does not manage or issue a cryptocurrency is far less of a pain in the ass than running one that does. Bolting on a token to one’s commercial offering means introducing into one’s life a panoply of the worst and best elements of the crypto world: community management, troll bot armies on Twitter, Telegram groups, Subreddits, and the like. It also promises the possibility of undertaking some of cryptoland’s most sublime pleasures, including sending some love letters to any or all of the Securities and Exchange Commission, FinCEN and the Commodity Futures Trading Commission.

Now, I don’t mean to throw shade at Ripple Labs here. More power to them. Like the famous firsts of Neil Armstrong landing on the Moon, or Charles Lindbergh flying across the Atlantic in a single-engine propeller-driven aircraft, I can think of few acts of such singular daring as voluntarily wading into an ocean of complications, licences (note: British spelling) and litigants… as a cryptocurrency issuer.

In exchange for forging ahead through these many annoyances and dangers, the possibility of vast wealth awaits the Ripplenauts on the other side, a decentralized latter-day El Dorado, with vast mountains of fidget spinner-branded treasure gleaming just beyond the shore. Equally there lies the possibility of total, abject ruin. As Kazantzakis put it in The Last Temptation of Christ, “the doors to heaven and hell are adjacent and identical.” Nowhere is this more true than in cryptocurrency issuance and investment.

With this as our background, long have I been willing to extend Ripple the courtesy of not writing about them on this blog. No longer. Unfortunately, like my friend Bitfinexed I too am a “shill for truth,” so when I see Bloomberg reporting that XRP and Ripple are totally independent of one another – specifically,

XRP, which is an independent digital asset

…which is then repeated on Twitter by folks like this charming fellow,

…I am compelled to respond. This is wrong. I was there in 2013; I remember the days when Ripple owned the fact that it had built the Ripple… excuse me, XRP… protocol. Now, when the mainstream media, like Bloomberg, start to categorize XRP as an “independent digital asset,” like Bitcoin, we should, as a community, push back.

It’s crucial to ensure the market has accurate information about how XRP was created, how consensus is achieved on the XRP ledger, and therefore how XRP should be treated by an investor running a risk analysis and making an investment decision on whether and how to buy the token. Or as my friend Colin puts it:

I set the record straight below with a helpful timeline.

1) Did Ripple Labs create XRP?

Ripple Labs’ own documents speak for themselves. In my opinion the answer is “yes, Ripple created XRP, they own most of it and it was issued after company formation.” Open-and-shut determination.

a) 17-19 September 2012: Ripple Labs is incorporated

Ripple Labs was incorporated as “Newcoin, Inc.” in the State of California on 17 September, 2012, at which point a de facto corporation came into being. On the 19th of September the company’s articles of association were stamped by the CA Secretary of State, at which point “Newcoin, Inc.” formally came into being.

Screen Shot 2018-09-20 at 6.30.03 PM

Contrary to what many of Ripple’s defenders on Twitter and the forums claim, “Newcoin, Inc.” is, for all intents and purposes, the same company as present-day “Ripple Labs.” Newcoin, Inc. was renamed to “Opencoin, Inc.” in October, 2012. OpenCoin Inc. was later re-named to “Ripple Labs, Inc.” in 2013.

California-incorporated Ripple Labs, Inc. was then merged into a wholly-owned subsidiary, a Delaware corporation also called “Ripple Labs, Inc.,” in 2014. This is the Ripple Labs we all know and love today.


Anything done by Newcoin/Opencoin/Ripple Labs (CA) was done by a direct predecessor of the current Ripple entity that runs the business. All those names refer to the same company. For the sake of this analysis, therefore, each of the four names should be treated as if they refer to the same enterprise.

b) 17 September 2012: The Founders’ Agreement is signed

On the same date and presumably at or about the same time, the Ripple founders Arthur Britto, Jed McCaleb and Chris Larsen signed the following short-form agreement:founders-agreement-2

Now, I’m an English lawyer rather than a California lawyer (because the Countenance Divine shines forth upon England’s clouded hills, whereas California is just awful). But if this agreement were governed by English law, it would achieve three things. I’ll work through them in reverse order, because it makes more sense that way.

