Blockchain and regulation Pt 3 regulating issues | Blockchain: Out of the Labs

Yeah, I guess I would add that you don't have to set up a foundation to do these kinds of things either. You can choose to do it under a Luxembourg corporation or out of London if you want to take those risks. The reason why people do foundations is actually because that's what the investment community or the crypto community has typically demanded. That's what they would rather invest in. They don't want to see totally for-profit companies run. It's just the way their ethos is, I suppose, in some ways. Now there could be some other reasons why you would explain, but—

Yeah, there's, you know, on this protocol level, there is kind of a collective initiative that you're trying to push forward. So of course these tokens, everyone hopes that tokens appreciate over time, but the goal of the foundation and the essence of how the foundation is set up is to promote the protocol. So if you believe that the protocol is a— in our case, we're doing intrinsically tradable tokens. To open up the long tail of cryptocurrencies. That entails solving the liquidity challenge. I'll go into it later in my presentation, but we think that this protocol is healthy for the community, is healthy for people beyond our company, and that's a good reason to set up a foundation.

And also, I may add, the founders usually take a nice percentage of the coins for themselves. Well, in some cases.

The foundation actually pays in tokens to the company that's developing the software, right? So your budget is kind of baked into this foundation, but the foundation is not— isn't revenue generating in and of itself.

Right, and that makes sense too because you align the incentives of the developers with the other token holders. And I think one of the challenges to date for all these crowd sales is finding the right balance between the amount of tokens sold and the amount retained. So I'm interested to hear people's thoughts on that.

Well, I was just shocked at what Gnosis did in holding 95%. I thought that was outrageous, and I couldn't believe they raised the money that quickly. But that is ConsenSys, right? They have a certain street credibility that drove it. But, you know, a $300 mil evaluation on something that took 15 minutes is nuts. But most of them will take, you know, they'll take 15%, 20%, 25%. That seems quite normal. Taking 95%, I mean, I know some friends of mine that just held back, wouldn't go.

Yeah, I think we're still in the exploratory phase of working out what actually is the right percentage and the right structure for the crowd sale.

Maybe they did the right thing, we don't know that.

Well, it's possible. I mean, I don't think they intended to give 95% because the variable issuance with a dollar cap, they might have ended up selling up to 80 or 90%, I think, of the tokens. But because people just jumped in so early, maybe some people didn't realize it was a Dutch auction and not a first-come, first-served sale.

Maybe some people didn't care.

There's just so much money flowing around in the space that they end up only selling a tiny fraction at a really high price. And in one view, it's irrational. All those investors, you know, paid an inflated price. But on another view, you know, on the secondary markets, those Gnosis tokens are already trading at 2x or more of the ICO price. So you can see there's a lot of challenges in the space with the structure of these sales.

I'm sure it won't be the last Dutch auction we see.

I would add that one of the challenges is Transparency, right? I mean, these are self-reported numbers, and while there's some verification that can be done, the value of that verification is limited. In other words, we can't really be certain of— and when we throw around words like valuation and percentage retained, that's not going to be—

It's in the smart contracts, which are publicly available, as well as the transactions. I know, but yeah, if you want to sit around for like weeks and weeks and troll through it all, you may make sense and validate it. But nobody's doing that, probably.

Right. I mean, it's just like Bitcoin exchange volumes. They are— we're just at a point in the industry where the level of information discovery, if you will, is lower than traditional markets.

Here's another interesting angle. Another Canadian company. I'm from Vancouver originally. I got attached to a company called Blockchain Intelligence Group, and they're working on something called BitRank. And it's not the first company to do this, we also discussed this with Ryan. But basically they're working with Homeland Security and also with Canadian intelligence and various other— FBI. And basically they figured out how to give a rank to a Bitcoin, or the holder of a Bitcoin, and basically because they have the whole history of where that money traveled. Did it go through the dark markets? Has it got a stain on it? Was it in the drug trade? So they actually have a 0 to 10 Bitcoin ranking system for Bitcoin, whether it's dirty or clean, which could also be a regulatory issue later. Is it money laundered money? Is that important for regulators? If it's gone through some kind of dodgy drug deal at some point and then been invested in an ICO?

