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  • GARY GENSLER: So let's turn to this world

  • of initial coin offerings.

  • And so we're going to chat about it today and next Tuesday.

  • Next Tuesday, we'll come back to the regulatory side of this.

  • And in fact, there were some new things out

  • of the Securities and Exchange Commission

  • even last week on initial coin offerings.

  • But we're going to spend a little time on ICOs today.

  • And so of course, we've talked about Bakkt already.

  • And we'll talk about their characteristics.

  • What is an initial coin offering?

  • What is this new form of crowdfunding?

  • How to evaluate initial coin offerings-- and some of this

  • will be familiar, because it's how

  • to really evaluate any blockchain technology

  • project in some regard.

  • And then I'm going to share some statistics,

  • and then hopefully wish you all a Happy Thanksgiving

  • and call it a day.

  • So the study question was, what is

  • this new form of crowdfunding?

  • Does anybody want to tell me?

  • What is an ICO in the easiest way?

  • You're going home for Thanksgiving and somebody says,

  • what have you been studying?

  • And you say ICOs.

  • What is an ICO?

  • Yeah?

  • AUDIENCE: It's a startup that sells its own crypto

  • token to raise money.

  • GARY GENSLER: So it's a--

  • AUDIENCE: Sells its own crypto token to raise money.

  • GARY GENSLER: So it's a way to raise money with a crypto

  • token, pretty simple.

  • AUDIENCE: And in addition to that,

  • it gives people an expectation that the token's value

  • will go up in the future.

  • GARY GENSLER: Did anybody read the optional reading for today

  • about the dude that actually came up with this idea?

  • Do you remember his name?

  • |

  • AUDIENCE: JR.

  • GARY GENSLER: JR, Willett, is it?

  • AUDIENCE: Yeah.

  • GARY GENSLER: Yeah.

  • I mean, I don't know if anybody watched the video,

  • but this individual in 2010 came up

  • with an idea of saying Bitcoin is out there.

  • I mean, Bitcoin was selling for like $0.06,

  • $0.10 a Bitcoin or something.

  • He said, if you could put something on top of Bitcoin--

  • I don't even know if you use the term smart contract.

  • But he did say, if you could put an application

  • on top of Bitcoin-- it was before Vitalik Buterin

  • came along with Ethereum.

  • He said, you could raise a lot of money.

  • And he went to conference after conference

  • and tried to convince people.

  • And there's even this one feedback

  • where somebody said to him in an email exchange,

  • you're probably breaking the law.

  • This can't be legal.

  • But he couldn't get anybody to adopt this idea.

  • And he's not wealthy now either.

  • He missed the whole ICO way, but he was basically

  • the inventor of this initial coin offering,

  • saying that the technology of Bitcoin,

  • even the scripting language, was enough

  • that you could maybe raise money on top of Bitcoin

  • with an application layer.

  • And we'll sort through.

  • Now, I'm going to see if I can do a little video for you.

  • This shouldn't be too hard for me.

  • So this is a two minute video of all the ICOs

  • that have ever happened.

  • And Elementus, I've shown you this picture,

  • but you know there wasn't much.

  • Where we are we?

  • Are we in 2015 now?

  • Nothing.

  • So you see the first ICO that they

  • mark in there is Ethereum itself raised $18 million.

  • I apologize.

  • It's only going to take two minutes,

  • but you're going to see the whole history of ICOs.

  • And then there's nothing.

  • It's really-- so you can see no country,

  • no official sector is really focused on this in 2016.

  • But then there's going to be a big offering

  • in the middle of 2016.

  • Anybody know who that is?

  • Dow.

  • $168 million, and it fails.

  • It spectacularly fails. $50 million of it is stolen

  • and it leads to the Ethereum fork and things like that.

  • But still not a lot, and then, by the summer of '17,

  • Katy bar the door.

  • Tasos and quarter billion dollars, Filecoin,

  • a quarter billion dollars.

  • And then oh, I pulled the one that finished in 2017.

  • I'm sorry.

  • So there's the final chart that goes all the way

  • through August.

  • Now, some say that it's not $28 billion.

  • Some say it's $23 billion, because there's

  • no really good figures.

  • But EOS raises $4.2 billion and Telegram raises $1.7 billion,

  • huge amounts of money.

  • And this is in a period--

  • almost all of this was raised and in about 12 months,

  • from June of '17 to June of '18.

  • Call it $25 billion in that 12 months.

  • And now, it's trickling off.

  • Now, it's less than $0.5 billion month.

  • But that $25 billion in 12 months

  • compares to venture capital--

  • and Simone, you might help me.

  • But venture capital worldwide is about $150 billion

  • a year in a 12 month period.

