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April 16, 2021

The Story of the Blockchain Boom.
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Way back in February 2020 B.C. (before covid), U.S. Securities and Exchange Commission (SEC) Commissioner Hester Peirce put together a proposal to help the blockchain industry innovate in a safe manner. In plain language, she suggested a three-year “Safe Harbor” -- or grace period -- to allow blockchain projects to be “born in the USA.”

We were very supportive of this proposal, and since Commissioner Peirce asked for feedback from the blockchain community, we worked with all of you to help improve the proposal. That all happened through this very newsletter (many of you are listed on the title page).

Recently, Commissioner Peirce issued SafeHarbor2.0, an updated version of her proposal, and we were pleased to see that many of our ideas and suggestions made it into the new document, which was released on GitHub (that’s just cool).

Today I will try to paint a picture of the problem that we’re trying to solve, and why SafeHarbor2.0 is a huge step forward, protecting both investors and the blockchain industry. I’ll try to paint a picture of what things will look like if this becomes law, so you can decide whether to support it.

 
The Problem We’re Trying to Solve

Flash back to the blockchain boom of 2017-2018. New projects were being launched every day using initial coin offerings (ICOs). In other words, these were blockchain startups looking for money from investors. In a typical ICO, investors would buy tokens (similar to buying shares of a startup company) and hope the tokens would go up in price so they could trade them for a profit.

This caused an explosion of new blockchain projects, as both founders and investors saw an opportunity to make “easy money.” Most of these projects (like most startups) never went anywhere, so many of these tokens became worthless.

For the SEC, whose charge is to protect investors, the central question is this: is a blockchain token an unregistered security? Investors were acting like they were buying stock in a high-flying tech company. But were they?

Are the stock market and the block market two different things?
This question had huge implications. If tokens were like stocks, then blockchain investors were really buying unregistered securities, which is illegal.

But there is a case to be made that they’re different. As Commissioner Peirce pointed out, a decentralized network like Ethereum doesn’t look like a public company. There is no CEO, no earnings statements, no legal entity. It’s more like a … well, like a network.

However, someone has to create a decentralized network in the first place. Imagine what it would be like if Vitalik Buterin started building Ethereum, and the government stepped in as soon as someone bought their first ether, calling it an “unregistered security!” and hauling him off to prison.

This is the Catch-22. When blockchain projects become decentralized, they are no longer like a company — but if they don’t start off like a company, they can’t become decentralized.

Commissioner Peirce’s proposal neatly solves this problem by giving new blockchain projects a three-year grace period, during which they can develop the code and build the community, with the goal of becoming decentralized. At the end of three years, they can either show that their project is decentralized, or register their tokens as securities (like traditional stocks).

The idea sounds great, but the devil is in the details. Let’s look at how the SafeHarbor2.0 proposal evolves this basic concept.
SafeHarbor2.0: How It Might Work

I’ll outline the major points as I see them, showing how a future Buterin could launch a blockchain project while still protecting investors. Note this is my interpretation of Commissioner Peirce’s document, with the benefit of having lived through the ICO craze.

  • The goal of your project will be decentralization. In other words, you’re not using tokens to fund your traditional startup, then slapping “blockchain” in front of the name. Investors may not know how it will turn out, but they know what they’re getting into.

  • You will clearly disclose your development team. This is a huge step forward from the 2018 boom, where it was not uncommon to see “anonymous founders.” Here investors have transparency and accountability — they know who’s behind the project.

  • Everything will be open source. Investors will be able to examine the source code, which can help prevent both scams (intentional) and hacks (accidental). Operating in broad daylight also provides rigor and transparency for blockchain teams.

  • You will have a block explorer. This is an incredibly good idea, so investors can see all the transactions made on the blockchain. Public companies don’t have this. The stock market doesn’t have this. It will be a huge step forward in financial transparency.

  • You will clearly describe the “tokenomics. This is another huge step forward: investors must understand the launch and supply, how many tokens were pre-sold (and to whom), how new tokens are minted or mined, and how the rules might be changed in the future.

  • You will clearly lay out a development plan. Investors will have a roadmap for achieving decentralization, with target milestones and quantifiable metrics (i.e., numbers) so investors will be able to measure whether those milestones are being achieved.

  • You will provide a warning to token purchasers. You must explain there’s a high degree of risk, most startups fail, and that investors should only put in as much as they’re willing to lose.

  • You will give six-month updates on all the above. This lets investors see what you’ve achieved, and it provides accountability to your project team to keep moving.

  • You will file your intent with the SEC. This alone sets a “bar of entry” that weeds out a lot of weaker projects, while also creating a handy watchlist for the SEC. In return for this “entry fee,” entrepreneurs will get a three-year grace period.

  • You will file an “Exit Report” at the end of three years, showing whether decentralization has been achieved. (More on this below.)

In summary, SafeHarbor2.0 is a meaningful step forward for both investors and the industry. Commissioner Peirce gets it.

But there’s still one more problem. You might say it's the central problem.
 

How to Define Decentralization

This is perhaps the thorniest issue that we faced when writing our response to the original proposal. After much debate, we ended up suggesting three “Tests of Decentralization” (see page 11) in the form of mathematical formulas, but these received a fair amount of criticism.

The key question is: can decentralization be measured?

Commissioner Peirce’s new proposal suggests that at the end of three years, blockchain teams hire an outside lawyer to argue whether their project has met the tests of decentralization, which she describes as (my words):

  • The blockchain network is not likely to be controlled by any one person or group, OR

  • The token behaves functionally more like a “utility token”

This is a critical issue that we still need to resolve. If decentralization is quantifiable (i.e., if we can measure it), then we have a simple test — although it leads to blockchain teams trying to just game the system so they meet the numbers.

On the other hand, if decentralization is more a “legal argument” that meets one of the two criteria above, then we have a lot of lawyers (and a lot of bureaucrats) arguing whether it is or is not decentralized at the end of three years — a precarious grey area.

Even if this becomes law tomorrow, it could be we still have three years to figure this out. As we’ve seen in the last three years, this industry evolves at breakneck speed. But let's get started now, with more thoughtful debate around this key issue: how do we define decentralization?

I welcome your feedback. The central issue is decentralization.
Health, wealth, and happiness,
John Hargrave
Publisher
Bitcoin Market Journal

Hi Everyone,

Perhaps this time is really different. Perhaps finally, the 99% is equipped with the capability of outperforming the bright suits of Wall Street.

The tool they are using to do this is not any sort of advanced financial analysis or deep understanding of economic thought. Actually, it's just a joke.

Even as bitcoin and ether decline this morning, the memecoin known as dogecoin, represented by a talking dog with poor grammar, has reached a peak of 33 cents, outpacing the U.S. dollar with all its might and military strength by 16,000% (according to Binance data) since the start of last year.

Considering that the Dow Jones Industrial Average has risen less than 20% within this time, it is safe to say that the teens on TikTok are literally crushing it in comparison.

Even those asset managers who are forward-thinking enough to add a reasonable allocation to bitcoin in time to catch this bull by the horns could only dream of such returns. In a very real way, they are the butt of this joke.

The Ironic Process Theory, a distorted version of which was recently quoted by Elon Musk, who previously declared himself the "former CEO of Dogecoin," helps us understand how something that may be a mere joke might soon become top of mind, or in the case of the investment world, the top dog.

And the more economists try to laugh it off or suppress it, the more it will come back to the fore with a vengeance.

The popular joke target for dogecoin that keeps coming up is a whopping $1. We're precisely one-third the way there now. 

Have an awesome weekend. To the moon!!
Mati Greenspan
Analysis, Advisory, Money Management