I told you so… now, what’s next for American ICOs?

1) Getting it out of my system: I told you so

The American Initial Coin Offering is dead.

As I predicted, years ago. In case you’re wondering why I make predictions years in advance, such as

  • my 2013 prediction that the UK’s Help to Buy scheme would end badly, or
  • my 20142016 and 2017 predictions that the American ICO market would come crashing down due to regulatory intervention,

I make those predictions for days like today, when they finally come true.

Today’s post to my blog is the latest, and arguably best, post in my ICO Mania series. That’s because, today, I can prove that my bear case for crypto was absolutely correct in predicting major regulatory headwinds at a scale that few other lawyers, or investors for that matter, foresaw.

I take an ultra-conservative approach when it comes to token issuances in the United States, and have done so for years. This has not been an easy position to publicly maintain for the last half-decade. The great and the good of cryptocurrency, including numerous cryptocurrency foundations and their “billionaire” entrepreneur sponsors, BigLaw partners, Coin Center (more) (more), USV, a Cardozo/Consensys joint venture,  a Coin Center/Consensys/Coinbase/USV collaboration, venture capitalists talking their books, and others have all insisted, at various points, that there is some magical workaround, some way that a token becomes useful-enough, which has the result that the registration requirements of U.S. federal law no longer apply.

I was right. They were wrong.

In the instant case, the two companies that settled – Paragon and AirFox – each agreed to register the tokens as securities within 90 days, and to pay a substantial fine. The SEC concurrently announced pathways to compliance for token issuers, unregistered token investment funds, unregistered exchanges and unregistered broker-dealers. All of this follows last week’s enforcement action against a founder of the decentralized exchange EtherDelta, who no longer runs it, yet was made to pay restitution and penalties.

These enforcement actions are an earthquake that should be felt by the entire cryptocurrency and digital asset space, all over the world.

There is nothing extraordinary or particularly interesting about these enforcement actions by themselves; one could describe the orders as being mundane. It is for this reason that these orders are notable; they all but destroy a narrative that I have often heard in legal and VC circles, accepted hitherto as gospel, that US regulators will “only go after bad actors” or “the most egregious frauds,” and that strength in numbers from the startup side of things will overwhelm regulators’ ability to cope or, Uber-style, convince the regulators of the errors of their ways.

Screen Shot 2018-11-17 at 1.32.02 PM.png
Presented without comment

This assumption and comparison – which I have heard dozens if not hundreds of times over the last five years from investors and entrepreneurs alike – is flat wrong. VCs everywhere with no legal training, enabled by too-clever-by-half associates and advisers, failed to appreciate the meaningful difference between a municipal taxi regulation and federal law, and underestimated the intelligence and professionalism of those enforcing it. They thus failed to see what is becoming increasingly clear: the SEC intends to go after anyone in the ICO space who violates U.S. securities laws, well-intentioned or not, honest or not, technologically sophisticated or not, VC backed or not.

“But the SEC is a law enforcement agency, they don’t decide what the law is,” I hear you say. Yeah, OK. Sure. Let’s noodle on that for a second. It’s possible that, rather than roll over and die, some extremely wealthy coin promoter is going to decide to use his or her resources and a not inconsequential percentage of what time he or she has left on Earth to fight the SEC all the way up to the Supreme Court, and seek to overturn 70 years of extremely solid precedent on the basis of “because blockchain,” unlikely though that is. To the extent that unlucky entrepreneur’s scheme fits the standard mold we’ve come to expect of ICOs in the American market, I do not believe that effort will be successful, although I wish him or her the best of luck, if for no other reason than the college tuitions of the lawyers’ children for which such an action will pay.

2) So what’s next?

Companies that think they have a compliance issue on the ICO front shouldn’t panic. What they should do is convene their boards and call a lawyer, immediately.

Crucially, startups should get psychologically prepared to put in a lot of time and effort on a compliance program. What exactly this will look like for a particular startup will depend on a number of factors, e.g. whether any tokens have actually been issued or whether only SAFT notes are outstanding, whether those tokens have been listed on public exchanges, the residence of the team and investors, and the content of marketing efforts undertaken to date. Depending on those factors a number of different pathways might be available, including registering the token as a security, eliminating any U.S. touchpoints and moving the project offshore, or winding the project down and refunding investors.