  • I think the figures range from $125 to $170 billion.

  • So just to give you a sense, in this 12 month

  • period, it's, give or take, 20% of the size of all venture

  • funds, 20% to 30% roughly of all venture funds.

  • And again, it's tailing off, but it's significant.

  • If you can come up with an idea in these 12 months

  • and raise the money, JR Willett's idea,

  • this was the moment.

  • So what are initial coin offerings?

  • What's the more detailed characteristics?

  • Well, number one, they're proceeds

  • that help build a network.

  • That's what Vitalik Buterin actually did back

  • in 2013 is when he published, in 2014 is when he went live.

  • But he was raising $18 million, hired a law firm, big, big law

  • firm in--

  • I can't remember if it was Perkins or Skadden Arps,

  • but a big US law firm, partnered up with a Canadian, Joe

  • Lubin, who saw this potential in a 19

  • or 20-year-old kid who had great writing skills.

  • He knew a lot about Bitcoin.

  • He had been writing about it for a number of years,

  • but he also had a great idea.

  • He moved off to Switzerland for regulatory and other reasons

  • set up a foundation for tax and other reasons,

  • and did it in a very professional way.

  • But you can look at their sources and uses.

  • You can go back to the original offering

  • and say they were willing to say what they were going

  • to use the $18 million for--

  • law fees and counting fees and the usual things you

  • do when you start something.

  • So it's proceeds to help build up a network.

  • But just like that moment, it was before the network

  • could be used.

  • So that was pre-functional.

  • We're going to show statistics later,

  • but anybody want to take a gander in the last three

  • months.

  • So this isn't back 2014.

  • I'm talking about third quarter of 2018.

  • What percentage of token offerings

  • were offered before the network is functional, fully

  • functional?

  • Alin?

  • AUDIENCE: 99%.

  • GARY GENSLER: Anybody else want to take a--

  • argue with Alin?

  • Just because he is a computer scientist?

  • Tom?

  • AUDIENCE: I was going to say 95%.

  • GARY GENSLER: All right, 95%.

  • All right, so we've got a market.

  • So 95%, 99%.

  • Does anybody want to say that more than 5% were functional?

  • No?

  • All right, I'll give you the number later.

  • It's in between the two of you.

  • It's in between the two of you.

  • So it's raising money before something is functional.

  • It's like raising the money for a Broadway play

  • before you've got the actors and the script.

  • Or it's even worse than that.

  • You don't even have the idea.

  • But usually, you have an idea.

  • Usually-- what percentage of ICOs

  • are marketed on just an idea?

  • Anybody?

  • I have that statistic later, too.

  • Rahim, you have a view?

  • What do you think?

  • AUDIENCE: I would think maybe of these

  • with an idea, maybe 60% to 70%.

  • GARY GENSLER: 60% to 70%.

  • Sean?

  • AUDIENCE: I would say 90%.

  • GARY GENSLER: 90%.

  • All right, no, it's in between the two of you.

  • Rahim is a little closer.

  • It's about 75%, just an idea, or at least as defined

  • by a certain tracking center.

  • So it's usually you have an idea, you market it,

  • you raise some money, or at least

  • during these boom periods in the last 15 months.

  • The development, while open source, is largely centralized.

  • But in fact, in the last quarter,

  • the last three months, well over half

  • isn't even open source technology any longer,

  • partly because it's so based on just an idea

  • that people aren't publishing their source code until later.

  • They will eventually publish some source code.

  • But at the moment of the initial coin offering,

  • a majority don't even have open source software at that moment,

  • even though they say later they'll publish this software.

  • But even if it's open source, it's highly centralized.

  • Please.

  • AUDIENCE: I don't understand how open source is related

  • to [INAUDIBLE] if I say I'm going to sell something,

  • these are the coins you should use to pay me back.

  • Where is open source connected?

  • GARY GENSLER: So there's a movement

  • in technology and software development--

  • certainly, it was started in the 1990s,

  • but it may have been earlier.

  • But now, it's very prevalent-- where

  • you publish your software and everybody can see it.

  • So it's transparency in software.

  • That's called the open source movement.

  • In the blockchain technology, when Satoshi Nakamoto first

  • published the Bitcoin software in January of 2009,

  • it was open source.

  • It meant everybody could see the computer code.

  • And you could even--

  • it's actually published under an MIT

  • license, which meant you didn't have to pay any fee to use it.

  • Zero fee, you can copy it, you can use the Bitcoin core

  • software.

  • That's the definition.

  • That's the best definition of open source,

  • because it's with an MIT license.

  • But it's truly open.

  • That's what I'm referencing here.

