ICOs, common sense and the long reach of the law

I’m scratching my head here.

Most respondents to CoinDesk’s poll question “Who should be most fearful after the SEC’s DAO token sale ruling?” answered “Nobody, very unactionable”.

CoinDesk poll on SEC impact

This goes a long way to explaining the continued momentum of initial coin offerings (ICOs). A quick look at any of the ICO tracking sites shows no shortage of upcoming sales, many of which look to the naked eye very much like securities.

Are the respondents on to something? Or are they buying into the tragic “it’ll never happen to me” fallacy?

The thing is, they’re probably right. The SEC doesn’t have the resources to “go after” every digital token that acts like a security but didn’t register.

But, its moves can be swift and sharp. Today CoinDesk reported that the SEC has ordered the temporary suspension of trading in OTC-listed CIAO Group over questions about ICO-related claims.

Whether this is a one-off or the beginning of a slew of actions is unclear (the fact that CIAO is a listed company is no doubt a significant influence). However, the chance of a sanction or even an investigation should be enough to give pause. It’s a career-breaker. Even if the SEC ends up giving the green light after poking around, the stigma of having been singled out will be difficult to wash off.

What’s more, almost all digital token issuers are young startups with shallow pockets. An SEC fine would financially cripple the founders for years. Even just doing a simple risk analysis of [potential cost * probability] vs [potential benefit * probability] shows that, in many cases, ploughing ahead on the assumption that you’re immune is just not worth it.

The likely outcome is that the SEC, having issued a warning shot and seeing that the industry didn’t really take it seriously, swiftly moves to take action. We can probably expect further precedents to be set over the next few months as the regulator decides to make examples of some of the more egregious cases.

Meanwhile, lawyers will continue to speculate on what the rather vague wording of the SEC statement means, cryptoasset entrepreneurs will continue to build new economic models and investors will continue to dream of rapid riches with no consequences. All part of the evolution, right?

Kik’s mixed signals on their ICO

Am I the only one that found this article alarming?

I wrote a while ago that the Kik initial coin offering (ICO) was interesting because it obviously wasn’t purely for financing purposes. I mean, they already have a lot of VC funding, and given their user base, would most likely be able to get more.

It seems I was wrong. From the TechCrunch article:

“When asked if the unicorn-valued startup had trouble raising additional funding, [CEO Ted Livingston] demurred but claimed that the ICO is an alternative form of exit.”

Uh oh.

mark wahlberg confused

I would like to point out that neither VC funding nor an ICO should be seen as an exit! Acquisition, sure. IPO, maybe. But minority investors don’t buy into a company so that current shareholders and/or the CEO can exit. The fact that they would even want to should send interested parties scuttling.

Especially in an ICO, whose tokens supposedly will only have value if the holders want to use them. Which they would want to do if the platform was to continue growing, right?

The uh-ohs keep coming.

“[Livingston] believes that the ICO will provide an adequate return for the existing investors, which would take pressure off a possible acquisition or an IPO.”

The CEO has pretty much declared that it’s a security.

And then there’s this quote:

“The way I think about ICOs is it’s very similar to the dot-com era. There was a bunch of excitement, people made a bunch of money, people lost a bunch of money but Amazon and Google came out of it.”

Relating ICOs to the dot-com crash and claiming that Amazon and Google would not have happened without it is… to put it kindly, very strange.

However, an article on CoinDesk yesterday quotes Livingston as saying (referring to the test run of non-blockchain based Kik Points):

“There were two things it was meant to test. One is, could digital currency be used to incentivize opt-in advertising? Two is, could we use a digital currency to build an economy? We were trying to test those two things at the same time. What we found it’s yes to both.”

Now, that sounds more like it.

On the surface, the idea makes sense (so far, anyway). Using a blockchain token means that the native currency can be bought and sold on digital currency exchanges, which was not the case with Kik points.

Kik has said on previous occasions that it aspires to being North America’s WeChat, referring to the Chinese messaging app on which users spend an average of four hours a day. But, WeChat doesn’t have a blockchain-based cryptocurrency, and manages to do just fine.

The CoinDesk article reminds us that other attempts to commoditize social media attention (including Facebook’s now-shuttered Credits) have not worked. However, Kin (as Kik’s currency will be called) will emerge in a very different paradigm, with digital tokens all the rage, and cryptocurrency technology advancing in giant leaps.

Yet this does not guarantee success, and the mixed messages aren’t going to help.

Is the ICO an ecosystem builder or is it a money grabber?

A bigger question is: is it possible to be both?