Digging in one’s heels and fighting is also a possible option, but one which I would consider inadvisable for most startups.

In practical terms, for most ICO startups, the party, at least in the United States, is over. The landscape that makes ICO business practices so much more attractive than traditional capital-raising models has changed irreversibly. Much of the ease with which current coin businesses operate, including low overheads and the ease of onboarding new users, is facilitated by deficient compliance processes and absent licensure. Most existing “coin” services infrastructure accessible in the U.S. has a long way to go before it is in a position to deal in regulated products. Many coin issuers and service providers may not have the resources to achieve compliance. This includes exchanges. Overseas exchanges, based on their past performance, are unlikely to try.

At the issuer level, registration and ongoing reporting is extremely expensive, for which reason I cannot see it ever being an attractive option for seed-stage firms. Additionally, to the extent that Palley’s view is correct (it’s a fact-based determination, but I agree with his view that most ICO tokens, as they are encountered in the wild, are securities under U.S. law) this also has implications for any and all altcoin exchanges servicing U.S. customers, who will either need to register as national securities exchanges or cease servicing the U.S. For real, though, not just by easily-circumvented IP blocking.

The knock-on effects for the rest of the crypto ecosystem will be substantial, as U.S. projects wind down or register, projects that have not yet issued tokens pivot to Europe and Asia, and years of legal wrangling begins to pick up the mess engendered by a couple of years’ worth of crypto-anarchic whataboutism, Silicon Valley move-fast-and-break-things-ism and plain old bad legal advice.

In terms of assessing projects who really took the “Fat Protocol” thesis on board and are too far down the line to pivot, if I were running an altcoin portfolio for a living, today I should mark any such assets – if U.S.-based and having seriously deficient securities compliance – to zero.

None of this, of course, should come as any surprise to anybody who bothered to take the time to read the nearly 75 years of U.S. caselaw that exists on this question. Historia magistra vitae est. One wonders how many billions of dollars of value are going to be destroyed as a result of our industry’s shortsightedness; losses which might not have been, if only people had cultivated respect for legal history and the law, paid a little less attention to the salesmen, and paid a little more attention to the skeptics.

The FCA/Cryptoassets Task Force Report: mostly boring

So the FCA’s Cryptoassets Task Force Report is out today. Compared to the last time the FCA chimed in on crypto, there are few surprises/not a lot to write home about.

For this reason, rather than writing a blog post, I have decided to go all “Web 2.0” on everyone by writing a Twitter thread instead.

Highlights include:

Enjoy!

 

For the last time, Ripple Labs created XRP

Not a U.S. lawyer, not your lawyer, and what follows is a blog post, not legal advice.

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.

Delaware_ripple.png

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…”

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

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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 License.md 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.

$100 Ether, revisited

Ethereum’s cryptocurrency, Ether, peaked at $1397.48 per coin on 14 January, 2018.

Eight months later, Ether is today at $190 per coin. Put differently, Ether has lost 87% of its value since January.

This is not something Ethereum’s promoters expected, nor is it the vision they sold, a year ago.

Buy the dream

A little over a year ago, my longtime acquaintance and philosophical opponent Vinay Gupta wrote a very well-shared piece titled “What does $100 Ether mean?” as the price of Ethereum’s cryptocurrency, Ether, blew through $100 (then $200, then $300… all the way to nearly $1,400). At the time, Vinay wrote:

Today, Ether hit $100 (update: it’s $300 now, five weeks later). I’m sure by the time you’re reading this it will be in The Guardian and the New York Times as a curiosity piece. Our market cap will approach thirty billion dollars. By all and any standards, this is a success beyond anything dreamt of when the project started, and the money raised will continue to finance technical innovation for years to come. While the impact and worth of a technology cannot be measured by money alone, on this occasion, celebration is appropriate. We have done well.