So Greg can answer that question specifically, but I just do want to mind our Words become important, right, in these new spaces. And Bitcoin and other virtual currencies are virtual currencies. And that doesn't mean virtual as in digital, like a type of currency that is virtual. It means like currency. So virtually currency. And I think it's just important to make that distinction for one reason, really, which is that there are different rules, legal rules that govern the transfer of currency as opposed to property. And so terminology becomes really important, especially when you're talking to regulators. And I know you didn't mean money is a really broad term, but just to make the distinction between—

Well, it's the difference between ITO and ICO, right? Initial token offering. The same kind of language things are important, I think.

Yeah, correct. Yeah. And there's actually been a war over words, not war, War, that's overstating it, but digital currency versus virtual currency. There's been a push from the industry towards digital currency, whereas the regulators have pushed back on virtual currency. And I think probably could have done a better job in selecting an entirely new word instead of— or used a modifier to make it clear that virtual currency is not a type of currency. But rather something like currency that behaves like currency in certain environments.

Did you want to address the money— well, not money laundering, I'm not going to say that word again. Well, the legal issues about the history of Bitcoin and where it's been traded, and how is that going to affect in the future the regulatory issues. Because that's an important thing. I mean, it's KYC/AML, right? It's where's the money coming from and know your customers.

I just wanted to touch on something that Ryan mentioned, and it is that terminology is important. And it's particularly important in this space where you're talking about things that look like investments, that function like products, and that are available to anyone. And I personally— and I know there's a few people in this camp— I really don't like the term ICO. I prefer crowd sale or token sale or presale. When you use investment-type language like ICO and returns and profits, that can lead people who are buying the tokens to really expect profit. And that's in fact one of the elements of the Howey Test for securities. So if you use language which is really positioning these things as useful goods, useful digital products that are used in networks that create applications or transfer protocols, then we actually see that these things are valuable in themselves and not as some sort of speculative investment.

Language will be important. Yeah, well, language will be important, but can we make the change? You know, when everybody wants to put ICO on their ICO because that's what people are searching for, when the search engine optimization or whatever reasons they have, it's difficult to make that transition. But I do know that now I'm seeing more and more ICOs that I'm working with wanting to say, like, let's leave that out and stick with crowdsale. So there is definitely some traction moving that way, but It's hard to change, you know, something that's been around already for a few years.

Yeah, that's true. I think it's interesting that, like, we're at this stage now, we have the ability to change it, really shape the narrative, and to actually create a sensible structure for all these sales. So Coinbase led some research last year. We put out a framework to help determine whether a particular token is a security or not. We worked with Coin Center, ConsenSys, and a few others, and some top law firms. And our research showed that there's really 2 key factors that really determine or help shape whether a particular token is a security or not. And the first one is really, is the token useful? Is it something that has a use case within the network that it exists in? Does it enable the holder to do something, whether it's, you know, something like Augur or Gnosis or Golem or Bancor or something which enables functionality that's only available to the token holders? If it is, then it's less likely to be a security and more like a product. The second is, again, the marketing. So are you marketing this thing as an investment or are you marketing it as a product? So the combination of those 2 things, we believe, would determine the particular outcome for any token.

Yeah, and I would direct anybody to Coin Center's white paper on it, and they also have a chart in the back of the white paper and separately on it. It's actually— it's a guide. It's a pretty good guide. That's all it is, but I think it's a useful starting point. And I agree with his comments about kind of where some of those lines are. And I think that's again where words matter. And words matter not only on the white paper, not only on the website, but what about on Reddit? What about in emails? Are you saying, you know, buy this, it's going to go up in value? Well, that's an investment, right? And so it's— and what's problematic or can be problematic, people particularly non-lawyers, are pretty loose with language. And it's fair, right? When you go out to a bar, you don't think about what you're going to say. You're talking on Reddit, super com— you're in a super comfortable situation in a sense. But what the regulators will do is they'll mine everything that you've ever said, written, blogged about, etc. And if they see one or two words, that can be enough to say, wait a minute, you said it was an investment. You said it was going to go up in value. So that's— so words, unfortunately, really do matter. You have to be super diligent about what you use and why you use it.

Maybe I'll add one thing.