Bitcoin Forum

Dear SEC: ICOs & ‘Tokens’ are killing innovation

Initial Coin Offerings have raised $200 million dollars in 2017. Here is a short list of recent ICOs, and their fundraising results:
Basic Attention Token — $35 million USD
Storj — $30 million USD
Waves — $16 million USD
Qtum — $15.7 million USD
Gnosis $12.5 million USD
Iconomi — $10.5 million USD
Golem — $8.6 million USD

So what is an ICO? ICO’s are an old phenomenon in the blockchain space with a new brand name. The word ICO is merely a synonym for a ‘unlicensed security’. ICOs are released to investors under a pretense of venture equity, but with the specific purpose of circumventing SEC authority and control.
ICO fundraisers leverage the confusion around ‘blockchain technology’ to swindle uninformed consumers with false promises, dubious claims, and dishonest terms related to their ‘high yield’ investment opportunities.

Here’s the state of the ICO/Token industry today:

Token-based fundraising and company valuations are 5x-10x higher than incumbent fundraising mechanisms, with no investor protection
Retail Investors are left holding these worthless securities in lieu of real world assets, unable to comprehend what risk they’ve agreed to
Previously fined offenders are operating these schemes unscathed, and without even so much as reputational damage to their name in exchange for dumping these securities onto victims
Elaborate schemes are undertaken to project scarcity, where no scarcity exists, for the promotion of ‘tokens’
Inventory of these so-called ‘decentralized’ ICO tokens sit on exchanges where they are actively traded, and rarely (if ever) withdrawn for use
To date, there has never been a ‘consumption’ of a token that offers an efficiency over incumbent online solutions.
In many cases, it is unclear how these tokens are anything more than unsecured and poorly structured liabilities issued by the ICO team.
It is unclear why ‘blockchain’ is needed for any of these projects, other than as a mere label, in which to dodge regulatory enforcement.
‘Tokens’ have preexisted blockchain by decades, and are in widespread use in incumbent data systems. The only new ‘development’ that is causing the rise in these platforms, is the lack of SEC action in response to increasingly aggressive fundraiser claims.

How did we get here?

Clearly Bitcoin was the precursor. Bitcoin’s success was an unplanned experiment which culminated in a massive bubble during 2013. But as Bitcoin’s market cap growth stalled in 2014, Venture capitalists began early attempts at recreating the manic euphoria of the Bitcoin movement in the years prior. David Johnston (Factom) and Ethereum promoters led much of that discussion, with many of today’s fundraising buzzwords coined in various papers and guides that they promoted. Over time, more established, and vocal Venture Capitalists began to chime in.

Fast forward to today, and these ICOs are effectively pitching the security as the common man’s ticket to Silicon Valley success.

If the ICO term sounds eerily similar to “IPO” well, that’s no coincidence. In the minds of impressionable and inexperienced, an ICO is an IPO. ICO proponents will of course state otherwise, but the difference between these terms is increasingly cosmetic.

Here’s what IPOs and ICOs have in common

Both are sold at the onset of a venture, to fund a team of corporate officers for deployment of a venture
Both are marketed by teams of promoters for sale on exchanges (though ICO promoters are far more aggressive boiler rooms operations)
Both ICO and security exchanges are nearly identical (or strive to be) in their design, and trade features

Here’s what’s different

ICO has ‘blockchain’ in it. Though what that means? Well, no one really knows, or cares.
There are no regulations, constraints, or pretense of investor guarantees on ICO offerings
There is very little due diligence being performed on these offerings, and it is routine practice for convicted offenders to launch these offerings without restraint
The ‘rights’ offered to shareholders are shockingly limited. There is generally no pretense of signing legally valid documentation for profit sharing, voting, auditing, or corporate rights of any kind - despite the fact that promoters often promise that their schemes will permit these things
Members of the ICO promoters and marketers are generally given inventory, alongside insider information in the venture, and use this position to exit their risk onto investors immediately after ‘going public’ (and before building a product)

What’s the Problem?

