Jimmy: From a technical perspective, it’s centralized. They’ve had hard forks, they’ve had upgrades.
Simon: Jimmy, how would you take Ethereum down as a central point of failure?
Jimmy: If I were Vitalik, I’d release new code that destroys everything.
Simon: But Bitcoin is the same thing, you’ve got GitHub Repo access
Jimmy: No, you’ve got multiple implementations
Charles: Well there are multiple levels of Ethereum
Jimmy: But none of them actually sync. They do whatever they want, you can reset the ledger. It’s a centralized system. You could do a hard fork and force everyone to upgrade.
Simon: Explain what BTC has that ETH doesn’t have. If you wanted to take down ETH tomorrow, what would you do?
Jimmy: Kidnap Vitalik and have him reset the ledger to zero.
Simon: Could that be done in BTC?
Jimmy: NO, there’s no central point of failure.
Charles: I have a client, I could just run Eth on my client.
Jimmy: Well, that’s very dubious. If Vitalik says he’s going to do something, it’s dubious you would have a successful way to continue ETH. You would be an alt coin compared to them.
Charles: If someone owned the trademark of BTC, or a core patent. Would that make it centralized? Like Adam Back owned the patent for mining.
Palley: Someone does have a trademark for BTC.
Drew: The IP rights don’t touch upon the system. Notwithstanding that these systems are inherently decentralized, there have been natural market forces that have caused some centralization. You can look at mining pools, influential core devs, clusters of node operators. You can infer that they have some level of control. Now, how do you take a system down? Well if you take out the six biggest mining pools in a given platform, you may cause a serious interruption. If you bribe them it may change the way it behaves. These systems are robust. If you take out the top six, the next four will come in their place. I tend to lean towards Jimmy’s answer.
Jimmy: How do you take ETH down is a red herring. The fact it’s centralized means it’s controlled by somebody, Vitalik and co. If you wanted to regulate them, you could say they have to do X, Y, and Z. Say Germany has some privacy law, they can say any person in the ETH foundation who doesn’t conform to what we say, you will get arrested the moment you set foot in Germany. It becomes a choke point.
Simon: Does ETH have less Github repo devs than Bitcoin?
Jimmy: No, it has a creator that everyone follows. He said we are going to bale out people on the DAO, and they did.
Tone: Jimmy, also he says we want to go POS –
Jimmy – Yup, and Sharding, they are even talking about a tax. They are acting just like a central government. How is that not centralized? If he can say the amount of data you can put in our system we can charge you – that’s about as centralized as it gets. You can levy taxes guys.
(Adella Toulon Foerster aka Bitcoin Khaleesi joined the Conversation!!!!!!!!!)
Simon: Essentially what the SEC is saying is that there is a level of decentralization
Jimmy: What they said makes no sense, you either have a single point of failure or you don’t.
Simon: Some would argue that with BTC you’ve got decentralization with pockets of centralization – as in there’s a slight degree of development centralization – some developers have more influence than others.
Jimmy – Well, ya but they’ve earned it. Which developers are you arguing here?
Simon – I’m not really arguing it, I’m a Bitcoiner. But Eth has definitely changed over time.
Jimmy – if you aren’t going to make the case I can’t argue with you. If you are arguing for it, than make the case.
Charles: Jimmy, how many developers is the threshold for decentralization? If Vitalik is a God, and King of ETH, well what if Joe Lubin and Gab – say they all share power and it’s 2/3. How far do we have to go to be decentralized?
Drew: Charles, it’s simple. The regulators are going to have to give us some sort of guidance or clarity. This phrase where “purchasers would no longer reasonably expect a person or group to carry out essential managerial efforts” … Me, Palley and Silver can make that mean a thousand different things if we want to. If this is going to be our official policy and we are expected to govern ourselves based on this speech, we are going to need a rule, a reg, something
Charles: Drew, isn’t it entirely possible that the SEC is waiting for the Industry to come up with this on our own?
Drew: Sure, we could come up with it, we can walk in with our lobbyists and make suggestions, and they can feel free to follow it or not.
Charles: Well say this panel, who does have a fair amount of experience in the industry, was asked to write that definition, what would it look like? Is it 3 to be decentralized, is it 5?
Palley: It depends on the individual facts and circumstances, that’s the way – I don’t think you’re going to find – the difference between writing laws, regulations, and code – a regulation can’t be static, it has to be dynamic. We may be able to define “sufficiently decentralized” but ultimately it’s going to turn of facts and circumstances. It’s going to be case specific. Not every country uses a common law precedent driven approach to law. I would say one of the strengths to the American legal system and common law is how cases are decided. We have regulations that are promulgated by statutory authority. And then we have judges who interpret those regulations, and may reach their own decisions. Every case may be different. Every case is different.
