Why we need to end the practice of ICOs. Why the "ICO" model is stupid and the ICD is better
Why we need to end the trend of ICOs
- The ICO is becoming so popular that there are now template "services" which will make a cookie cutter ICO for your idea.
- The ICO model has resulted in what many are calling an "ICO bubble".
- The ICO which stands for Initial Coin Offering is flawed because it treats the blockchain or smart contract as a corporation.
- The ICOs are risky because it can open the developers up to regulatory risk should their "investors" become disappointed.
My views on the ICO process are that it is stupid. It is stupid to do an ICO for anyone not willing to accept the risks of doing it. It is stupid primarily because an ICO invites risk with no additional benefit that I can see over less risky approaches.
The mission objective should dictate the most viable and favored approach
In the cases where the mission is to produce a smart contract, fund development, conduct genuine blockchain experiments and research, then there is no need for "business language" such as "ICOs", "investors", "dividends", "stocks", etc. And I admit I have slipped up and made these mistakes in language myself on occasion due to the fact that in some cases we lacked better terms and concepts from which to frame our ideas. The concept which is now outdated called the "Decentralized Autonomous Corporation" was horribly framed, and attracted unnecessary regulatory risk for no gain beyond marketing. It was great for marketing because it allowed people to immediately have an idea of the potential of the blockchain technology but it was also horrible because the marketing appealed exactly to the regulators who want for the blockchain to be defined as a corporation.
A corporation to the best of my understanding has a precise legal definition. By law a corporation must profit for it's shareholders. Blockchains do not exist specifically to profit for token holders. Bitcoin for example does not exist specifically to generate the maximum profit for miners. Ethereum for example does not specifically exist to generate maximum profit for stakers. A corporation exists by the authority of the law, and a definition can be found in this quote:
The definition of a corporation is a legal entity with its own rights, privileges and liabilities separate from the members who created it.
A group of individuals, created by law or under authority of law, having a continuous existence independent of the existences of its members, and powers and liabilities distinct from those of its members.
Additional problematic concepts are "Code is Law" and "Smart Contract". These concepts are problematic because again they use the language of the traditional approaches to solving the problem, yet conceptually and substantively are not at all similar. Code are formulas, are rules, programs are proofs, 1s and 0s, and the only thing it has similar with the law is that it's a language.Smart contracts are more like scripts, blocks of code which execute according to some defined rules, and currently they are not smart as no AI is built in, and while you can use cryptography in a legal sense it is not currently how Ethereum or any of these platforms are using it.
Corporations have owners while blockchains don't. It is possible certain blockchins have delegated Proof of Stake and you could make a claim that the accounts which have voting rights are the owners of the blockchain. This however would not be true for Proof of Work because miners don't really have control or ownership of the Bitcoin blockchain, nor do the developers, but there may be cartels which form that include miners, developers and pool operators who combined control how the chain evolves, they still might not actually control what the users do with the network.
In the future even delegated Proof of Stake could in a sense become controlled by the AI which chooses the delegates, assuming bots can own tokens, can have "stake" and can vote, all which cannot be ruled out. That said, while a blockchain in my opinion isn't a corporation it is up for debate and depends on if it meets certain criteria. In general, for these reasons, it makes greater sense not to structure blockchains to resemble a corporation in the first place as they never were intended for that function, and in general to fit blockchain into that pre-defined function could limit the potential evolution of the technology itself.
Some ideas on how to move away from the ICO template
Instead of the "Initial Coin Offering" model we should move toward "Initial Coin Distribution" as a model. These aren't stocks or intended to be securities so why use the word "offering"? Why choose a term which resembles IPO merely because it's familiar sounding for Wall Street? The function of an Initial Coin Distribution is to distribute tokens to a wide range of stakeholders. Instead of having "investors" and "shareholders" in a "Decentralized Autonomous Company", we should instead have donors, and stakeholders in a global solutions network. In an ICD there can be a request for donations, but there should be no promise to deliver any return on investment or anything in return for that donation except for the desired code. In essence the donation would be to pay for development of the project and that's all.
No more promises of returns on investment. No more talk of investors. No more talk of offerings. No more talk of shareholders. No more "business language", and no guarantees of success. All projects should be viewed as experiments, all outcomes should be to generate knowledge for society and for future experiments. All participants shall agree to take part in the experiment and consent to the risks which can come from being a part of the learning process.
