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visit MIT OpenCourseWare at ocw.mit.edu. GARY GENSLER: We're going
to turn back to ICOs and spend a little bit
more time on initial coin offerings in the markets and
the regulation of initial coin offerings today. But before I did
that, I was going to talk about one short
announcement that happened. In the US, we've talked
about how fiat currencies are accepted for taxes. AUDIENCE: Ohio! GARY GENSLER: Ohio. James, what do you want
to tell me about Ohio? AUDIENCE: They're taking
Bitcoin for taxes, right? AUDIENCE: Yes. AUDIENCE: Yep. GARY GENSLER: Yeah. What's that? So do you want to
say a little bit more about it, Hugo, or Ross? AUDIENCE: Go ahead. AUDIENCE: Sure. Yeah, so they're accepting
Bitcoin for taxes through BitPay, which
means that it's instantly transferred into fiat. But still, that's
a pretty big thing. You know? GARY GENSLER: Yeah, so the state
of Ohio, I guess it was the-- AUDIENCE: Treasurer. GARY GENSLER: --treasurer. Tom, you're shaking your head. AUDIENCE: Oh, as an Ohioan,
just Ohio today breaks my heart, not related to this-- unrelated. GARY GENSLER: So Ohio
breaks your heart because they're accepting
Bitcoin for taxes? AUDIENCE: Unrelated. GARY GENSLER: Unrelated. Do you want to share
for the class, or? AUDIENCE: I'll let [INAUDIBLE]
and his next four years of policy speak for itself. AUDIENCE: Oh, yes. GARY GENSLER: Oh, I see. So the state of
Ohio has announced, the state treasurer-- is this
an elected office, the state treasurer? So he saw that it would be good
for Ohio, for the economics and for the job creation
in Ohio, and maybe for his politics,
to move forward and say the state of Ohio
would accept Bitcoin for taxes. It's the only US jurisdiction
that I know that has done that. Now, you can think
of them as a vendor, like they're saying
they will take it. And they've arranged it, as
Hugo said, through BitPay. BitPay is an application
where, whether you're Starbucks or the state of Ohio, you can
take a cryptocurrency like Bitcoin, and they will
take that Bitcoin, sell it quickly on an
exchange, take some price risk- BitPay takes a little
bit of price risk-- and for a 1% fee, give
you fiat currency. Now, it's 1% and
whatever exchange rate, because I don't know how
much VIG, or margin, is in the exchange
rate transaction. But their stated fee is 1%. Hugo? AUDIENCE: I think the big
question is whether or not that's a taxable event, too. GARY GENSLER: Is a
taxable event for who? AUDIENCE: For the person who's
paying their taxes in Bitcoin, if any transaction from Bitcoin
to fiat is a taxable event. GARY GENSLER: All right. So Hugo's raised the
question, is the sale of the Bitcoin to fiat-- because the fiat is,
in essence, being used to pay the
state of Ohio taxes-- is the sale of that
Bitcoin a taxable event? And I think somebody
in the class will know. It's knowable. AUDIENCE: If you sold Bitcoin
to acquire fiat, it would be. But if you use fiat
to acquire Bitcoin, which I think the
big application here is the marijuana
industry in Ohio, if they're not able to back the
bank-- if they are acquiring Bitcoins and then paying
them to the government, I think they don't
have to pay taxes. GARY GENSLER: What if you
bought Bitcoin at $3,700, and the day that you
sent in your taxes it's valued at $3,800 bitcoin? AUDIENCE: Congratulations. AUDIENCE: Yeah. AUDIENCE: You would pay
taxes on the profit. GARY GENSLER: That's correct. So at least here in the US-- the IRS has spoken to this--
if you acquire Bitcoin and then you use the
Bitcoin in commerce, if you're using it to fulfill
an obligation, in this case a debt to the Ohio government,
and if it moved from $3,700 to $3,800, you would, yes. You would have a
short-term capital gains on the $100 difference. Whether everybody will
comply and report properly is another thing. But that is certainly my
reading of US law at this time. Ross? AUDIENCE: This rate-- I saw this, and I looked
up a couple of things-- it strikes me it
would be taxable given what you've said
about the US thing. And it really is just
changing it for fiat. It's just the structure, really. But what might make it
seem more interesting or gain a little
traction is if, Ohio, if they have a state income
tax, agreed not to tax the gain. Ohio could agree not to do it. You split the pay
on the federal side. But then they could make it
more like a real transaction if you're paying Bitcoin. GARY GENSLER: And
how many of you are from Ohio here
other than Tom? Tom, as an Ohioan,
would you want them to not charge the taxes? You're one voter, I know. AUDIENCE: So
there's [INAUDIBLE].. GARY GENSLER: Oh, [LAUGHS] OK. AUDIENCE: So they charge
the state income tax. But I don't know if they charge
a state capital gains tax. AUDIENCE: But
that's the question. I'm just saying that's how they
could make it more real than-- like Hugo was saying. It's not real right now. We're just converting it to
dollars and taking the dollars. GARY GENSLER: They did,
in this announcement-- if you read the fine print as
I was want to do because I was fascinated by this-- for the first three
months of the program, Ohio negotiated with BitPay
that BitPay would charge a 0% fee for the first three months. But this was BitPay foregoing-- it appears that that was their
bonus to the state of Ohio-- 0% fee for three
months, again, not knowing exactly what
exchange rate you're getting and so forth. And you think that it would
be the cannabis industry? AUDIENCE: Yeah, so Ohio passed
a state constitutional amendment two years ago. GARY GENSLER: We're talking
about Ohio that's now accepting Bitcoin for taxes. And Tom is our
resident Ohio expert. AUDIENCE: I guess so. So yeah, Ohio will
legalize-- the state voters passed an amendment to allow
marijuana legalization. It's subject to,
I think, some time delay or regulatory approval. But the expectation is
it will be approved. And the marijuana
industry is still restricted from accessing
the federal banking system. So an alternate way
for them to avoid carrying large sums of cash-- GARY GENSLER: Is carry the
value in cryptocurrency. And do you think that's what
motivated the Ohio State Treasurer? I see. Shawn? AUDIENCE: I was just curious. So if that's the
case, and if I may-- well, look, I don't
know of capital gains, but if we can cut losses on
Bitcoin, does that part of loss get carried forward
that allows you to upset some of your income? GARY GENSLER: Yeah,
it's a capital loss, just as if you
bought Apple stock and had a loss on Apple stock. AUDIENCE: So this cannot be
carried forward to offset the future-- AUDIENCE: Yeah. GARY GENSLER: Under US law-- I can't speak to other
jurisdictions' tax-- but you can apply
losses against gains. And to the extent you have
greater losses than gains, you can actually take
some of those losses against your income-- I don't remember the limit any
longer; it's 3,000 US dollars-- and then, otherwise,
carry it forward. So for most citizens, they
would just take that loss. If you had greater than that,
you would carry it forward. Any other thoughts on Ohio? I mean-- AUDIENCE: Yeah, I'm
just wondering, sort of philosophically,
Ohio isn't actually carrying the price for this. But given they're converting
it to fiat instantaneously, philosophically are
they really accepting Bitcoin as payment for taxes? Or is it just a
marketing gimmick? GARY GENSLER: I don't know. I mean, any other views on that? So the question
is, is Ohio really taking cryptocurrencies,
Bitcoin, or is it just marketing? AUDIENCE: I think it's marketing
because if you have BitPay, the whole point of
BitPay is turning it back into fiat, which is why I think
they should pay taxes on it. If the state of Ohio had
a wallet with Bitcoin and they would accept those
bitcoins into their wallet and hold those proceedings
in their wallet, then they would be formally
accepting Bitcoin for taxes. And you will not need to pay
taxes on that transaction. GARY GENSLER: But I
would raise the question, with all respect,
what's the relevance? Why does it matter
to a taxpayer in Ohio if this facilitates
my paying my taxes, whether it's in the cannabis
trade or some other trade? They're facilitating another
means of paying my taxes, fulfilling my
obligation to society. AUDIENCE: Yeah. So my response to
that would be in how we define what a currency is. And one of those criteria is,
are they accepted to pay taxes? I think it's relevant
to that distinction. GARY GENSLER: All right. Tom, do you want to defend
your fellow Ohioans? AUDIENCE: No. I mean, I think it's relevant. I mean, the Ohio State
Treasurer doesn't take pork bellies or cotton or