In the third paragraph, we have what appears to be either a very slapdash IP assignment or a reference to an IP assignment which is taking place in some agreement that’s outside of the four corners of this letter.

Crucially, the assignment shows that the intellectual property in Ripple the software was to be transferred to Ripple Labs (technically Newcoin Inc., renamed to Opencoin Inc. 30 days later, and eventually renamed to Ripple Labs, Inc.) and would thereafter be owned by Ripple Labs and not by Arthur Britto. There was, furthermore, an agreement, either here (if so, poorly drafted) or referenced here and agreed somewhere else more fully, that any further contributions by Britto or anyone of the other Founders to the Ripple software would be open-source. In exchange for that assignment, Ripple granted a lifetime licence to Britto to build apps with the coin (no word on whether that licence is assignable or not).

IMV Ripple got the better end of that deal. But I digress.

Moving up to the second paragraph, here we have the three Founders making agreements about how credits will later exist on an “Official Ledger” which “it is anticipated” (a) will have 100 billion credits and (b) if it has more credits than that, will permit Britto to acquire (again, per a fairly loosely-drafted anti-dilution provision) a number of credits, at no charge, that will bring his total holdings of credits to 2% of the total number of credits in issue.

Finally, we have the first paragraph. We know from the third paragraph that, per this agreement, Ripple Labs owns the Ripple software. We know from the second paragraph that, per this agreement, there’s going to be an Official Ledger built with the software Ripple Labs owns and, based on the construction of that paragraph, it is likely that the Official Ledger does not yet exist as it is referred to in the future tense. Therefore “Ripple Credits,” later re-branded XRP, also do not yet exist. 

Now, we are told that on that Official Ledger, 80% of the Ripple Credits “shall be allocated to the Company, as determined by the percentage share of all existing Credits set forth in the ledger created, approved and adopted by the majority of Founders as the Official Ledger.” So we know that of the software Ripple owns, that does not yet exist, in relation to which an official ledger is to be created, Ripple is to be allocated 80% of the tokens thereon for its own purposes.

So when were the tokens actually created?

c) 1 January 2013

The first Ripple transaction in existence was made on 1 January 2013, when the network was publicly launched. We can assume that this is the “Official Ledger” as, presumably, no launch would have occurred without the requisite majority of the Founders providing their consent (and at least Chris Larsen and Jed McCaleb would have consented to this version of the ledger, based on the historical record). Ripple Labs, Inc. also will have owned all the IP in the Official Ledger if it had executed anything like market standard agreements with its founders and employees. More on IP ownership in the “conclusions” section below.

Here’s what the transaction explorer says about all of the transactions on the Ripple ledger from 17 August 2012 (a month before Ripple Labs was incorporated) through 31 December 2012:

Screen Shot 2018-09-20 at 6.59.17 PM

Zero. Zilch. Donut.

So are there any transactions on 1 January? Why yes. Yes there are. 18 of them to be precise:

Screen Shot 2018-09-20 at 6.59.43 PM

d) So is XRP an “independent digital asset?”

The terms “independent” and “digital asset” are not defined when used by Ripple, so rather than go back and forth about semantics all day, I suggest we simply ask a different question.

The question that really should be asked is “Is calling XRP an ‘independent digital asset’ potentially misleading given the factual matrix surrounding its creation and issuance?” This is a question I cannot answer; you, dear reader, will have to do that for yourself. Our information, available from public documents and block explorers, tells us:

