$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.

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.


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.

With crypto, the United Kingdom needs to put its house in order

This is the latest entry in my ICO Mania series of blog posts.

The Shapps Incident

Speaking as one who has long waited for legislators and regulators to get serious about cryptocurrency and blockchain tech, yesterday’s alleged scandal involving Grant Shapps MP is not only shocking, but it tells me that the state of ICO regulation in the UK is years away from being what it needs to be.

For those of you who were living under a rock, Grant Shapps – former co-chair of the British Conservative Party and a member of Parliament in that country – yesterday stepped down from both a Parliamentary working group and an ICO’s advisory board after it was alleged in the pages of the Financial Times that Shapps apparently failed to disclose a $3.7 million interest in tokens issued by an ICO. Note, officers of the allegedly offending ICO itself also advised the Parliamentary working group.

That something this inappropriate could allegedly happen in such close proximity to the heart of the regulatory process shows that it is more likely than not that the British government is, currently, totally blind to the size of the issues presented by the space they are only now beginning to understand, and the extent to which they are failing to exercise their duty to the public to quickly achieve competence and work with industry to establish appropriate supervisory frameworks.

It’s time for regulators around the world to (a) get serious about learning how this technology does and does not work, (b) work with legislators to get the power to put an end to market conduct which is abusive of the investing public and (c) put those powers to use.

An exercise in futility

Over the years, I have had the privilege to speak with regulators, law enforcers, legislative aides and legislators alike, in several countries, about the danger that the proliferation of ICO, or “Initial Coin Offering,” schemes poses to the investing public. I have done so consistently and unwaveringly since 2014.

To date, warning regulators about this misconduct has been an exercise in futility.

The more money these ICO schemes make for their promoters, the less the warnings are taken seriously, not only by new entrants seeking to raise money in the space or investors doing diligence, but also by regulators who have become accustomed to coin offerings as a fact of life.

The reasons why this should be the case are clear enough to me. Cryptocurrency companies with vast marketing and lobbying budgets have sent sufficiently hip and sloppily dressed technology emissaries ’round the capitals of North America and Europe, peddling decentralization prosperity gospel to our leaders, and blinding them with the promise of “blockchain technology.”

A small but not insignificant number of the companies in “blockchain” do good, honest, and solid development work. But they are in the minority. To any half-decent engineer, most of the claims peddled by the average ICO firm these days are, transparently, garbage. So-called “stablecoins” set themselves apart as being particularly awful, but many others that don’t try to be anything other than a cryptocurrency are themselves chronically oversold. The much-vaunted Eos scheme, for example, which raised more than $4 billion, utilizes four-year-old consensus tech known as delegated proof of stake which wasn’t that impressive on the two occasions it was tried previously (Bitshares and Steemit) and remains unimpressive now, at least to anyone whose opinion I respect.

The issue, of course, is that most people in “blockchain” arrived on the scene in the last 12 months. As a consequence, they are unable to exercise the requisite levels of diligence to sift out the marketing B.S. from genuine innovation. This explains, for example, the U.S. Securities and Exchange Commission’s legally puzzling pronouncement, which appeared to borrow heavily from the logic put forth by U.S. lobbying firm Coin Center, that Ethereum, which virtually any legal professional I know will agree started its life as a security, somehow transmogrified into a non-security by the mere passage of time (despite there being no basis in the precedents I’m aware of for such an interpretation).

Or why a European Parliament subcommittee produced a breathless resolution that read like a marketing document that might be more at home on the blog of the European Commission’s “blockchain observatory” development partner, ConsenSys, than it would be as serious legislation that could be found within a library of evenhanded assessments of blockchain tech.

Those of us standing against unqualified evangelism – the half-dozen or so consistent and battle-weary public “skeptics” like myself, Izabella Kaminska, Tim Swanson, and David Gerard, who between us have $0 in marketing budget and have to earn a living without recourse to the coin-capital markets – look on with ever-increasing levels of horror as unbridled greed goes unchecked and indeed is endorsed by regulators who have been told, and in good faith believe, the lie that in order to utilize blockchain cryptography, a coin is required.

This is not to say that the entire space is a waste. I firmly believe that cryptocurrency and cryptography combined with distributed systems, which currently takes the form  of blockchains, will change the world. Indeed, these things already have changed the world. 

However, I also believe that ICO boom is to “crypto” what the Railway Mania was to the industrial revolution. Lasting change will come not from an infinite proliferation of instamined “shitcoins,” or by handing hundreds of millions of dollars to un-tested novices whose only objective is to drive up the price of the digital assets they sell. Distributed cryptosystems will, as with all technologies, evolve incrementally and as a result of a slow and gradual process of adoption and developer familiarity with the tooling.