  • And the relevance is that, though there

  • is a big open source movement in a lot of fields

  • and in blockchain and certainly in Bitcoin

  • and the Ethereum network is open source,

  • many, many developments and initial coin offerings

  • don't publish their code until months later.

  • They raise the money, they're still developing their code.

  • Are you with me?

  • So Brotish?

  • AUDIENCE: So why do investors put in their money

  • even before the code is published?

  • GARY GENSLER: So why do investors

  • put their money in before the code is published?

  • Why do investors put money into any investment?

  • Sabrina?

  • AUDIENCE: FOMO.

  • GARY GENSLER: What's that?

  • AUDIENCE: FOMO.

  • GARY GENSLER: What's FOMO?

  • Fear of missing out.

  • All right.

  • Oh by the way, Sabrina and Thalita,

  • I announced that anybody that was here today

  • got double credit for participating right

  • before Thanksgiving.

  • So I just want to let you know.

  • I live by that.

  • So fear of missing out.

  • Why else do people invest in any investment,

  • even if you're just investing in Apple stock?

  • AUDIENCE: To get returns.

  • GARY GENSLER: To get returns, to get a profit,

  • to take risk and a return.

  • Brotish?

  • AUDIENCE: I think in one of the readings

  • they mentioned that one strategy of putting money in an ICO

  • is going to the board and understanding.

  • So I thought that that was a prerequisite

  • for the investment.

  • I also happened to attend one seminar here

  • where there was a company called BlockTEST,

  • which is funded by a--

  • GARY GENSLER: What's it called?

  • Block--

  • AUDIENCE: BlockTEST.

  • It's MIT alumni.

  • So they evaluate these codes and run some solutions

  • to verify whether they're doing what

  • they're supposed to be doing.

  • So I thought that it was a prerequisite

  • for the investment.

  • So that's where my question came from.

  • GARY GENSLER: So you assume that you could always read the code

  • to make the investment.

  • In the fall of 2017 and into the spring of 2018,

  • I would suggest that wasn't always the case.

  • And in fact, it usually was not the case.

  • I think if these things are to persist,

  • my prediction is you'll see more and more rigor

  • in this marketplace.

  • Oh, I skipped promoters.

  • The people starting it keep some of the coins for themselves.

  • This is not that different from any venture capital round.

  • When you're raising money and you're

  • selling equity or selling a preferred stock in something--

  • you'll know this, any of your taking ventures

  • course or if you worked in it--

  • you're going to keep equity for yourself as well.

  • So this is just how much do you keep for yourself,

  • how much do you sell to the public,

  • but just translated to a new form of capital raising.

  • Instead of it being applied to your equity,

  • you're applying it to this new form of fund raising.

  • They're fungible and transferable,

  • meaning you can sell them.

  • Sometimes, you can't sell them for a number of months.

  • Technically speaking, sometimes you

  • can't sell him until the platform is functioning.

  • But often, you can still sell them

  • by private agreement, private arrangements.

  • Ethereum-- let me just mention something about Ethereum.

  • When Ethereum was first sold, for 12 months, the only record

  • you had that you were purchasing Ethereum was

  • the email return back from either Vitalik or others who

  • said, yes, you've purchased it.

  • It wasn't even that you had a private key for 12 months.

  • You had an email confirmation.

  • But you could, based on that email confirmation,

  • sell the right to what later you would be issued, a coin.

  • Sorry?

  • AUDIENCE: Yeah, so along those lines,

  • I've seen a number of ICOs use SAFTs, simple agreement

  • for future tokens.

  • And I guess I'm wondering what the trade-offs are

  • versus directly issuing the tokens at time of the ICO.

  • And then more specifically, that just feels like you're not even

  • getting the token, you're not even

  • getting the rights to the token until the network launches.

  • That seems like a second order, really far removal

  • from even close to any form of a utility on a network.

  • GARY GENSLER: Is this an answer to the SAFT?

  • AUDIENCE: Yes.

  • So isn't it because under the US--

  • I mean, right now, the coins aren't

  • considered as a security.

  • And if you are doing ICOs, then you

  • can only sell it to accredited investors [INAUDIBLE]

  • if you are based in the US, and you

  • can do some things other than that outside the US.

  • And so I think SAP is trying to see if coins can--

  • at some point, they can be considered as not

  • as securities.

  • So I think the purpose of SAP is to, I guess,

  • expand the basically investor base so

  • that more people can purchase.

  • GARY GENSLER: So it's Jihee right?

  • So Jihee's answer delved into the regulatory,

  • but I'm going to take it up a level from the regulatory.

  • What you said was accurate, but there's a--

  • it's selling something for future delivery,

  • because the token currently is not usable.