What followed was a paean to Ethereum as the future of the internet. The price of the coin, Vinay said, was the very embodiment of the hope Ethereum’s most fervent adopters; its entry into the annals of titans of world finance, like JP Morgan or Goldman Sachs, guaranteed:

I think Ether at $100 means that so many people believe in the world they think Ethereum will create, that it is becoming inevitable. I suspect that the full implementation of that vision will be a lot more humane and user-friendly than most of what people are thinking about right now…

…Regardless of how the technological details are worked out, I am more convinced than ever that the smart contract ecosystem is here to stay, because people want it, they need it, and it solves problems they face regularly. It may well be used by ordinary people 50 times a day without ever realizing they have touched it.

And how many “ordinary people” will Ethereum service? According to Vinay & co, “millions:”

It means that enough people are rallying around this vision of the future, and putting their money on the line for it, that the core development teams and entrepreneurs building that future will be funded more-or-less indefinitely. It means that there’s a massive wave of product innovation as people try to figure out how to get the millions of Ethereum users to spend their money on our products, and that evolutionary process builds further into the potential that the Ethereum system has to satisfy real human needs and desires.

jzm8y
Ezekiel’s Wheels, Ethereum Edition

Sell the news

But, of course, there aren’t millions of users; there are perhaps 100,000 active addresses on the network each day, and roughly only 5,000 or so DApp users (I stress, these are maximum numbers, and the likely number of actual users is considerably lower than this). Absent some very major technical innovations which do not as yet exist, Ethereum breaks whenever a few hundred people try to use it at the same time. Ethereum very obviously lacks the capacity to address millions of users, unless those users do absolutely nothing with the cryptocurrency except hold onto it and hope that the value will rise.

I have been aware of these limitations from the start, which is why I have long been skeptical of the Ethereum team’s claims. I remember, back in 2014, attending the very early Ethereum meetups and being told that Ethereum would become a “world computer” capable of running the entire internet on this one, fully-decentralized platform. This is a contradiction in terms, mind you, as it seems awfully centralizing to be using a single instance of a blockchain database to decentralize all the things.

But the “world computer” made for fantastic advertising. Remember the marketing? Hospitals, automobiles, groceries, identity, local government, payments, cloud storage, encrypted messaging, airplanes, power stations Ethereum, Ethereum the World Computer, the one Ethereum that held its ICO back in 2014, that Ethereum whose coin we were all told to buy, was quite literally “the secure backbone for everything” and was going to do it all.

And you people believed it.

It was all bullshit, of course. Ethereum can barely handle the traffic it gets for a single Initial Coin Offering. But it was easier, and it apparently continues to be easier, for uncritical journalists and conferences looking to fill airtime to find some coin sellers wearing unicorn t-shirts to talk nonsense for 45 minutes than to learn who is actually building real applications with actual, working code, and ensure that those people get airtime instead.

https://twitter.com/mdudas/status/1038064657012084737

I never bought Vitalik’s vision. Loathed the Ethereum-as-cryptoccurency vision, actually. I always thought smart contracts should be free to develop and use, as Nick Szabo first described them in 1997, rather than pairing smart contracts with an investment scheme designed, seemingly, only to extract economic rent for the benefit of early adopters at every stage of the system’s future use.

Indeed: what is now known as the “permissioned” or “private” blockchain grew out of the realization that a single, stateful Ethereum instance shouldn’t scale, doesn’t scale, and never will scale, but stateless standards for blockchains and languages, like HTML, can scale (giving rise to a codebase that lives on today as the absolutely-free-to-use Hyperledger Burrow, the Hyperledger project’s Ethereum Virtual Machine).

Practical concerns about Ethereum’s capabilities were not, last year, foremost in everyone’s minds. Making money, however, was. As Ether blew past $300/coin in September of last year, I had lunch with a private equity bod one afternoon in New Haven.

Echoing similar noises that could be heard about the housing market in 2006, the investor told me that “nobody in cryptocurrency could imagine the price of this stuff going down.” “Is that so,” I thought.