There are well-worn methods for promoting innovation in cryptocurrency (see e.g. the BIP process for Bitcoin) and in blockchain-without-the-coins (see e.g. the development process utilized by the Hyperledger project). Note, in each case, that the substantial development – hundreds of thousands of man-hours – that has occurred in either project has required the sale of precisely zero coins of any description, and certainly not the excessive sums like the $1.5 billion raised by Telegram or the $4 billion purportedly raised by Eos.

This brings me to my main point. What is not required for a healthy innovation sector is the repetitive, cookie-cutter ICO industry which has been allowed to proliferate in the U.S. and the U.K. almost completely untrammeled for the last four years. Which I find problematic, which practically every lawyer I know finds problematic, and which regulators on both sides of the Atlantic Ocean have singularly failed to address directly for half a decade or more.

Legislative failure

Parliament, in particular, should bear some responsibility for the inability of British regulators to address market misconduct occurring within the jurisdiction. Numerous coin schemes have been run out of London. Stand-out examples of regulatory inability to come to grips with “blockchain” include:

In May 2016: A “decentralized venture fund,” calling itself the “DAO,” is launched from London and Berlin. The scheme  quickly raises $150,000,000 in outside capital. However, because the smart contract administering the scheme was sloppily written, the DAO was hacked and the scheme collapsed, causing user funds to be lost (although later efforts by the Ethereum Foundation ensured that some of the funds would be reclaimed). No action was taken in England and Wales; the U.S. S.E.C. wrote a “report of investigation” in July 2017 rapping the DAO scheme on the knuckles for violating securities laws in that country.

September 2016: the UK FCA warns consumers about the Onecoin Ponzi scheme while at the same doing nothing to intervene in the scheme: “This firm is not authorized by us and we do not believe it is undertaking any activities that require our authorization. However, we are concerned about the potential risks this firm poses to UK consumers.”

September 2017: the FCA, after what must have been a thorough review, confirms what many practitioners suspected when it says it has almost no statutory power to supervise cryptocurrency and ICO offerings, leaving no dedicated regulator with the remit.

January 2018: The Bitconnect Ponzi scheme, which was apparently administered by an English registered shell company, is shut down. More to the point, it is shut down after regulators in Texas of all places filed a cease-and-desist order against the company and the founders cut and run. As far as I can tell, no investigation or regulatory response ever occurred in the United Kingdom.

May 2018 – Ripple Labs states, to a committee of Parliament, that its business has no relationship with the cryptocurrency XRP despite the fact that this assertion is frequently disputed in the cryptocurrency community.  Members of the Parliamentary Committee lack the competence or sector knowledge to challenge this assertion on the spot.


July 2018: Grant Shapps MP, former co-Chairman of the Conservative Party, steps down from his role in the All-Party Parliamentary Group for Blockchain tech for allegedly receiving compensation from one of the schemes he’s meant to be supervising and allegedly failing to disclose this to Parliament.


Stop equivocating

I warned in November of 2017 that failure to adequately supervise the cryptocurrency space will create levels of systemic risk which could potentially endanger the mainstream financial system. Last week we learned from the erudite Bitcoin banker OG Caitlin Long that ICO issuances were, in dollar terms, equal to 45% of IPO issuance in Q2 – with nary a prospectus or registration statement in sight.

Regulators of the world, the time for exploratory work is past. Clean house, come up with a battle plan, establish a supervisory framework, and enforce it.

It’s long overdue. There’s a real possibility it will soon be too late.


I usually end my posts with a picture of a marmot but because this is for Britain, I end this one with a badger

Ether is not a Security?

 Not your lawyer, not legal advice.

Following my post Whether Ether is a Security, in which I agreed with Gary Gensler’s assessment that Ether is probably a security, and Ether was (probably) a security, in which the WSJ leaked that regulators did in fact consider Ether to be a security, SEC director William Hinman announced today that it is his view that Ethereum is likely not a security – although it may have been one in the past.

This has been received by the market as semi-official opinion of the agency, as it should be. In practice, I suspect this means that some might expect a great many unregistered investment schemes – no matter how harebrained or illegal – dating back to the 2014 era will get a free pass.

Although I’m an English lawyer, my personal view that this interpretation of what was and continues to be an ICO-funded scheme doesn’t gybe well with the purpose or substance of U.S. securities law.

Just about everyone appears to agree that Ethereum was a security when it was first issued. “Promoters,” Hinman said in his speech, “in order to raise money to develop networks on which digital assets will operate, often sell the tokens or coins rather than sell shares, issue notes or obtain bank financing… [where] Funds are raised with the expectation that the promoters will build their system and investors can earn a return on the instrument – usually by selling their tokens in the secondary market once the promoters create something of value with the proceeds and the value of the digital enterprise increases… it is easy to apply the Supreme Court’s “investment contract” test first announced in SEC v. Howey.” In other words, very much what happened with Ethereum four years ago.