  • Just in the last quarter, I'm talking about the last quarter

  • of 2018, three quarters of the ICOs

  • that were started or launched were just on an idea.

  • So they hadn't yet written the code.

  • A token wouldn't even be usable.

  • So you have some economic basis to say,

  • I'm trying to sell you something that will be a future delivery.

  • When Vitalik Buterin even did Ethereum, you got an email.

  • It was not called a simple agreement for future token.

  • Is that what SAFT is?

  • But it was a simple email for a future token.

  • I mean, it was, in essence, an economic arrangement

  • where you exchanged Bitcoin for an email.

  • And that email, some 12 months later,

  • you would get a private key when the genesis block happened.

  • And most of these still had to deal

  • with that economic arrangement.

  • Then a law firm here in Boston took

  • an arrangement that was handled in securities offerings

  • and they created something, and they put out, in essence,

  • a legal white paper, if you wish,

  • called a Simple Agreement for Future Tokens, SAFT,

  • to try to address, they thought--

  • they thought-- I think they were wrong, by the way.

  • But they thought they were addressing

  • a bunch of regulatory issues that somehow this SAFT, this

  • would be maybe have to register under the securities laws

  • in the US.

  • But when you finally got the token,

  • maybe later it would not have to be a registered security.

  • And they were trying to do a two-tiered arrangement.

  • But even before you got to this Boston law firm that did this,

  • you still had the economic reality

  • that you were trying to raise money

  • today to get a token later.

  • And then the lawyers got involved to try to--

  • I would say they were trying to get

  • between the wallpaper and the wall of regulation

  • and say, we'll register the first thing,

  • we'll give it a fancy name.

  • We'll call it a SAFT.

  • We won't register the second thing when you finally

  • get the token 12 months later.

  • I think they'll probably end up mistaken on that.

  • But I think that was the background.

  • Let me hit a couple other points.

  • Scarcity is usually, but not always, fostered

  • through some monetary policy.

  • If we go back to Nakamoto consensus and Bitcoin,

  • what's the monetary policy there?

  • Anybody remember that monetary?

  • I call it monetary policy, but it's

  • the control of the supply of the money supply.

  • So what's the money supply algorithm in Bitcoin?

  • Eilon?

  • AUDIENCE: [INAUDIBLE]

  • GARY GENSLER: Half?

  • Half of what?

  • AUDIENCE: [INAUDIBLE] reward for the blocks.

  • GARY GENSLER: So there's a reward.

  • The Bitcoin monetary policy is a reward of--

  • anybody remember the reward today?

  • AUDIENCE: 12.5 coins.

  • GARY GENSLER: 12 and 1/2 coins today.

  • It started at 50 coins every how many minutes?

  • 10 minutes on average.

  • But every 200,000 blocks, it halves.

  • So somewhere out in the 22nd century,

  • it will cap at 21 million coins.

  • But way before that, the monetary policy,

  • it's slowing and slowing and slowing the growth rate.

  • So embedded in the algorithm of Bitcoin is a monetary policy.

  • Is it immutable?

  • How many people would say that's hard coded and immutable?

  • Not a hand.

  • How many people would say it's actually not immutable?

  • So what can change it?

  • Alan, you didn't raise your hand either way.

  • AUDIENCE: It depends how you define immutable.

  • GARY GENSLER: Yes, I'm listening.

  • AUDIENCE: If you change the monetary policy,

  • you're going to have a fork.

  • You're going to have the old folks sticking

  • with the old policy and the new folks

  • sticking with the new policy.

  • And now, what has changed?

  • Some people argue nothing has changed, while others

  • argue something has seen.

  • GARY GENSLER: All right.

  • So Alin's pointing out not everybody will go along

  • with the new monetary policy.

  • But I would note on Ethereum, they've

  • changed their monetary policy two or three times.

  • And they haven't had to use a hard fork.

  • So they've changed their block reward.

  • And in changing a block reward, by lowering the block rewards,

  • by consensus, they effectively are

  • changing their monetary policy, because they're changing,

  • in essence, their inflation rate.

  • But most initial coin offerings have some algorithm,

  • some built in, what we'll call, money supply policy

  • or monetary policy, but not all of them do.

  • Some, if you read them closely, they

  • can issue as much as they want whenever they want

  • and so forth.

  • But I would say the majority have a monetary policy.

  • If this space, if this world really took off a,

  • lot of monetary policy economists would study it.

  • But there's not a lot of deep research

  • yet on what works, what doesn't work.

  • It's a playground or a sandbox if it

  • were to ever take off as to exploring

  • hard monetary policies.

  • Sean?