even corn as paying for taxes. I don't know if they take gold. GARY GENSLER: No. To the best of my knowledge, no. AUDIENCE: Yeah, so even for
the short-term transfer, I think it's relevant. GARY GENSLER: So it's
a bit of a hybrid, I guess, is what Tom's saying. Ross? AUDIENCE: There's a real
question about whether they could take it
directly for taxes, because under the Constitution,
the states cannot make anything legal tender. Only the federal government
can make that determination. Only the federal government
can establish legal tender, not the states, other than gold. So it would actually
be a question about whether Ohio could-- who would object is
another question. But it's an issue. What they're doing is
marketing, I think. But they could, for example-- GARY GENSLER: Though
I'm not studied in the law of legal tender,
I could see a case that says, this is not making
it legal tender. This is just saying
you can pay your taxes in another form of property. AUDIENCE: That's the question. GARY GENSLER: You know? Does that make it legal tender? No. It just makes it that we,
the government of Ohio, will accept it for taxes. But it doesn't mean that we
are saying that Starbucks has to take it for a cup of coffee. AUDIENCE: I also
see it as a gateway as taking it in a few years,
having their own wallet. So testing it out, see how
many people actually use it. And if they want
to eventually avoid the fees of the
processing service, they could eventually
rule that out of it. If they set it is
a precedent now, and whether or not they're
converting it immediately, doesn't really have an
effect as to whether it sets a precedent
for future years to actually use it as legal-- GARY GENSLER: Right. AUDIENCE: --tender,
as their own wallet, as [INAUDIBLE] was saying. GARY GENSLER: And they might
just be testing it out. James? AUDIENCE: I guess, reverting to
Ross's point, in legal tender, the money is different. Right? So the criteria here,
where you're talking money, you could pay taxes,
which, in this case, I think this is verging
on to the hybrid situation where it's not a cow. It's not some corn. But it certainly can pay
the taxes via [INAUDIBLE].. So they kind of make it
more and more like money. Where about this legal
tender, that's money, [? well, ?] [? 2.0. ?] AUDIENCE: I think it's-- [INTERPOSING VOICES] AUDIENCE: --a question
of whether you can get to a hybrid using bits. I agree with that. GARY GENSLER: Yeah. And they're testing it out. And maybe this state
treasurer feels that it's good for
his politics, it will appeal to some
portion of the electorate, whether it's
millennials, whether it's Bitcoin maximalist, whether
it's the cannabis trade. Or maybe he just
looks more tech savvy, that they can put
out an announcement saying we are the only
state in the land. The website says that they're
promoting it to lower fees. Now, I don't know
how many people would pay their taxes in Ohio
using the credit card rails. But literally on
the website, they talk about, well, this has lower
fees than the 2 and 1/2% or 3% you get charged on
your credit cards. But I think that that would
only be a very small portion of taxpayers. And they're accepting
it for sales tax. They're accepting it
for all forms of tax. It's not just income tax. So it's all the small
transactional taxes as well as income tax and real estate tax. So it's just an
interesting thing. Jake? AUDIENCE: What's the
actual benefit for it, because can't they just go
sell the Bitcoin on the market and pay the taxes in cash? GARY GENSLER: So benefit for? AUDIENCE: For the taxpayer. GARY GENSLER: For the taxpayer? This is a good question. What's the benefit
for the taxpayer? It's the same
question of, what's the benefit for any consumer if
I want to use Bitcoin, maybe, to buy a Starbucks? So any vendor could say,
we'll accept Bitcoin here. The benefit for the
consumer or taxpayer is if they find it
more convenient, if it's lower fees, if this
is where they're storing their value rather than fiat. Not many people are. But that would be-- and maybe as Tom
pointed out, that there is a specific
idiosyncratic thing in Ohio that they've just moved forward. And they legalized the
marijuana trade in Ohio? AUDIENCE: I don't think
it's fully legalized. It's been authorized
to be legalized. But I don't think that they-- GARY GENSLER: So
they're in the process. And Tom has a theory
that maybe there's some that can't access the
banking system, the fiat. In essence, they're
off fiat rails. So here's, at least,
Tom's theory of the case. So those might be some of the-- anyway. So what else happened
in the last week, by the way, since
we came together? Anything else in
the crypto space? AUDIENCE: 30% drop in Bitcoin. GARY GENSLER: 30% drop. I haven't checked
recently, but yeah. Do you have any theories
on that before we go to crypto exchanges
and ICOs and everything? AUDIENCE: Not that come up. GARY GENSLER: No. No theories. Oh, well, Brotish we
haven't heard from Brotish. You have a theory
as to the 30% drop since we were last together? AUDIENCE: I have
a different point about what happened recently. We saw the news
article [INAUDIBLE] postponing the launch
of the Bitcoin future to February, which was
supposed to happen in November. GARY GENSLER: Do you think
that was because they were here to talk with us? I mean, your
questions were good. Do you have any views on-- Sean, we'll come
back to the back. AUDIENCE: Because
of the hard fork, there was a hard fork that
happened last Saturday, a week ago, on Bitcoin Cash. And then people, kind of, caused
the skepticism in the market to say which is going to be
the majority of the consensus for the currency. GARY GENSLER: So there was
a hard fork in Bitcoin Cash, that Bitcoin Cash split
into, yet, Bitcoin Cash. And is it now settled
as Bitcoin SV? S-- what's that? AUDIENCE: Satoshi's Vision. GARY GENSLER: Satoshi's
Vision, so SV. I couldn't make this stuff up. But that hard fork
was, timing wise, right at the center of
a break in the markets. And so there's some
that have written, well, is that the reason? I've been around
markets long enough to think that might
be a news event. But I don't think that
was the reason there was such a softness in demand,
that a news event like that comes along, and then the market
breaks and finds no support, and it drops from,
what was it around, $6,300 all the way through
to $3,700 or $3,800? I don't know where
it's trading right now. But it's somewhere
in that range. AUDIENCE: $3,714. GARY GENSLER: I'm sorry. AUDIENCE: $3,714. GARY GENSLER: The
Ohioan has spoken-- $3,714. So that type of not
finding a price support, there's other reasons,
I would think, which really goes back to the
heart and soul of valuation. Yes. AUDIENCE: What about, we were
talking about tax stability earlier. It is approaching December,
so tax-loss selling for people in taxable [? jurisdictions. ?] GARY GENSLER: So maybe
tax-loss selling. [INAUDIBLE] AUDIENCE: [INAUDIBLE]
[? for a ?] company and news about
Visa and MasterCard [INAUDIBLE] anything
related to cryptocurrencies and initial coin offering,
so any transaction related to them. So there was something
in the news about it. GARY GENSLER:
There is also news, which we're going to review
today, that the Securities and Exchange Commission
took two additional actions in the initial coin
offering space. But these actions were
a little different than the past actions. So they've already taken about
a dozen enforcement actions, or settlements, or orders,
in the initial coin offering space. But these two, Paragon and-- AUDIENCE: Airfox. GARY GENSLER: --Airfox were
different in that, one, they weren't surrounded by
obvious scam or fraud. I'm not going to speak
to their motivations. But they were more traditional,
$12, $15, $18 million raised in each of
them, situations. Two, they're about a year old. And here they are finally
coming to a settlement where the entrepreneurs, the
venture capitalists behind it, said, all right, we get it. We're going to come
into compliance. We're going to do an
offering statement. We're going to put out the
full and fair information about this. But also, we're going to be
willing to give back money to people who were-- so they're not
fighting in a court. Some have gone into
court against the SEC. But here, also, the other
thing was the first time they paid penalties,
I think they were modest, relatively modest--
quarter million dollars, if I saw. But that also happened
in the midst of this. The SEC for the first time
actually assessed penalties, had settlements. They were also not
