Honestly I can't wait until that filecoin ICO thing becomes an epic disaster. Like most of the ICOs I've seen, it is flawed on basic principle and lacks a clear business model, and is ill-positioned for the future. Just because you can make a big splash and raise a bunch of money does not mean you have created anything of value for the world.
ICOs seem to be a new way to raise from unsuspecting investors aka a way of separating people who have too much money and not enough common sense from their money. The fact that it is utilizing a blockchain technology has nothing to do with the actual mechanisms at work here, focusing on the use of blockchain in negotiating ownership and value is actually harmful here.
The real technology isn't glamorous at all and has been in operation ever since Charles Ponzi "innovated" the concept in the 1920's.
It's the most questionable to me. The ones that are "vaporous", it's obvious to everyone so not many questions need to be asked. But about FileCoin...
How can they compete with economies of scale? And how will they prevent data centers of disks being created (centralizing forces)? If they manage to stay decentralized, how will the very public team defend all the illegal and/or illegitimate content that gets hosted on there? How will they defend against the FBI ordering them to shut it down? Why would people pay more for a slower or less reliable storage solution?
It's very questionable that they were able to make bold claims and get millions of dollars from people who do not have a clue that FileCoin and "distributed storage on the blockchain" is DOA unless you want to store your 3d printed gun designs in the cloud. But in that case, the team building it should've been anonymous...
I don't use filecoin's network but I do use a competitor that is basically doing the same thing, storj. Also when I say I use the network I am talking about actually uploading and paying for data storage.
To answer some of your questions, storj's network consists primarily of people who are renting out their unused hard drive space. Economic of scale doesn't really matter because the people renting the space are just trying to make a few extra bucks per month and they have already paid for the hardware.
They have no way of preventing centralization of disks but the whole network is decentralized. The file you upload is being hosted on thousands of different disks.
Like all companies, they will probably comply with FBI/DMCA orders to the best of their abilities. The issue for them and the FBI is that all data uploaded to the network is encrypted at the point of upload so it is impossible for the FBI/DMCA to find it. These decentralized file hosting systems don't allow public sharing of the download links/keys (yet at least).
Also the reason I pay for storj over say google is because storj is cheaper and has higher redundancy requirements. I have files that I absolutely can never risk losing and storj allows you to pay for the service anonymously while other services do not. In the world of data breaches everywhere, the less information the company has about you, the better.
> Economic of scale doesn't really matter because the people renting the space are just trying to make a few extra bucks per month and they have already paid for the hardware.
OK so hypothetically, if this decentralized storage thingie made the sellers a profit, there would be at least 1 rational and greedy seller who would take that profit, invest it in more disks, and save on costs compared to other folks, right? In other words, if I have 100,000 computers in a data center with central cooling system, the total electricity costs will be less than the total cooling costs of 100,000 individuals each with their own 1 computer. Furthermore, the total bandwidth costs of the 100,000-computer data center will be cheaper than the total bandwidth costs of 100,000 individuals with 1 computer each (economies of scale).
How can you say that "there is no way to prevent centralization" and then follow up with "the whole network is decentralized", when the cost structure obviously makes more sense for this distributed storage to all be controlled by a handful of resourceful entities?
Then those 4-5 data centers just become an encrypted Dropbox, right? So like, SpiderOak?
It's Airbnb for disks. Maybe not the perfect analogy, but I think the idea here is to just capture latent inventory that is otherwise being wasted. It's not about competing on margins, but activating latent resources that are sitting out there completely unused.
I haven't made the analysis but maybe Airbnb works because it is actually more profitable for an entity to host 100 airbnbs then to have a regulated hotel with 100 units, in which case the analogy doesn't work because that's the crux of my argument.
In the case of decentralized storage, this is not the case, as we've seemed to have agreed. Which means this:
1- The 4 data centers will host 99% of the available storage because it's so profitable for them
2- Because the supply of storage on the network is so high, the reward given to the hosters goes down (this is how FileCoin works I'm guessing, the reward needs to come down to close to the overall cost of the suppliers, like difficulty adjustments in Bitcoin)
3- Because the costs of the data centers which now have millions of disks all under centralized electricity/infrastructure is so low, the reward becomes lower than the cost of being an individual storage supplier.
4- At this point, the individuals with "latent resources" have no incentive to put these on the network, and actually are incentivized to sell the disks instead, because at least that way they'll make money.
5- Who is incentivized to BUY these disks? See #1
That's how economies of scale work and why they will make FileCoin useless.
