The Ins and Outs of the Crypto Crowd



hey everybody I'm Joshua Brustein I'm a writer for Bloomberg technology for the next 30 minutes or so we are going to talk about token sales and icos as a form of crowdfunding we have a panel of experts to talk about it closest to me is Sudan Goran of the global blockchain technologies an investment firm that looks at blockchain businesses we have Georgia Quinn of coin list which is a platform for token sales and we have Perry and boring who is the president and founder of the chamber of digital commerce which is a trade group for the blockchain industry so Perry and I wanted to start with you to kind of set the stage a little bit you recently released a set of guidelines for kind of best practices for token sales and I just want to read the definition you gave for tokens because I think this kind of gets at gets that sort of we're going to be talking about a little bit you wrote a digital token can be a security a currency a commodity property or even a hybrid of those characteristics now it seems like that flexibility is sort of contained within it the potential of this kind of crowdfunding and also some of the complications that come with it so I was wondering if you could just parse that definition for it for us a little bit and tell me kind of like where the sort of what are the good parts and what are the parts that are gonna maybe trip people up there yeah sure so blockchain technology allows for tremendous amounts of flexibility for digital assets or crypto assets or tokens kind of depending on your preference of the term on the report that you referenced it's called understanding digital tokens and part of it is educational to inform the policy community push the broader industry about laws and regulations impacting digital tokens and then part of it is also our guidelines so we worked with the industry we brought together over 400 stakeholders globally to agree on principles for what we call at nine security tokens or sometimes it referred as utility tokens tokens depending on how they're used can have a range of different functions and when we're speaking with policy makers our motto is always regulate by function on how the technology it's being used and so we have seen use cases where tokens are considered a currency or a crypto currency like Bitcoin or it could be a security so there's this whole new wave of security tokens they can also be a commodity so the CFTC the Commodity Futures Trading Commission has determined that Bitcoin and digital assets are commodity under the CEA and then you also have Benson who regulates money laundering who issued guidance in 2013 so you know five years ago and who have said convertible virtual currencies will be regulated like currency the IRS which is also part of Treasury just like fencin has determined that they'll be taxed as property and then you of course have the FCC that's looking at this through the lens of a security so it's about a quick as clear as mud in terms of how to navigate through this first start out so we're really at the ground floor of really determining what laws and regulations will apply to blockchain but again we encourage you to look at it as function what was the purpose of this project what are those tokens supposed to do and applying regulatory frameworks with that concept in mind sure so I think what we saw over the last two years or so was things like the development of these tokens were happening not many people were paying attention at least relatively and then all of a sudden there was this huge boom not only in Bitcoin but in in icos initial coin offerings I'd love to hear from you guys just kind of like what happened over the last two years I mean my head's been spinning as someone who's been covering it from the periphery but it did just seem to come out like a rocket ship out of nowhere yeah I mean I can kind of take the lead and then let you guys jump in but really and I think it's important that we're actually at this crowdfunding conference because the genesis of all of this really came from crowdfunding if there hadn't been this concept of online capital raising we never would have had this boom in icos and the development of you know the this industry so that was really the ground floor and utilizing that methodology a lot of issuers and project developers realize that they could raise a lot money very quickly with the promise of this you know blockchain technology and simply by calling something that was most likely a security a coin or a token they felt that they wouldn't have to adhere to securities laws of any country and what we found out is that it was really not appropriate and not the case and so you know we had this huge frothy period where everyone wanted to get involved and these icos seemed like this very glamorous exciting thing and then the Commissioner SEC Commissioner came out and said that actually there had not been an IC o—- that he had seen that had not been an offering of securities and thus was an illegal offering and so now we've seen that market dry up to to a large extent and you know we were talking about this before you know there are a lot of different takes you can have on there's this good things as a bad thing we reacquaint list we really think this is a positive thing because it's created a flight to quality and the cream is really rising to the top and frankly there were a lot of really bad deals out there over the past couple of years that you know we wouldn't want to be associated where there be a part of and those are really falling to the wayside and now we're seeing much more legitimate deals that are utilizing this technology and you know really exciting and innovative ways rising to the top and able to access that capital now yeah I would absolutely agree with those comments so we really outlined the history of IC OS and that paper it was released on github so it's a free resource that you guys are all welcome and to look to and so we saw some early token offerings or icos starting as early as 2013 with master coin and there were a few and this concept of you know raising money using blockchain technology was tested over a couple of years it wasn't until about 24 months ago that we saw this huge spike in I see owes upwards of five billion dollars raised through ICO in a very short amount of time just the concept really took off and then as Georgia mentioned there there was absolutely fraudulent activity there were scams like any new technology the is not unique to blockchain there were