the, sort of, clear, obvious scam and fraud cases. They were simply, hey,
you didn't register, and you were
supposed to register. You're, in essence, an
illegal securities offering. But now, come into compliance,
pay a penalty, move forward, as well. So a lot going on. So today, we already did
Ohio, which was more fun than the rest of this stuff. We're going to talk a little
bit about the Howey Test again, which we talked
about about a month ago. But I wanted to bring it
back into the discussion about initial coin offerings. We're going to talk a little
bit about some realities. Ernst & Young put
out a recent report that wasn't in your readings. It just came out last week. But I want to review some of the
findings that Ernst & Young did on, what they call,
the class of 2017. They look at the top
140 ICOs from 2017, and where are they as of the
end of September of this year, not even speaking about the
last six or eight weeks. Some SEC enforcement
actions I want to walk through just to give
you a flavor for, at least, this country's approach
to initial coin offerings, how you can actually
comply with securities law. I promise you that I'm not
going to go deep diving. But I want to give you a
little bit of a flavor for, if you were to be involved
in an initial coin offering, how to do it in a compliant way. And some personal thoughts
on the path forward in ICO [INAUDIBLE]. So that's what
we're going to do. The study questions,
we'll get to. But I just want to ask the
class the middle question, which is the easiest,
or maybe the hardest. Why is this market so rife with
scams and fraud, whether it's Christian Catalini's
work that said 25% of the market or
the smaller survey status group that was part of
today's readings, up to 80%? Why do you think this
market has so many scams? Aline what do you-- AUDIENCE: It's so easy to con. GARY GENSLER: What's easy? The question's easy, or
scamming the market's easy? AUDIENCE: It's so
easy to scam people. Like, why wouldn't you do it? It's so damn easy. GARY GENSLER: I'm sorry. The first part I got. Remember we're on video. All right. AUDIENCE: It's a
rhetorical question. GARY GENSLER: It's a
rhetorical question. It's so easy. And thus, it's easy
for bad actors. Jihee. AUDIENCE: I thought there
were two main reasons. One is because it's
such a new thing, there is lack of the
regulatory environment that happens with the IPO and
other ways of raising funds. And I think the second one
is it's, as Alin pointed out, I think it's very easy to
just go say, I'm going to do ICO when there is only an idea. So I think that's why a lot
of investors or consumers just fall into these
scams and fraud. AUDIENCE: And I mean,
the fact that you're just publishing a white paper, that
no one actually is interacting with you unless it's on a
blog or something like that, they're publishing
a white paper that could have this grandiose
idea, and then all of a sudden they just run. And there's really nothing
stopping them from doing that. So it's just difficult. GARY GENSLER: So
I've heard it's easy. It's not yet in a
regulatory space. It's at a distance. It's just the publishing
of a white paper. AUDIENCE: And there's simply
demand because of immediate-- GARY GENSLER: So demand. AUDIENCE: Yeah, there's
just a lot of demand. With the media around Bitcoin
going up towards $20,000 last year, there's demand to
get into the bottom of one of these ICOs to hope to get
the same kind of returns. GARY GENSLER: So there is
tremendous demand and, related to demand, fear of missing
out, so whether it's greed-- the animal spirits, the
human spirits of market's around fear and greed. So the greed of participating
or the fear of missing out was certainly part of
late 2017 and into 2018. Kelly? AUDIENCE: We could
talk a little bit more about what Jihee
said about the lack of a regulatory environment. That sort of leads to--
because a lot of these ICOs are not in compliance
with securities acts and regulations that allows
them to sort of skirmish around investor protection. So investors, they're
not necessarily privy to material information
about the financing and what they might
reasonably expect as a return. So it kind of-- GARY GENSLER: Right. AUDIENCE: They're just taking
advantage of it a little bit. GARY GENSLER: I agree,
but I think the court-- Kelly is touching
on one other thing. Guillermo. AUDIENCE: I had one
question on this. The scams are
defined as a company that you can no
longer reach or see if they came out with a product. But I was wondering,
given that this is a very early-stage
venture, how much, really, do people maliciously
run away with the money, or just tried
something and failed? Do they just raise money,
and because they did it with a PowerPoint, they
realized this is not going to be a good
business case, and they just abandon
it, not as a scam but as a new
venture that failed? GARY GENSLER: I think Guillermo
raises the right question. It's why one study says it's
5% to 25% scams or frauds, and another study says 80%. It's what's in the definition. A good-faith actor could
say this is easy money. A good-faith actor could
say this is cheap money. I can raise money
fast just on the backs of a white paper in the middle
of a bull market, maybe even a bubble, and then find
out three months later that their idea
doesn't work out. And I accept that
there are probably a lot of good-faith actors
that raised tens of millions of dollars. And I wouldn't necessarily
personally call that a scam. But nonetheless, somebody
else might call that a scam. So Telegram raised $1.7 billion
in February of this year. I don't know-- how
many people have ever read the white paper, I mean,
not that it was ever assigned? All right, all right. So all right, I've
read the white paper. I couldn't figure
out in February when they raised the
money what they were going to use that $1.7 billion for. Now, it's a
remarkable technology. And they have, I think,
somewhere around 200 million users in their
non-blockchain use. And so they were able
to raise a lot of money with a lot of fancy words. But they still
haven't gone live. They haven't taken the $1.7
billion and created a network. Filecoin seemed
to be a good-faith concept about using
a token to motivate the exchange of file storage. Assume for a moment
it's good-faith actors. They raised the money
in October of 2017. It's 13 months later. They still do not
have a live network. And the latest
announcement says it will come either in the first
or second quarter of 2019. Some people might
call that a scam. I wouldn't. But so I think you're right. There's a range of activity. But there's one
other thing about why I think this has been an easy
place for scams and frauds. And it's the technical
nature of it, as well. Like, I hope at the end
of this class, whatever you think of the lectures,
whatever you think of the assignments,
you come away with some critical reasoning
skills, that the 80 or so of you who have been on
this journey together will leave and say,
all right, I get it. But for most, for the
hundreds of thousands or even millions of
people that have invested, there's a lot of technical-- whether it's hash functions
or digital signatures. And so I think it's
easier to scam the public when it's shrouded in jargon. And so maybe it's a
lesson for all of us to always be careful
about our own investments when something is
shrouded in jargon. And it doesn't have to
be cryptographic jargon. It could be other types
of jargon, as well. I think that's also
one of the reasons why it's been easier
to scam and fleece the public in the midst
of a bubble, in the midst of a nonregulated
space, in the midst of, just throw a white paper up. Jake? AUDIENCE: It's also the
nature of it just being, we're investing in
such an early stage. So plenty of tech that
ends up IPOing and has public investors when it's early
on, it's only VCs investing. And they understand the tech. But you don't have regular
consumer retail investors actually putting money into
those really early-stage companies, where
with ICOs, we're investing at the white paper. So regardless of
whether it's blockchain or a robotics
company or whatever, it is very confusing
that early on. GARY GENSLER: Right. So it's also very
early-stage investing, which is a good point. So I'm going to skip
over the reading. So investor protection. I found in a conference in
Paris, an OECD conference-- we got into a debate. And there were regulators-- I was not a regulator
at the time; this was earlier this year-- regulators from 30
or 40 countries. And we got in a
debate of, what's the difference between investor