  • AUDIENCE: So just based on those six criteria,

  • maybe apart from the last one.

  • It looks to me like--

  • GARY GENSLER: You want to get rid of that one?

  • AUDIENCE: Yeah.

  • It looks to me like a Kickstarter.

  • GARY GENSLER: Like a what?

  • AUDIENCE: A Kickstarter.

  • GARY GENSLER: A Kickstarter.

  • So this looks like Kickstarter to you?

  • But does Kickstarter give you something else?

  • Anything?

  • AUDIENCE: It depends on how you structure the terms.

  • Basically, most of the items that are posted on Kickstarter,

  • they use the funding to build their product.

  • It's before it's actually functional.

  • And it's also open source.

  • It's pretty much the same.

  • GARY GENSLER: Shimon?

  • AUDIENCE: There's a very big difference,

  • which is that Kickstarter, you fix the price

  • and you let the market determine the quantity, right?

  • And arguably, you fix the quantity

  • and you let the market determine the price.

  • That's a big difference between those two,

  • and the fact that there's a secondary market, right?

  • You can also sell your items, lieke the super early bird

  • items in a secondary market.

  • Sure, you could.

  • And again, this is nothing--

  • yes, you can.

  • I mean, I would argue that it's a lot harder, right?

  • But it also is the case that, if I'm selling a new widget,

  • I'm not going to sell the early birds for $30, right?

  • That's the price, right?

  • And here, you're letting--

  • the auction is for the price not for the coin.

  • GARY GENSLER: So there are similarities to Kickstarter.

  • There's similarities to other crowd funding mechanisms,

  • but there's also some real distinctions in terms of--

  • one, of course, this is all digital assets.

  • And Kickstarter often there is a service or a good,

  • a physical good, or a service you're getting.

  • But also, what Shimon does?

  • Hugo?

  • AUDIENCE: Just to push back on that last point,

  • often the ICOs are priced in theory.

  • And then only on the secondary markets do the prices change.

  • Isn't that the case?

  • If you want to spit in an ICO, they'll

  • be like, oh, here's 1,000 points for 0.1 F. And that, I guess,

  • varies based on price fluctuations in US dollars,

  • if you're still taking US dollars.

  • But since you're using Ether to pay for the ICO--

  • GARY GENSLER: Hugo's saying it's not really

  • that price is variable until it gets to the secondary market.

  • But I would contend that one big difference between most

  • of what's done on Kickstarter, not everything

  • but most, and here is here the investors

  • really are looking and anticipating

  • profits and returns.

  • And when I think of most people that

  • are going into Kickstarter, they're

  • getting one product, one unit of something as a reward.

  • And they're not looking for a significant profit

  • or appreciation.

  • They could-- maybe a modest, but not a--

  • AUDIENCE: The secondary market--

  • the super early birds in the secondary market--

  • GARY GENSLER: Super early birds, yeah.

  • So there is monetary policy and this last point,

  • that purchases really are anticipating profits

  • through appreciation.

  • So that's what I think of.

  • Now, how to you evaluate ICOs?

  • You're not going to be surprised by my first one.

  • It's what we've talked a lot about in this class.

  • Assess the viability of the token use case.

  • Like, does it make any sense?

  • Does it make any sense?

  • Do you need to use an append only log

  • with a consensus among a bunch of parties

  • that can write to a ledger?

  • So append only logs and consensus,

  • throw a bunch of cryptography in there, too.

  • And do you need a native token?

  • Those basic fundamental economics

  • that we've talked about a lot this semester,

  • hopefully, will save you off from investing

  • in really bad ICOs.

  • But beyond that, which I think is over 50% of what you should

  • do, read the white paper.

  • I tell you, if anybody could read the Telegraph white paper

  • that they raised $1.7 billion and please tell me--

  • feel free to tell me what they are

  • going to use that money for, because I've

  • read it a number of times and I wouldn't invest in it,

  • because it felt like they could raise the money

  • and do almost anything they want with it.

  • I mean, they're an incredible company.

  • They've got hundreds of millions of users.

  • And they have incredible resources to draw upon,

  • but I'm still not sure what they're using--

  • what I will ultimately be able to use the coin for,

  • what service I can get from that,

  • and what they're using the money for.

  • So I would say, read the white paper.

  • And if there's source code, which

  • is less than half the time there's source code,

  • have somebody you trust read the source

  • code if you can't read it.

  • Who's the team?

  • Just like any venture capital investor,

  • you want to know who's the team.

  • What's their history?

  • What's their experience and so forth?

  • But I start with the economics and the white paper

  • before I get to the team and the website.

  • Is there venture capital involvement,

  • and who and which ones?