When ICO’s deliver 100% of the company’s expected receivables at launch, founders are incentivized to leave their project immediately thereafter
As such, these projects are increasingly resembling classical ponzis, with the losses borne by ordinary blue-collar Americans
No pretense of accuracy or responsibility for claims have led to ornate perpetual motion schemes receiving funding, at expense to humbler better-grounded offerings.
Incumbent and regulated VC models are no longer sustainable fundraising options, as the returns from ICO ponzis are starving out capital and perverting investor expectations
The common narrative amongst investors is surprisingly simple: Great fortunes were made in Bitcoin, this is your chance to get in on Bitcoin riches. And this narrative is so ingrained in the minds of investors that websites exist to strengthen and quantify the claim.
For the ICOs that have already run their course, victims will not speak out. They believe that either they themselves are fully responsible for their loss, or that they would not be able to exit their meager positions by doing so.
There is no ICO success story. Like all ponzis, ICOs are nearly guaranteed to be profitable until the time at which capital inflow has ceased. The success stories merely exist amongst the lucky, or those with insider information on when to pull out of the schemes.

Where’s it going?

Left unabated, ICOs will completely displace any pretense or recognition of security regulation law
Boiler rooms will continue to grow more aggressive in finding ignorant and unaware Americans to prey on
Facebook, Youtube, and other social media ads will grow more brazen with their claims, and less scrupulous with their demographic targeting
Self-help coach, Youtube, and Celebrity endorsement schemes will continue to grow into organized affinity fraud
Unrepentant and serial offenders will continue to run subsequent and larger rounds of ICO schemes
Companies completely outside the blockchain space will use the moniker “ICO/Token/blockchain”, to raise capital without the cost or liability associated with traditional securities regulation
ICO claims will grow increasingly detached from the limits of science and meaningful progress
Industry representatives will sponsor bills and advocate legislation designed to indemnify operators, and promote these practices

So what’s next from here?

The ICO industry will get as big as the SEC decides it should be. Though I’m sure that recent high profile actions were a fine use of its resources, such scandals are now been dwarfed by the growth of the ICO market. My assumption is that reputational damage to the SEC will grow commensurate with this market.
Ridicule of the SEC’s authority is already common amongst investors, and will spread to fundraisers themselves. Such disdain is already at so great a level that this Texas company would appear to be recreating the original Howey Test, but with the word ‘blockchain’ in their prospectus.
So-called ‘Blockchain’ securities have become a return of the South Seas Bubble, the fallout for which will eventually become a burden to American citizens and taxpayers. An ‘ICO’ is merely a label that’s been assigned to the current state of a securities regulation vacuum. There’s nothing ‘blockchain’ about tokens.

Dear SEC: ICO’s and Tokens are killing innovation.

Is it necessarily a contradiction for someone to like what, in general, gives Bitcoin its censorship resistant, regulatory arbitraging properties when it is applied to certain areas, but also for them to be in support of trying to regulate its use in other areas, where, say, people are using it to avoid regulations to make running scams easier? I mean, it's clearly the case that once you have actual names attached to something, like many of these ICOs, that just because the Bitcoin (or Ethereum) system can't easily be shut down doesn't mean anything in terms of protecting known ICO scam creators from being put in jail. I don't see pointing that out and supporting that as "ratting out on all of us".

Just because bitcoins can be used by scammers (or even terrorists) doesn't necessitate that we should be against bitcoin, but it *also* doesn't necessitate that we should be against trying to stop scammers (or terrorists) that use bitcoin. Chris knows that the SEC can't stop Bitcoin, but he also knows that they very well could stop a number of these ICO scams.

This is the most important sentence imo.
I agree that most of these ICOs are having head figures which could be easily arrested. And I would say that 80-90% deserve it as these are mostly scams. And they know that it. They also know they are breaking the law as the token has more the function of a share then being used as a piece of software.
With or without Chris' letter I'm sure sooner or later the authorities will step in.