  • The “Official Ledger” did not exist on 17 September 2012.
  • I assume the “Official Ledger” is the XRP everyone uses today. Indeed, it can have no other meaning. In that case, transaction data on the Official Ledger shows that it did not exist until 1 January 2013.
  • On 1 January 2013, Ripple Labs very likely owned all right, title and interest in the software on which the Official Ledger was being run that had been generated by its founding team. If they covered their bases Ripple Labs will also have owned all the IP contributed by any other team members, e.g. David Schwartz.
  • On the launch date, Ripple Labs owned 80% of the tokens on the network, being 80 billion tokens.
  • The tokens were called “Ripple Credits.” As in Ripple Labs, the company.
  • To the extent any Ripple Credits tokens owned at one point by Ripple Labs are now being traded by third parties, it is because those tokens were first sold into the public markets by Ripple Labs or otherwise found their way there by some volitional act of Ripple Labs.
  • To the extent any Ripple Credits tokens are being traded at all, these will have at one point been part of contractual arrangements to which Ripple Labs was a party.
  • Any Ripple Credit token on the network was created pursuant to a pre-incorporation agreement, which Ripple Labs appears to have adopted, in relation to which Ripple Labs appears to have been an intended beneficiary and which assigned Ripple Labs the rights in the software with which that Official Ledger was, and any Ripple Credits in it were, to be instantiated.

To really drive the point home about who calls the shots about XRP, look at the branding of the product itself. When I go to Ripple’s website, on the upper right, there’s a heading that says “XRP”…

 Screen Shot 2018-09-20 at 9.40.44 PM.png

…which, if I click through, leads me to a big honking logo reading “XRP…”

Screen Shot 2018-09-20 at 7.13.56 PM

…a brand name owned by none other than… you guessed it!… Ripple Labs. 

Screen Shot 2018-09-20 at 9.14.44 PM

If, in Ryan Zagone’s words,

XRP is open source and… was not created by our company,

…what business, exactly, did Ripple Labs have registering that trademark with the USPTO, thereby representing that Ripple Labs owned that IP, on 17 May 2013 – nearly six months after the network launched on 1 January 2013?

My conclusions

The Ripple vs. XRP situation appears pretty straightforward to me. All of the above makes no sense if Ripple did not create XRP, and makes perfect sense if Ripple Labs did in fact create XRP. This rather suggests that it may be less than accurate to characterize XRP as being fully independent from Ripple Labs. Certainly it is absolutely not accurate to say that XRP’s existence has always been separate from Ripple Labs.

The fact is, Ripple Labs is all over XRP. The XRP brand name is owned by Ripple Labs. The fact that Ripple Labs filed a trademark application over the word mark “XRP” six months after launch, and 8 months after Jed McCaleb’s GitHub commit on 4 November 2012 that first changed the ticker symbol from “XNS” to “XRP,” shows that (a) XRP did not exist before that date, which in any case is two months after Ripple Labs was incorporated and (b) the company regarded the “XRP” IP as its own.

From the date of incorporation onwards, the software which runs XRP appears to have been owned by Ripple Labs. The copyright notice over the software specifies that Ripple Labs began asserting copyright over the software as early as 2012, consistent with our interpretation of the “Founders’ Agreement” that appears to show the company was concerned with getting the IP in the product away from the developers and into the Ripple Labs, Inc. vehicle.

Furthermore, the software was not open-source when XRP were created, as the company claims. Rather, Rippled as a whole was closed source and proprietary until 26 September 2013. (And here’s the GitHub commit proving same), although some FOSS code was incorporated into it. Although the “Rippled” software is currently open-source, according to the file currently found in in Ripple Labs’ GitHub repository, Ripple Labs continues to own and assert copyright over the protocol to this day.

Screen Shot 2018-09-21 at 3.02.10 PM
In software-land, this is what ownership looks like

Then there’s the matter of the tokens which Ripple claims it received as a “gift.” A very large number of the tokens were, are, and will likely continue to be owned by Ripple Labs. XRP tokens were not “gifted” to Ripple Labs but rather were granted to Ripple Labs by Ripple Labs itself in consideration of and in accordance with certain mutual obligations contained in a commercial contract to which the original Ripple Labs, Inc. was bound. (See, e.g., the language: “[Ripple] Credit Grant.”) This commercial understanding, when signed, was not yet implemented on an “Official Ledger” that was to be created by engineers who either founded Ripple Labs or were otherwise employed by Ripple Labs, meaning that it is exceedingly likely that Ripple Labs owned the resulting work product outright.