Conclusion
The reason that the ICO bubble is bad is because when it pops it could attract the iron hands of regulators. These regulators have very limited understanding of the technology. Confusing language which mixes concepts they do understand with completely foreign concepts is only likely to help confuse the responses both from the media and from regulators. While it does generate interest in Ethereum and Bitcoin from Wall Street, it also risks turning all tokens into securities, which could damage the hacker and experimenter communities which create most of the innovations in this space. So to preserve the culture of experimentation, we who see these technologies as experiments rather than strictly profit generation vehicles should use a separate language, and use smarter language (legally speaking), as a means of reducing legal and regulatory risks. In the end, if it's about risk vs reward, I don't see the point in taking on unnecessary risk to receive the same reward.
If anyone disagrees with this approach or if any lawyers would like to comment please feel free to share your thoughts on what can be done to change the language of the ICD to allow the mission of "funding development" to be achieved with the least legal and regulatory risk involved.
I think we can't try to jam the new political and corporative organizations using concepts and the view point of a centralized society.
The paradigm created by the decentralization and trustless systems will allow several new corporate-like or ONG-like entities which will operate dramatically different than what we have today.
Highly rEsteemed!
Excellent post! I love your work and completely agree...
Blockchains that are setting up ICOs are not Blockchains.
ICOs are ancient history. We need more evolved humans...
with this logic, people should stop doing kickstarter too
Then use GoFundMe because the point is you cannot promise any kind of profit, or create any kind of investors, or make any kind of offering, unless you are willing to accept the risks associated with it. Kickstarter if done right doesn't create investors.
VC is the same. High risk - high profit. and if you try to compare normal crowdfunding, VC seed funding, IPO with ICO, there are much more benefits going through ICO than other types of capital raise. ICO name should be changed because of negative stigma around it, but token inital offering, coin crowdsale etc is pretty much the same.
Edited: why did Omni did an ICO at first place?
Exactly high risk with high returns. The market needs to work itself out and it will in the longterm. Many scams are caught very early by community if people just check before investing. When you spread the risk out across several promising ICOs its not risky. The new way of raising capital is superior in every way and will the future.
correct. as the community outs these scams through due diligence, even scammers are getting smarter.
I would agree about ICO being superior, compared to other types of capital raise: less fees of tx, no middlemen fees, less time consuming, less legal bullshit etc
ICO risk isn't from scams but from over-zealous regulators and investor lawsuits. The risks are on the developers but I guess you're not a developer so you don't know.
If you are a developer and are in the USA then the risk is on you if you do an ICO. You have to essentially hope that the SEC decides not to regulate your activities.
Its a software token. SEC can't regulate that. The whole blockchain system is designed for no third party trust so you are your own bank. If there was a third party to go after they would have stopped Bitcoin years ago. One thing about if they SEC decides to "crack down" all the innovation will flow out of the US. Trumps new SEC head hates regulation. I think we are good. If Globalist Hillary was in I would be more concerned with that one. Trump hates dumb regulation
The law says anything which passes the Howey test is a security. It can be fruit, tokens, anything. If it quacks like a duck...
But again, you cannot protect yourself from regulatory risk using ideology. It's about defense from the risks involved in being a developer.
I am not saying the SEC will not eventually step in and try to regulate ICOs the bigger and bigger they become but it does not mean they are coming after the developers. Many developers are overseas anyway and anonymous. That's the beautiful of open source. Another thing to think about is marijuana has been illegal in the US for years and yet their many marijuana stores with no raids. The SEC is not coming after developers if its not a scam like One Coin. Big Investors are starting to pile in like Tim Draper with his first ICO. The simple facts are the US needs to change the laws to allow more ICOs the be available to everyone not just rich 1%. Like I said I am not worried especially since Trump has a new head of SEC that hates stupid regulations like Howdy Test. I am certain they will come after known scams though!
You have DEFINITELY not talked to a lawyer about this.
This is completely inaccurate.
Then we both have different information from lawyers.
States have different laws no doubt, but the general US federal laws are favorable to ICOs because of the JOBs act. Again, if you have not paid for legal counsel to discuss this topic, you're NOT going to get a lawyer's researched response on any of these subjects. That is why we paid so much money to get legal counsel, to parse out what is and is not legal, and what is misunderstood.
ICOs remove risk from the developers. Since ICOs function as crowdfunds, the developers CANNOT promise any returns, and thus the tokens are effectively used as a mechanism to track what amount to "gifts" to the company.
We have consulted our lawyers at Frost, Brown, Todd on the nuances here.
ICOs are the equivalent of doing a kickstarter.