Screen Shot 2018-06-17 at 3.47.57 PM
The contract which set out the terms of the Ethereum scheme

Hinman suggests, however, that the wide adoption of secondary market transactions have caused the Ether instrument to lose its qualities as a security. Or more to the point, that the transactions in Ether are not sales of a security. “Putting aside the fundraising that accompanied the creation of Ether,” he continues, “based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.” (Emphasis mine.)

This is because, he argues, “if the network on which the token or coin is to function is sufficiently decentralized – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract.”

Except it totally is

I join Chairman Clayton and Director Hinman in thinking that a “decentralized” scheme – which I define as

“a (1) cryptocurrency scheme, (2) in relation to which neither an originator nor promoter has sold or distributed tokens for value to third parties, and (3) which utilizes a consensus algorithm that ensures the process of adding blocks or transactions to the shared transaction history is not controllable or censorable by one person or a reasonably foreseeable cartel”

is not an investment contract and should not be subject to securities regulation.

Where I struggle is in understanding how tokens issued by a scheme start life as investment contracts, and then, despite openly flouting the law for years and seemingly only because the scheme has successfully evaded enforcement action during that time, despite being part of and enabling what former SEC Commissioner Joseph Grundfest called “the most pervasive, open and notorious violation of federal securities laws since the Code of Hammurabi,” the tokens issued by such a scheme could conceivably lose their status as investment contracts.

With such a scheme it is the instrument, aka the token, which is the investment contract. It is the mode of that investment contract’s issuance which should determine the character of the entire scheme. As Chairman Clayton made clear when he carved out Bitcoin from the SEC’s purview, we are concerned with the initial sale of the token for value with an expectation of profits etc., not the secondary market transactions in such a token, when determining the token-qua-instrument’s character and whether the securities laws apply to it. Tokens are the thing that the public values; they are the evidence of the share in the scheme, “it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise.” Howey.

The property that backs the token and of which it is a proportional share, if any, is the goodwill of the underlying chain ecosystem to which that token relates, which can be and is quantified as a “market cap” on websites like Coinmarketcap, calculated as the spot price of the token multiplied by the total tokens outstanding.

Secondary trading of the token-qua-investment-contract ought not to change the investment contract into a cryptocurrency,  ant more than a secondary trading of, say, a private company share doesn’t transmogrify the share into money. If there’s a precedent that supports the SEC’s current proposed approach, I’m not aware of it.

Anyway. I don’t think it should be terribly difficult for the SEC to get on board with that approach once they get some skeptical input to counter some of the input I know they’ve had from the lobbyists (I’m easy to get hold of, guys). Especially since, towards the end of Director Hinman’s speech, he rattled off a list of criteria, one of which refers to a token as an “instrument:”


I will leave it to you, dear reader, how you might have applied these factors in 2014. If we assume for the sake of argument that the Howey criteria are met, and if we pay very close attention to the word “scheme” in Howey’s “contract, transaction, or scheme,” it seems clear that later decentralization should not save a cryptocurrency scheme from earlier transgressions; where the later-mined tokens are part of the same scheme as the presale coins and facilitate its objectives, and it was an investment contract at inception, then as a practical matter the Ether sold in the presale and the Ether today are all part of the same scheme, albeit one that has achieved completely its promoters’ original goals.

Indeed, decentralization does not terminate the initial investment contract; it is the purpose and objective of the initial investment contract. Funding marketing efforts and becoming a decentralized cryptocurrency is the point of the exercise.


To think otherwise is to effectively allow crypto-token systems to outrun regulation even if at their genesis they violated the laws. It does not take long for a cryptocurrency system to grow beyond the immediate control of its creators; even with Ethereum, it would have been very difficult, as a practical matter, for the system to be unilaterally controlled by the Ethereum Foundation or the core team mere days after the system launched (ignoring the DAO hard fork, which was the result of an at-the-time-unforeseeable cartel of most of the major economic interests in Eth trying to extricate themselves from a plainly absurd $150 million unregistered investment scheme, which also escaped scrutiny despite being a flagrant violation of U.S. securities laws and, presumably, the public offering rules in every jurisdiction in which DAO Tokens were sold).

“Decentralization” is, accordingly, not a good measure for deciding whether securities laws should apply to a scheme, as a scheme can become functionally decentralized fairly quickly merely by choosing an appropriately decentralized consensus algorithm. Today, that means proof-of-work.

Why have we now changed the subject to be about secondary market transactions in Ether instead of the thing that is possibly the investment contract and may have been all along, Ether itself? Lord only knows. But in my view, coins, when sold to obtain investment capital, should be treated as an investment contract of a kind, no matter how “decentralized” the system eventually becomes. (Note, whether Ethereum is decentralized – or will be after the transition to Proof of Stake, where its largest holders will have a meaningful input on consensus – is an open question.)