The “Official Ledger” was that work product. No “Official Ledger” containing XRP or any transactions on the ledger which is today used as “XRP” existed before Ripple Labs, Inc. (initially named Newcoin Inc.) was incorporated on 19 September 2012. What we call XRP came into being at Ripple Labs, Inc.’s behest and with its very close involvement on 1 January 2013 when Ripple Labs launched what was referred to in the Founders’ Agreement of 17 September 2012 as the “Official Ledger.”

The “Official Ledger” was later called the “Ripple Network” or “Ripple.” Today the “Official Ledger” is called “XRP.”  It’s the same thing.

Until recently, this view was shared by Ripple Labs, who wrote in 2013 that “Ripple was created by Opencoin, Inc.” (h/t Michael del Castillo for the image.)

Screen Shot 2018-09-25 at 6.36.30 PM.png

It doesn’t really get much clearer than that. XRP is a Ripple Labs project.

End of discussion.

And that’s fine. Many companies are embarking on token projects and I wish them all the very best of luck. However, only one company is, for whatever reason, trying to convince us that none of this ever happened. That company is Ripple Labs. And that I cannot abide.

2) Is XRP decentralized?

I’ll be staying out of that debate save to say that there is disagreement, and I am happy to point you to it.

Ayes to the right:

Noes to the left:

And in the opinion of BIS:

And with that, my friends, I bid you good evening.

Against Tokens: Part II

This is adapted from a Reddit thread (shout out to my homeboys in /r/ethereum). It is a follow-on from an earlier piece, Against Tokens.

Warning: this blog post is long.

Today brings us a paper, written by Coin Center and Debevoise & Plimpton, and sponsored by Coinbase, USV, Coin Center and ConsenSys, which explores the question of whether tokens sold on a blockchain are or are not securities under the test of Howey v SEC.   

Given what we know of the paper’s sponsors, the paper’s unsurprising conclusion is:

An appropriately designed Blockchain Token that consists of rights and does not include any investment interests should not be deemed to be a security, subject to the specific facts, circumstances and characteristics of the Blockchain Token itself…. given our analysis in the above, it should be characterized as a simple contract, akin to a franchise or license agreement.

Oh! So tokens are acceptable now, all is forgiven and this is now a valid business model?


So I’m going to spend the next 3,000 words taking Coin Center’s proposition apart. The paper arrives at this conclusion because it asks the wrong question. Of course it’s possible to do virtually anything on a blockchain in a legally compliant way, including representing an interest of some kind as a security or not, as any type of data entry you want, whether that be a “token” or otherwise. As one comment on Reddit put it, aptly,

you can make a tree branch into a security if you wrap it in the utterances and ceremonies which make it a tally stick.

How it might look

This view, mind you, is what informed the innovation known as a private blockchain. With private blockchains, no cryptocurrency is involved and the rights and obligations of all the participants are set out neatly in writing somewhere – with the blockchain used as a distributed reconciliation engine for the participants.

But private blockchains aren’t what we’re talking about here. The instant case concerns the idea, per USV’s Fat Protocols post, that users of a “public” or “unpermissioned” cryptocurrency/blockchain protocol should

become stakeholders in the protocol itself and [be] financially invested in its success. Then some of these early adopters, perhaps financed in part by the profits of getting in at the start, build products and services around the protocol, recognizing that its success would further increase the value of their tokens.

This process/business model follows a simple four-step plan:

  1. Developers have idea for a coin.
  2. Developers write an application, instantiate their new blockchain and sell tokens on that blockchain to fund development of the half-baked protocol they’ve already released (because, you know, they already sold the tokens). 
  3. Developers and early adopters sell those blockchain tokens on public crypto-exchanges for profit;
  4. Bro down.
How it actually looks

The question the paper does not directly answer, and the question everyone would like to see answered, is whether the method for conducting a token sale as they are actually done on a daily basis – the “Bro Down Model™” – is legally compliant.