protection and consumer protection? And so these are
just some thoughts. But investor protection, which
has been the hallmark of the US markets that's in the 1930s,
and in other jurisdictions, other decades it's
been adopted, I think is part of why the US
capital markets were really at the forefront of this
incredible economy for 70 or 80 years here in the US. And it's helped other
economies subsequently. But it's four big things. Investors do take risk. But they get full and fair
disclosure from an issuer. And there's a concept that
there's asymmetric knowledge, that an issuer has a
bunch of information and an investor does not. Through the laws
of the land, can we balance that a little bit? Investors still have every
opportunity to take risk. But can we address the
asymmetry of information? And that's really a core
part of investor protection, a little bit different
than consumer protection. You still want to be protected
that a crib that you buy is not going to hurt your
child or that the clothing you put on an infant isn't
instantly flammable. Those are important
consumer protections. And often, we protect
them in the laws, as well. But information asymmetry
and the difference between information between an
issuer, somebody raising money, and an investor is
something we try to embed in securities
laws around the globe. Two is the concept
of sales practices. Various fraud and sales
practices are prohibited. Sometimes you hear this
around securities laws about the marketing
information, what information you need to provide. So the first and
second are principles that go into why there's
information statements. Or securities offerings come
with all that boilerplate, and sometimes you might
say it's too much. But all of that is to address
information asymmetries and try to lessen
or make it harder to have fraud and
deceptive practices. Then we have something called
secondary markets, where buyers and sellers meet, like
on the New York Stock Exchange or on a crypto exchange,
and the concept being, can we promote market integrity? Can we promote those markets
either through transparency-- transparency is really being
able to see what buy orders and sell orders-- what's the price that
people are willing to pay? What's the amount they're
willing to buy or sell? So pre-trade
transparency says, I'm going to share in
the marketplace, that there's not somebody
over here, some high frequency traders, that get
transparency, but retail public does not get transparency. It brings it into one market. And some rules
against manipulation. Now one person's manipulation's
another person's market practice. I respect that, too, just
like the word "scam." But there's traditional
things about manipulation that have come to
be, no, we should forbid certain practices. Front-running is one,
where a customer gives you a sell order, and you say,
well, the customers sell order, good, I'll sell in
front of them because I know that when they
sell, it's going to be market pressure, either
up pressure with a buy order or down pressure
with a sell order. So one is address asymmetries
through information. Prohibit or limit fraud and
deceptive sales practices and marketing-- lying, sort of. Promote the integrity
of the secondary markets through, first,
price transparency and, secondly, antimanipulation. And then, lastly, recognizing
that all financial markets have conflicts. And we are not going
to repeal conflicts. Anytime any one of
you goes to a broker, that broker does
want you to transact so that they earn more money. But by the way, when you
sit down at a restaurant and they ask you if you want
a drink before you order, there is a bit of
a conflict, too. They want you to buy the
drink because your tip amount is a percent of your
final bill, well, in most countries. I can't speak for
every country here. But in finance,
those conflicts are so evident that there are
sets of rules, usually, that promote some transparency
that you know what the advisor is getting. But some practices
are prohibited. So these are some of the
core things that, at least, I think are embedded as
concepts in our securities laws, and not just here in the
US but around the globe. Any questions on that before-- Brotish? AUDIENCE: So on the
first point, if we are saying that we have some
sort of a minimum disclosure requirement for ICOs, do you
think in this kind of a field, do we have the regulators
who have the expertise to judge whether those
requirements are met or not? Like, they can say that-- GARY GENSLER: Are you
asking whether the investors will have the expertise,
or the regulators? AUDIENCE: Regulators. GARY GENSLER: It's
a good question. I think that the concept is
that issuers should share a certain level of
material information with potential investors, and
then investors assess the risk, not that the regulator assesses
the risk but the investors. So the question is,
what is material? And what needs to be shared
in what readable fashion? And maybe it's the
case in this ecosystem that the information should
be a little different. Historically, you'd have to
share three years of financials or two years of financials. But what do financials mean if
it's a new concept, a new idea? So I think you
raise a good point that it might need to
shift a little bit. But the core concept is that
the material information to make an investment
decision should be shared, and then investors
have an opportunity to assess that risk. And you're right. The regulators are less
experienced in this space to say what is a material bit
of information beyond here's the team, and
here's the concept. The Howey Test. So there is an
individual in Florida. He ran for governor
twice in Florida and lost twice, just
a little background-- William Howey. He was also very
successful in real estate, and he had a hotel. And he had something
called Howey on the Hills. And he started buying
a bunch of land. And then he thought, well,
I'll sell some of the land and grow orange groves. And when he sold the land,
he gave the opportunity to investors in
the land to enter into a separate
contract with a company he had, but it was not required. You could buy the land, you
know, an acre, three acres. But he said, if
you want, you can enter into a contract
with my affiliate-- Howey on the Hills, I think,
was the affiliate, as well-- and we'll grow your
oranges for you and give you the revenues
from growing the oranges. So there was a new law
in the US in the 1930s. He was doing this
in the late 1930s. And the new law was called the
Securities Laws of '33 and '34. The question was, was what
William Howey was doing-- and then he passed
away-- was his estate and what they were doing
a security under the US Securities Law? Well, in the US,
the word "security" was defined by our Congress to
include equity, bonds, options, and there was a comma, and
said, "investment contracts." So the real question
was, what was the definition of this, two
words, "investment contracts?" In 1946, it went to
our US Supreme Court. And this was the four-part test. And this four-part test is going
back to the US Supreme Court three or four times since then. And it's been
affirmed every time, in the Edwards case and
other cases and so forth over 70 years. This same four-part test went
to the Taiwanese high court in 2011, and they adopted it. I don't know enough
about Taiwan law. But it was adopted
in Taiwan in 2011. And it's a similar
test as in Canada. So there's three jurisdictions
that basically have this. Is it an investment
of money or assets? Is the investment in
a common enterprise? Do you have a reasonable
expectation of profits? And is it based on
the efforts of others? So they determined that William
Howey, and then his estate afterwards, was basically
a common enterprise growing all these oranges, and so it
was the expectation of profits. That's the Howey Test. I've talked to you before
about the Duck Test. But when I see an investment
that walks like a duck, swims like a duck, and
quacks like a duck, I call that investment
a security, in a way. But that's really it, you
know, using your common sense. Ethereum, when it was
first promoted in 2014, I believe passed this test. And the word "passed" means
that you are a security, just a little vocabulary thing. You want to fail the
Howey Test, by the way. Like, if you are a
venture capitalist and don't want to be regulated,
you want to fail this test. But to pass the Howey
test, Ethereum, in 2014, exchanged Bitcoin for an ETH. It was an investment
in a common enterprise at that point in time, a 20-
or 21-year-old Vitalik Buterin running Ethereum Foundation