I wrote my most popular blog post ever, the Bear Case for Crypto, later that night. I recommended that people run away from Ether as quickly as they could. At the time Ether was $385/coin.

Ether is now at $190 and falling fast, with no end in sight.

Takeaway points

I write this blog post only to put down a marker for historical purposes. My thesis in “the Bear Case for Crypto,” for those of you who do not care to read it in full, was simple:

First, cryptocurrencies are being wildly over-sold by their promoters. Technical promises – such as Zerohedge which name-checked Microsoft in an Ethereum Enterprise Alliance puff piece while repeating the garbage claim that Ethereum can process a million transaction per second (it can’t) –  bore no relation whatsoever to reality. Most code-free ICOs are in the same boat: as Matt Levine put it, people selling things in crypto are “like if the Wright brothers sold air miles to finance inventing the aeroplane.”

Second, on account of this expectation/reality mismatch, the 2017 bubble was unsustainable and anyone who advised you otherwise was a charlatan or a fool, or possibly both.

Third, it was, as of last September, very likely that a crash and regulatory intervention would create a self-reinforcing feedback loop which would bring about it a catastrophic crash in the value of cryptocurrencies. I referred to this event as the “zombie marmot apocalypse.”

Re: 1, res ipsa loquitur. That’s Latin for “I am dropping my microphone.”

Re: 2, see above.

Re: 3, it is of course difficult to gauge why investors are dumping their coins, as I have not yet learned telepathy. However, if we’re selling the news, last week Shapeshift’s announcement that it was implementing basic KYC procedures (pursuant, in all likelihood, to a request from the Department of the Treasury) resulted in a 20% sell-off in Bitcoin.

Which means there is indeed a relationship between regulatory action in the U.S. and the price of Bitcoin, such that we may expect an end to regulatory forbearance to exert downward pressure on Bitcoin’s price and indeed the price of all coins in the ecosystem.

I will therefore update my prediction from a year ago. If

  • a civil case and criminal charges are brought against a major ICO promoter and/or cryptocurrency exchange operator for perpetuating coin investment schemes in contravention of some provision of the Securities Acts other than obvious fraud (any day, now, SEC & DOJ, you’ve had four years);
  • a major exchange is shut down for AML violations or charges of market abuse/manipulation; and/or
  • Tether, the central bank of Bitcoin, implodes due either to the allegations of noncompliance or allegations of non-possession of funds turning out to be true,

you should expect drops in the value of the crypto-economy roughly on par with, if not greater than, the plunge in value we saw when ShapeShift announced its KYC policy last week.

Mission accomplished

Thus ends roughly a year of blog posts I have written about ICO Mania, which – seeing as the conventional wisdom, i.e. the Economist, has now adopted the view I have espoused consistently since 2014 (and the Economist quoted me in the process as well!) – also means that I have accomplished everything I set out to do when I started this series last August. Chiefly, I have done my part to convince the world – before the world even wanted to be convinced – that most ICOs were a pile of hot garbage.

Going forward, I am planning to redirect the majority of my writing and research efforts into other less critical, and more productive, areas of the blockchain and cryptocurrency space, like building systems that automate securities lifecycle management or figuring out thorny legal questions for clients who are developing new and interesting peer-to-peer network applications.

I may, of course, chime in from time to time on this project or that one, but will be de-emphasizing the criticism from here on out.

So, what does $100 Ether mean?

Or rather, what will $100 Ether mean, when that price level is inevitably reached once again in the next few weeks?

What Stephen said.

As a parting note, to close this series, I would encourage everyone reading this post to remember the following:

Remember the future you were sold in 2017. Remember who sold it to you. Remember the fairweather folks who were made rich by these offerings, or worked for ICO mills, but now feign disapproval as the wind blows against them. Remember how those the coin bubble enriched the most cavalierly dismiss criticism of their products’ nonperformance, now that the tide has gone out.

Remember the small cadre of skeptical voices that tried to warn you about all of this so that you did not get burned, as you have undoubtedly been burned very, very badly.

Remember to apply that same skepticism to every investment decision you make from here on out.