Given what we are dealing with (selling unregistered investments to unsophisticated investors over the Internet) it is pretty easy for the answer to that question to be “no.” And to reach that conclusion, it doesn’t really matter whether we’re dealing with a security or not.

Let me break it down for you:

1A) Scenario A: Tokens = Securities

Let’s say, for sake of argument, that the tokens issued per the Bro Down Model do turn out to be securities or investment contracts, which is the only way that the “fat protocol” thesis currently being bandied about in the Valley and elsewhere makes any sense.

If something is sold with the expectation or intention that it’s an investment, irrespective of what function that thing performs, it’s going to be deemed an investment contract by the regulator. Investment contracts, as a matter of law, which are offered to the public may only be so offered through the filing of the appropriate documentation/registration statements, the publication of a prospectus and the sale by broker-dealers or equivalent, licensed service providers.

This would need to be done every single time an ICO/protocol offering takes place.

This process is standardised, straightforward, and legally certain. In the real world the process is absolutely mandatory for every offering of investments to the public. However, ICO promoters to date have all chosen not to follow this remarkably simple, standardized process. 

Which is odd – since if these transactions were all above-board, legally kosher investments, as they have been marketed, I can’t see any reason why someone wouldn’t try to make them stand up to the scrutiny of the regulators. Surely an opportunity to legally access public capital markets with a simple coin is an opportunity too good to pass up.

But I digress.

1B) Please note: the argument that tokens are “not an investment” is nonsense

When cryptogeeks talk securities law, Dunning and Kruger are never very far away. A first-year trainee lawyer in a banking seat has the requisite training to see that blockchain token-sale transactions would not pass muster with the regulators. And by “not pass muster,” I mean not even close.

The entire “fat protocol” thesis re: blockchain tokens only makes sense if the tokens are in fact purchased for the purpose of investment and asset price appreciation. Which all ICO promoters, deep down in their hearts, know. But refuse to admit.

Let’s revisit the “fat protocol” blogpost quoted above, only this time, let’s put some text in bold:

become stakeholders in the protocol itself and [be] financially invested in its success. Then some of these early adopters, perhaps financed in part by the profits of getting in at the start, build products and services around the protocol, recognizing that its success would further increase the value of their tokens. (emp

That these tokens are envisioned to have value in market exchange is more or less admitted by Coin Center where the paper issues this recommendation:

(Scheme promoters should decide on) the percentage of the total token supply that represents a fair reward for the work of the development team and advisors.

yet the USV-sponsored Coin Center paper goes on to contradict itself by saying:

Marketing a token as a speculative investment, or drawing comparisons to existing investment processes, may mislead or confuse potential buyers. It may also increase the likelihood that the token is a security.

These ideas are, from a securities law perspective, not reconcilable. One cannot say something one sells to third parties is not an investment if (a) the value of that thing is tied to the performance of the project and (b) you plan to provide that thing to developers in consideration of their work on that project, with the expectation that they can cash out.

1C) Scenario B: Tokens ! Securities. Are we in the clear now?


Coin Center’s 27 pages’ worth of legal gymnastics earlier today struggled desperately to explain why ICO transactions are not necessarily securities or investment contracts and are in fact some other kind of legal critter. So let’s be charitable and give Coin Center & friends the benefit of the doubt – and suppose they’re right.

This is still not a green-light where we can with confidence say

“OK, so the Bro Down Model is just like selling knitted jumpers from a local store.  Let’s sell tokens willy-nilly. WORD UP.” *fist bump*

To the contrary: we have to explain what, exactly, these non-investment investment tokens actually are.

Even if token sales aren’t investment contracts, there’s unquestionably a contract somewhere in here to sell them. Where promoters plead “decentralization” to try to disclaim that any contract exists, there are still unquestionably inducements and representations made by promoters – marketing – to buy into these schemes, otherwise we would not know they exist.

