Make law, not war
If it’s old law versus the new common sense, it’s time we start a discourse — not “file settled cease and desist charges” that will agonize innovators for months if not years.
If there is no discourse now, laws will be “violated” or misused under the pretext of interpretation. However, during times of paradigm shift, regulators, too, agonize about which “common sense” to apply — as it is about to change:
Carlota Perez writes in Technological revolutions and techno-economic paradigms:
The emergence of a techno-economic paradigm — No matter how important and dynamic a set of new technologies may be, it only merits the term revolution if it has the power to bring about a transformation across the board. It is the technoeconomic paradigm (TEP), evolving as the new technologies diffuse, that multiplies their impact across the economy and eventually also modifies the socio-institutional structures.
Such a meta-paradigm is the set of the most successful and profitable practices in terms of choice of inputs, methods and technologies and in terms of organisational structures, business models and strategies. Those mutually compatible principles and criteria develop in the process of using[!] the new technologies, overcoming obstacles and finding more adequate procedures,
routines and structures. The emerging heuristic routines and approaches are gradually internalized by engineers and managers, investors and bankers, sales and advertising people, entrepreneurs and consumers. In time, a shared logic is established; a new “common sense” is accepted for investment decisions as well as for consumer choice. The old ideas are unlearned and the new ones become “normal”.
Now, you can ignore the new paradigm (sovereign individual, automated contracts in cyberspace), and keep fiddling around with the old (Howey test and as many other old paradigms as there are sovereign nation-states) — but it will look in vain, increasingly more so, when a lot of smart people, now connected globally and in near real time, get excited about what new patterns will be discovered with this new frame of reference.
On our path to becoming sovereign individuals, what we have to sacrifice first, is, the bliss of ignorance. Apply our individual common sense, and start a discourse:
Yesterday, “The Commission filed a settled cease and desist proceeding against the founder of a digital asset trading platform for secondary market trading of ERC20 tokens, EtherDelta, for causing the trading platform to operate as an unregistered national securities exchange.”
Is this a signal to all founders? Not fraudsters.
Is this a warning to all founders: that they will come after you, so better not cause anything stupid — like change?
This is protecting status quo from the future. This is not about protecting investors, because they are still “left trading unprotectedly” on EtherDelta, the said unregistered national securities exchange, which is currently being operated — not by the founder(s), not in the US — presumably by a Chinese company. The company, after it stopped being operated by the founder(s), got hacked, ICOd, and had other scandals — and this has been going on for almost a year now.
But SEC doesn’t charge the current operator under whose operations fraud most probably happened and is happening since mid of December 2017. No. The SEC charges the founder for the period between them publishing TheDAO report and the transfer of operation of the platform to another company (?): a period of not even 5 months. The claim being, he knew he caused the trading platform to operate as an unregistered national securities exchange.
That’s English, but not plain as in straight forward.
Let’s unroll all sorts of false assumptions here (which are allowed to lead to false conclusions):
First of all TheDAO report states that
- “DAO Tokens Are Securities” (duh! their utility was investing in other people’s ventures or open source projects: old common sense still might seem to work here) — but certainly not national securities, as they were issued in cyberspace. And also open source projects are not your grand fathers ventures. So utility tokens were still unclear (are still unclear!) in the existing/old frame of reference.
- “A System that Meets the Definition of an Exchange Must Register as a National Securities Exchange or Operate Pursuant to an Exemption from Such Registration”. You have to keep stumbling over that word: “national”.
In the proceeding filing, the founder is charged — based on the ground that EtherDelta resembles online securities trading platform — and might mislead investors(?)/traders (is SEC supposed to protect traders?), that they are using a registered national securities exchange platform to trade their ERC20 tokens.
What is wrong with that?
- Anyone who ever exchanged value over internet without having to log on anywhere, knows, this resembles nothing that exists in the current framework. And EtherDelta did differ very much in that regard from an online securities trading platform.
- All the information that EtherDelta displays is either from the public blockchain (anyone can browse that info anytime without EtherDelta) or “user”-generated.
- Those traders know exactly how they got their ERC20 tokens, they invested in the projects, for their own reasons. Whereas, the SEC mentioned many many times (please leave comments with references for fun) after TheDAO report that they will decide case by case basis. There is no way for the website or the smart contracts to query which ERC20 tokens are not utility tokens — and the SEC commissioners outcry, he has “yet to see a utility token that is not a security,” just is not enough to comply with.
Additionally the “Relevant period” for the charging starts July 12 (TheDAO report published 14 days later) hints that there might be a list of utility tokens that are deemed securities, which the founder might have received alongside a cease and desist. So if the SEC already stated case by case, why did they not, share that knowledge and guidance as promised?
And whatever he did then, was his decision and if the actions are criminal, he should be charged for those actions.
But one human’s greed, doesn’t make the first MVP of a decentralized exchange become “A System that Meets the Definition of an Exchange Must Register as a National Securities Exchange”.
EtherDelta is not an unregistered national securities exchange. It’s a minimally viable decentralized exchange (DEX).
It is at most, a website with user-generated content ( you would not even need that with a true DEX).
That is why the charge sounds so crafted: Like “manner of sale”, the SEC most probably tries to make a case through “manner of operation” — but I can’t believe law can be interpreted that flexibly. Or if it can, it’s not much of a law. He should be charged for his actions, not in order to keep the old paradigm in place.
Whatever you do founders — you only have one job:
Just don’t loose your integrity. Don’t run away from the discourse! EtherDelta was and is still “a digital asset trading platform for secondary market trading of ERC20 tokens” — and not an unregistered national securities exchange. If Zack didn’t run the other way, but removed the features — if any — or his actions that caused EtherDelta “to operate as an unregistered national securities exchange”, all of us would be wiser. But no, he had to sell it to a Chinese company and settle the cease and desist charges.
Again he should be charged with whatever he did wrong — but it was not “for operating an unregistered national securities exchange”. Most and foremost — and the proceedings make that clear — it was not for founding EtherDelta, a minimally viable DEX. And, again to emphasize, it was not because EtherDelta — as is — can be seen as an unregistered national securities exchange.
What the SEC is trying to do is to show how a person’s “means of operations” caused the same piece of software from being legal, or at least alegal, to being illegal. Like it can be with guns. Indeed, until 1997, PGP was considered a weapon. But common sense and law cleared that non sense 21 years ago.
I don’t understand the value of SEC’s actions. I can imagine, however, how damaging those actions can be to innovation — if we would not be in public discourse.
But we are.