Comment by Animats | Hacker News Reader

Comment by Animats | Hacker News Reader

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The SEC seems to be sorting the list of ICOs by level of criminality and size, and working down the list. First they went after the ones which were large, obvious, out and out criminal enterprises. As in [1], or "they really didn't have the real estate and diamonds they said they had." And [2], or "they really didn't have deals in place with PayPal, Boeing, and Disney".

Then the SEC went after the ones that were merely flaky. As in [3], or "a blockchain based food review service with in-app purchasing of tokens". This actually got going, not that anybody used it much. They hired a "YouTube influencer" and claimed “199% GAINS on MUN token at ICO price! Sign up for PRE-SALE NOW!”

Along the way, the SEC found some ICOs from the usual suspects in the penny stock market. Those got shut down.

Then they started sending out letters along the lines of "Hello, ICO promoter. What you're doing is probably illegal. Do you want to give the money back now, or do we bring out our big hammer?" This stopped a lot of potential ICOs.

If you haven't seen it, see the SEC's fake ICO site.[3]

I have yet to find an ICO that resulted in a real, operating, profitable business that wasn't some other cryptocurrency/blockchain based thing. We're not seeing ICOs to build factories or farms or do real stuff.

[1] https://www.sec.gov/news/press-release/2017-185-0

[2] https://www.sec.gov/news/press-release/2018-94

[3] https://www.investor.gov/additional-resources/news-alerts/pr...

[3] https://www.howeycoins.com

"that wasn't some other cryptocurrency/blockchain based thing."

This is probably intentional on the part of all of the promoters, investors, and potential users. The idea of the cryptocurrency world is to completely replace the existing global financial system; if a company uses an ICO to build a business that then takes payment in dollars, they've lost, and their backers will be very angry. The whole point is for the ICO token to be the primary means of payment for services within the company's ecosystem, and the backers are rewarded by having an advance claim on those services by virtue of owning the tokens.

The question I'd look at to see whether an ICO is a scam or not is "Are goods or services of non-monetary value being exchanged for tokens?" I suspect the answer to this is negative for the vast majority of tokens, but it's also pretty early in the development cycle: most ICO-funded companies are <1 year old, while it typically takes 2-3 years to build something somewhat useful.

I think the larger issue here will eventually be that the concept of 'the code is law' breaks down when you need to rely on the actual law and law enforcement to to enforce your 'code law'.

I think that's most likely true, but the wildcard is that "actual law" is breaking down for an increasing number of people. There is an increasing perception that existing government institutions and law enforcement are a tool for the wealthy & powerful to oppress the poor, and - whether I agree with that perception or not - when it comes to government legitimacy, perception is reality. This trend comes from outside of cryptocurrency, and is driven by things like international terrorism, perpetual war, drug cartels, state corruption, Occupy Wall Street and the continuing anger that few if any of the Wall Street Bankers that got us into the global financial crisis were punished for it, the Tea Party, police brutality, a legal system that's unaffordable for anyone that's not rich, increasing political polarization, filter bubbles, and the rise of authoritarian governments. Cryptocurrency's just stepping into the void left behind when institutions fuck themselves up; if they continue fucking up, it's only a matter of time before you start seeing crypto-legal systems with automated drone enforcement.

If you suggested in the late 1990s that people would be spending real money for cryptocurrency, I'd think you were crazy. (Actually, Cryptonomicon did suggest exactly that, and I thought that particular plot point was crazy.) Now, I'd give it maybe an 85% chance of being a crazy passing fad and a 15% chance of being the social organizing principle of the 22nd century.

Well, actually the job of the SEC is to oppress the rich.

> crypto-legal systems with automated drone enforcement.

Or read Snow Crash by Neal Stephenson and experience it today. :)

I was thinking more Diamond Age, but yes.

There are few ICOs that have even resulted in working cryptocurrency things. I for one am absolutely shocked by the hideously poor quality of the stuff ICOs were used to fund. Excluding obvious scams the remainder seem to be solutions in search of a problem or meandering boil the ocean pipe dreams. None seem well executed, and most dont seem to have shipped at all.

I wonder how much of that is actually a symptom of the whole ICO funding model, i.e. you need increasingly "boil the ocean pipe dreams" to stand out from the competitors, which in turn leads you to raise increasingly large sums, but as the sums raised increase the incentive to actually deliver anything decreases (bearing in mind the money is raised in advance and there is no external oversight to put any pressure on delivering anything).

Yes, I think incentives matter.

A similar perverse incentive exists in the VC funding world that was parodied in HBO's Silicon Valley series-- namely an incentive against booking revenue early in the game. When you are "pre-revenue" then the mind can go wild with speculation, but as soon as you book revenue those become hard numbers and if they're unimpressive it turns people off. It's incredibly irrational of course, but investors are not on average more rational than other people.

In the ICO world an analog of this is that ICO projects that do ship inevitably suffer from hype deflation since the very first version of anything is never up to the hype that was used to sell it. So there's a dis-incentive to ship. Shipping means contact with reality, so failure to ship leads projects to wander off into scope-creep lala-land and never deliver anything.

I also think the large sums raised could cause pathologies that lead to project failure like ballooning scope, excessive hubris, over-hiring, or factional conflicts among founders. Too much money can defocus a project and too many new hires can actually reduce productivity.

Some ICOs are clearly frauds, but the rest I think are victims of these and other perverse incentives in the system.

Starting companies is hard. Rational investing is hard. Rationally investing in new companies is hard^2.

Was Lunyr (the creator of the MUN token) ever federally investigated? I haven't heard much from them for about a year.

Yes. They shut down the ICO within hours of being contacted by the SEC and gave all the money back.[1] The SEC was satisfied with that.

[1] https://www.sec.gov/litigation/admin/2017/33-10445.pdf

You have two [3]s, just fyi

>>We're not seeing ICOs to build factories or farms or do real stuff.

Decentralized prediction markets, CPU-renting markets and ad networks aren't doing real stuff?

Blockchain-based tokens provide little advantage for representing claims to real assets like factories and farms. Where they're most useful is as currencies in decentralized autonomous organizations, since they are programmable and thus can be used in smart-contract enforced compensation/incentive mechanisms.

In contrast, any token representing a legal claim to a real physical asset would certainly not be a utility token. It would be a traditional security, and thus would find much less of an advantage in being on a blockchain, since it can't take advantage of smart-contract based enforcement, given its dependence on the traditional legal system.

That might change in the future if large liquid securities markets appear on the blockchain, but right now the low-hanging fruit is utility tokens for use in decentralized applications.

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