out of Switzerland. It was one group. An expectation of profits-- they had no functioning network. It was just an idea and a white
paper-- a really good idea-- and good-faith actors. And it was reliant on whether
Vitalik and his team of coders were going to stand
this project up. To me, I don't even think
there's much doubt what this was in 2014 when they
raised the $18 million. Now, it was the largest
ICO done at the time. There hadn't been anything
of its size, at $18 million. And our US Securities agency
and others around the globe really weren't
looking and watching until the DAO happened in 2016
and raised $160 or so million. And then that sort of
caught the attention. So regulators start to wake up
and think about it after that. So initial coin offerings,
we've already talked about this. But the proceeds are
used to build networks. And purchasers anticipate
profits through appreciation. So that's like the
core of the Howey Test. Now, some jurisdictions
don't have the Howey Test. And some jurisdictions
don't have those two words in the definition of security--
"investment contract." So I actually think, in
a lot of jurisdictions, an initial coin offering may not
be a security because it's not defined in their statutes. It's not some legislative
body like ours in the 1930s included it in a definition. But I believe if this
market were to grow, and it might not grow,
but if it were to grow, other countries might want
to address that and change their statutory language
because investors still have an asymmetry and could
benefit with more disclosure. As we've talked
about, the tokens are usually prior
to being functional. What was the statistic? Does anybody remember? In the third quarter
of 2018, what was the percent
that was functional? Anybody? What's that, Alpha? 5%? You're a little high. AUDIENCE: 2%-- 2% or 3%? GARY GENSLER: Yeah. 1.4%-- 1.37% was
fully-ready product. Or 1.7 was code,
so we'll round up. But 76% were on ideas. And this is in the third quarter
of 2018 by CryptoCompare. And here are some
large tokens offerings that have yet to go live. And I just picked
five really big ones. That doesn't mean that all
big ones haven't gone live. But you were asking me about
Filecoin in our last class. I think Filecoin-- I went back, and I looked
at the white paper; I've looked at a lot of
things about Filecoin since last Tuesday-- Filecoin is basically
coin that says you can use this coin when we
go live, which hopefully will be by the second quarter of '19,
to buy file storage from others that are on the network. Their business model--
Filecoin sold 10% of the token. So if it was truly worth
$257 million at the time, they, in essence, had a total
value of $2 and 1/2 billion. Some of the tokens were
kept by the company. Some of the tokens
were kept by founders. But it, in essence, capitalized
the total stock 10 times that. So in that model,
the usage of the coin was amongst the
community, to answer-- I think that was a question
you asked me to go back. But that's not the
case for every ICO. There's two stark variations. One is one where you use the
token to buy a good or service from a service provider. Let's, in the case
of Filecoin, say it's directly from Filecoin. Or you use the token to
buy a good or service from other people
in the community. The Filecoin white
paper suggests-- it's a year since
they wrote it-- that it's a token to be used
amongst the community, which I think was your-- it's a little confusing
because they haven't gone live. We don't really know. Hugo? AUDIENCE: So I have a
question about Ripple-- GARY GENSLER: Yes. AUDIENCE: --and if
you have an opinion on whether XRP is a security
that was sold by Ripple, or currently continuing
to be sold by Ripple, as they own, like, 55
billion of the clients, because, also,
their product, what they want XRP to be used on,
xRapid, isn't really live. xCurrent is the thing that
they're using most right now. And that's just an alternative
for SWIFT that doesn't even use their coin. GARY GENSLER: So Hugo has
asked about the token XRP and whether I think it's
a non-compliant security. I've spoken publicly. Yes, I do think it's a
non-compliant security. But this will not be resolved
just by the Securities and Exchange Commission. It will be resolved
by some courts, whether it's appellate
courts or the Supreme Court. So what I believe is just that. It's a belief. But why would I say that? I think back to the Howey Test. I think they are exchanging XRP. Ripple, the company,
is exchanging XRP for something of value. And they're using it right now. They sell it every month. It's in a lock-up. It's in an escrow. And they sell XRP every month. Ripple, the company, initially
did the genesis block back in 2013 but kept
80% of the tokens. Now they have about
60% of the token. But they sell it on a continuous
100 million to 200 million or so a month of value. Two, I think it is reliant
on a common enterprise. I think Ripple, the company-- XRP investors are very much
reliant on Ripple, the company, and that if Ripple, the company,
went away, as you noted, there's not much use of XRP. In fact, for the first
three or four years, or five years even,
there was no use. And then they prototyped
something called xRapid. xCurrent, the main product
of Ripple, the company, is a messaging-- and
apparently a clever one that's competing with SWIFT. But xRapid, the prototype,
doesn't have a large community right now. So it's highly centralized
around Ripple, the company. The development,
the node network-- the ownership is 55%
or 60% owned by them. They're promoting it as such. But it will be settled in some
court at some point in time. And there might be
regulatory forbearance. And maybe they'll be
determined not to be. But I've expressed my thoughts. I don't own any of this stuff. I don't have any
particular conflict. I'm just speaking as I believe. Catalina? AUDIENCE: Regarding
how do you determine where the ICO took place-- GARY GENSLER: Where, what? AUDIENCE: Where
the ICO took place, what is the jurisdiction? Like, which will
be the regulator if they are under the laws
of the US or everywhere else, because the blockchain-- [INTERPOSING VOICES] GARY GENSLER: No, it's
a very good question. So jurisdiction. When does any country
have jurisdiction? Or maybe I should
ask it differently. When do you think countries
try to exert their jurisdiction in the context of
capital markets? We're not talking about the
context of consumable goods. But in terms of the
capital markets, where do jurisdictions usually
exert their jurisdiction? AUDIENCE: I think that this
should be a [INAUDIBLE] which investor
will take the ICO. GARY GENSLER: OK. AUDIENCE: So even if they're
not majority of investor, it will be a US person. So it should be a US
regulator who handles this. GARY GENSLER: So
one approach theory is it's where the investors are. And you even used the word
a "majority" of investors, or just where the investors are? AUDIENCE: Yeah, that's correct. GARY GENSLER: All right. So where the investors are. And then the question is, how
many investors-- minority, majority, de minimis, so forth. Another point of view,
any, just, counter-- AUDIENCE: Where the
company was incorporated. GARY GENSLER: All right. So where the company's
legal jurisdiction is. Maybe the company's
incorporated somewhere. So in essence,
where the issuer is. And there's a third one. AUDIENCE: Tax considerations. GARY GENSLER: What's that? AUDIENCE: Tax considerations. GARY GENSLER: Tax
considerations, you know, can you collect taxes? AUDIENCE: Where the team
is physically located. GARY GENSLER: Where the, what? AUDIENCE: Where the
team is physically-- GARY GENSLER: The team,
the physical team. So you might legally incorporate
in the Cayman Islands, but your executive team might
be in New York or in Beijing. And the one other, which I
think all of these go in-- AUDIENCE: The exchange. GARY GENSLER: The exchange. All right. The secondary markets. So all of these things
somehow influence the concept of jurisdiction. And there's various laws. And each country has
their own different-- I'm not going to do a
whole review of this. But usually countries want
to exert their jurisdiction if their citizens
somehow are affected or if their tax base
is somehow affected. So in the US securities laws,
if it's affecting US citizens or if the exchange
or secondary markets are in our physical
jurisdiction, in the 50 states and so forth, or the issuer, so
it's all three of these, often there's some exertion
of jurisdiction. And it's upheld in the courts. And then you get
to some issuers who have to deal with