bad actors that were coming in abusing this for nefarious purposes and that was the whole point of putting the token Alliance together is in the absence of having regulatory clarity we wanted to bring the good actors together adapt have something on paper that says here's how you delineate the garbage from the good and ask those guidelines are really meant to be used as a resource and a point of reference to how to be able to determine a scam from a real project but as Georgia also mentioned file coin there are it is not about avoiding regulation it's about making sure you have the appropriate regulatory approach that takes into account the unique attributes of boxing's we don't want to stifle it and call it something that it's not so it doesn't have the opportunity to grow into a new piece of technology so file coin is a good example of a token that should not be considered a security even the CFTC Commissioner Brian quinten's even said in a speech that he believed file coin would not be a security it should be outside of securities laws it's a utility token so there are our good and legitimate projects we've seen a huge slowdown as we've seen many enforcement actions over the SEC just over the recent past which has sent a sign to the market of the Haws do apply they apply to you if you don't follow that are what we call it right it doesn't matter what you want to call it and they are looking at this space and so you know I would agree with what you said what we've seen is a lot of the garbage is left you don't want to go to jail and what has what we've been left with are real quality projects that deserve to be here and deserve to have the opportunity to grow and go to market but we have been successful in rooting out a lot of the scams so I just want to add to that so I I I think you know from 2013 to 2017 the heyday of these icos for every successful project people don't talk about the other 100 projects that weren't successful and didn't raise a lot of money in fact you know in in my opinion it's mostly icos haven't done better than Pink Sheets and they're not any better or worse as far as being illegitimate you know legitimate or not then than most No of the capital markets the reason some of these projects like file coin why they raise so much money is because they came out with the promise of totally changing the business model taking what our platforms today using blockchain technology to turn those platforms into a Commons where the the tragedy of Commons that problem has been solved through the technology of blockchain so people are very very very enthusiastic they invested a lot in this space and there's now a certain amount amount of fatigue because people are like okay we've now invested a lot we're very excited we put hundreds of millions into these projects now we're waiting to see if they can deliver on and you know so those those projects rightfully deserved that kind of reaction because they they were looking to solve a very fundamental problem with with with society and business and whatnot and and it'd be a real advancement in technology and that's that's one thing to keep in mind that that you know these projects have promised a lot they excited people a lot and now that we're in the trial of disillusionment it's because you know people are like ok what comes now let's let's see you know if anybody can actually deliver on anything and I I think if people expect to be able to raise the kind of money that that some of those projects like file coin you know and and a few others that I was myself involved with you know to raise that kind of money is it's not really realistic today I think I think it's not gonna happen and I think you know token funding is is no different than crowd funding it's it's no easier it's no harder it doesn't get rid of middlemen because a lot of those middlemen aren't really middlemen through their service providers if you're a business you know you you don't necessarily know how to market to investors you don't you don't necessarily know how to you know build a book or you know you're not an investment bank you you you still need those service providers this and blockchains don't get rid of those intermediaries because you know that's a skill that's that's a something you develop over time and it's not everybody's job there their job is to run their business whatever it is so that brings up an interesting point because right before we saw this huge boom in icos there was a lot of talk about equity crowdfunding there was federal legislation there was a lot of excitement that this was going to be kind of the democratizing way to for companies to raise money outside of the traditional VC ecosystem and so on what did that lack that that blockchain based crowdfunding and ni cos and so on managed to come in and offer yeah I mean I think it's twofold one is crowdfunding is still highly regulated I mean crowdfunding is still there's a registration process with the SEC it has to be conducted on an SEC registered funding portal so there are a lot of you know hoops and hurdles that have to be jumped through caps and exactly there's investor caps there's you know total raised caps you can only raise you know a million seventy thousand now so you know there's a lot of issues with equity crowdfunding as it stands today the people who are doing icos were not abiding by any law you know they just were raising as much money as they could on the internet as quickly as possible so that's why it was able to take off they didn't adhere to any regulations and requirements so just like the traditional tech story that like you go ahead and break all the rules until someone pays a tenth until you get big enough that people start paying attention to you and then you go back and say okay tell us what rules we need to abide by I think this is I mean you guys laugh but I think this is a fundamental issue in entrepreneurship today I think the big models that we see are uber and airbnb who made a habit of asking for permission or asking for forgiveness and not permission and so that hat is now part of the culture of startups and part of the culture of entrepreneurship which is you know break all the laws until I get caught or break all the laws until somebody gets hurt and that is an issue and we need to rethink I mean is this a byproduct of the regulatory state and that we have too many rules to even be able to comply so why try or something else I don't know but I mean we're getting a lot topic sorry but I mean I do think that this is this