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Health, Wealth, and Happiness

January 20, 2023

“Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the delayed-gratification gene, you’ve got to work very hard to overcome that.”

- Charlie Munger

In today's issue: The crypto industry is engaged in what we're calling the Great Lie.

In a nutshell, the Great Lie is that cryptos are not companies and that they should not be subject to securities laws.

Our investing philosophy is built around the idea that cryptos are like companies and that tokens are like stocks. This is abundantly obvious by the homepage of CoinMarketCap, which looks exactly like a stock exchange.

This may seem like an obscure point, but it's the Great Lie at the heart of the crypto industry today. To aid us on the road to recovery, we need to renew our call to crypto honesty.

That call to honesty starts with today's column. There's something you can do to help; it takes just two minutes. Read on.

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New Investor Workshop: The Rise of Blockchain Reward Programs!

Next Wed. 25 Jan. at 6:30 pm ET, join us for a hands-on workshop to talk about the rise of blockchain-based reward programs (including how we built our new BMJ Reward Token).

Premium members can RSVP here.Bitcoin Market Journal publisher John Hargrave will be joined by Heather Lowe, Senior Attorney at Gravis Law, to discuss the state of crypto rewards and our real-life experience building them.

Not yet a Premium member?Sign up nowto get access to our complete library of previous investor workshops, plus our BMJ Reward Tokens airdropped to your crypto wallet each month.

Must Read

Today's most important story for crypto investors.

How is Polygon Doing It? (Bankless)

After we rejected building our new BMJ Reward Token on Polygon (here's why), this great piece from Jack Inabinet unpacks all the big brands who are building on Polygon.

Starbucks is doing coffee collectibles. Reddit is doing collectible avatars. Even Meta is integrating NFT functionality. It's all built on Polygon.

This piece credits Polygon Labs, the internal team funded by Polygon shareholders, for building these valuable relationships with big brands and helping them get these products to market.

For bringing crypto to the masses, you need to partner with mass-market brands. In that respect, Polygon has it covered on all sides.

Polygon is selling at 50% off its year-ago price.

Rather than building directly on Ethereum, Polygon is a Layer-2 solution that allows you to run on Ethereum only faster and cheaper. It's a real product with real utility and real customers.

Investor takeaway: Polygon's MATIC token is down about 50% year over year, putting it in line with bitcoin and the broader crypto market, but these big-brand projects are worth watching. The more they take off, the more Polygon will, too.

A Call to Crypto Honesty

by John Hargrave

The crypto industry is living a lie.

Most tokens really are securities.

The crypto industry wants you to believe that most tokens really are not securities. This is the Great Lie.

Today, I will explain how (and why) this Great Lie took hold, and how we usher in a new age of crypto honesty. By the end, I hope you will see the Great Lie is simple and obvious, and how you can help us move toward honesty (it takes two minutes).

Why Most Tokens are Securities

If you’re just joining us, the question of whether or not tokens are securities is at the heart of the crypto industry. Everything revolves around it.

For simplicity, think of a security like a company stock. Like buying APPL stock to invest in Apple. Companies issue these shares of stock to raise money. They then use the money to grow their businesses.

Obviously, this is exactly what happens in crypto. A couple whiz kids get an idea for a new product. They create a new token, sell it to investors, then live off the money while they build the product into something great (or not).

This is so obvious I shouldn’t even have to say it. Most crypto entrepreneurs sell tokens to investors to fund a business.

It may not be a business in the traditional sense (i.e., there may be no corporation), but the mechanics are the same.

Sell tokens. Raise money. Build the business.

There's nothing morally wrong with this. In fact, so long as the intentions are good (and most of the entrepreneurs I’ve met have good intentions), this creates value for the world in the form of new products or services. In America, we applaud small business owners.

Legally, however, it’s another matter. Securities, of course, are governed by the SEC, the agency charged with protecting investors (which, to be fair, is an impossible task, since many investors don’t want to be protected).

Creating a small business is easy, but raising money from investors is hard. Really hard.

Small business owners power America. I should know. I am one.

To raise money from the general public in an initial public offering (IPO) can cost over $100 million. it’s a non-starter for startups. There are other vehicles like Regulation A that can allow entrepreneurs to raise smaller amounts, but they're still complicated and expensive.

The reality is that you have to raise money just to raise money.

This creates a Catch-22. You need a certain amount of money just to hire the legal team and file the offering, then more money to do all the marketing and promotion of your Reg A offering. Meanwhile, you’re trying to build a product, find the market fit, and build the business.

For most entrepreneurs, this system doesn't work.

When blockchain-based tokens came along, They were revelations. Here were ways to quickly raise money so you could have some run room to build products and see if they worked.

