The Journal of Things We Like (Lots)–JOTWELL
Extraordinary Popular Delusions and the Madness of ICO Crowdfunding
Oldthinkers unbellyfeel blockchain. We are told that blockchains, cryptocurrencies, and smart contracts are about to revolutionize everything. They remove fallible humans from every step where a transaction could go wrong, replacing them with the crystalline perfection of software. Result: clarity, certainty, and complete freedom from censors and tyrants....MORE
And yet we still don’t get it. Some oldthinkers think that not all regulation is tyranny, while others point to the environmentally disastrous costs of blockchain strip mining. And then there are those of us who think that the entire premise of blockchain boosterism is mistaken, because the new “smart” contracts are not so different from the old “dumb” contracts. Coin-Operated Capitalism, by a team of four authors from the University of Pennsylvania, is the best recent entry in this vein. It is a playful, precise, and damning look at how smart contracts actually function in the real world.
This is one of very few law-and-computer science articles that takes both sides of the “and” seriously, and is one of the best examples I have ever seen of what this field can be. It is a law-review article about an empirical study of contracts and software. To quote the star footnote’s description of the authors’ combined expertise, “Cohney is a fifth-year doctoral student in computer and information science at the University of Pennsylvania, where Hoffman is a Professor of Law, Sklaroff received a JD/MBA in 2018, and Wishnick is a fellow in the Center for Technology, Innovation and Competition.” (Jeremy Sklaroff, the (alphabetically) third author, wrote an unusually good law-review comment on smart contracts last year.) Another nine research assistants helped, presumably with the extensive white-paper reading and coding. It takes a village to write a truly interdisciplinary article.
Coin-Operated Capitalism’s target is the initial coin offering (ICO). As the name suggests, an ICO is a blockchain analogue to a corporate initial public offering (IPO) of equity shares. Instead of receiving stock in a new business, an ICO investor receives tokens that give her a stake in a new smart contract. The token typically gives the holder some transactional rights (the authors’ example is to receive sodas from vending machines) and some control rights (e.g. to vote on investment opportunities, or to approve modifications to some of the terms of the ICO contract), both of which are coded into the smart contract. The promoters use the funds thereby raised for the associated venture (e.g., building and filling the vending machines), for the development and maintenance of the smart contract itself, and sometimes for further investments as directed by the new class of token-holders.
Anyone who has ever heard of securities law should be hearing alarm bells at this point....
And the paper via the Social Science Research Network:
Coin-Operated Capitalism
105 Pages
Posted: 18 Jul 2018
Last revised: 11 Dec 2018
AbstractThis Article presents the legal literature’s first detailed analysis of the inner workings of Initial Coin Offerings. We characterize the ICO as an example of financial innovation, placing it in kinship with venture capital contracting, asset securitization, and (obviously) the IPO. We also take the form seriously as an example of technological innovation, where promoters are beginning to effectuate their promises to investors through computer code, rather than traditional contract. To understand the dynamics of this shift, we first collect contracts, “white papers,” and other contract-like documents for the fifty top-grossing ICOs of 2017. We then analyze how such projects’ software code reflected (or failed to reflect) their contractual promises. Our inquiry reveals that many ICOs failed even to promise that they would protect investors against insider self-dealing. Fewer still manifested such contracts in code. Surprisingly, in a community known for espousing a technolibertarian belief in the power of “trustless trust” built with carefully designed code, a significant fraction of issuers retained centralized control through previously undisclosed code permitting modification of the entities’ governing structures. These findings offer valuable lessons to legal scholars, economists, and policymakers about the roles played by gatekeepers; about the value of regulation; and the possibilities for socially valuable private ordering in a relatively anonymous, decentralized environment.