multiple jurisdictions. And almost every
large corporation that has investors in
multiple jurisdictions has to deal with the investor
laws in multiple jurisdictions. So initial coin
offerings, if they want to tap into US 328 million
people to buy some of these, it's more than a de minimis. It's not a majority. US law doesn't need a majority. It just has to be
more than a handful. US Securities and
Exchange Commission might exert its jurisdiction. It doesn't always. So please. AUDIENCE: So some of these
ICOs, Filecoin, I think, included, only sold to
accredited investors. In my mind, that
doesn't really change the definition of security or
highly taxed or jurisdiction. So what is the benefit
of only selling to accredited investors? GARY GENSLER: Can I
hold that, because I'm going to slide on that? But it's a very good question. So the Ernst & Young study-- and I promise we'll get to it. So one year later, they looked
at the top 141 ICOs of 2017. I haven't looked
at the whole list. But I think they pretty
much got the top end. 86% are trading below listed
price as of September 30. This does not take into
consideration the last week. But the number would go up-- 86% nine months later. 30% have lost substantially
all their value, and not necessarily scams and frauds. But it's interesting to compare
that to Christian Catalini's 25% scam or fraud number. But these are the
top 141 in size. These aren't the
small riff-raff size. Collectively, the
portfolio is down 66%. I didn't go back to
compare what that would be versus Bitcoin
because some of these were issued in
October, some December. But collectively, if you
invested in the port-- it's not January
1 to September 30. It's from investment day. And only 13% have
working products and 16% have prototypes. Another interesting
thing is the 13% that have working products,
which is about 25 of these. Is that right? Roughly, yeah, about
25 or so, 20 to 25. Seven of them have decided
subsequent to launch to accept fiat currency to
get the good or service. So literally, if you dig into
the Ernst & Young report, they've chosen to
take something else. And Hugo, back to your question
about XRP, as I understand it and as I studied it, I might
be mistaken, but xRapid, you can actually use
something other than XRP as the bridge currency. It has to be another crypto. But 7 of 25 live projects
that Ernst & Young followed have decided subsequently
maybe to take a fiat currency for the good or
service, as well. So that kind of
gives you the sense this was a note about the
Catalini report and that status report, as well. What's going on on Ethereum? This is the most recent report. I summarized
something from a site. These are exchanges. There's 179 DApps. This is just
looking at Ethereum. But there's only 25,000
uses a day for 179 sites. 17,000 in gambling. But it's exchanges, gambling,
games, finance fourth. And then you can go down. The other category, which
only has 275 daily uses, covers governance, identity,
security, energy, insurance, and health. Of six of those use cases-- 218 DApps, which means they're
all being used zero or once a day. I believe I pulled this
for the month of October. I think all these stats are-- yeah, this was for
the month of October. So it might be September, but
it's all current information. So what has the SEC
done in this space? Well, they brought the DAO
report in July of 2017. If you remember, this was
the big $150, $160 million big ICO in 2016. A third of it was hacked. It led to the break in
the Ethereum network between Ethereum Classic,
the hard fork, and Ethereum. DAO actually shut down. It didn't take off. And a year later,
the SEC did not bring an enforcement action. They chose not to
penalize anybody. But they laid out in pretty
good detail as to why these things were securities. I don't think they
had planned for what was going to happen next. But the ICO, boom, took off, I
don't think because of the DAO report. But it's an
interesting coincidence whether this kind of
gave a bunch of lawyers and entrepreneurs
a sense, all right, if I avoid doing what
they did specifically-- and the DAO, they actually
paid part of the revenues to the token holders, and they
gave a sense of voting rights. So it was so security-looking
because there were a form of
participation in governance and a form of
participation in profits that everything took off. Then then the SEC
did two other things. One was-- the REcoin complaint
was a real fraudulent player, and the Munchee order
in December last year. I read that in
January or February. And I thought, well,
that's pretty clear. And Jay Clayton,
who runs the SEC, has said in congressional
testimony in February that he hadn't met an ICO that
he didn't think was a security. His words were a
little different. But I thought between
the Munchee order and Chairman Clayton's
statement in February, he had really said it. But it wasn't quite enough. And the Munchee order, again,
they didn't assess penalties. But it was an offering-- I can't remember the
size-- $20 to $30 million. They knocked on Munchee's-- Munchee, by the way, does
anybody know what the coin did? It was for restaurant reviews-- munchie, food. Yeah. But they knocked on the
Munchee folks' door right as they were doing the offering. And they basically
shut down the offering. But then they did
a whole bunch of-- there's five or six of
these, almost all of which are really scammy,
fraudy-type things. I mean, I can't
speak to each one. But they'd have some celebrity
that was paid a lot of money to go out to hawk the coins. And there wasn't much
behind it, and so forth. Asset freezes, filing
complaints in courts, emergency court orders,
one settlement-- it takes a long time
to build a case. Having been the chairman of
a smaller regulatory agency, I can tell you it just takes
a long time to build cases. It's not, like, three months. Sometimes it's a year. Sometimes it's even three years. But the last two, Airfox
and Paragon orders, were two offerings that were
done 12 to 15 months ago, so a long time to
bring it together. But they were settlements. And Paragon and Airfox,
which each raised, I don't know, $12 or $18 million
each or $15 or $18 million each, appeared on the surface
to be more good-faith actors. I can't speak-- I
don't know for sure, but the first time the
SEC has gotten penalties, the first time they've
gotten somebody to say yes, if somebody wants
their money back a year later, we'll do that. And yes, we'll come
into compliance, and we'll do offering documents. So now I'm going to
talk a little bit about, what can you do? And I think Zhenyu asked this
question, what can you do? And I'm going to do it
in two different charts. But the first one is called
restricted offerings. And this is not a
securities law class. This is just to give you a sense
of what are the potentials. A restricted offering,
which came out 30-plus years ago at first, was
the concept of, I'm not doing a public
offering, I'm only selling these securities
in a private placement. In my day, when I
was on Wall Street, we called these
private placements. But a restricted offering-- and
there's three different ones. The most likely
one is the 506(c) which came out of a recent law
passed in 2012 called the JOBS Act in Congress. Don't you love how we
name our laws in the US? The JOBS Act. Accredited investors only. And an accredited investor--
and every jurisdiction is different--
the concept is you have a little bit of net
worth, or a lot of net worth, depending upon your
view about money, but you have enough net
worth that you supposedly are sophisticated or
accredited or you can have less protection under
this securities law, unless you need
less information. So 506(c) says,
"accredited investors." If that's all it is, it's
a restricted security, "restricted" meaning you cannot
sell it publicly for either six months or 12 months depending
upon how you structure these things. And the big thing about all
of the restricted offerings is you don't have to do one
of those detailed information statements. So the SEC says, all right,
if you keep it restricted, it's only accredited investors. Or the 506(b)--
accredited investors, but 35 people can be
sophisticated rather than accredited. Please don't challenge
me on the definitions of what's sophisticated
and not accredited. It's basically, you
can show sophistication even if you don't have money. Accredited is about how
much money you have. Sophisticated is knowledge but
not money, roughly speaking. And then there's a small
thing for small offerings. Regulation D is
what most of them-- Telegram did a Regulation D.
[INAUDIBLE],, to let you know, I think Filecoin did
a Reg D offering. Generally speaking, it's, quote,
"accredited investors," meaning they have enough money. They have over,
I can't remember, a million bucks or
whatever that number is. Regulation A is
offering statement. So you have to give a statement. You have to give something
with the financials. Not many ICOs want to
do a Reg A offering. But if you were doing a startup,
if you're thinking about, like, you're in one of
the wonderful venture classes, fintech ventures
or other venture classes, you might consider doing a Reg
A offering rather than a Reg D. The benefit of Reg
A, Regulation A, is you can go to any investors. You don't have to only limit
to accredited investors. So Regulation D, only
accredited investors, generally, with a little footnote about
sophisticated investors. Regulation A, you've got to
give them more information. You have to address some of
that information asymmetry. There's two tiers-- $20
million and $50 million. The $50 million offering,
you have ongoing reporting obligations. The $20 million, you
just have to get yourself around doing something
at the beginning. But how do you do financials
for an ICO when there's-- oh, I guess you just say you
have no revenues, no income, et cetera. There's something very
new called Regulation CF, or crowdfunding. Unless you're raising less
than a million dollars, you wouldn't put
it on your list. So almost no initial
coin offerings are looking at Reg CF. They're basically
looking mostly at what we used to call private
placements or restricted offerings, Regulation D.
That's where most of them are. And you have to use
good-faith efforts to make sure that every
one of your investors is, in fact, an
accredited investor. And that's where it is. Questions. AUDIENCE: Do all of
these regulations, D, A, and CF, entail KYC and AML? GARY GENSLER: Yeah,
so the question is, do you have to know
your customer and any money laundering? And the answer is yes because
over the last couple of decades what's happened is finance
ministries around the globe, and this is not
just here in the US, have kind of layered
on top of securities laws, hey, we need
your help here because there's this public
policy goal of making sure that you can't money launder. So yes, but in varying degrees. So in the Regulation
D requirements, you have to make the
good-faith efforts when you do the initial sale. And purportedly,
it's restricted. And it's not supposed to be
resold for either six or 12 months. But on the resale,
the issuer doesn't have the same obligations,
where some of the others, you would have more continuing
obligations on the resale. So I think that some
have tried to get around this in doing a Reg D
offering and then said, can I get some crypto
exchange to list this ICO? And I'm going to
turn a blind eye-- I think it's bad legal
advice they're taking-- but turn a blind eye as to
where it gets sold on that. I wouldn't recommend it. But I think some are doing
that on the resale and not, maybe, doing KYC or
AML on the resale. At least that's
what some tell me. Please. AUDIENCE: I've heard
some crypto folks argue that the definition of
the accredited investor is not particularly
relevant in this ICO space. And actually, having
investable assets doesn't make you well-placed
to understand whether an ICO is a good product. And actually, having
technical skills and being able to
read a white paper is a more relevant qualification
to allow you to invest and that by having these
regulations, in a way you're restricting access. And that promotes inequality,
that only rich people are getting these
investment opportunities. So I've heard crypto
people make this argument. So I guess, what would
your response to that be? GARY GENSLER: And I will hear
your classmate's response. AUDIENCE: Yeah, I would
say that rich people don't know how to handle money,
necessarily, anyway. So there isn't a
direct correlation between having wealth and
knowing how to use it. The law exists the way it does
because of diversification and because of asset allocation
theory and the idea that people don't understand that. And I think that even if
you have technical expertise in crypto, you may not
understand asset allocation theory and be able to
balance what you need when. And basically, the
law is set up such that you can lose all of that. And even if you're very
savvy, you can be very savvy and still be wrong, and
you've lost more than you own. And that wouldn't be OK. So I think from the government's
perspective, it is what it is. AUDIENCE: I would
just respond to say that I don't know if it's
the government's role to police that. GARY GENSLER: Sorry,
can you speak up? AUDIENCE: I think both
of the points are right. It's my opinion that it's
not the government's role to decide that you don't get
to invest in something that you believe in or worked on
because you may not understand portfolio theory,
just because you don't have a two-year
track record of making $200,000 a year. GARY GENSLER: No, it's
a very good question. And there's this public
policy debate as to, if you have a belief that
investor protection helps promote markets and investor
protection is about addressing some information asymmetries
and protecting against fraud and bad actors, do you tier it? Now, in the US, we've decided
on some multiple-decade-- Republicans and Democrats
alike, somehow we've come to a tiered system,
meaning that there's more investor protection,
more rules and regulations, for what's usually called the
retail public than some tiering of usually higher net
worth individuals, this term "accredited investor." And that tiering, you could
come to a point of view that we shouldn't have any
tiering, that everybody should have the same protections, and
it should be, maybe, somewhere in the middle of the two. Or you might be
more pro-protection or less pro-protection. But we have come to
a place in the US over multiple decades
of this tiering, where the, quote, "accredited
investors" get a little less. They're allowed to risk their
capital with less information. That's, in essence, what
happens in the system. And Congress even pressed
harder because the Regulation D, restricted
offerings, the 506(c) was added in this thing
called the JOBS Act in 2012. Some of the politics behind
it was a venture capital space and a lot of entrepreneurial
space were saying, we'd like a less-regulated,
restricted offering exemption. Remember, these are all called
exempt security offerings. They're exempt from
the traditional roles. And there was a coalition
that came together in Congress with the support
of President Obama, actually not with the support
of the head of his Securities and Exchange Commission. Mary Shapiro at the time was
not in favor of some of this. So it was an interesting
event in 2012. But I think 506(c),
if I remember, was either expanded or
was added, to say, well, if it's accredited
investors, there will be no limitation
on general solicitation. If you see, 506(b),
traditionally, there was a limitation on
general solicitation. And the thought was, in
2012, now with the internet, we should be able to-- and crowdsourcing had started. And Kickstarter and
GoFundMe had started. So maybe we can have, quote,
"general solicitation" if it's only accredited investors. So it was a bit of a legislative
