Two Fascinating Perspectives on ICOs: Both Predict a Crash, One Identifies A Sustaining Benefit

17. October 2017.

“Now, back to ICO’s. This is a new way that businesses are selling “securities”. In a nutshell, you give them dollars and instead of stock (or bonds) they give you a new type of coin (not to be confused with a Bitcoin). What can you do with this coin? The same thing you can do with a stock certificate (except unlike stock, with a coin you probably don’t actually own any part of the company, depending upon terms of issuance)…almost nothing. Can you sell a company-specific-coin? Sure, if you can find someone who wants to buy it, and provided your sale is done via SEC rules for the type of offering it was issued pursuant to (Reg D, Reg A, Reg CF, etc).

The problem is that this has been a wild-west situation, with people cavalierly selling ICO’s to unsophisticated people who are irrationally glassy-eyed about “coins”, and with total disregard for securities regulations. The SEC has already started to take action against these, and a flood of regulatory enforcement actions are in the near-term forecast (see ICOs and a soon-arriving flood of SEC enforcement investigations). There will be lawsuits. There will be fines. There might be jail time. And, in my opinion, there will be massive losses for “investors”.

Some attorneys, and even some platforms such as StartEngine, are working to clean up this market and ensure that ICO’s are conducted pursuant to securities regulations. They are even hosting what I believe is the industry’s first securities conference for ICO’s in Santa Monica in November, the “ICO 2.0 Summit”. This is a very, very good sign.

So, am I open to Prime Trust becoming involved with ICO’s by acting as escrow agent for the offerings? I honestly don’t know. I expect that we will have customers who want to add their “coins” to their asset protection trusts, just as they would stocks, bonds, real estate, or other assets. That’s fine, as we don’t have an obligation to value those things (though we do obviously provide statements which include current prices/values for exchange-traded securities held in custody, just not for “non-quoted” assets like real estate, business interests, etc).

However…

  • When we hold cash for people, it’s FDIC insured for each individual customer.
  • When we hold marketable securities, they are in an SIPC insured account.
  • When we hold real estate, it has title insurance.
  • Private securities, business interests, partnership agreements and licenses are direct instruments with the issuer and held in our (street) name.
  • If we hold coins, and an employee, hacker or someone else steals coins from the place where they are held, what insurance is there? None, as far as I know. What recourse would we have to recover the stolen property? Almost none, from what I can tell.

That makes it very scary for a chartered, regulated, insured financial institution like Prime Trust to agree to hold these for people. So if we act as escrow agent for ICO’s, what is our regulatory risk? What might our tort/civil risk be if coins get stolen or if/when things go south or the offering gets hit by regulators as fraud? How do we price that risk? I have yet to get comfortable answers to those questions. I’m open to figuring this out, but don’t mind missing the market if I can’t quantify the risk.”

If interested in an opinion that shares the caution but also identifies the smaller market that may prove sustainable, read this article by Adam Ludwin, the CEO of Chain. Adam begins by admitting that decentralized services have little going for them – which I wish more developers in decentralized services would admit:

“In fact, on almost every dimension, decentralized services are worse than their centralized counterparts:

  • They are slower
  • They are more expensive
  • They are less scalable
  • They have worse user experiences
  • They have volatile and uncertain governance

And no, this isn’t just because they are new. This won’t fundamentally change with bigger blocks, lightning networks, sharding, forks, self-amending ledgers, or any other technical solutions.

That’s because there are structural trade-offs that result directly from the primary design goal of these services, beneath which all other goals must be subordinated in order for them to be relevant: decentralization.

Remember that “elaborate and expensive competition” I described? Well, it comes at the cost of throughput. Remember how users need to “cryptographically sign” their transaction announcements? Well, those private keys need to be held onto much more securely than a typical password (passwords can be recovered). Remember how “no single entity operates” these networks? The flip side is that there is no good way to make decisions or govern them.

Sure, you can make decentralized applications more efficient and user friendly by, for example, centralizing users’ cryptographic signing keys (i.e., control of their coins) with a trusted entity. But then we’re mostly back to square one and would be better off using a service that is centralized.

Thus, bitcoin, for example, isn’t best described as “Decentralized PayPal.” It’s more honest to say it’s an extremely inefficient electronic payments network, but in exchange we get decentralization.

Bottom line: centralized applications beat the pants off decentralized applications on virtually every dimension.”

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