What will happen to ETH when the US suddenly declares Vitalik Buterin as the enemy of the State? It will collapse in a flash.

and if they try to do it with bitcoin... Who'll be getting arrested as the creator of Bitcoin? No-one.

When people get burned by those scams, they'll be crying and asking for the government's help anyway. We don't have to do anything.

I don't think some guy writing a letter to the sec and publishing it online will have any impact on anything. I would not be surprised if nobody at the sec even sees it.

Just because chris derose bought high and held as it dropped doesn't mean the rest of us are losing our shirts on these markets. Only the people that greedily buy too much while its high and then don't have enough money to back up their bets when they are wrong are losing here. The rest of use are making small easy profits on every new market.

Hopefully Craig Wright, that would be poetic justice.

Chris DeRose is right in every aspect of his letter. ICOs are terrible way to gather money as there is no guarantee that project is legit at all.
It is not even that team behind ICO is trygin to scam from the start, they might just not be suited to manage money and fail later.
SEC needs to curb ICOs ASAP, protect bitcoin and introduce healthy equilibrium between already existing coins.

The whole hood just heard my laugh

Anyway, thinking about it more, yes we know the SEC will come down and get somebody arrested, yes some new regulation to define what an ICO will come for sure, but is regulation in crypto what really want?  I mean I like Chris DeRose, I think he's great and he's someone to be listened to in the space, but did he really have to try and stir up the hornet's nest?

Hopefully Craig Wright, that would be poetic justice.

I think having a community that is against scammy use cases of cryptocurrency is a good thing. But we don't even have to argue about whether regulation of ICOs "in crypto" is what we really want -- securities law already exists and applies here. There's nothing magical in blockchain technology that is going to stop a scammy, ICO-creating CEO from being arrested for committing securities fraud. It's *going* to happen. Do we want to be associated with scammers, or do we want our community to self police, educate, and put more of a distance between the good uses for cryptocurrency and the bad uses for cryptocurrency, and do it on the front end?

Crypto will always be associated with illegal activities and nefarious endeavors, nothing will change that.  Even without any ICO, Bitcoin is already associated with illegal drugs, ransomware, pedophilia, illegal gambling (probably mostly under aged gambling too) and lots of other stuff.  So what's a another questionable use case like ICO investing/gambling?  It's nothing...  Just another one of those things you can do with Bitcoin.

The SEC can start looking for the "bad actors" using this list ..

https://www.smithandcrown.com/icos/
 (https://www.smithandcrown.com/icos/)

Triff ..

All of that *is* associated with Bitcoin (well, ICOs more with Ethereum at the moment), but it doesn't mean that as Bitcoiners, we are somehow obligated to be *against* the government working to find ways to stop things such as ransomware, pedophilia (well, child porn), or ICO scams.

That's true, and I know he means well.  But his bias against Ethereum and ICO's is showing here.  If he wants to write an open letter to the SEC then I would like to see him to write an open letter to the FBI asking them to put a halt on all the drug trafficking going on in the darknet.  Those same Bitcoins used in the ICO's are also used on drugs and it puts minors at risk in hurting themselves.

Do you get the point of what I'm trying to say here?

I doubt that 1% of people has ever heard of this guy before you mentioned him here.

And applications of bitcoin funds have not worked, even though it is directly mailed to the SEC. What will make the SEC even take notice on this random nobody in the internet full of trolls? They seem uninterested in btc, period.

No, i don't think that this will make any significant impact on bitcoin.

Who is Chris DeRose and why would the SEC pay any attention to him?

ICOs will be brought to heel whether or not someone points them out. It's a healthy thing ultimately.

It will definitely rock the alt market, but only certain sections and Bitcoin itself hasn't gone anywhere near it. I assume the overall price effect might be negative for everyone. You'd have to be a moron not to have seen it coming.

The fundamental difference between an IPO and an ICO is that an IPO occurs after several stages of private financing
via professional Investors who know the risks and there is normally a functional business which generates cashflow
(if not profit) with several years of operation behind each one.