This all depends on the behavior of the SEC and how they interpret the ICO. I'm not a lawyer but lawyers I've communicated with, and people who have years of experience in that profession, have warned me about the risks involved in the ICO approach. I wouldn't go with that approach but if you've talked to lawyers and they've told you it's safe then good luck taking that approach.
My point is that different lawyers are saying different things. Here is an example of something published by legal experts on the subject in 2014 that your lawyers may or may not have been aware of:
http://www.bollier.org/sites/default/files/misc-file-upload/files/DistributedNetworksandtheLaw%20report,%20Swarm-Coin%20Center-Berkman.pdf
As you can see different lawyers have different opinions on this topic. Additionally, Steemit also has dealt with lawyers, and Bitshares, and you can see from their approach that they didn't choose the ICO model yet Steemit is successful.
My lawyers have been consulted by the SEC within the last year. You are using outdated information. Again, you are making assumptions about laws based on your emotional predisposition not to accept any ICO as valid. I enjoy your posts, but you are way off concerning the legal aspects of ICOs. That may be why you have such an aversion.
http://www.frostbrowntodd.com/resources-1993.html
We are represented by FBT.
They are one of the most active legal firms concerning Blockchain in the US.
Again, if you are not going to pay lawyers' fees to discuss this information, you will never actually get an opinion that is based in actually knowing legislation. New York is drastically different than the rest of the US for example concerning blockchain laws, especially ICOs. That is why most blockchain organizations block NY IPs from participating in ICOs.
Cheers!
Omni did not do an ICO. JR did not promise anything like a profit but I do see your point on why you would choose that example because he was really one of the first to ever fundraise but he did it directly.
Fundraising is perfectly fine but my point is we need to seek the least risk highest reward methods of doing so. Not choose unnecessarily risky language and tactics thinking it will appeal more to big finance when in reality it only appeals to regulators watching the space.
A non-profit is more efficient for accomplishing the same goal. Can you explain why it isn't? You can raise just as much money and possibly even have tax breaks, accept fiat, etc. What is my agenda? I want to see the crypto space be able to raise as much money as possible with the least risk on developers, donors, stakeholders, players, etc. Additional risks means higher fees such as legal fees, meaning less efficient, less effective, less smart.
Follow a template similar to what was used by Steem but modified to be even smarter, more safe. We should be iterating over time to better and safer fundraising templates rather than taking two steps backwards like with this ICO trend.
If you are willing to accept the risks associated with the ICO template then you can proceed to use it but if you'd like to lower your risk there are low risk templates which can accomplish something similar.
Hi
You should read the fine print or the ICO terms & conditions. No one is promising profits.
You can't avoid risks, it's part of the investment, doesn't matter if it's ICO or not. Trading is risky, too.
I understand your perspective and because you're not a US citizen the risk to you is much lower than it would be for a US developer playing around with the ICO model. In your case maybe you've decided that you don't care what the SEC might do because it will not likely effect you. In the bigger picture a lot of money and a lot of developer talent are situated within the United States. The SEC is being given ammo and excuses with every failed "ICO" or "IPO". It's not that I'm against the function, we all agree that funneling money into projects is great. Seeing 100 billion flow into the cryptoverse is great for all projects. The question is what is the smartest way to bring money into the space.
I don't see from a risk perspective that the ICO model is any smarter than a bunch of projects offering IPOs on Bitcointalk. If they called it IPO or ICO, in either case they are putting an intention in their words that is corporate, that they are under the SEC domain, by using the same language.
So sure, if you want to be viewed as a corporation then communicate like one and if you get treated as one then that is the risk you decided to take. But I don't think everyone in this space wants to be treated like a corporation, and not everyone is seeking to benefit from the stigma or prestige of that.
As far as avoiding risks, it's not really that I have much to comment about that. I only say don't make promises at all and don't use risky legal terms which have a different meaning in another context. IPO has a very specific meaning and to link it to the crypto community via ICO is in my opinion not justified by reason. It's marketing, and a lot of scams will take full advantage.
well. i dont know a thing about law so instead, I hire a lawyer :)
Here is the result from 2014 from the Berkman Law Center at Harvard:
No one said anything about ICOs replacing IPOs...They serve completely different purposes. Scams pre-existed ICOs, and the due diligence that should be done by anyone taking part in ICOs should be a standard pre-requisite.
ICO's are technically 100% risk, because technically you cannot be promised any returns. This is where I believe you are conflating "securities" and "tokens".
ICOs are the equivalent of purchasing a game at gamestop before it is released.
Literally.