  • Now, VCs often will take part of the--

  • at this stage will take part of the equity and also

  • part of the coin round.

  • So they're doing hybrid investments.

  • It's very rare, now in November of 2018,

  • that a venture capitalist will only

  • take a part of the token round.

  • In late '17, there were still some they were just getting

  • on this parade and taking parts of the pre--

  • basically, the pre-round of the tokens.

  • But now, they want part of the actual equity and tokens.

  • Erik, were you asking?

  • AUDIENCE: No, it's just that's exactly what we

  • got from a VC that mentioned that they go with a free ICO

  • round of investment first as a means

  • to assess the capability of the full body offering,

  • and then go through the ICO again.

  • GARY GENSLER: But their first investment

  • is either preferred or an equity-like instrument.

  • AUDIENCE: Absolutely.

  • And I feel like it changes completely the time

  • from the investment for a venture capitalist, which

  • normally would for five to 10 years.

  • And here, it's like you're going to hide

  • for the next few months, and then just resell the coins

  • right after.

  • What is the time frame?

  • GARY GENSLER: So Alexis's observation

  • is this might shorten the time frame for venture capitalists.

  • I would say yes during this 2017-2018 period.

  • I don't know if that will persist.

  • But yes, I think that, for venture capitalists saying,

  • well, I can be taken up by selling the company,

  • I can be taken out of my investor term--

  • how am I going to sell my investment, my take out?

  • I can take the company public, I can sell the company, or maybe

  • I can ICO, and if you can do it sooner.

  • And what happened a lot in the fall of '17 and into '18

  • is many venture capitalists changed

  • their standard contracts and their standard documentation

  • when they were investing in start ups

  • to say also that they could participate in the ICO round

  • and that they could participate in the early rounds.

  • But if you're assessing an ICO and you're

  • thinking about investing in it, you

  • want to know what venture capitalists are backing it.

  • And then a big thing that folks look at--

  • I put it fifth on the list, as you can see--

  • is what's the community.

  • How many Redis post, Medium posts?

  • How many people are following Bitcoin talk, et cetera,

  • et cetera, et cetera?

  • There's eight or 10 of these talk channels.

  • And I don't know the ratios anymore,

  • but it used to be if you could get

  • to like 7,000 to 10,000 folks following you on Reddit

  • and Medium and everything, you knew

  • you could raise a successful ICO.

  • Like in the heyday, if you could get your numbers

  • to a certain following, then that

  • was enough momentum to raise your $15 to $30 million.

  • I think that's probably a little less so now.

  • Tom?

  • AUDIENCE: I mean, this is just the definition of the greater

  • fool theory, right?

  • If enough people believe that your token is valuable,

  • then it's valuable.

  • So I get that it's the fifth thing on the list for a reason.

  • GARY GENSLER: Right.

  • But if you're a momentum investor

  • and you're just saying--

  • or if it's FOMO investing as Sabrina

  • said, to see how big the community is.

  • And is there an interest in it?

  • Does this have a following?

  • I said I'm neither a maximalist nor a minimalist.

  • I'm just not--

  • I'm not trying to--

  • but this is real economics.

  • If you had 100,000 people following in a community,

  • probably more likely it's a successful ICO

  • in terms of raising money.

  • It doesn't mean it's going to be successful as a token later on.

  • Here?

  • AUDIENCE: You don't actually use it as a specific criterion,

  • but you can use it maybe as a filter, the first filter.

  • If you have that the person who's

  • publishing the white paper has not been posted,

  • he's never been there, then it raises

  • a little bit of suspicion.

  • And then you have to go on and do some more

  • research on the paper, on the idea, on the guy, whatever.

  • GARY GENSLER: It is a way to see whether there's

  • other people even tuning in and showing interest.

  • And it could be the greater fool theory

  • just because if Tim Draper, Mike Novogratz

  • is invested, who are both very savvy investors and very

  • successful investors, you might say, do I want to be in?

  • Or is that my time to say it's not to be in,

  • because they've already gotten the best of it.

  • Either way, I mean, they're still good investors.

  • What's their monetary policy?

  • Again, how's it going to affect--

  • can they-- is it one of the majority that

  • has a fixed monetary policy?

  • Or is it one of the minority that

  • has no monetary policy at all?

  • How did they distribute the tokens?

  • And I mean in two ways.

  • Basically, some will actually disclose a cap table,

  • a capitalization table of the tokens, the same way

  • you can think of a capitalization table of equity,

  • but who owns the tokens pre-sale and post-sale.

  • So that's what I mean by token distribution.

  • Are they keeping 10% for the founder or 80% for the founder?

  • It might change your view on all of it.