Misbehaving  in any way in relation to the promotion of a token scheme can still attract extremely serious criminal penalties of various kinds, depending on:

  • what the promoter said to third party investors in order to induce people to buy the tokens,
  • whether any of the promoter’s statements were untrue and misleading, or whether the promoter failed to disclose material information; 
  • whether the sale is considered an unfair trade practice under applicable local statutes (as these things often are);
  • whether the promotion activity requires a licence;
  • how much money these buyers subsequently lose, 
  • whether the regulator, and which regulator, takes notice of the activity.

A range of potential civil and criminal sanctions are therefore available depending on the fact pattern. They range from the relatively benign such as

  • innocent misrepresentation entitling the buyer/investor to rescind;

to the more serious such as

  • undertaking a regulated activity without authorisation (or equivalent in whatever jurisdiction you’re operating in);

to show-stoppingly, life-endingly, extremely serious e.g.

  • theft or fraud by false representation, or
  • a finding that the promoter engaged in unfair trade practices.

This is to say nothing of the tax consequences of operating such a scheme, liability for which (absent a legal entity) would arise personally against each of the scheme’s promoters, likely through the lens of a Partnership Act 1890 general partnership or local equivalent. 

When enforcement comes, false or exaggerated statements are what is most likely to get scheme promoters into trouble. In terms of what statements we typically see made out in the field, cryptocoin promoters are not known for sober restraint and are usually not *that* careful with the representations they make. 

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Exhibit A

2) If the tokens are designed to have intrinsic value, like Bitcoin, you’re doing it wrong

Assuming that “rights” exist at all – as the Coin Center paper does –  presupposes the existence of a licensor/franchisor, i.e. someone against whom the “right” can be enforced. Tokens that follow the mold of Bitcoin or the “fat protocols” idea espoused by USV, on the other hand, are designed to have standalone value which is intrinsic to the token and does not depend on a third party to redeem or honour it.

These two approaches are mutually exclusive.

As anyone who knows how a crypto-token ICO works, “public blockchain” systems with exchange-listed tokens follow the latter approach (coins, intrinsic value, not redeemable). Where there’s no licensor/franchisor, there is only

  • the “fat” protocol,
  • its tokens, and
  • what those tokens are worth.

Because of this, it’s impossible for there to be legally binding licences or franchise agreements, because contracts require counterparties. The suggestion from Debevoise that we could characterise blockchain tokens created through a token sale as being licenses or franchises is therefore not accepted. Legally, what we’re dealing with is

  • an automatic, distributed software system, that
  • a promoter set up with money from unsophisticated “investors,”
  • which confers those unsophisticated “investors” no legal rights, and
  • which uses game theory to hold itself together – game theory backed by the money of new investors combined with the promise of astronomical returns made by the original promoters.

Here, as with many ICOs, there are no rights and obligations conferred – just tokens which serve no practical function and which value depends on whether people will buy them, and little else.

It is not therefore something I could recommend as a prudent structure for a transaction. 

3) What if I don’t sell any tokens and just hold back a pre-mine?

Different set of issues, but still real potential for a crap sandwich.  Including AML/KYC issues and money transmission issues. World of pain, etc. 

4) Shenanigans 

Trying to get around public offering rules strikes me as a bit of a minefield and not worth the risk.

The law wasn’t born yesterday. Saying a token is “purely functional” or a “software product”, so therefore “not an investment” is language we’ve seen before – the Federal Trade Commission observes that fraudulent investment schemes (of the non-cryptocurrency variety) often promise “consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public. Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure.”

For this reason, legitimate investments don’t try to walk the line – they try to be two miles away from the line, and on the right side of it.

It would be easier to just do things correctly, constitute your token as a security on a private chain and publish an offering circular. As Patrick Byrne’s T0 is planning to do.

But saying we should listen to Sherriff McLawdog all the time stifles innovation! I hear you cry.

