I was asked to submit commentary to Euromoney for this article on the G20 regulating crypto. Below is the full version of the comments I submitted:
UPDATE: I realized after writing this post that lawyer Gordon Einstein (left) had previously referred to crypto as a ‘New Kind Of Thing’ in his Liberating Crypto Assets presentation — so credit goes to him for that specific wording :)
The world of crypto is currently a regulatory mess.
In the United States, the SEC says that tokens are (maybe) a security. FinCEN on March 6th said it’s money (and thus issuers of ICO’s are a money transmitter subject to the Bank Secrecy Act and must be licensed: https://bitcoinmagazine.com/articles/fincen-deals-major-regulatory-blow-icos-and-exchanges/). On March 7 — the very next day — the CFTC said crypto is a commodity and a judge confirmed that https://www.coindesk.com/us-judge-rules-cryptocurrencies-are-commodities-in-cftc-case.
So United States regulators and courts cannot agree on what cryptocurrency is and which agency has jurisdiction.
At Guardian Circle, we are in the middle of the GUARDIUM token sale for global emergency response. We’re working very hard to create a tokenized ecosystem and service that greatly benefits the entire world. And we are left with no clear idea of what we can do or not. We are forced to kind of guess and mitigate risk.
- If all tokens are securities, then we must register them — and money raised in this fashion is not subject to taxes, and we are NOT required to have a money transmitter license.
- On the other hand, if they are utility tokens — assets — then money we collect from token sales is simply taxable revenue, but does not require securities registration or a money transmitter license.
- Or tokens are indeed money, and thus not required to be registered as a security and also not taxable, but we DO require a money transmitter license.
We have no idea which of these scenarios are true. They cannot ALL be true. Yet we are under threat of all of them being true.
Since crypto defies classification under existing laws and agencies, it seems obvious to me that it is indeed a new ‘species of thing’ — a new asset class — requiring new laws, regulations and a new agency. So I applaud what the G20 is trying to do, and think they are on the right track classifying crypto as an asset.
Since crypto is not limited to one country, but is worldwide, like the Internet itself, it would seem to make sense that this be done by a world regulatory body.
Right now, the climate in the United States is so chaotic that is simply best to domicile your token sale elsewhere and prohibit US participation. This is really bad for US citizens, who are now effectively barred from participating in token sales.
Think about that: the most important technology revolution since the internet is underway, and the place it is least accessible to on the entire planet is the United States.
If this continues, the US will be dead last in the next generation of wealth creation and the next wave of great tech companies. It’s like if the US barred angel investing in Internet and mobile companies back in 1998. Google, Facebook, Amazon and Uber would have happened everywhere else but here. That is where the US is headed right now with blockchain.
Jack Dorsey, Marc Andreessen, Reid Hoffman and other blue-chip innovators are on record as saying crypto is extremely important — the next big tech wave, possibly BIGGER than the Internet itself. The Internet ate media, telecom and retail. Crypto will eat world money, banking and law. That is a MUCH bigger meal.
Most crypto is probably not a security. Think of it this way: In World of Warcraft, imagine if I purchased a magic sword for $10. I bought it, knowing that there are only 100 such magic swords, and more players are coming online every day. In a year, I sell the sword for $250 on eBay. Now — is that a security? Of course not: it’s a magic sword. It’s a digital good. Yes, I speculated on it. Yes, I realized a profit. But at no time did I actually own stock in World of Warcraft, Inc.
There is no difference between a cryptographic token and that magic sword. Abstractly speaking, they are exactly the same. They are an in-world digital good: an asset. So again, the G20 idea of crypto-as-asset seems completely correct to me. It passes the sniff test, lines up nicely with other precedents.
Farmville had Farmbucks. Second Life had Linden Dollars. We’ve already seen digital tokens as assets on a mass level already — this is not really new. None of those tokens were classified as securities by the SEC, nor were they required to have FinCEN compliant money transmitter licenses.
What’s different now is that with blockchain crypto tokens, we have a way for anyone to mass-produce in-world digital goods in a new, distributed and unforgeable fashion. Hence, the mass-explosion of such things and hence the new attention from regulatory agencies.
Speculation on tokens-as-assets should indeed be possible — and encouraged. We are pushing wealth creation out to the periphery where the customers live, in a non-securitized fashion. Early participants in an ecosystem can realize venture capital-style gains — simply by purchasing the ‘magic swords’ early on in the ‘game’ while they’re still cheap. We should be inclusive.
Imagine if Uber had started as a crypto company. The very first Uber drivers in San Francisco — the ones who performed the actual labor that made the company happen — having been paid in UberCoin, would have participated in a wild appreciation of those ‘in-world digital goods’. As things stand today, those drivers were not rewarded for their early labor. We were NOT inclusive. There was simply no structure to provide 1099 contractors with those kind of rewards. Now there is.
In Silicon Valley, the SAFE or convertible debt note has been used for 20+ years now to fund early-stage companies. And yet, the SEC has looked the other way when these notes were not immediately registered as Reg A or D. This was the right move, as this allowed for easy capital formation to occur. Without these notes, we would not have had Uber, Facebook, LinkedIN. We NEED this style of easy capital formation. Angel investors depend on it being ‘fast and loose’.
And yet: the SAFT structure is under attack by the SEC right now. Why? What is materially different? Either SAFE notes from angel investors in the traditional venture world should require immediate registration as a security (and should be retroactively enforced for the past 20 years) — or SAFTs should be given the same lenient consideration SAFEs have enjoyed for decades. We should not have two completely different styles of enforcement.
We’d like to see world regulation where ICO’s are legal and encouraged. Where anyone can participate with any amount, not just accredited investors. And yes: one where frauds and bad actors are punished. We need to weed out those who are obviously scamming people.
But there are a LOT of blue-chip, high-end entrepreneurs in the crypto space. There is a LOT of really great stuff happening. It’s already obvious that blockchain is where the next giant wave of wealth and value creation will come from. We need to grease the wheels for these people, not make their entreprenurial efforts more difficult with a frighteningly uncertain regulatory environment. And we need that environment to be friendly, decidedly and unambiguously pro-crypto, so that innovation continues to occur in the United States and not migrate elsewhere for safety.