  • But also token distribution is how are they selling it

  • during what's usually a 30 to 60 day period or 15 to 60 day

  • period.

  • The longest that I am aware of is 350 days.

  • EOS sold over 350 days.

  • Every day was a form of a Dutch auction.

  • It was a remarkable way that they sold 4.2 billion.

  • I doubt that anybody who did EOS at the beginning

  • thought they were going to raise over $1 billion.

  • In fact, maybe nobody thought they'd raise over $100 million,

  • because they started in the summer of '17.

  • But they did a distribution over 350 days.

  • Most, though, are done over 15 to 60 days or so.

  • Please.

  • AUDIENCE: So you mentioned [INAUDIBLE]

  • how are ICOs accounted for?

  • Do they go as equity on their revenue?

  • Where do they fall?

  • GARY GENSLER: So terrific question.

  • How are ICO proceeds accounted for?

  • Who's our accountant?

  • Aviva?

  • AUDIENCE: No idea.

  • GARY GENSLER: All right, no idea from Aviva.

  • I want to try to answer it, but anybody?

  • AUDIENCE: I think that's another important feature.

  • It's the token economics, how you use potential incentive,

  • [INAUDIBLE] and for the profit of the project,

  • the project would repurchase their tokens

  • in a way similar to a dividend.

  • GARY GENSLER: But how do you book it?

  • What's the debit and what's the credit?

  • AUDIENCE: Marketable securities and cash.

  • GARY GENSLER: What's that?

  • AUDIENCE: [INAUDIBLE]

  • GARY GENSLER: I hope this works.

  • You know of the T account, right?

  • We've got the T account.

  • Over here's cash, right?

  • Because you receive cash when you sell something.

  • What's the credit item?

  • AUDIENCE: Question mark.

  • GARY GENSLER: What's that?

  • AUDIENCE: Retained earnings.

  • GARY GENSLER: You think it's retained earnings?

  • AUDIENCE: Yes.

  • GARY GENSLER: You think it's just retained earnings?

  • AUDIENCE: They're selling nothing.

  • GARY GENSLER: All right.

  • So the question is, is it earnings?

  • Is it a revenue item when you sell it?

  • Or some people book it as deferred revenue.

  • So there's two ways you can book it.

  • You could also book it as a liability,

  • but it's either deferred revenue or current revenue.

  • All right, what could motivate you to book

  • it as a deferred revenue instead of current revenue?

  • What's that?

  • AUDIENCE: Taxes, probably.

  • GARY GENSLER: Taxes.

  • So some book it as deferred revenues,

  • because they don't want to book taxes.

  • And God knows whether that's really the right way

  • to book it.

  • And others book it right as a revenue item right now.

  • But I don't know of anybody, whether they're booking it

  • as deferred revenues or current revenues, that

  • wants to book it to trigger that it's a security.

  • So most law firms that I understand, they're not they're

  • not accountants, but they don't want their clients

  • to book it in a way that will make it look more like equity.

  • So it's either deferred revenue or current revenue.

  • Some, I've heard, have called it a liability,

  • but I think that's the minority.

  • AUDIENCE: I don't know if it takes too much time

  • to go through a use case to make these examples tangible.

  • If I'm promising to deliver a good,

  • then the company is getting back the tokens, right?

  • How do you put it back out again in the market?

  • GARY GENSLER: So the question is what is the use case.

  • So some use cases, the token is issued

  • and it's really for the community.

  • And some tokens come back to the company.

  • So a file storage, Filecoin, for instance,

  • they raised $250-some million, the equivalent of.

  • And in that case, I think the token

  • would be used within the community

  • rather than back to the company.

  • So even like Ethereum, when you use

  • Ethereum as a form of buying computing power,

  • it doesn't go back to the Ethereum Foundation.

  • So the most dominant--

  • and that's why it really should be booked as current revenue,

  • because it's not even that the software provider is providing

  • a service later.

  • The most dominant use case is, like in Ethereum,

  • that you're using the Eth for other people in the network.

  • It's a monetary unit that's not coming back.

  • There are some where it comes back,

  • and then it's basically returned to the corporate treasury.

  • So it's two different models.

  • Have I lost you or are you with me?

  • AUDIENCE: [INAUDIBLE]

  • GARY GENSLER: All right.

  • One way is that it gets returned to the company.

  • That's the more narrow case.

  • Usually, it's you're selling a token that will be used.

  • And I'll give it to Eilon, because Eilon

  • gives me file storage.

  • Eilon will give it to Tom, because Tom

  • gives Eilon file storage.

  • In Ethereum, it literally keeps going around

  • and it doesn't get returned to--

  • it never gets burned and never gets extinguished

  • and handed back to the company.