Your argument is "maybe not", which isn't adding much. So can we agree that if the reward you would get is actually less than the electricity+bandwidth costs of you leaving your computer on all day, then you're better off keeping the 500GB free?
Just like in Bitcoin, my free CPU cycles are better kept free because if I try to mine Bitcoin I would have to leave my computer on 24/7 and it would cost me more than the BTC rewards I'd very rarely receive?
We've literally just swapped free CPU cycles for free disk space, and we both know PoW is centralized and it's not worth individuals with a laptop to mine, but somehow the free disk space won't suffer the same fate?
Prior to AirBnB property owners left their homes unoccupied while they continued to pay property tax and upkeep on them during those times. Similarly, there are people with computers powered on all day that have disk space unused while they continue to pay for the electricity costs. If you assume these are the people who are going to make up the majority of the FileCoin network, this is effectively "found money" for those folks. (Albeit probably not much money.) This might not be the way it plays out, but if it does, your arguments about margins and electricity bills are moot: these costs are not increasing after the network is connected.
edit: Also even if FileCoin doesn't throw off a ton of ETH, presumably there will eventually be a wide array of services like the FileCoin network that you can transparently trade your liquid crypto assets into. For example, consider a person who happens to have 50TB of disk they don't need for the next month but would like to perform some low latency rendering jobs on the RenderCoin network during that time instead. They could easily just trade one for the other, increasing market efficiency for those resources. This example would be a small transaction in terms of ETH, but multiply that across the entire set of all computing resources, across all services, and it is a potentially tectonic shift in effective allocation of resources.
I leave my computer on all day anyways, I'm pretty lazy. Or rather, the cost of having to wait for it to boot is greater than the electricity. The fact of the matter is that I'm paying a large premium for a small slice of usable time and I'm not in the minority.
Bancor was also "too big to fail" but has primarily stayed below it's $3.50/token ICO price. Currently $2.19
People paid up to $5/token to participate in Filecoin. Steep starting point to actually increase market cap when there exists two hundred million Filecoin tokens.
What difference does it make to the Filecoin users and network whether or not their tokens are overpriced right now? Some speculators might burn themselves on it, but speculation isn't the point of Filecoin, and its current price at any time won't affect whether or not the system is usable.
>Like most of the ICOs I've seen, it is flawed on basic principle and lacks a clear business model, and is ill-positioned for the future.
I thought the idea was extremely straightforward compared to almost every other ICO: you pay tokens to have files hosted for you, and you get paid tokens to host other people's files. Or are you saying that you think they won't manage to implement that?
A quick chat with an attorney who is an SEC specialist basically said "if it breathes" i.e. involves money that ICO is seen as a security. The SEC putting together the digital division which covers cryptocurrency tokens is part of what led to him saying this. Basically fish in a barrel.
It is in my opinion that any US-based ICO is now in a lottery as to whether they get the SEC visit.
Not legal advice at all, just sharing an excerpt from a coffee chat.
I saw your analogy got downvoted because people didn't like it.
But I've talked with prominent lawyers about this distinction and securities laws are flexible enough to include practically any product in their purview.
The Howey Test isn't the only test that courts and regulators have created.
There are several tests floating amongst the states and various federal circuits, which can and have deemed otherwise benign products and services as things that should be registered as securities with the most onerous costs and distinctions.
A California country club's member fees were deemed securities under one framework.
And every kickstarter and centrally issued product can under other frameworks.
There is nothing wrong with your analogy. The securities regulators generally don't try to stifle all commerce so far.
The idea that all ICOs will experience this form of securities discrimination - just for the mere fact they are using cryptographic hashes and get a lot of revenue/capital - is just as logically unsound.
But they could. Just like almost every product or service could. When they do it will quickly evolve securities law towards a more apt framework. Its not about "securities or not" its about consumer and investor protection, and this is currently the tool available.
I agree, many things which could be deemed securities are not. The SEC's mandate is to protect small investors and public faith in investment markets, and they will hopefully focus their power on instruments where that faith is being challenged.
If they do, the best strategy for an organization raising money through an ICO is to use that money in as transparent and ethical a manner as possible.
When you turn PLEX -> USD using official means, can you withdraw that USD from Eve Online? Or can that USD only be spent on subscriptions/in-game items?
If it's the former, Eve Online is at minimum, a money transferrer. If it's the latter, it's just a store that accepts gift cards.
Officially, PLEX can only be redeemed for subscriptions, but it can also be traded as an in game item for ISK (standard in game currency). The only real difference between it and a cryptocoin is that selling PLEX on a secondary market is against the ToS. You will get flagged if you're trading away PLEX ingame for nothing in return, because they assume you're selling it.