was the ethos of that whole IC o—- froth but it seems like maybe the point in that froth that we've reached is the let's go ask for permission now that they've noticed us well after you know about a hundred enforcement actions and and the SEC dropping subpoenas on everyone I think people got religion sure ninety percent of i ciose the only people that made money were the lawyers and and you know you say Laurie you know seems like a mature because you know people didn't you know we it wasn't a matter of registering most most people didn't want to do it in North America because they were you know worried about this thing called a token and it be tradable after and everything and it's ridiculous the amounts of money they they spent on legal and and all the other services that I mentioned all the other intermediaries that's actually went where most the money of these failed I SEOs went and it's you know failed I SEOs is here whose might have spent four hundred thousand five hundred thousand dollars to try to do an ICO and successful I SEOs is here right I need even even the successful ones people think that it was the retail crowd that invested in him that's not the case ninety percent of these were were mostly funded by you know sophisticated investors very early people in the stage VC's in the valley you know even file coin for example I think the first fifty two million was was pretty much all the credit but but but even more than that the first fifty two million I think was you know the cream of the crop in in in the valley right and that's that's really what happened with these tokens more than anything so it's it's not as easy as people think it is it's not any easier than raising money through a reggae plus offering last year I remember I saw this reggae offering that was yeyo I think it was and and I was looking at it to me look like and I see it was a website you had this video of maybe not Evander Holyfield but it was the Seinfeld guy yeah mr. Peterman and it was it was a pretty vague as far as with the Roth ring and everything and and they raised a lot of money so you know there one of you know many many dozens of companies who try to do a proper reggae Plus that weren't successful right so that's that's one thing to keep in mind it's it's not as easy as people think it is there's kind of two different ways that I would look at a token offering you were issuing a token of our project is issuing a token to raise money so they can build something that looks a lot like a security and they're issuing a token that is a grants you access to a software program that is already built that doesn't look like a security and so if they're using this tool to raise money then it's very easy to make the argument that that's a regulated process and we need investor and consumer protections through that what we want to protect are for those companies that are issuing tokens that allow for access to a software program that's kind of the way that we've kind of differentiated the way that we look at token projects and so that's where to your point on security token offerings that's now why we're starting to see this idea of stos or security token offerings where they're issuing a security to raise money to build something and that token may or may not operate within the software program that will be built at a later date and that functions basically like equity in it it can be shared and kind of going back to your original question of well why not just use traditional crowdfunding what's the point of a security token it's that the difference is is being issued on a blockchain so you have that distributed ledger so then those tokens will be connected to that blockchain and they won't likely serve some type of function in some type of platform and there's a lot of different types of security off security token offerings but they have a function within a system it's not just a piece of paper that says you have this many shares in the company right I'm sorry yeah just just one thing I wanted to add and just what parry Anza reminded me of this there is one huge advantage of you know I SEOs and and security token offerings and all of this over traditional crowdfunding even online funding and that's the banking and the fundraising is done in crypto currencies so what that means is and I mentioned this to you before I think you know some Engineer in Shenzhen who makes 120k a year he can't necessarily come here and open up a bank account and you know get a broker and all that kind of stuff you need to be considerably more rich than not to to be able to do that in North America but he can easily send some Bitcoin and you know do a quick kyc AML and invested a North American company or North American real estate you have a huge it does make the world smaller it's not because it makes the financial industry like the securities industry more efficient it's because it makes the commercial banking world more efficient because you don't really need them necessarily right you could you can raise money without them and that reduces costs a lot if you're a cannabis company and and and you want to raise money in North America right now it's very difficult to work with a lot of those intermediaries that are very useful like the investment banks and whatnot and and to even open up a bank account to be able to handle the money for the crowd rates to get a broker-dealer who's willing to settle the you know payments because you know they're they're scared about federal laws but if you're accepting cryptocurrencies you can crowd fund your cannabis business for example so that's one example of an area you know thinks things that are outside of the norm let's say you know is and and that's one of it one part of it that it really been benefits the unbanked businesses commercial banking and cannabis they give me an example of another unbanked industry well I mean and anything anything where it's difficult to get a banking relationship so even a cryptocurrency exchange would fall into that you know category right anything that's touching a crypto okay so that's one and then you gain the other that's that's even more important is it opens up a whole sea of investors for you overseas that would not have existed and and it becomes a lot easier to reach those people so that that's one real solid tangible benefit of this whole environment because now you have a whole crowd of people overseas who people like like our teams and georgous teams and whatnot have very good connections with from the ico world that they can sell to now right so that's because you kind of skirted over this concept of AML kyc just assuming that people would do it because they should but that is one of the issues like hopefully some of you guys like the hair on the back of your neck started to stand up a little bit and you were like oh people from overseas can just invest cryptocurrency and things you're like does that sound right because yeah it could be used for a lot of nefarious purposes right which why responsible companies that are trying to raise money make sure that they conduct AML & kyc procedure just in case anyone knows I'm money laundering and know your customer exactly so they're banking regulations maybe not even necessarily applicable but certainly best practices to this industry and one of the things we pride ourselves according list is being compliant alternative so if you want a conductor offering in a compliant way we'll help you with that and just one of the really interesting things about working in AML kyc and helping these issuers is it's such a good way to screen out potentially fraudulent activity because when you're issuing tokens you're really building your network like these are people that are going to be in your community they're gonna be using tokens and exchanging with you and and really becoming a part of your business and because we've been able to do AML kyc we're able to screen out a lot of you know bad actors and things that you wouldn't want you know to be associated with and so it has kind of a positive feedback loop when we were talking earlier about sort of the international aspect of this you you said something really interesting which was this idea I mean if there anyone who's been following crypto you'll know that there's a lot going on and it's Switzerland right and there was this idea that if you set up somewhere else then that would give you like extra freedom to do things and that's really actually come back to UM to smack some people in the face could just talk a little bit more about that experience and maybe just a little bit more generally about some of maybe the bad advice that some of the entrepreneurs in this space have gotten absolutely and I really want to get perience thoughts on this as well but for a long time we were hearing about issuers setting up in Malta Switzerland Gibraltar these now Panama Panama's like crypto friendly jurisdictions and so you know these issuers were seeking outside counsel setting up these elaborate entities and then realizing that the locus of the entity is makes no difference it's where you're trying to raise money so if you want to target US investors or EU investors you have to abide by US securities laws and EU securities laws and UK securities laws so they just spent all this money thinking they were escaping jurisdiction to find themselves now having to comply with all these multiple sets and having a for an entity trying to do it I mean we've had several instances where these companies that set up foreign entities had to then drop a US subsidiary just to be able to take advantage of US securities laws because they wanted to target US investors and then once they get that money they can't expatriate it out to the parent company so it's like it's a huge mess and all of those attorneys and other people advisers that you know told these issuers that they should be incorporating offshore or just like should be shot and that's also just to dovetail into this other but this is why I was like I hate lawyers but and like I said I am a lawyer but a lot of these lawyers also were the ones giving advice saying oh you know these are tokens these are not securities you can go ahead and offer these offer these to retail investors it's fine it's not a security it's just a product even if they had no you know as Parian was mentioning even if they had no network built they had nothing to actually use the token to do they actually didn't even have a token they were issuing it on a futures contract basically for a token in the future and these advisers were telling them you know those aren't securities go ahead offer them no big deal well eight hundred subpoenas later you can see the mess we're in and I really I mean look I blame the issuers to a certain degree but those issuers that actually sought out guidance and paid like you were saying like made hundreds of thousands of dollars for legal counsel I mean those people should receive some subpoenas they they really should and I think they are actually right now and you know right right now there's there's a lot of good exchanges and and issuance platforms coming out we ourselves VL OCS or ticker symbol we we invested in in 80's in New York and and a security token platform that we're launching called Hyperion coinless is obviously an amazing one as well and there's there's a few of these popping up and my recommendation is is that you really try to use these if you want to do a crowdfunding offering and you know if if nothing what we're seeing is the crowdfunding is moving to offering secondary markets whether it's lending platforms or crowdfunding platforms or the kinds of stuff that Hyperion and coin lists are doing I think I think that's really where where the space is moving to and and you're gonna have a lot of private equity that's gonna become a lot more liquid because because of that over time it's not gonna happen overnight but but it will so there there will be some changes there and and the space is growing up look at these platforms there's two sides of the International argument in the United States we're really at a disadvantage in the way that our government is organized space is very fragmented you have the SEC the CFTC fencin IRS and the let's just keeps going on and a lot of other jurisdictions they're very streamlined for example in the United Kingdom you have the financial conduct authority which is really a one-stop shop for everything financial related so you don't have to go back and forth between all these different agencies who don't coordinate or even like each other here in the US or in Singapore where you have the Monetary Authority of Singapore which is even more centralized in the UK because it's the finance and bank regulator and it's also the central bank but it is a one-stop shop so companies and defend tax in general have been able to get to market a lot sooner because it's a much easier process to get the regulatory clarity or approval you need to bring a new and innovative product to market and that's really worked against us in the United States and the data shows in our report we have a graph that shows where money is being funded from and and in what countries these projects are being domiciled and when you get to the United States the trends reverse so in the United States there's a lot of foreign money being invested or there's a lot of domestic money investing into domestic token sales but the trend is the opposite with foreign money where there's very little domestic money that has the opportunity to invest in foreign products and that's the reason that Georgia mentioned because if you are an investor in the United States you're subjected to the SCC's laws and there's other projects that are able to get to market quicker so ms regulatory arbitrage but there are quality projects overseas and they're just blocking out US people where they're just you're not allowed to invest in their platform not allowed to use any of their products because we don't really know what the highs are and they can't figure them out and it's too expensive to get the legal guidance or opinions or law firms are unable or unwilling to provide opinions give that clarity so part of us is also holding us back as a country to being able to participate in innovative projects overseas and part of it is because we're very unorganized from the federal government's perspective and there is no leadership in terms of what is the plan for blockchain in the United States of America if you talk to every different agency you're gonna get a million different answers everyone is marching in their own direction which is really irresponsible because blockchain is a very exciting development people all over the world most well respected technologists investors have recognized this as an important potential similar to the Internet but there's no plan there's no plan on how we're going to do that how we're going to have responsible innovation that protects us from these issues that we've been talking about but that still does not stifle innovation and investment in jobs and economic growth which is what we're doing today is there a hunger to do that and just no coordination or is it residual skepticism about the space in general so a big issue well one and I don't blame the regulator's because I believe they're doing their job and we spend a lot of time with these people every day their public servants you know I formerly used to work in Congress so you know I know what it's like to be a government employee they're doing their job they're applying the laws that they're you know supposed to enforce the best that they know how the issue was really at the higher level where the President of the United States has never even said the word blockchain at least not publicly he's never tweeted it which may be a good thing but there's really just a lack of you know anyone within the administration even acknowledged this and so the agencies are all just left kind of off on their own path which is leaving to mass confusion mm-hmm okay we have about two minutes left I'm just wondering sort of quickly from each of you if we did this panel again a year from now like what do you think would be the main thing we would be talking about where are we headed in the short term I'm here Michelle why I think I think what I said you're gonna see more liquidity in the space you're gonna see more of these second markets associated with crowdfunding platforms of various kinds and that's that's gonna be a good I I don't think you'll ever be as big as it was before like you're not going to see raises like that obviously and there's no reason why people should expect that you're you're not gonna have you know you'd be lucky if you have a hockey stick growth and if the company is actually doing something and is positive and gaining users and whatnot and it it overall it's it's it's a benefit yeah yep I could incur with the the secondary market piece like I think we're gonna see a lot more exchanges these tokens are gonna start to be issued we're gonna start seeing the functionality I'm really excited for a lot of the projects that you know we've worked with and some of the others that I've seen that are actually going to start you know going live and having users and we're gonna get to see you know the the fruits of their labor and then I'm hopeful cautiously optimistic that we will get some sort of government you know consensus around just simple things what is the utility token versus what is the security token you know I'm not asking for much but um you know having a little more clarity and guidance from from our regulators would be helpful as well so I'm incredibly optimistic I think we will see a wave of institutional money enter this space there's been a lot of institutional money that has been sitting on the sidelines mostly because there's not protections in place for the institutional investor custody being one of the biggest issues over the past several weeks we've seen many different very well-respected companies come forward with custody solutions and those will be all rolling out and I just quickly say when you say custody that's just quickly to find that 50 so if an if an institutional investor wants to invest in crypto they want to buy Bitcoin they want to bite you there they want to buy whatever crypto token they're likely not going to take custody of that themselves they just don't do that they want a custodian a qualified custodian to do that for them today there's been very little that's because that's essentially like holding a lot of cash kind of it's a huge for an investment advisors where you actually aren't allowed to hold it yourself you have to engage a qualified custodian and we're just now starting to see qualified custodians being able to offer products to the crypto community those are just starting to happen like right now it's just two weeks ago fidelity issued their announcement that they will be offering a custody solution for crypto so I think that will enable a whole nother wave of investment into the space that we haven't seen before and there was also the Yale endowment fund just release the information that they invested into a crypto related Pro folio so that was kind of the I think the tip of the iceberg of the next set of institutional investors that we will begin to see enter this space so I think the prices of of the of the crypto industry will increase over time but you're also going to continue to see a lot of fraudulent projects continue to dissipate

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