Clayton's Cliff Notes - Unqualified Opinions

thoughts on consensus invest and the SEC Chairman's comments


Today, KWu offers up her two cents on the current ICO hangover and its regulatory implications.

For my part, I think the crypto word of 2019 will be “rescission.”

“In contract law, rescission has been defined as the unmaking of a contract between parties. Rescission is the unwinding of a transaction. This is done to bring the parties, as far as possible, back to the position in which they were before they entered into a contract.” -Wikipedia (where all TBI legal research happens)

If you think the crypto markets have been painful this quarter, wait until you see the ICO market fully unwind, and many projects begin to refund investors in 2019. The best and most ethical teams will get through the rough patch to the other side. For everyone else...

Look out below.


The Token Hangover

If 2017 was the year of the ICO, 2018 has been the year of the ICO regulatory crackdown.

This week’s Consensus Invest conference included a half-hour long fireside chat between Glenn Hutchins (founder of Silver Lake Partners) and Jay Clayton (SEC Chairman). It was, perhaps fittingly, the most packed session of the entire event, which had a much more sober (hungover?) mood than last year’s Invest when the BTC price first rocketed through $10k.

Three key takeaways from Clayton: (1) the SEC’s baseline assumption is that (most) tokens sales were (probably) unregistered securities offerings; (2) the SEC would like to see more crypto market surveillance tools and safeguards before the approval of ETFs; and (3) they are consistent in their warnings to the industry: ‘Get your act together’!

Nothing groundbreaking, but Clayton did acknowledge the potential of the technology for applications in securities markets and beyond. Which is genuinely exciting. While everything recently may *seem* doom and gloom on the U.S. regulatory front, consider these events:

  • The SEC Chairman went on stage at a crypto conference for an extensive Q&A (and streamed it live to hundreds of thousands of people)

  • The SEC's ethics office (notoriously difficult in granting any interviews/ public statement for SEC employees) approved one of its commissioners to go on the record on a crypto (!) podcast. Shoutout to Peter for making this happen!

  • CFTC's LabCFTC put out a detailed primer on smart contracts, demonstrating the willingness to learn and to expand beyond its comfort zone.

It’s not in the best interest of U.S. regulators and lawmakers (and their constituents) to artificially constrain the crypto ecosystem to such an extent that projects leave the country. Governments and regulators around the world appear to be cautiously optimistic on crypto, and exploring how they can continue to facilitate capital formation in this new tech frontier and not get left behind.

  • South Korea just granted its first certification to Upbit, a crypto exchange, for adhering to the country's compliance and security standards.

  • We know lawmakers in jurisdictions like Bermuda, Malta, or Switzerland are actively exploring new frameworks of law that would allow for crypto to flourish.

  • Regulators in Hong Kong and Singapore are working to provide for clear and plain-English guidance for crypto operators.

The U.S. will follow suit to develop something that will allow for the development for crypto markets, in time.

For now, though, token sales are pretty much DOA in the U.S. unless they are registered under one of the exemptions provided by federal securities law (TBI Note: or we eventually see the SEC issue no action letters to projects that have approached them proactively - don’t hold your breath).

How feasible is it for an early stage token project to provide all the information required by an exemption such as Reg A+ (basically a light version of IPO documents)? How can teams reconcile the nuances of Reg D offerings with the technical challenges of token distribution (super cumbersome in terms of restrictions on investor type and liquidity)? How well could Reg CF satisfy funding needs (maxed out at a million dollars per year and only available to US investors)?

If everything token issuance related should operate under the assumption that these are securities transactions, will any real innovation actually take place?

It may be frustrating, but with many token markets down 90%+, it’s not time to get too creative and/or find sneaky ways around the spirit of the law.

We are working to rebuild an entire financial system that took decades to build. The related law takes time to get implemented and is almost always behind technology.

So in the meantime, maybe we should lightly tap the brakes and get our act together.



P.S. Share. Subscribe. Spread the (rational) crypto love. Tweet at Messari for requests, feedback, comments, or questions.

News & Analyses

Messari Compression Algorithm

Content and thoughts from around the web as summarized by the Messari team.

🔎 [Analysis] A Skeptic’s Guide to Bitcoin - Su Zhu and Hasu

Bitcoin has enabled a conversation around money and its impact on society according to Zhu and Hasu. Proponents of Bitcoin are often sound money advocates, meaning they prefer money that at least is not created or destroyed by a central party like a government, leading to a predictable supply. Sovereign currencies have seen numerous abuses, with instances of hyperinflation being most prominent. Still, sovereign currencies can allow nation states tailor to create custom solutions for their unique problems. Governments can print money to build public services, demonetize or freeze assets related to crime, manage fiat liquidity to influence business cycles, hold their currency to a peg to increase usableablity or even boost trade by devaluing it.

The problem of course is that over time inflation tends to erode the value of fiat currencies. Furthermore, when central parties are responsible managing the banking system various services becoming hopelessly intertwined. The mixing of payments, lending, investment, and insurance by commercial banks has created a scenario where if one function fails, the rest of the system could collapse. (Messari | Source)

👍 [Analysis] How the crypto crash could be good for crypto – Tyler Cowen

Tyler Cowen argues that the popping of bubbles can be good as it brings prices back to reality, imposes discipline, and identifies the most useful innovations. The shifting rhetoric from easy ICO money to a more cautious tone will help bring greater focus and relevance to the crypto space. The industry still has a lot of problems and work to do and the price crash can help people focus on building instead of speculating. (Messari | Source)

Quick Bits (Don't read that, I read it for you)

Choke Points (Exchange News)

  • 🤝 Nasdaq is partnering with VanEck to launch crypto futures contracts. These contracts will leverage Nasdaq’s surveillance system, called SMARTS, to automatically pick up on suspicious market activity. (Messari | Source)

  • 🔥 Coinbase has debuted over-the-counter (OTC) trading for its Prime customers, which are institutional investors. (Messari | Source)

Startup Signals (ICOs, Cryptos, and Startups)

  • 😭 Steemit has laid off close to 70 percent of its staff, citing the prolonged bear market for cryptocurrency. Founder and CEO Ned Scott also noted in a blog post that fiat returns could no longer adequately cover the growing costs of running full Steem nodes. (Messari | Source)

  • 📉 Net realized and unrealized losses on digital assets at Galaxy Digital Holdings LP’s trading operation totaled about $41 million in the third quarter, bringing losses for the first nine months of the year to $136 million, according to company filings this week. (Messari | Source)

The Powers That Be (Legal/Reg/Policy)

  • 👮 The U.S. Office of Foreign Assets Control (OFAC) took action today against two Iran-based individuals who helped exchange bitcoin ransom payments into Iranian rial on behalf of malicious cyber actors. (Messari | Source)

Did I miss something?

Send me the link, your twitter handle and your best imitation compression algorithm write up. If I like it, I’ll include your bit next issue (with attribution).

Podcast Recap

🎧 ICYMI on the Messari podcast, Katherine sits down with MyCrypto’s Taylor Monahan to talk product design. Taylor highlights the vast difference between intentions and outcome in product design vs. user experience and shares some of her experiences in building tools for crypto users. (19 min for your lunch break)

BONUS: Qiao swung by Jeffrey Tong’s “Smartest Contract” podcast to chat all things crypto, and provide some updates on what we’re working on at Messari.

Listen and subscribe to all of our podcasts— on Apple Podcasts here, Spotify here, and Google play here.

Shameless Plugs

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