> You will get flagged if you're trading away PLEX ingame for nothing in return, because they assume you're selling it.
I'm pretty sure that is enough to avoid it being deemed a security under the SEC's jurisdiction. There needs to be an expectation of future profit. (Not a lawyer.)
First, the Howey Test is the only test from the Supreme Court.
Second, that is a multipronged test, a product/service which wasn't registered as a security but still passes or fails one prong isn't enough to say it is or isn't a security.
THIRD, there are multiple other tests in various federal circuits.
Fourth, there are tests created by states relevant at the state level.
Fifth, most people are just lucky that securities frameworks haven't been applied haphazardly to everything under the sun.
> There needs to be an expectation of future profit.
I hear this statement repeated a lot, but that seems unlikely to be an absolute requirement. That is, even if every instrument sold for future profit is a security, that doesn't mean everything else isn't. Do you have a source for that statement?
> The test of whether there is an "investment contract" under the Securities Act is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others; and, if that test be satisfied, it is immaterial whether the enterprise is speculative or nonspeculative, or whether there is a sale of property with or without intrinsic value.
That decision defines, in that very part you quote, an investment contract (where basically one expects profit directly without working for it) as a security. That is not surprising really, as it is perhaps the most trivial form of it.
But that was not my question. You, and others have also in conversation, stated that has a requirement for something to be legally regarded as a security. That is what seems unlikely to me.
The very decision you quoted starts out with:
> the Securities Act of 1933 defining "security" as including any "investment contract,"
Note the word "including". That A is B does not mean that B is A. There are other forms of securities, and this document alone should not lead anyone to believe that if they only append to their contractual terms that tokens are to be regarded without use or value, that they somehow would not legally be selling securities anymore.
Note, however, that “investment contract” is one of very many things that are securities (see the recursive definition at 15 USC Sec. 77b(A)(1)), so anything that is an investment contract by the Howey test is a security, but so are lots of things that are not investment contracts.
I can second this view, not only at the SEC but also a few attorneys’ general offices around the country. A lot of people see a promotion or Senate seat in bagging (i.e. fining, shutting down and jailing) ICOs and their promoters.
I find it unlikely an ICO conviction would help anyone electorally. Only tiny proportion of voters would even understand what happened. It's not like high profile corruption or murder or something everyone gets.
That's not to say they wouldn't do it to advance themselves internal to the justice system, where that kind of conviction would have forward-looking value.
> I find it unlikely an ICO conviction would help anyone electorally. Only tiny proportion of voters would even understand what happened. It's not like high profile corruption or murder or something everyone gets.
It'd be so easy to spin ICOs as a matter of fraud that's taking advantage of uninformed investors, a Ponzi scheme, or any of the other buzzwords that historically work pretty well in convincing voters of criminal financial activity.
Whether or not you actually view ICOs as any of these things is incidental to whether or not an AG with career ambitions would be able use that rhetoric to gain votes.
> It'd be so easy to spin ICOs as a matter of fraud that's taking advantage of uninformed investors, a Ponzi scheme, or any of the other buzzwords that historically work pretty well in convincing voters of criminal financial activity.
Indeed. The fact that ICO's have generally been fraudulent get rich schemes aids greatly in this "spin" of which you speak.
Even worse. ICOs are based on crypto magic money. Crypto means computers. Computers means Silicon Valley, which is the current go-to elite to hate. I can see a way to spin this politically that could resonate with plenty of the US population.
Given the recent deluge of anti-SV (and anti-tech sphere in general) articles in mass media, I'm not sure about that. People do read and share this stuff.
> I find it unlikely an ICO conviction would help anyone electorally
I've never held elected office. I defer my opinion to those who do. They say ICOs represents a golden trifecta between (a) fraud against moms and pops, (b) complicated financial instruments and (c) Silicon Valley arrogance.
Can you elaborate on what you mean by shutting down? AFAIK, most ICOs are closed off to us citizens already (and for those that are available to us citizens, it requires the investors to be accredited).
What kind of regulation do you think would come? ICOs are already restricted in the us to accredited investors (if i understand correctly). Do you see something beyond this?
The majority of ICOs are not restricted to accredited investors.
There will be penalties for failure to register securities, for failure to meet reporting and other registered securities requirements, and shareholder clawback lawsuits.
and how exactly are they going to enforce these rules? Do you think the SEC is going to zimbabwe, congo or some other backwater country to tell these people to stop issuing ICO lol? The US federal government is not the policeman of the world my friend.
People who are doing ICOs will just move to where they can have their business be successful. If USA/Europe or Asia ban ICOs then all the devs will just move to another country where it is legal, maybe russia?
I haven't been following closely, recently, but literally the first one I checked has no check on residency [0], which is enough to bring it under SEC jurisdiction if the sale goes over other thresholds.[1]
Sales before and after the bulletin are subject to the same laws.
It was totally legal for US residents to participate, as far as I know. I believe almost all the securities-law obligations resulting from the sale are on Tezos. (Not a lawyer.) The only obligation on buyers might be that they can't resell it without being guilty of selling an unregistered security themselves.
> When do tokens that are securities stop being securities? This is a central question in the token community right now. Our current view is that once the value of the tokens is primarily driven by their commercial usage, rather than by the efforts of the token sponsor or other developers, the tokens should no longer be deemed to be securities. The SEC has not yet addressed this question.
This has been settled law for 70+ years.
When one of the biggest law firms feels the need to preemptively issue a public statement pretending they don't understand how the law works, you know shit is about to get crazy.
"Primarily driven by commercial usage". Can anyone name an ICO token for which that is really the case?
Filecoin is supposed to have "commercial usage". But the insiders extracted 2/3 of the cash already.[1] As far as I can tell, the "Filecoin Storage Network" doesn't exist. There's no software you can download. You can't actually store data yet. If ever. A key point from WSGR is that if the ICO precedes the service becoming active, it's a security.
> "Primarily driven by commercial usage". Can anyone name an ICO token for which that is really the case?
The value of the token can't come primarily from the person or entity promoting the token sale, but whether there is commercial usage or not is largely orthogonal to whether or not something is a security.
WSGR disagrees. And where are you finding 70 years of settled law on securities that later become primarily valued via use in commercial transactions?
> Our current view is that once the value of the tokens is primarily driven by their commercial usage, rather than by the efforts of the token sponsor or other developers, the tokens should no longer be deemed to be securities. The SEC has not yet addressed this question.
The Howey Test, from 1946, is about whether assets that are classified as real estate, currencies, 'utility tokens', etc., can also be classified as securities.
Yes and where's an example of a onetime security which was later considered not-a-security?
From your own link:
> The final factor of the Howey Test concerns whether any profit that comes from the investment is largely or wholly outside of the investor's control. If so, then the investment might be a security. If, however, the investor's own actions largely dictate whether an investment will be profitable, then that investment is probably not a security.
WSGR's position: once tokens are used primarily for commerce, the value will be determined by commercial usage and not by the offerors, so that:
> Tokens that are solely utility tokens should not be securities. If a token-based platform is fully developed and the tokens are widely used commercially on that platform, the tokens generally should not be securities.
> WSGR is claiming that once tokens are used primarily for commerce, the value will be determined by commercial usage
And they're wrong. If a token is primarily used for commerce then it's value might come primarily from that usage, or it might not. But it certainly isn't some sort of get-out-of-jail-free card.
I don't see how you're disagreeing with WSGR here. You seem to be saying that even after a token becomes broadly useful in its intended setting (say, storing files), it might still get most of its economic value from speculation. WSGR agrees, and seems to go out of its way to say that coins would likely remain securities under those conditions.
I was saying the same thing when Uber launched- "An Uber is just a Taxi and if they don't follow taxi regulations they will be shut down quickly."
I'm still not sure exactly why this didn't happen, but if people can agree that Uber isn't a Taxi, then I think they can also come to the conclusion that an ICO token isn't a traditional security... the world just isn't as black-and-white as we often like to think, and legislators are human beings that have a lot more flexibility around enforcement than people imagine.
Funnily enough UberX wasn't the first. Uber was only using licensed Taxi drives for UberBlack, and wanted to do UberX, but knew they'd be shut down immediately.
Then Lyft did it....normal people accepting rides. Uber waited for the Lyft shutdown. Didn't happen. Then the city of SF proposed giving Lyft a licence.
At that point, Uber pulled out the brakes and that changed their view on regulations permanently.
The difference is that Uber wasn't a taxi because they didn't (and still don't) accept street hails.
The question around Uber was whether the laws would be changed to make them a taxi, which after much lobbying they weren't, but they were already fine under the existing laws. As kenbaylor says below, Uber themselves thought the laws would quickly be changed to make their business illegal, so they didn't even get into that market until Lyft forced them to do so.
taxi drivers are selling their medallions that they used to offer service. They are selling these medallions at a loss because a competitor is eating their lunch.
the two are completely different things. Uber is/was committing an administrative violation. When you violate securities laws, that's actually a crime.
> "Is this token being marketed as an investment opportunity?"
Wrong. What matters is whether the person buying the token is doing so because they think it's going to go up in price. The person selling it could explicitly say that it will never be listed on an exchange or go up in value, but if the person buying it thinks it will go up in value, then the person selling it has committed securities fraud. (That's slightly simplified, but that's the general idea.)
Anyone who's ever touched bitcoin or run a node is risking prison time. It's luck that running a node didn't get your door kicked in by the feds for being an unlicensed money transmitter. At a certain point you just stop caring and hope they can't lock up everyone. Seems to be working so far.
That 70 year old law is based on financial models that have been settled for far longer though. I hate to use the overhawked term 'disruption' but ICO's appear to be causing major issues amongst the status quo.
The only innovation that tokens bring to securities is reducing the cost of recording who owns what shares. Which is certainly important, in fact one of the most important innovations since the 1400s, but the idea that this new feature would have any impact whatsoever on the interpretation of our existing securities laws is insane.
> which is what humans like Jamie Dimon and some investors do not like
There are plenty of people on this thread (myself included) who believe regulators are overdue in cracking down on this space. No need to invoke a bogeyman.
> That 70 year old law is based on financial models that have been settled for far longer though
No, it's based on the language of a statute that's about a decade older.
Now, the statute may be based on older financial models, but that doesn't control the case law, and disrupting the financial model doesn't, in and of itself, amend the statute underlying the case law.
The unintended consequences of the SEC forcing ICOs away from representing equity towards "use tokens" is that investors lose any rights at all.
The SEC is fucking up pretty hard at the moment and doing real damage. Their actions in the IPO market, meant to protect advisors, have resulted in only pump-and-dump crap like snapchat and blue apron going public, while all the gains from real growth tech companies are being retained by VCs, sovereign wealth funds and investment banks, while retail investors holding index funds miss out.
I think this is a major factor contributing to widening gap between the super-rich and everyone else. There are a lot of ICO scams, however giving vague guidance and forcing ICOs out of their own jurisdiction when clearly people are still investing in tokens as a speculation/profit vehicle is worse than useless. Token-holders need the ability to change management, dissolve companies and reclaim cryptocurrency investment if companies are mismanaged or scammy, and they need to have the right to see how funds invested are being spent.
How does buying an ICO link me to a company? does it entitle me to a dividend for investing in them? Are the company under any obligation to share their success with me?
Some ICOs effectively did exactly that. Then the SEC started rumbling about how that made them securities and obligationed them to the same restrictions as securities. So, now lots of tokens try to skirt the law by making the dividend more indirect. Ex: you don't just sit back and collect, you must contribute to the system to be rewarded. Of course, the size of the reward scales with the success of the system naturally.
Speaking as the world's biggest ethereum believer: ICO have pretty much have zero obligation to share their success with you and it seems crazy to me that anyone would buy into an ICO.
Well they have as much obligation as you when you read TOS/EULAs and click "Agree". So there is an actual obligation in most cases when it was specified in the terms on their website. It's very hard for most top ICO teams to deny their ties to the ICO and it's terms.
Not only are they not under an obligation to share their success with you, it's illegal to do so. If I get Future_Technology_01 and sell ICO coins with the knowledge that any engineer in the world can understand my white paper and sees the value in it, it's illegal for me to offer to repurchase the coins at a whateverx multiple in 36 months after using the ICO raise to get to market.
That's because it's illegal to sell coins if the primary motivation of the buyer is to make money from their increased value. It's literally illegal for the company to let you invest in it via ICO's while providing a mechanism for the money from the ICO to make it back to you after the company has used it to get to market.
> Simple Agreements for Future Tokens (SAFTs), as used today, almost always are securities.
Does this mean that SAFEs are also securities? I imagine so, and they are usually given to accredited investors. I have also seen them being given to contractors and employees as partial payment in equity.
Is paying a non-accredited contractor in SAFE a possible issue with the SEC? If not, how are SAFTs different?
ICOs seem to be a new way to raise from unsuspecting investors aka a way of separating people who have too much money and not enough common sense from their money. The fact that it is utilizing a blockchain technology has nothing to do with the actual mechanisms at work here, focusing on the use of blockchain in negotiating ownership and value is actually harmful here.
The real technology isn't glamorous at all and has been in operation ever since Charles Ponzi "innovated" the concept in the 1920's.