Yesterday, I was having lunch with Tierion’s Wayne Vaughan at our local Irish diner when our conversation turned to a rather distressing recent development we’d both noticed in the “blockchain” space.

That development is, chiefly, that people who frankly should know better are openly discussing whether speculative investment in “crypto crowdsales” – the practice of creating a Bitcoin clone or some other distributed protocol, and selling “coins” or “shares” in the protocol in exchange for investment funds – should be promoted.

Long have I been a vocal critic of these schemes. Usually I keep my critiques general (or to myself). Occasionally, when a scheme promoter’s conduct becomes so abusive of their users that I feel comfortable calling them out, I’m happy to get specific. My blog posts on Bitshares and the DAO (and this on the DAO too)) speak for themselves.

The problem is

a) it’s all rotten; and

b) we’ve been here before.

Back in 2014, it seemed a new hot “bitcoin 2.0” was being released every other week (whether it be Dogecoin, Auroracoin, Maidsafe, SwarmCoin, Bitshares, or otherwise). Now, it seems, for reasons known only to God, the appcoin concept is back on the table again and is being seriously discussed.

I didn’t like alt/appcoins when I first saw them (except Dogecoin because it features a cute dog). I don’t like them now.

When, with my two outstanding co-founders Casey and Tyler, we cofounded a smart contracts and blockchain company of  our own, we did so in the context of the “altcoin boom” – a time when there were going to be thousands if not millions of cryptocurrencies, all with tokens to be bought and sold.

Those of us who were around back then remember that there was a ton of exceedingly dumb money on the table; rolling a new “coin” was the  surefire way to get your hands on it. Dozens of projects went ahead and so did their pre-product, pre-revenue token launches, raising five, ten, twenty million dollars a pop. 

But we didn’t do that. We decided to build a real business instead. 

I can’t speak for Casey and Tyler, but back in 2014 when we founded our smart contracts company, I was setting out to give people the utility of the blockchain without needing coins – the permissioned blockchain. In late 2014 we released what is, to my knowledge, the first blockchain client that did exactly that.

There were a lot of reasons that we set out to do this – chief among them that a distributed BFT database that controls user permissions with public-key crypto is a really useful enterprise tool. However, in the back of my mind, there was a hope that the advent of a open-source blockchain that would be entirely free to use would put down, once and for all, the distasteful, dishonest, and (more often than not) illegal promotion of commercially nonsensical investment schemes by dubious actors with questionable motivations.

Free blockchains would outcompete the public blockchains, while revealing alt-coins for what they really were: well-marketed investment schemes to enrich insiders. 

For the most part, the plan has worked; permissioned chains are more performant than their public counterparts and enjoy much more traction in an enterprise context. But that’s only half the battle won. Unfortunately, the quasi-religious allure of “decentralisation” and the possibility of instant, overnight wealth – far from receding – has only grown stronger in recent months. Much as during altcoin boom, the meteoric rise of Ether and Steemit has reignited interest in these “products.”

I’m not going to write chapter and verse on the subject here. But I am going to put down a marker as follows:

1. Offering appcoins to retail investors as an investment, and then operating the scheme without registration, is probably against the law

This is not the place to argue finer points of international securities and banking law, but simply to point out that there are two camps.

Among those whose opinion on this subject matters (lawyers), the pro-appcoin camp features Coin Center’s Peter van Valkenburgh and Cardozo Law School’s Aaron Wright. Against, are myself, and practically every other practitioner I know. 

We can only make educated guesses as to what the legal position actually is, since law enforcement has yet to make any firm moves against any scheme promoters on the basis that token sales schemes are unlawful. The closest they’ve come is the Securities and Exchange Commission’s action against Josh Garza/Paycoin in respect of the “hashlet” mining contracts (which, it is alleged, were in fact artifices to defraud). On a very different note, we should take notice of FinCEN’s civil enforcement action vs Ripple Labs for operating as an unregistered money services business. 

New appcoin issuances are vulnerable to regulatory attack from both directions.

There are limited cases where private sales of these things might be able to get around the regs. 

And before you mention it, Switzerland and the EU have these laws too. America is not alone in this respect. 

2. There is no such thing as a “digital asset”

Unlike much of the libertarian literature (including Rothbard) which Bitcoin aficionados are known to read, law categorises property into very detailed, well-defined categories. Take, for example, a “chose in possession,” chose being the French word for “thing,” which is effectively tangible personal property (a pen, a desk, etc.). 

This should be contrasted with a “chose in action,” literally a “thing in action,” i.e., something which has no existence save that which is recognised by a court of law. A chose in action is a right to sue. Debts, shares, and other documentary intangibles fall within this category of property. 

In each case (say, with a share) there are very rigid formalities which need to be complied with. An entity must exist. It must have constitutional documents. Those constitutional documents will set out, e.g., the classes of shareholders and what they say will determine the rights of those shareholders vis-a-vis each other and the company. In turn, shareholders’ legal status as shareholders (as recognised by a court) will determine their rights vis a vis the rest of the world (e.g. in a bank bail-in situation).

This is of relevance when looking at, say, an insolvency scenario when a company is being wound up and a distribution of assets needs to take place, or when a change of course is needed and the shareholders decide to throw the incumbent management out.

The number of formalities that need to be complied with is daunting. Complying with them is not easy and requires expert help. So when I see something like this: 

…I don’t see “tokens” which are “shares” in a “company.” I see no company; I see no shares; I see no rights.  I see no formalities. I see nothing, because a chose in action is that which a court will enforce – not what the issuer says it is. 

An “equity token” that isn’t backed by equity documentation – which a scheme promoter is encouraging people to buy on the basis that it is equity – isn’t equity.

It’s an actionable misrepresentation. It might also be a Ponzi scheme.

3. The game theory is really hard

Even Bitcoin doesn’t get it right. 

4. Grow up

There are just certain things that grown-ups have to do. 

One of those things is obeying the law. Another one is working your ass off before you get paid. 

The arguments in favour of appcoin crowdsales are dangerously close to a teen-ager’s gripe that their allowance isn’t high enough (make it easy to get investment capital! IPOs are too expensive!) These complaints reflect the fact that the people who are advocating for these reforms have little to no experience of what it’s like to do business in the real world. 

Venture capital is supposed to be hard to obtain. VCs know that out of hundreds of people with an idea, of which perhaps a dozen actually have a good idea, of that, perhaps one or two will be able to execute with alacrity and build a sustainable business out of it. 

Similarly, IPOs are supposed to be expensive. Because you need a team of expensive lawyers and bankers to make sure that what you’re selling on the capital markets corresponds exactly with the marketing material you’re selling it with, and that all of the relevant tax, regulatory, and disclosure requirements have been met in full so that people can fairly assess the risk that they’re taking.

By way of example, BitFinEx’s “debt coin” was rolled in three days. I’ve worked on debt instruments which were negotiated for six months.

It’s not that the tech of a “DebtCoin” issued in this way is superior. To the contrary, my suspicion is that the legal structuring component is deficient. 

All in all, it comes down to the advice our parents and math teachers gave us when we were young. Don’t cut corners and do the work, and you’ll get the right result. 

Do it the other way, and… well. Only time will tell.