Tone: I want to get Adella in here, but I want to touch on Charles – if there was three of them – my question is are the three of them debating and independent, or are they under one enterprise?
Charles: Look at the example. Consensus did not get along with Ming.
Jimmy: If you say five is enough, you could have five sock puppets. That was Drew’s point, you can’t do that. The statement you made is too broad. You can make five sock puppets. It’s too broad a brush. If you say five, you put Vitalik and four yes men.
Tone: Adella – tell people your back ground, and your opinion.
Adella: My name is Adella Toulon-Foerester, aka Bitcoin Khaleesi. I used to run a gold exchange in 2001, built that out, sold it in 2004. Was in Cryptography, super old school. Got into BTC in 2010, wrote my legal thesis on it. Thought Someone has got to look at this stuff, BSA is my specialty. I am a partner at a Law Firm in DC. I’ve done a lot of things in the BTC space spanning the last 8 years. That is who I am in a nutshell. I deal with these issues all the time. Tone, as far as your questions go, I think it’s a yes and a no. As the laws are written currently, I just don’t think they speak to what is going on right now. Jimmy got it correct when he said the laws are written very broadly. They are broad for a reason, and that is because the regulators never want to corner themselves with narrow language. As far as things are right now, these laws need to be reviewed. The very fact that we are dealing with a case from, when is it Drew, 1930 something? We are dealing with an antiquated case talking about orange groves, and we’re up here in 2018 dealing with securitized or utility tokens on blockchains that might also be issuing unregistered securities. The main point is that we need more clarity on the laws as they are written, they just don’t address the technology. We spend all day massaging the Howey Test to make it fit all these utility definitions. Come on, just go out there and read a couple legal memos. Interestingly, the very first reaction to this statement, is the disclaimer that the SEC doesn’t take any responsibility for the statements of its agents. It’s nice they gave us a few pointers and guidelines, but if you want to be a regulating body, your job is to start streamlining the law as it is.
Tone: So what’s your opinion? You have been in the space as long as anyone on this panel. What’s your opinion? I have always caused ETH a Security, the law could disagree with me, but what is your opinion on ETH and Tokens like ETH?
Adella: Well, Tone, you, and I have argued about this a lot in the past. I think in my living room right there a few months ago. I think ETH can be, it probably is, the fact they could roll back the DAO, it’s very securities like – you know, efforts of others. I think it kind of fulfills that. I deal with securities a lot. I asked this very question to one of our clients earlier this week. What happens when a thing is offered like a security, but ends up on a market and has to deal with all this external issues outside their control like volatility. So I’m not going lose any friends today Tone.
Tone: Or Clients probably, right
Drew: We are ignoring the implications here. We’ve got reference to the case called Gary Plastic in the speech here, which says you can take something that by itself isn’t a security and wrap it in a contract between buyer and seller and make it a security. That case was cited for the prospect that there are really two things happening here. You have a contract between issuer and purchaser, then you have a thing gets transferred that indicates the existence of the contract. And what this gentlemen said you can sever the two. You have the indicia of the agreement, and terms of the Agreement. So it seems to indicate that you can take the indicia and then sell it, that is the token, can be sold to someone else for value. So what happens to the contract rights? You might see a world where if someone had a colorable claim against the issuers of the Ethereum token… If someone was in direct privity to the issuer, you might be able to initiate a claim against them, even if you sold the token. Because the Token is now severable … just like in the speech they said in the Howey test, the Agreement in question was a servicing contract for the orange groves, but the orange groves were just real estate that could be sold and had independent utility. That also suggests that the trading of this asset may exist in a world where it’s decoupled from the contract agreement that was created, so you might see a world where the tokens are sold pursuant to securities laws, but traded on exchanges that are regulated by CFTC not the SEC.
Simon: And that’s what we got, now we have a very clear notice on how to sell these things in the initial offering
Drew: There is nothing clear about this.
Simon: It’s either Reg D, Reg S or Reg A+ or comply with international regulations.
Charles: What is that interpretation is correct? It favors consumer protection because you have a regulatory capture of the supply chain and recourse if people are defrauded
Palley: Either it’s a security, or commodity, or its money. Regulators are going to jam you one way or another. There’s going to be a bucket that it fits into.
Simon: There’s a fourth bucket, the decentralized exchange.
Tone: The last thing you want to be is money, right.
Palley: What’s your goal, it might be that’s the most profitable.
Adella: If you are creating money, you have to be able to take back all the coins you put into circulation. That would make you a MSB right off the bat, and there’s no way in hell you can maintain – you would have to do KYC on everyone. How is that even possible? It’s probably the easiest thing, you have have to download Internet Explorer and become a MSB on Fincen.gov. Then you have no power over the adoption in the secondary market.