Poppycock. If you want to get investment from someone, there are ready categories – VC, equity crowdfunding, bank debt, convertible debt – which a young blockchain entrepreneur can and should avail him/herself of in order to obtain working capital for his or her business. These legal classifications involve the entrepreneur obtaining that capital, usually from a sophisticated investor, after setting out a detailed business case and setting out in writing, the legal rights which his or her investor will obtain in the business in exchange for their money. 

When someone is selling a coin, on the other hand, this means that someone is trying to get money very quickly from unfussy, unsophisticated investors who are grateful for the chance to get in on the ground floor of the “next big thing.”

Because they’re unsophisticated, in consideration they do not insist upon, and therefore do not receive,  any rights in the business which those funds build in return (e.g. equity, interest, or a share in the profits).

I repeat: someone selling you a coin is bootstrapping their business with your money, and may very well be giving you jack squat – no stake – in their business in return. 

Experience shows that unsophisticated investors are not particularly aware of how badly they’re treated by promoters of these ICOs or similar schemes.

5) Ignoring the law doesn’t mean it doesn’t exist

This, of course, is questionable from a legal perspective. Its questionableness would be more obvious if the coin-sellers were to promise a security and give you nothing in return; you could take your fake share certificate or fake secured loan to a lawyer, who could undertake some inquiries, and tell you whether the document were genuine/enforceable or not.

Turn a fake “share” into a “coin,” however, and suddenly all bets are off? I don’t think so – and I don’t think regulators such as the UK FCA or the Securities and Exchange Commission think so either although, for reasons known only to God, they have so far failed to drop the flaming hammer of justice on these schemes.

So, when we see a project not choosing a legal framework up front and saying “the software rules all,” it means, more often than not, that someone promoting a ICO has a compelling interest in not following the formalities because they’re out to screw you.

Doing things on a purely P2P basis has been shown to frustrate enforcement enough that, at least in the short term, scheme promoters are able to get away with it. But ignoring the law doesn’t mean it doesn’t exist. 

Blockchains and cryptocurrencies are not a new paradigm in personal property or the law of obligations. When enforcement occurs – as it surely will – courts will look at the arrangements and take the initiative in classifying them themselves. That’s generally not a good thing – making an affirmative choice to be this thing or that (e.g. a LLC or a Limited Company) comes with significant tax, liability, or ease-of-doing-business benefits which you will very likely lose if you let a court make that decision for you (and, say, calls your blockchain critter a general partnership or a mere misrepresentation).

6) Conclusion: don’t buy it

The question then turns to why this subject is coming up again today, given how much the tech has moved on since the altcoins’ heyday (and collapse) three years ago.

I have no idea why any honest new business would want to run an ICO unless they were supremely poorly advised. Entrepreneurs owe their users better treatment, it’s commercial suicide from a VC or new business development standpoint, and creates a huge contingent risk of future enforcement action.

One theory I have is that some companies in the “blockchain” space got into Bitcoin or some other coin – hard – and possess such an intractably deep-seated loss aversion bias that they’re held in thrall to the Almighty Coins, unable to cast off their original thesis, and incapable of seeing what the space has become. Chiefly:

  • Bitcoin and internet funny money tokens are on the way out, and
  • good old-fashioned applied cryptography, business process/workflow automation and enterprise networking are on the way back in.

Because the only other plausible explanation for so many people thinking that crypto-tokens are appropriate investment products is that they’re all on drugs.

I’m going to give them the benefit of the doubt and assume they’re talking their own books.

The 2017 interpretation of the tech is not just legally correct, but it’s morally correct as well – and in keeping with the ethos of open-source software development. There’s nothing “free and open” about a FOSS protocol that costs money to use and causes a direct pecuniary benefit to accrue to early adopters – that’s called a rent, and imposing it runs contrary to the idea that the “free” in “FOSS” should mean both free as in beer and free as in speech.

A point which, over the course of 2017, I shall enjoy pointing out whenever it is prudent to do so.


“We are governed by morons”

Words fail me:

The only conclusion I can reach:

Sounds about right: