Showing posts with label ICO. Show all posts
Showing posts with label ICO. Show all posts

Thursday, September 14, 2017

The SEC, ICOs and roaches

In a statement straight out of the Ministry of Public Enlightenment, a member of the U.S. Securities and Exchange Commission's (SEC) division of enforcement "compared those seeking to leverage the blockchain use case improperly to cockroaches."

To be specific, SEC Enforcement Division co-director Steven Peikin said "roaches kind of crawl out of the woodwork and try to scam money off of investors."

Of course, he should know.

According to the Anne Frank Guide, this type of language was a key feature of nazi propaganda: "Jews are described everywhere as a threat to Germany and the German way of life that had to be dealt with quickly and harshly. They were even compared to rats and cockroaches."

The issue is this: it is impossible for Mr. Peikin to know which ICOs are scams unless he can look into the hearts of ICO issuers to determine their true motivation. He knows this. We know this. He must, then, actually be referring to all ICOs. This is the same type of  discriminatory attitude used to categorize all Black men as "thugs."

This is also a prejudicial statement from a person in a position to not only influence, but to actually carry out enforcement actions against ICO issuers. My hope is that legal counsel for those so accused would point to this single statement as justification for dismissing, or at least questioning, any charges brought by the SEC.

One wonders why the SEC did not use the same language to describe the traders at Goldman Sachs, fined more that $5 Billion in connection with its sale of residential mortgage backed securities, or Wells Fargo when they set up a special sales office to steer risky subprime loans to residents in Prince George's County, Baltimore city and other predominantly black communities, or Standard and Poor's when issuing fraudulent credit ratings on residential mortgage-backed securities and collateralized debt obligations. (Talk about insects....)

We know why Mr. Peikin and the SEC Enforcement Division made no such statements. After all, employees at these large financial institutions are friends, fellow church and synagogue members, colleagues and, most importantly, potential employers.

This is exactly why ICOs are so necessary and why they are popular. 

Sunday, August 13, 2017

Why we need a Global ICO Census and Database

The Securities and Exchange Commission’s (SEC) recent report defines tokens sold through ICO offerings as “securities.” This is neither appropriate nor in the public interest. This definition will restrict the ability of startups to raise much needed capital without having to go to commercial banks, investment banks and venture capitalists, institutions who long ago abdicated their role in providing capital to deserving startups and small businesses. (Commercial banks, investment banks and venture capitalists focus on providing capital to a narrow group of non-minority and non female firms. As Uber and others (Google?) have shown, many of the women who dared work for these commercial bank, investment bank and venture capitalist supported firms found themselves harassed..and we know what happened when they sought funding.)

In a press release, the SEC concluded that anyone using "..distributed ledger or blockchain enabled means for capital raising (needs) to take appropriate steps to insure compliance with US federal securities laws.” This determination is inappropriately broad, and is sure to be overturned in Court, since the SEC does not have direct authority over currencies.

As we note in our report (https://www.prlog.org/12655138-creative- investment-issues- initial-coin- offering-ico-report.html) ICOs have features that resemble crowdfunding, venture capital and IPOs. They are simply a new tool for doing what Title III of the JOBS Act should have done - sourcing capital to innovative startups in an efficient way. Title III allows all companies with less than $1 billion in sales to raise up to $1 million dollars in equity or debt. This section of the JOBS Act was designed, as I note in my book, to create eBay-like sites that allow you to post your idea for a commercial venture online and then allows investors to purchase equity shares or stakes in it. Title III has, since 2016, in aggregate generated slightly over $50 million in committed capital. The law was signed in 2012. So far in 2017, ICO issuers have raised over $1 billion.

The SEC may have legitimate questions about the classification of ICOs, but their action simply confirms that regulators are protecting entrenched social and financial interests (not the public) from a new financial technology (blockchain) with almost unlimited potential.

In attempting to bring ICOs under federal securities laws, the SEC states that "participating in unregistered offerings may subject participants to..criminal enforcement proceedings." Of course, this is only true if you are not Goldman Sachs, Wells Fargo or Standard and Poor's, institutions guilty of significant securities law violations before, during and after the financial crisis who have yet to be subject to criminal enforcement proceedings..

A key factor the SEC cites in its argument in favor of ICO regulation rests on “full and fair disclosure,” but Wells Fargo created two million fake accounts without disclosing this. If the SEC were actually concerned about the public interest, Wells would have faced charges immediately for violating disclosure regulations. Given this, one can legitimately question the public's ability, based on past performance, to trust the SEC to act in the public interest. As outlined this in our Transaction Cost Theory of the Financial Crisis, released in 2010, people are looking for financial instruments, institutions and regulators they can trust. The popularity of digital currency, decentralized structures and new ways of raising capital is, quite simply, the result of this lack of trust.

The nature of blockchain is such that this technology — not regulators — will win in the long term. It would be better for the SEC to recognize this and to simply call for ICOs to list on a globally centralized, publicly accessible database, maintained by the SEC, at no cost to ICO issuers, and with no penalties (other than fines for deliberately fraudulent registrations.)

At this point in the development of this marketplace, having a comprehensive database of all ICOs is more valuable and appropriate than subjecting these new firms to full and complete SEC registration. The agency can revisit this in, say, a year or two to determine if more comprehensive regulation is required, but for the next six to twelve months, this should be the regulatory position of the SEC with respect to the new ICO marketplace.

Friday, August 11, 2017

SEC takes jab at startups while leaving the big banks alone


The Securities and Exchange Commission’s concern about “initial coin offerings” is understandable. There are significant problems in the ICO marketplace, but new markets always have issues. Unfortunately, the SEC’s recent restrictions defining the tokens sold through such offerings as “securities” completely miss the point and once again will constrain the ability of startups to raise much-needed capital without having to go to a bank or venture capitalist first.

See: https://www.americanbanker.com/opinion/sec-takes-jab-at-startups-while-leaving-the-big-banks-alone

Tuesday, July 25, 2017

Branchless Banking Roundtable by Zhuoxi (Austin) Wu, Impact Investing Analyst


On July 24th, I attended a Branchless Banking Roundtable discussion sponsored by the Financial Services Innovation Coalition (FSIC) at the Rayburn House Office Building in D.C. 

Panelists include the Co-Founder of BankMobile, Luvleen Sidhu, Founder of Creative Investment Research, William Michael Cunningham, and the founder of HBCU Wall Street, Torrence Reed. The moderator was the founder of FSIC, Kevin B. Kimble. During the hour-long discussion, they discussed issues related to the inefficiency of bank branches, the problem of bank transaction fees, and how newly developed technologies can change people’s way of banking.

The discussion kicked off with agreement among the panelists that bank branches are no longer a necessary part of people’s banking experience. Based on statistics, bank branches are, on average, only getting one account opened each week per branch, which equals 52 accounts opened a year at each branch. Apparently, the influence of bank branches on people’s banking habits has diminished. 

Mrs. Sidhu, the founder of BankMobile, noted she designed her company to target the underbanked, millennials, and middle-income Americans. She offers an entirely fee-free checking account for each of her clients. The fee-free guarantee includes the following: no minimum balance requirement, no direct deposit requirement, no transfer fee, etc. (There is a fee when a user withdraws money from ATMs that are not owned by BankMobile.) Considering that millennials nowadays transfer money much more frequently (that is why apps like Venmo are popular among the younger generation), the free transfer feature is viewed as a major benefit.

Mr. Cunningham echoed the idea that regulations are pushing people away from using bank services. He talked about Nigerian digital money service provider ‘Paga’, a mobile banking service provider like BankMobile. With smartphone penetration rates getting higher everywhere in the world, branches will likely suffer, generating lower revenue. This got me thinking about the Wells Fargo scandal, where the bank notoriously opened 2 million fake accounts, as a clear example of why the existence of mobile banking services like Paga threaten branch banking.

Mr. Cunningham then described the Initial Coin Offering (ICO) as a way for young entrepreneurs to fund their ideas. An ICO is a way to raise startup funding (mostly Bitcoin or Ethereum) by issuing your own currency, in our case, SRI coins. Investors who choose to invest in your ICO are either: speculating the rise of cryptocurrencies, or: investing in your idea in exchange for future service from the ICO issuer. What makes an ICO so desirable is the fact that: it is totally unregulated.

Funding ideas come and go, going from venture capitalists, to borrowing money from the bank, or even asking for money from your friends or parents. These all take time, and timing is everything in creating a new business. With an ICO, you do not need to know who is investing in your business, you do not need to worry about explaining to your friends or your parents of why your business failed, if it does fail, but the most valuable factor in an ICO is it's unregulated nature. People can invest tons of money into a business with or without knowing the risks behind their investment. Although controversial, an ICO is indeed the easiest way for young entrepreneurs to fulfill their dreams. In 2016, over $1 billion has been raised via ICOs, compared to $600 million in venture capital.

After attending the discussion, I came away impressed by the progress regular people (like me) have made over the years, seeking to make our lives easier. It is because of new technologies that we can access capital in a much better way.