Tone: If ETH was a security when it started and it’s not a security now because it’s pretty decentralized. What is the possibility of the Pandora’s box. What if Jeff Bezos decides to convert Amazon stock a decentralized proof of stake – what does this mean for companies that currently have securities?
Charles: The point is they have utility
Tone: They don’t have utility. You shouldn’t be forced … you should be able to pay for your smart contract in any security.
Simon: So enterprises might do traditional stock or bond offerings and launch a decentralized network, and people will have securities traded on securities token exchange, and will have the ability to use the utility in a different network. We have that already, there can be two forces, driving in two different directions.
Drew: It was covered in the speech Tone, he said that equities and traditional investment products offered this way will continue to be treated as investment products.
Tone: So everyone who went public in the last two years fucked up. They should have done this.
Bruce: You can’t just change Amazon, because under 33 Act, Amazon is not decentralized. The fact that, and maybe the lawyers will have an opinion, maybe the way the SEC will interpret it, they don’t know about nodes, they don’t mean decentralized like Jimmy does, they are talking about investment contracts, and people in a contract with you to issue annual reports. It’s a mistake to focus overly on the decentralization because as crypto people we have a very different idea of decentralization than the general public.
Simon: And you’ve got to keep in mind in other countries the definition of a security is – for instance, in Hong Kong – a Security is your average debenture, collective investment scheme, there is still an opportunity for all of this to move outside the US.
Bruce: Wait, other countries have laws?
Tone: Let me kthrow something else – we don’t have a European perspective
Charles: Simon is British
Tone: Last night Craig Wright was at a dinner, and he was talking about how the Securities Laws in Europe are significantly more important and the SEC will follow what the European laws do.
Simon: Different regulators do – we have been contacted by over 10 regulators – there are so many nuances. A sophisticated investor can be someone whose made a purchase in two transactions. A lot of ICOs are not looking at this stuff. Is the SEC the most important regulator? Yes. That’s crazy to think the SEC is following Europe. A lot of regulators that don’t have the resources that the SEC does will look to the SEC for guidance, but here’s the difference. Blockchain, I’m here near the UK, and many jurisdictions see this as their opportunity to have an impact by supporting things like utility tokens, or security tokens. The international players see this as their opportunity. It’s where the jobs are, its’ shwer the growth is. We now have competition in Wall Street, Silicone Valley, USD, and Gov’t and countries need to move to a more competitive regulatory environment. SEC is the one that people are looking to as leadership.
Charles: I couldn’t agree with Simon more. I was just in Rawanda, and the government wanted to do crypto project. They could give a damn about the SEC. same with Barbados. There are a lot of countries going their own way. In terms of the EU vs. the USA, this gov’t under Trump is USA first, they don’t give a shit they pulled out of the Paris treaty. I couldn’t imagine the SEC waiting to see what the Europeans do before making a decision.
Drew: The only real boundries that could effect is if they fall out of compatibility with the international msb regime. There is some startling consistency with global MSB regulation, there is relative uniformity.
Charles: And that’s where it makes sense, the Wulford principles. There is 120 nations reporting each other accounts for catchingtax evadors. Nationalisms.
Simon: The other place is privacy – GDPR – everyone getting e-mails. Europe has taken the lead on that side.
Tone: We have talked about this a lot. Any other thoughts.
Bruce: One thing, you were regulated by these folks, they are not your friends, I’m an anarchist, but not the kind who wants to go to jail to prove a point. You have to follow these regulations, but they are pretty onorous. The idea the government knows better than citizens is wrong. We don’t need you to go in there, or federal agents – if you believe in free markets
Tone: So no government body should have ever done anything to Bitconnect? And let the market decide, and let chips fall where they may?
Bruce: I’m an anarchist, in reality, we need at least a minimal government, and a legitimate government prevents assaults on life, liberty, property. That would encompass fraud. That’s a very loose apparatus for you to move from that to Securities Laws.
Tone: When did Bitconnect commit fraud?
Charles: I was in the Ron Paul movement in 07/08. Anyone remember the liberty dollar? Those people went to jail.
Adella: I worked with Bernard.
Charles: Satoshi had no idea if what he was doing was legal or not.
Tone: And that is probably why he was invisible.
Drew: No problem with US dollars as long as not marketed like USD
Charles: What happens if Satoshi came out?
Adella: That is horse-shit Drew.
Drew: Tell me more.
Adella: Guess what they don’t look like, they don’t look like USD. I think I showed you a bunch
Drew: My point is
Charles Satoshi would have never been given the opportunity to do what they did. So are you saying Eth should have been anonymous?
Tone: Satoshi wasn’t on Tv claiming he was the smartest guy soliciting money from unqualified investors. If they were anonymous…
Bruce: People should have the choice. What if someone you like – what if Vladimir woke up and said – Ive seen the light, I know how to make a better BTC, it’s going to cost $18 Million and I’m going to do a NFP foundation, a salary of 100K per year. Do you think he should be put in jail for hat?
Tone: If he’s soliciting money from unqualified investors… yes. If doing it under certain conditions like Simon, than yes.
Bruce: What if he does a crowdfund? What if Greg Maxwell wants to take donations?
Tone: He can take donations and not money.
Palley: There’s a difference of donations and an expectation of profits
Bruce: When I donated to the crowd-sale, I thought it was a donation.
Tone: I don’t believe that.
Bruce: It was a different time. Do you remember how risky it was when I put money in a project of a 19 year old kid?
David: Bruce is 100% right, it was a ridiculous bet. I love Bruce making these arguments – with Scrooge and Batman. The anarchist has both. Anyone who put money in Tezos were doing it for an expectation of profit. The original EETH crowd sale is different.
Adella: I agree, I was at TNABC in 2014 when I bought ETH, Vitalik rented a yacht. I remember buying ETH and getting a JSON file and not knowing . I remember asking him about this thing and not fully understanding it. I never expected anything was going to come up from this skinny bag who was carrying a pony bag – to something that was going to take over the planet.
Simon: Everyone was talking about inflationary assets, and colored coins, we were all drinking the cool-aide. Smart contracts were the talk of the town.
Tone: I could be convinced that the majority of people who bought the ETH ICO in 2014 were contributing to technology. I’m also with David that the later coins were for an expectation of profit. Let me ask, after ETH went live a year later and the gas was openly traded by people, and they found a use case of ICO-ing stuff. In 2016/17 how many were buying ETH with an expectation of profit?
Drew: After the DAO, it’s clear that people were buying it for investment purposes. Tge big thing that caused the price to run up was the DAO. The DAO gave people holding ETH with something to do with their ETH. That told everyone to use it as a manufacturing platform. It was expressly marketed to make money.
Adella: But not from the effort of the promoters. Through the effort of the investors
Drew: That’s a really interesting question. Is it the base layer promotion or the secondary layer on top.
Bruce: The network matters. Speculation doesn’t make it a security. Comic books. Art. If that artist becomes famous.
Drew: Bruce, we all agree something can go up in value and that doesn’t make it a security.
Tone: In 2016 – yes – everyone speculates on BTC, when people started speculating on BTC, when the DAO implied, people were trading/investing in ETH for speculation or expectation of profit. 80% of ETH was pre-mined through ICO. So does it have security attributes.
Simon: People using ETH to buy ICO. It’s become
Drew: Your q. looks at it the wrong way. If it was an equity or debt product, nothing would change. Something offered in a circumstance under US law needs to be handled under 33 act with disclosure and honest communication between buyer and seller. Now we know we have products that have to be issued in compliance with the law. The q. is how do we handle it once it leaves the nest. Does that contractual agreement get assigned to the next buyer. We have indication that we have a set of products, not debt or equity, that were offered pursuant to securities law, but regulator indicates we won’t have to handle it in accordance with the law now. For instance, if I bought ETH and sat on it, and it was a security, and I wanted to sell it to Adella, in order to sell it according to the law, I would need to register with a broker dealer, and make certain disclosures to Adella, and the suggestion here is that apparently its not. There are two prongs – the Regulator has done a great job telling us how to comply from an issuance standpoint. But where the issuance and contractual agreement are severable from the item conveyed, we have a new model to think about.
Adella: Drew, here’s a Libertarian/Philosophical idea. What about the expectation of the purchaser? How do the regulator translate that into a prong test? When I bought Eth in 2014 I didn’t think about it until the DAO. What point does it become a security? Is the creator still responsible if the market changes it from a security?
Drew: It was issued under contractual terms that required it to be issued in compliance with the 33 Act, however I’m not sure it’s technically an investment product in its function. People need to look at issuance, and function. That’s what is going on under the hood.
Adella: And the conduct of the issuer
Drew: 100% the honesty of the issuer.
Adella: At no time did Vitalik say 200X. I walked away from the conversation with Vitalik with absolutely no expectation of profit, and I bought some ETH. That’s a Libertarian thing to do. And I was in control and responsible for my actions. Did I read any disclaimers? Absolutely not. But I did not expect to make a profit. And I’m pretty sure most people who bought at that time, did not expect to make a profit.
Simon: Which is different from today, look at the Telegram groups.
Drew: One problem with that argument Adella is that they don’t look at the individual purchaser’s expectation of profit; it’s how it was marketed.
Adella: That’s why I said it was a philosophical question Drew.
Drew: Ya, I just wanted to point out the distinction. We have a set of guidelines and laws that put the burden on the issuer to disclose as opposed to each individual investor.
Bruce: And remember, the expectation of investors alone does not make something a security. Even if the promoter says its going to 100X that doesn’t make it a security. Saying Gold is going 100X is ok
Drew: If BTC is packaged in a fund and marketed like you could make money, it could be a security
Tone: Bitcoin ETF is a security
Bruce: Expectation of profit alone
Drew: That’s one part of the test
Bruce: If I say this glasses case, comic books, bitcoin, gold, none of those are securities.
Tone: David you have been quiet, do you want to make a comment?
David: Do I agree? I’m a capitalist, I’m doing work here, but do I agree with Bruce? The conversation about Utility Tokens – nothing the SEC said affects that argument. Those are the people where we will see enforcement actions against them. Nothing has changed. There is a Lambo test. If you did an ICO and claimed it was a utility token, and the next day you bought a Lambo – you should go to jail!
Drew: We should play them our panel from Wed. I find this is the most concerning part of my life right now, I keep agreeing with David and it’s really upsetting.
Tone: I said the same thing.
Drew: Circle your calendars, 2020 and 2021 is when the SOL starts to kick in. Will be a very busy time for the regulators looking at the 2015 and 2016 behavior.
David: At some time in the next two years, I’m going to put an ad in the NY Times and put every single company that has given money to Coin Center and… whether the SEC does something. I am going to love going through different statements of different people who have sold utility tokens pre-functionality and your lawyer took the utility token as a form of payment – this is a time where a lot of you are anarchists for 2008 and barley anyone got in trouble for 2008, and now I think a lot of people will get in a lot of trouble, and as Drew said, it’s the Theranos Test.
Tone: What happens to the function of Coin Center if one of these becomes an unlicensed unregistered security.
David: There is nothing wrong with a lobbyist, they have the most money behind them. Is it there that the early investors in Eth have benefited from participating in the sale of an unregistered sale of security. Did they build the next level of their success? Coinbase is the same way. If Brian Armstrong did anything wrong in 14-16 – he’s working with regulators – AML/KYC 1099 – he built that off the backs of a lot of people who did a lot of things wrong.
Bruce – there’s a lot of judgment in the law. I was the messenger of a law firm in high school. There’s a lot of headlines, but it’s how it can be proved, the public appetite, the history of the person, how the prosecutor feels, overall a pretty good system. Three felonies a day (a book) probably everyone in crypto if someone wanted to kick down the door and a regulator wanted to make life miserable. It happened to Iced T, audited by IRS, there is a lot of laws out there and there is some discretion that regulators and enforcement action have. Assume ETH was an illegal securities offering, it was the first of its kind, it was a weird and different time. I thought I was donating to Bitcoin, I liked Vitalik and I thought it was a cool project, and he was a Bitcoiner. If SEC wants to give a pass to the first one, it’s not a big nefarious thing. If a cop says – hey, too much noise, quite it down. Tone’s tactic is to come shoot you all and arrest you for every violation. Even assuming they got some kind of pass – it was a different ime. I’m all right with it.
Simon: Thank god that law enforcement never caught up with Satoshi. We have this thing that was allowed to be created, and if they caught up early enough, they wouldn’t have let it happen. And BTC funded ETH, it was all sold to Bitcoiners. And that led to the ICO bubble, and the ICO bubble led to Securities Tokens and eventually the disruption of retail markets and banks, and I’m grateful it all is happening. There will probably be some casualties along the way. But it all led to us here making this podcast.
David: I have lunch, it’s been great.
Tone: David, I was trying to keep you on. If you want to come back, Jason Seibert is trying to join but he’s in Panama.
David: Fine, I’ll stay on I will mute, eat my lunch, and fight with Kraken until 1:15
Adella: I have a philosophical question. What happens if it is victimless “crime” and nobody is harmed from this thing. What really bothered me about ETH is that after the DAO people were harmed, because people were not able to access their wallets. That was harm if you spent a significant amount of BTC on the project. I thought it was odd, shocking, when the roll back happened. Yet still, a lot of people were never able to access their wallet. What kind of redress is there for that? What do you think?
Drew: There was a purchase and sale there, whether there was a direct K or not. You should have recourse. When you have people trying to pretend they don’t exist. If I know you are the one I’m buying from – I want to buy your hat and if you never sell it to me, I know where to find it to you. If you are buying from a smart contract from a group of people disclaiming all responsibility, you start to run into some seriously complex issues. Judges in America will blow right through the protective decentralized language out there. They will hold some people liable even if they have thei own documentation attempted to insulate themselves. Judges will say sorry, you put the code into execution, and you are responsible for that code.
David: Lets use Nano for instance. The Nano lawsuit is no different than the DAO hack. The code can be rewritten and they should get their money back. It’s no different if their car was stolen out of their driveway and just because the mantra of decentralization says you shouldn’t, federal court judges may take a different perspective as to whether you should be allowed to get your property back. They should get their nano back if possible.
Tone: Someone reached out to me with a substantial amount of ETH – the triple digits
(Jason Siebert Joined)
Tone: Jason – we got you! Ok, we were talking about victimless crimes – like ETH up to this point. Someone reached out to me that they purchased a substantial amount during the pre-sale. You are supposed to download the JSON file but they also apparently emailed you the Json file. The guy can prove that’s his ETH because he still has the public key. He doesn’t have the email anymore, but the ETH is gone. He may not know which email it was sent to. His point – he offered me a substantial cut of the ETH if I was able to get him the backup Json file. I reached out to Vitalik and said if you emailed him an email – you should be able to have a record. He still has his private keys. If they emailed it once, they should be able to email it again. They claim they are decentralized, Vitalik said he couldn’t do it. I pushed on it. I have the chat.
David: More importantly, why are you trying to take my clients away? I can help them out! I’ll give an example, Poloniex.
Jason: Before we go any further, I want to introduce the interns in Panama. These are some of the greatest minds in Bitcoin space. We spent the morning breaking down the comments of the SEC.
Tone: Jason, the floor is yours
Jason: I don’t want to take away or backtrack – so what’s the current topic, so how can these brilliant minds – how can we provide a think tank on the subject
Simon: Can something be a Security and then not a security?
Drew: Before you guys get started – Ive got to take off. Sorry to interrupt Jason. Tone, thanks for having me, great to see everyone!
Tone: Thanks, great having you Drew!
Adella: Bye Drew
Tone: A high ranking SEC official has stated ETH is not a security, it’s not a law, but that’s our interpretation of the crypto space. Now that is what we all expected. I grossly disagree, I think ETH was a security and still is. Bruce is on the other side of that outlook. What do you think the SEC is saying, and do you agree with their outlook up to this point with their statements.
Jason: One of the things we covered, and we have a few whiteboards where we broke down statements and analysis. One of the disturbing things was the SEC failed to grasp what is being sold, and was sold during an ICO. What needs to be broken down is the reality of what is sold. I do agree the SEC carved out the pre-launch, pre-sale activity – one sentence they carved out – where the SEC failed is they are saying companies are selling digital assets, the security. That is a fundamental mistake and ignores the reality of the transaction. They are not selling a digital asset, they sell investment contracts. Did Tezos sell a Tezie? No, they sold a separate contract, a separate instrument, a promise to give a Tezie later. That’s the investment contract, not the underlying Tezie. All an investment contract or security is is a contract with fiduciary duty. When I bought that Tezie I bought an ERC 20, I didn’t buy a Tezie. Does everyone agree with that nuance? Yes, I’m getting head nods. When the SEC says they are selling digital assets, it’s a fundamental mistake. ERC 20 are investment contracts and need to be separated from the underlying utility token. It’s only after the network has launched … when you analyze the ETH pre-sale, I said the pre-sale function is an investment contract. After launched, arguably, not an investment contract.
Simon: That’s what the SEC was stating. The underlying thing might not be a security once the network is launched. It starts as an investment contract and then…
Jason – the initial sale is an ERC 20 promising a return later. None of these things exist to begin with. When you have utility tokens that exist when they sell them, now you have an argument because the thing exists at the time. ETH was doing their sale July 22, 2014 and ended it Sept 2, 2014 and the Genesis block didn’t launch until July 30 2015. All those prior sales are not sales of ETH because ETH didn’t exist.
Simon: So Tone, I think Jason is on the side of it’s not a security now, right?
Jaosn: No, I’m saying an ETH token sold today is more likely not a security than the pre-sale function. The pre-sale function is an investment contract now. The explanation that ETH is not under centralized management is *(^&^ stupid. Of course there is guidance from the people in Ethereum.
Simon: They’re buying ETH on exchanges today
Tone: The early days of ETH, should they be ignored? Or should they factor in? I think ETH should have been a security today, yesterday, and three years from today.
Bruce: If you arg. Is that it’s a Security because it was issued as a Security – Jason is saying it was launched as a Security, not today.
Jason: The SEC gets it wrong because they talk about the pre-sale of a digital asset. It’s fundamentally or technically wrong.
Bruce: It could be an asset that evolved. I had an API key and it transformed into a different API Key. I got a piece of data that was able to unlock mathematical keys using cryptography.
Jason: Look at Tezoz, something near and dear to David’s heart – today I can trade my pre-sale Tezie. That’s a separate instrument redeemable later on. That ERC 20 Token Contract that I have today is a separate distinguishable token.
Bruce: Does it depend on what the underlying thing is? If I issue a pre-sale token for my pre-sale of my poetry… in other words, if the underlying asset is not going to be a security anyway, what would make that investment contract a security?
Jason: One interesting example was the whiskey case. So if you google investment grade wine, and tell me what you find.
Bruce: (found some wine) Ok, what am I looking for?
Jason: You can purchase a certificate to receive the wine. The piece of paper is a negotiable instrument I can sell to you or anyone else. That’s an investment contract. That’s what ERC 20 is – I’ll gladly pay you Tuesday for my burger today. What you have with every ICO is no network, no formation documents for a corporation yet, but you can exchange your Utility tokens now for promise of delivery of a utility token in a year. That is a fundraising. That business isn’t in the business of raising other people’s money. They have a fiduciary duty.
Tone: Are you saying that investment contract is not a security?
Jason: No, I’m saying the ERC 20 Token can be purchased today for later delivery of some other thing. Your SAFT Agreement.
Tone: Is that the same as a security? Is investment contract same as security?
Jason: Yes, the Howey Test is used to define an investment contract.
Tone: So investment contract and security are one in the same.
Jason: Yes, and my frustration with the SEC statement is the fundamental misunderstanding. Selling a digital asset prior to launch is a security. What’s really being sold is an ERC 20 investment contract, not a digital asset. Does that make sense?
Simon: I think it supports the argument, its not a conversion, it’s two instruments being sold
Jason: SEC failed to connect what the underlying reality of the transaction is. They failed to connect that reality – saying ERC 20 – or even if it was a counter-party asset –which is redeemable later for some form of digital asset – that’s the instrument that needs to be regulated. After the network is launched, when it’s actually in place, now you have to look at how the market is actually treating the actual utility. Post genesis block of July 2015 – how is the market treating ETH? I think the SEC is right, it’s more of a commodity. An orange is a utility. A digital asset is a utility.
David: I got to drop off, can I ask Jason a question. What should SEC do to punish the Eth foundation for their illegal offering?
Jason: So a few months ago I was giving a presentation to Cali CPA board – Crypto 101 – SEC was in audience, I looked at them and said they screwed it up. They should have gone after them on Day 1. They gave a carbon copy to others without fear of ramification. Yes at the time it was unlicensed unregistered sale. Arguably, no harm. But what makes ETH immune to these things? One thing we spoke about this AM, a good government will give reliable repeatable regulation so paopel know how to comply. Here, the SEC opened the door to the flood of fraudulent ICOs. I thin we all agree, nobody wants them in the space. Had they done their job, we wouldn’t have this problem now with radio ads for people to take second mortgage to dump into crypto market.
David: Should we punish them?
Jason: From a regulatory standpoint – from class action – what remedy? Recession, no damages. I challenge you to find someone who wants to trade in their 500 ETH for a .50 recession?
David: I’d love to sue EOS, but no damages. I’d love to sue ETH but also no damages. But its not a victimless crime. It will enable them to do other things to the hindrance of newcomers. They got away with something but its not fair, not right, and I don’t know who can address it?
Jason: SEC could send a message by punishing for their initial unregistered, unlicensed sale and send a message to everyone else.
Bruce: You guys are taking for granted that it was a Securities Sale. That’s not some easy or simple fight. There’s a lot of arguments that smart people would make that it wasn’t.
Jason: The students and I could make a prima facie case that it was an unlicensed sale from the internet in 30 minutes.
Bruce: I don’t know what they will say about the offering, I feel strongly it’s not a security now.
Jason: The pre-sale – give us money today, we ill give you ETH when it launches…
Tone: say the SeC says that was an unlicensed sale, what should happen to the ETH issuers? What should happen to them?
Bruce: I think it’s a big assumption. You would have a lot of arguments of why it wouldn’t be the case. They’d have to prove the offering was subject to US law, and was not done by any exemption. It’s not like they did this without attorneys. They had some exemptions. You are donating money to a nonprofit foundation. Back then it was not talked about listing on an exchange. So even if you assumed all that, it’s a great time for a regulator to take a light touch. I think if the attorney’s on the line could do defense work – it’s different as the first time. There is a great degree of how Securities violations are treated. It’s a stern letter all the way up to people going to jail. I mean nobody was hurt.
Jason: ETH was able to get a get out of jail free letter from former SEC general counsel that said ETH was not a security. That letter did not address the pre-sale function. It only addressed ETHER as GAS to fuel the network. They didn’t talk about all the language they had – and go back and look at June 2014 – by the way the formation of the foundation was July 17, 2014. They were promoting and selling long before formation. They didn’t talk about it being a contribution then. So there’s enough in there to show these were sales of instruments at a minimum, they were not contributions. Nobody thought of it as a contribution then or now. When you go back to the original sale, what the promise was, how it was being marketed, Vitalik was saying it would solve the mining issues. What should be done, to say that ETH was the first person to sell an investment contract and they should only get a slap on the wrist is rediculice. The only thing that makes ETH unique is that they did it. We have 100 years of people running these types of scam. To the extent they were advised by attorneys, well 10b-5 allows the SEC to go against the attorneys that advised them on that. Slap on the wrist, no – there needs to be a clear message. The fact that SEC hasn’t done that has caused so much confusion in the market. It has fueled the fire for a continued market of fraud. I met some ETH board in Vegas; they said “the SEC hasn’t done anything so we must be ok?” That was six months – these things take time! What did they do to Voorhees with Satoshi Dice? Does anyone remember?
Tone: He got a big fine.
Bruce: He got a 50K fine and he was barred from certain activities. But that was a business, it had profit and loss statement, a bank account, it existed. ETH was a protocol not a business.
Bruce: You don’t see the difference?
Jason: You don’t have to have a share in the company to have an investment contract. They went after Eric Voorhees but it was a victimless crime. At the Texas BTC conference in 2015 and approached the SEC and they said, because you violated the laws on the books. Well lets have consistent application. What makes ETH so special that they don’t get treated the same way as Eric?
Bruce: You have that opinion, but it’s not cut and dry. You are not promised any revenue or as a business.
Jason: Lets introduce Tyler. A non- lawyer – Tyler.
Tone: Tyler has been a money manager – other people’s money – for 30 years. You have lots of experience with the SEC. Any comments for what you heard so far?
Tyler: I’ve heard four hours worth of brilliant argument. That makes me now, one of the 10 most accomplished legal experts on this subject. I say that because anyone that concludes this is not the wild west and that every day something new is going to happen and some new regulation is going to come out has not been in the practical side of this ecosystem. I started out 40 years ago as a broker. I set up my own firm, licensed as a Principle. Then Registered Advisor, commodity pool, management of institutional money, IPAM – Institutional Pension Account Manager – then the Dept. of Labor, SEC, CFTC, Fintech, and number of state regulators interacted the past 40 years. I got into crypto before mMt. Gox. Mining. Became disinterested because of how screwed up the ecosystem was becoming. Remember I represent clients with a fiduciary duty of what goes into their accounts. I’m proud to say in 40 years there is not any problem with any regulator. I say that because I am very aware of the practical side of handling other people’s money. With that as a background, when I heard the SEC statement yesterday, I called it groundbreaking. It’s one of the most important steps that I’ve seen in 10 years. A statement by a high employee and he talked to everyone before he made those comments, it was well thought out. It was the next step in a program that started well over a year ago. Even three years ago when the SEC approved GBTC BTC investment trust to trade on an exchange, almost four years ago. SEC has been trying to figure out how in the world they are going to put the genie back in the box. It’s been progressive. They’ve had a number of ETFs and MF”s that have attempted to get through the regulations, and none have been able to do it. We thought we got close earlier this year and the rug got pulled out. Then ignorant comments by congressman and regulators to everything being lumped together. If it was called a crypto, it fell into a basket. SEC has been parsing its words very carefully. It’s important to see what they were saying. They were trying to set up a website where you could go and set up an ICO and see how many regulations you were probably in violation of all set the stage for yesterday. No surprises here, on a practical level. Anyone that saw what was about to happen had to consider the practicality of being a major regulator that influences world regulation and finds themselves so far behind the eight ball because they ignored what was really happening over the past ten years. They are trying to come up with solutions that are as practical as possible without killing off the ecosystem. I think they walked a fine tight rope yesterday and I applaud them. I do not agree with their conclusions and they have still not shown their hands as to what is next to come. They only talked about BTC and ETH. They made implications about other ones. My guess, four months ago, carve out 10-15 cryptos. They said BTC is not a security and different than all the other cryptos. I happen to be a maximalist. I believe in BTC until nothing else, until yesterday when ETH got the nod of approval. Now I, as a fiduciary, know those two are supported by the SEC. Therefore I could put my clients into GTBTC. I ca’t comment on the others, that will be the next exciting scene, and I don’t think they are anywhere close to finding the answer.
Tone: Jason – you understand the stock markets well – this is what remains making me livid. As Tyler said, he, as a money manager for other people, now feels ETH is a good investment for his clients. This is so bad because ETH is a fundamental scam. Now people like Tyler are going to be investing in this legally.
Jason: First, as has been the case, memories are short in the crypto world. SEC stated in 2014 was not a security Why they had to say it again is beyond my comprehension. May work on the Shavers case established BTC was not a security. Why is that news? It’s not. The collective knowledge is running on a three month rolling time. How many remember that mining pools used to be considered securities. You ask any miner today and they say the SEC has been silent on mining. As to ETH being investment grade, any regulators would not give them the seal of approval.
(Tyler joined the conversation)
Drew: I agree.