and policy compromise. But you could take
the other side and say everybody should have
the same, one way or the other. But whether you're
thinking about blockchain or you're thinking about all the
other wonderful things you're thinking about as startups,
these are your three main ways. And really, probably,
Regulation D and Regulation A more than the small million. I have high hopes for
all of you that you'll be raising more than a million
dollars in your startups. This is a much more detailed-- I'm not going to go through it. But it's going to be in Canvas. I decided to throw it in the
slide deck so you have it. But this really is a
much more detailed review of the CrowdCheck put together. And I thought it was a
good review of all these. So what do I think
the path forward is? And then we'll wrap. So I think we're
going to continue to see high failure rates. Something like 3,000 ICOs have
raised some bits of money. I mean, some of them
only raised $200,000. But you can only
find about 700 or 800 of them listed on
various websites, if you want to see
where they're traded. But there's probably more than
700 that are still around. But I think you're
going to continue to see high failure rates like
the Ernst & Young study showed. I think it's going to lead to
a further decline in funding totals. We've already seen
that we were running $1 and 1/2 to $3 billion
a month earlier this year. And now we're less than a
billion dollars a month. But I think high failure
rates will probably lead to lower funding totals. It's just Gensler's view. Predicting markets is always
a treacherous thing to do. I think that there'll be an
increased number of enforcement cases and private litigation. We've seen only 11 or
12 actually at the SEC. These cases are hard
to put together. They take a long time. A lot of evidence
and a lot of paper trails to put
together and so forth. And even a civil law enforcement
agency like the SEC-- I don't know their
headcount right now-- the whole agency might
be about 4,000 people. Their enforcement arm
might be 1,000 people. They can't dedicate--
you know, what are they dedicating to this? I don't know the number. It's not a public figure. But could it be 50
or 100 people at most to this whole world, which
probably has hundreds of frauds and scams and a couple thousand
of unregistered, basically illegal, offerings? But I do think the enforcement
actions will pick up, and also private
litigation, which is also what you have in the XRP case. But you have it in
other cases, as well. I think regulators and courts
will bring greater clarity to the security definition. At some point in time, things
like XRP will decide it. It might be decided
it's not a security. You know? But I think that's
going to roll out over the next 18 to 36 months. It's not like the next
three weeks or six weeks. But I think that even the
Securities and Exchange Commission will speak more
definitively than Bill Hinman's speech he gave in, was it June? Yeah, June. That was one of the
readings, right-- Director Hinman's. I like that he used my name
in his speech, the title. He was talking about
Gary, Indiana, though. But I do think, just like
what happened with Airfox and Paragon, more ICOs will
be brought into compliance either by registering in
the US under Reg D, or maybe Regulation A. Or they'll just
come into compliance even if they didn't earlier
come into compliance. I think that the
early tokens will be tested as some platforms
become functional. Most will fail. Most we'll never hear from. But what happens when
Filecoin actually-- they raised a quarter of
a billion dollars. Let's at least for now presume
they will become functional sometime in 2019, or Telegraph. That will be
interesting to see what the test of these
large-cap ICOs are. We'll learn from that. I also think markets will
better differentiate viability. They'll go through,
when do you need an append-only log, consensus
among multiple parties, and a native token on
a distributed ledger? That wasn't happening,
probably, enough in late 2017 and early 2018. I don't think they had to take
this class, even though we'll put it out live, and people
will be able to see it. But I think markets will start
to differentiate viability by CO use cases a little better
than they have the last 12 months. So any questions? Eric? AUDIENCE: Yeah. There's a bunch of startups
we've been checking out. They're going through
a new approach. There is actually a lot
of venture capital firms that are doing a
financing stage pre-ICO to help these startups
build the actual network. And in that case, when
they go to post-ICO, you could argue that that helps,
building the network before the ICOs can actually make
them fail the Howey Test, because there's no-- in a sense, you have a network,
a decentralized arrangement, that you don't have
the single enterprise-- GARY GENSLER: So I think, Eric,
you're raising two questions. Are there ways to
stage your financing to help build a network, just
as a pure money and finance? And secondly, what is the
regulatory implication, because I think it's two-part. I think, like in
any form of venture, you might stage your
financing and, in this case, sort of address the
network possibility before you do the regulatory. And it may be enough. I mean, the US Securities
and Exchange Commission and Hinman's speech sort of
said you could be sufficiently decentralized as Ethereum. They, in essence, had some
regulatory forbearance. And there's a key sentence
in that speech as to, I think the words were,
regardless of what Ethereum might have been in 2014-- like, Hinman kind of pushed
that to the side and said, I'm not going to address
that question implicitly. But it's sufficiently
decentralized. That's the debate
that's going on now between a bunch of
venture firms and the SEC. When are you sufficiently
decentralized? And so that form that you
just mentioned might get us there-- might. I don't know. Did you have one last question? And then we're going to-- AUDIENCE: Maybe, just on the
second point about likelihood of [INAUDIBLE],, [? which I ?]
obviously agree, is there any research on-- GARY GENSLER: This
is just a prediction. AUDIENCE: Yeah. I'll bet on it. How much of the ICO
funding was crypto to fiat to crypto, people selling
appreciated bitcoins-- GARY GENSLER: Terrific question. Almost all ICOs are
priced crypto to crypto. So if you look at
whether the initial ones, all the way back when the
Ethereum was priced vis-á-vis Bitcoin or, the most recent,
iOS that raised $4.2 billion, their actual pricing mechanism-- I'm not familiar with any
that priced versus fiat. Their pricing mechanism in
their auction or offering, it's almost always
crypto to crypto. But somebody might be
funding it fiat to crypto. But I think, to
answer your question, you should assume 99% the actual
exchange is crypto to crypto. AUDIENCE: So I mean,
just the decline in the price of Ethereum to
Bitcoin, Bitcoin to cash almost has to-- GARY GENSLER: It has
to put pressure on it. But I also think it is likely
that the decline in the ICO market has put price pressure
downward on Ethereum, for sure. And so Ethereum was the
second-most valued crypto. And now it's third. And it's had more price
decline than Bitcoin or XRP. And I think part of
that's narrative. Part of that story is
the decline in ICO space is likely to put a
little decline on that.