Speaking of which,

“Decentralization” is legally meaningless

The term “decentralization” has no legal meaning, at least not yet. It could mean that a scheme uses POW consensus even if the supply of the cryptocurrency was pre-sold to a handful of large promoters who funded its early development (purely hypothetically). It could mean that the cryptocurrency has a hard-cap and is reliant in practice, if not in theory, on one company’s contributions to the network, as with Ripple. It could mean many investors hold the coins but consensus is determined by a cartel, like Eos. It could mean that, as with Bitcoin, three major mining pools and a small group of “core” devs have outsize influence over the currency.

If “decentralization” is a defense, all of the schemes outlined above will plead it. All of them will be both right and wrong to varying degrees.

Put another way, “decentralization” is a buzzword, not a term of art. We should therefore avoid entirely use of the term and  look to processes the law understands – issuance and sale – to inform our regulatory approaches. Relying on this amorphous, non-legal, coin-specific concept of “decentralization,” as Coin Center argues we should, muddies the waters completely unnecessarily, introduces a huge amount of legal uncertainty, has no basis in existing law and will result only in further confusion in the marketplace, exposing retail investors to more risk.

Screen Shot 2018-06-14 at 8.50.44 PM
Excerpt from Director Hinman’s speech (linked at top of post).

I have a pretty simple way of looking at tokens, one which squares the circle nicely when we’re trying to ask why Bitcoin shouldn’t be a security where something like Ether should. The most important question, the threshold issue, is whether the issuer or creator of the chain sells any of the tokens/coins.

This way of thinking about token transactions is elegant in its simplicity; e.g., it is hard to argue that a mined coin on a chain where no tokens have ever been sold or distributed by the issuer to the public is an investment contract, as there is no valuable consideration moving between the user and the blockchain’s creator, ergo no investment of money, ergo no investment contract. Tokens that are not sold are made, through mining or similar processes. Last time I checked, cryptocurrency mining was perfectly legal.

This means, given current market dynamics, from the perspective of a scheme promoter, assuming a scheme is “decentralized” per my definition given above,

  • If you’re selling/distributing tokens, and especially if you’re pre-selling them, to US persons, you probably have an investment contract on your hands.
  • If, like Satoshi Nakamoto, you’re not selling or distributing tokens to US persons, you probably don’t.

Again, none of that is legal advice, but more a point for discussing whether the SEC’s proposed regulatory approach could benefit from revisions.

To conclude

Anyhoo. Whatever people think of today’s statement of policy, it hints towards a liberal approach to cryptocurrency structuring. I don’t like that it hints towards that approach, as I think cryptocurrencies are economically extremely dangerous, but I have to concede that’s where it points.

I still think industry-specific regulation is now due. We will almost certainly not get it for at least half a decade or more. But its absence should not be interpreted by entrepreneurs as a free-for-all; remain mindful that this is the first round of a regulatory boxing match in what promises to be a decades-long bout. Remember also that securities regulation is fast-moving field where what worked yesterday might well not work tomorrow. See, e.g., U.S. v. Newman, where the Second Circuit Court of Appeals, overturning itself, criticised the government’s “overreliance on our prior dicta” to inform “the doctrinal novelty of its recent insider trading prosecutions.” Judicial gaslighting par excellence.

Doctrinal Novelty” – these are two words all lawyers in blockchain should keep in mind as we advise on and unravel these new and interesting technologies.

Entrepreneurs, on the other hand, should not commence a coin issuance free-for-all in response to today’s semi-official statement from the SEC, although I fear now that many of you will. If your behavior gets too out of line, you will ruin the party for everyone.

To sum up, compliance is a long game. Plan accordingly.


If ETH Isn’t a Security Then Nothing Is

This blog post can be summed up in one word: “frustration.” It shows how tired the market is of technobabble euphemisms, and how much people outside of Coinland want to see some enforcement to level the playing field for businesses that choose to *not* raise with noncompliant ICO coins.

Mechanical Markets

Ethereum tokens (ETH) are often considered commodities but not securities, like Bitcoins. [1] But I think that ETH meets any common sense definition of “security” and that the ETH ecosystem needs to be closely examined by securities regulators. I’m not a lawyer, and not the right person to be making this argument, but it seems important and urgent — so I hope you’ll forgive any errors. [2]

Ethereum’s Announcement

The Ethereum Project was announced on the bitcointalk.org forum in January 2014 by cofounder Vitalik Buterin. The announcement solicited “investors and evangelists” who would be protected by a “fiduciary team,” and linked to an announcement blog post titled “Ethereum: Now Going Public,” which said:

We will be able to develop fully functional and robust Ethereum clients with as little as 500 BTC funding… To that end, we would like to be able to invest a large quantity…

View original post 3,700 more words