Unlike the legal route, creating tokens was just a few lines of code. Crypto made it easy to receive the money from investors and start putting it to work. This is what fueled the ICO boom of 2017 and every blockchain boom since then.

The problem is that under current laws, most “tokens” are “unregistered securities.”

This is what the SEC's Gary Gensler has said, but the crypto industry doesn't like it, so the industry has focused its considerable brainpower on finding ways to make tokens not securities... and thus started the Great Lie.

"Most" Doesn't Mean "All"

When we say "most tokens are securities," please remember "most" doesn't mean "all."

This is where the SEC is falling down.

To be clear, some tokens are legitimately not securities. Our BMJ Reward Token, for example, is not used to raise money. It's a loyalty token for our Premium subscribers like any other reward program.

Likewise, it's hard to argue that the new coffee collectibles from Starbucks are securities or the new NFT avatars on Reddit. These tokens drive business, but they're not securities. Big difference.

However, if you've raised money to build a business (passing all four prongs of the Howey Test), then you've sold an unregistered security. To argue otherwise is the Great Lie.

The latest form of the Great Lie is “decentralized governance tokens.” The thinking is that if crypto projects are owned and managed by the people, no one is legally liable. The SEC has no one to sue.

As I’ve said repeatedly, this is an experiment doomed to failure. The beauty of great companies is they are run by great managers and leaders. Can you imagine if the public ran Apple?

Crypto projects are discovering that “decentralized governance tokens” are a mess as most token holders are a) too busy to get involved and/or b) don’t possess the technical knowledge to make meaningful contributions.

There are many other forms of the Great Lie, usually rhyming with “IPO” (ICO, IDO, IEO, etc.), but they all involve raising money, getting tokens that function like stock shares, and watching the prices on tickers that look exactly like they would on a stock exchange:

A path toward crypto honesty starts with three principles:

Most tokens are unregistered securities;
To avoid securities laws;
Because these laws don’t work.

Why Securities Laws Don’t Work

I just watched the four-part Netflix series MADOFF: The Monster of Wall Street about Bernie Madoff’s Ponzi scheme that defrauded investors out of $65 billion. The documentary goes into detail about the SEC’s failure to find the fraud, even when they were alerted to it many times.

The laws that were supposed to protect investors from Bernie Madoff? The laws don’t work.

America was founded on the principles of hard work and entrepreneurship. The “pioneer spirit” if you will, but securities laws (as we’ve just covered), make fundraising impractical for most entrepreneurs and pioneers. The laws don’t work.

The SEC will say the securities laws, most of which were written in the 1930s, have served us pretty well, but there have been plenty of updates to the original laws since then because, well, the laws don’t work.

The laws themselves are not written by the SEC; they're written by Congress. The SEC just enforces them. To get better laws, we must have action from Congress.

Better laws will enable entrepreneurs and startups to raise funds by issuing tokens to the public, perhaps up to a modest limit (say, $100K). They can then use these tokens to bootstrap the network and build something useful or great.

What's wrong with that?

What the people want is the ability to use tokens for fundraising. That’s the huge (and obvious) elephant in the room. I believe we can do this while protecting investors at the same time.

The laws don’t work. They're unnecessarily restrictive and prohibitively expensive for small companies and entrepreneurs to follow. Look at the explosion of token-based projects since 2017. That should be all the proof you need.

People want to create companies to build businesses. There's an enormous untapped potential of small business creativity and entrepreneurial talent. Better laws mean an explosion of amazing people building valuable products and services, creating jobs and wealth for the next generation.

Right now, that explosion is bottled up inside archaic securities laws.

The good news is laws are human inventions, and humans can change them. Rather than twisting ourselves around the Great Lie, let’s do something radical. Let’s start telling the truth.

If you’re a U.S. citizen, write to your senator. You can copy and paste this form letter:

Dear Senator [NAME],

Our current securities laws don't work.

As a crypto investor, I urge you to work with your fellow senators to find better laws to govern digital assets so honest investors like myself don't feel like criminals for investing in bitcoin, Ethereum, and other tokens.

I believe the power of these technologies can change the world. I also believe the U.S. should lead the world in finding a way to protect investors while encouraging crypto to thrive. Both are possible.

Please work on writing better securities laws that allow crypto entrepreneurs to innovate while permitting crypto investors to participate.

Sincerely,

[YOUR NAME HERE]

Let’s be honest... This is what we really want, so it's time to come out and say it.

The worst they can say is "no," but the best they can say is "YES!"

Health, wealth, and happiness,

John Hargrave

Publisher

Bitcoin Market Journal

ICYMI