Great post, really makes a point about the ICD ! I wrote a post about my own view on the whole bubble thing. My point is very simple, if each one of us do not make their part, we can ruin the party. If we get enough bad examples out on the street we'll sure piss off a bunch of regulators and traditional investors, and that will likely limit the whole of crypto and blockchain economy's growth. Also, don't miss out on the CFA Institute's view on the ICO Bubble.
Excellent perspective, well articulated.
The ICO phenomenon has also attracted alot or shady players, which tarnishes the credibility of the whole scene to some degree - perhaps could be best to redefine, setting new contexts during the process to account for a greater degree of foundational values necessary for the advancement of the space, as is demonstrated through this proposal and its intention of service...
Good points
I doubt we'll see a movement away from this model unless we get a huge crash, which isn't impossible. But the market might go up 10-100x before that happens.
I'm considering an ICD for a steemit hardfork called memethenews
Why don't you create a Kickstarter or GoFundMe and ask for donations?
That's what I'm considering. I pre-mined 20mil. I was going to give away 18M. I was going to do it in 10k chunks and give the coin for free but charge a $5 "shipping fee" to make sure people weren't taking more than one pass through dummy accounts. I figure folks can buy it too so I'll offer some for sale.
That model is so wholly inadequate and the reward mechanisms are very outdated. Again, we're talking about replacing that with a more direct line to the "free market". ICOs will become the pre-cursor to IPOs...as they should...
Inadequate for what? The problem is IPOs are regulated by the SEC so if you think they should replace the IPO then the SEC could see the tokens involved as being securities and being under their jurisdiction of their mission to protect investors.
I see no benefit to courting big money in this way because it only invites big regulation along with them. Have you considered the risk to benefit analysis? How do the benefits outweigh the risks for US developers?
That is not the point. You are completely missing the point of "crowdfunding".
It is to create widgets or services that the market wants.
Market demand drives ICO success, thus the ICO is an indicator of market interest in a widget or service.
You are looking at this from a completely one dimensional point of view as if "crowdfunding" serves no purpose other than to "raise money". That is not the point.
The point is to fund the research, development, and distribution of a product or service.
THAT is why crowdfunding puts no risk on the developers, and when you are an angel investor or a crowdfunder, you do it anticipating NO RETURN.
You are conflating investment for ROI and Angel Investing.
Many people in crypto PRETEND to be angel investors, but really want ROI.
That is the crux of the problem.
The crypto community has a grave misunderstanding of the function of ICOs...
ICOs are "crowdfunding mechanisms"...
it is not a security investment platform...you have many people who do not understand the definition of securities who get involved in ICOs thinking they are "investing" in something when they are actually not...
on the other hand, "Kickstarter" as a crowdfunding platform is wholly inadequate to get angel investors any sort of compensation...
This is where ICOs give Angel investors a mechanism to get a return, gives an organization a way to build their value and capital, without selling equity or taking on debt.
The issue is uninformed people throwing their money at things they do not understand.
ICOs are a superior crowdfunding platform to kickstarter type models, and ICOs are not going away.
It will be much better for the community if people took the time to get more informed about derivatives, naked derivative markets, bubbles, recessions, crowdfunding, and how many businesses actually fail...
MOST businesses fail long term...getting involved in crowdfunding is a huge risk. period.
equating all ICOs is a terrible way to go about refining the space.
You've not given your risk to benefit analysis. The risk is higher with the ICO approach but I don't see any additional benefit favoring it. Why should I as a developer promise to bring profit to you as an investor when I can reduce my risk by merely promising to deliver functioning code to you as a user and donor?
I see no additional benefit to me and increased risk to me. And if you look at Steemit, it was developed under an early iteration of an ICD model not the ICO model. Steemit had no ICO because Dan Larimer and company know better than to take on unnecessary regulatory risk. Steemit seems to be funded just fine, developers conducted their experiment, the code was released, what more could we want as users or as developers? On top of all that, some people actually did make some money as a side effect. So use Steemit as your case study and tell me why we need the ICO model at all?
you can't be serious about using one platform as a case study to discredit an entire economic model?
I am starting to wonder how scientific you are being about this argument, and how much of this is purely emotional response.
You can't seriously be saying use only one case study?
Our lawyers are $250/hour. No lawyer is going to come on here and rebut your arguments for free. I can pretty much guarantee you that.
Then they are "elite" lawyers who don't really care about the crypto space. It's not that they have to respond to me specifically but they can blog as others blog and I don't see any rule which says lawyers cannot use Steemit like the rest of us. They can easily get $250 from a few blog posts on Steemit.
That makes sense to me. Everyone is also saying that "new tokens will be distributed after X time from the ending of the crowdsale"