Monday, August 21, 2017

Climateer Line of the Day: Are Initial Coin Offerings Securities or Not Edition

From Preston Byrne's Back of the Envelope blog: 
...The question the paper does not directly answer, and the question everyone would like to see answered, is whether the method for conducting a token sale as they are actually done on a daily basis – the “Bro Down Model™” – is legally compliant..
Given what we are dealing with (selling unregistered investments to unsophisticated investors over the Internet) it is pretty easy for the answer to that question to be “no.” And to reach that conclusion, it doesn’t really matter whether we’re dealing with a security or not....
That is from his post "Against Tokens: Part II":
This is adapted from a Reddit thread (shout out to my homeboys in /r/ethereum). It is a follow-on from an earlier piece, Against Tokens.
Warning: this blog post is long.

Today brings us a paper, written by Coin Center and Debevoise & Plimpton, and sponsored by Coinbase, USV, Coin Center and ConsenSys, which explores the question of whether tokens sold on a blockchain are or are not securities under the test of Howey v SEC.   

Given what we know of the paper’s sponsors, the paper’s unsurprising conclusion is:
An appropriately designed Blockchain Token that consists of rights and does not include any investment interests should not be deemed to be a security, subject to the specific facts, circumstances and characteristics of the Blockchain Token itself…. given our analysis in the above, it should be characterized as a simple contract, akin to a franchise or license agreement.
Oh! So tokens are acceptable now, all is forgiven and this is now a valid business model?


So I’m going to spend the next 3,000 words taking Coin Center’s proposition apart. The paper arrives at this conclusion because it asks the wrong question. Of course it’s possible to do virtually anything on a blockchain in a legally compliant way, including representing an interest of some kind as a security or not, as any type of data entry you want, whether that be a “token” or otherwise. As one comment on Reddit put it, aptly,
you can make a tree branch into a security if you wrap it in the utterances and ceremonies which make it a tally stick.

Mr. Byrne was discovered by yours truly via a commenter at FT Alphaville's post "Goldman’s foray into cryptocurrency" which I'd intended to use as a jumping off point to look back at the long-only commodity index funds that the friendly Goldman swaps salesmen were peddling to the credulous yet complicit CalPERS buyers who used the swaps to evade commodity exchange position limits

Good times. 
Ms. Kaminska's triggering example in that post on what's up w/crypto begins:
...This, of course, follows exactly the pattern of events which led to the great commodities bubble. This too saw Goldman declare commodities an asset class suitable for passive investors and fund managers....MORE