  • AUDIENCE: And the pricing strategy on that first issuance

  • depends then on the value of, if it's storage,

  • on the value of storing--

  • GARY GENSLER: Well, in theory--

  • it's theory.

  • I think that a lot of this has been on speculation and FOMO

  • and things like that and a bubble, a 15 month or 18 month

  • bubble.

  • But on theory, yes, it should be--

  • to be in equilibrium, it should be

  • a discount to the future value of storage,

  • because today you're buying a token that you

  • might be able to use tomorrow.

  • But because there's a probability weighting

  • that you won't be able to use it if they don't complete

  • the software, if they don't complete the rollout,

  • it should sell at a-- in equilibrium,

  • it should sell at a discount to its eventual utility value.

  • That would be where it would be in equilibrium.

  • Shimon?

  • AUDIENCE: So this is a question.

  • Even in the bad use case, they're

  • not pre-determining what one unit of coin

  • is good for, right?

  • GARY GENSLER: Usually not.

  • Some white papers do, but usually not.

  • AUDIENCE: Because it's not just--

  • if they told you, OK, one unit will

  • buy you one terabyte of storage, now, of course,

  • the value of a terabyte of storage

  • would depend on the electricity, cost of electricity,

  • and hardware, and all that stuff in the future--

  • I don't know-- and the supply, and blah, blah, blah.

  • [INAUDIBLE] It's very hard to pin down the fundamental value

  • of that coin outside of how it's going to scale

  • and how the community will be and all that stuff,

  • because there's no clear allocation

  • between the coin and the service that you would get.

  • Does that make sense?

  • GARY GENSLER: Let me see.

  • You're asking absolutely the right question.

  • It's one that I've been kicking around a little bit

  • with a couple other faculty members in the finance group

  • here, with Antoinette and Leonid who have done a lot of research

  • in this area.

  • And we're all like, we're not sure exactly.

  • And these are some of the most world

  • class talented finance faculty.

  • Like, how do you really get to the value of a token, one,

  • when there's so little written in these white papers

  • about this specificity?

  • And I gave one reading, which was Christian's reading,

  • and I apologize, because it has a lot of formulas

  • and everything.

  • But he grapples with this.

  • Where is it in equilibrium?

  • What's the equilibrium price?

  • And the equilibrium price should be

  • some discount to that future value

  • of the service or the good.

  • And if there is more uncertainty of what that service or good,

  • it almost has to be a greater discount.

  • And yet, it appears that the market has been pricing it

  • at a way premium.

  • So I think, if you didn't take anything

  • from Christian's paper, that's what I was trying

  • to-- that the market has been at a premium,

  • even though it probably should be discounted.

  • And that's why issuers--

  • that's why entrepreneurs have tapped into it, because it's

  • a form of cheap financing.

  • It's been a remarkable area of cheap financing.

  • Please.

  • AUDIENCE: So as we look forward to Filecoin [INAUDIBLE]

  • so if we look at that and we flash forward to when

  • it's actually functional and whatever--

  • GARY GENSLER: And it's no longer SAFT.

  • AUDIENCE: When it actually ever comes out,

  • so is the idea that Filecoin at that point

  • would transition to realized revenue?

  • And then if I pay Don, three Filecoins

  • or whatever the unit is for storage, that he books that

  • as income and is taxed on that?

  • Has there been any thought as to how--

  • GARY GENSLER: If Don is selling files,

  • yes, he would have to book income, as I understand it.

  • And you're transferring a coin, just like you're transferring

  • a euro or a yen or a dollar.

  • And at the time, the IRS has spoken to this five,

  • six years ago.

  • It's marked to market value the day

  • that you, in essence, deliver the service

  • and receive the coin.

  • I mean, I'm not entirely sure what

  • happens if you get the coin a day later,

  • but it's basically the market value

  • at an exchange rate that day back to Fiat, always translated

  • back to the Fiat currency, in this case the US dollar.

  • AUDIENCE: So if you extend that example,

  • where does Filecoin gain revenue on the transaction

  • between Andrew and Don?

  • Are they charging a transaction fee?

  • GARY GENSLER: I don't know.

  • I'll try to figure that out by next Tuesday,

  • because we get ICOs twice.

  • I'll dig in and try to answer, and if anybody else knows.

  • But the revenue models vary with thousands of these.

  • Whether, in essence, Filecoin's entire revenue model

  • was the ICO?

  • No?

  • The second big piece of the revenue model

  • is retaining some ownership.

  • So let's look at Ripple, the company.

  • Ripple, the company, though they did their genesis block back

  • in 2013, they basically distributed 20% of their tokens

  • and kept 80%.

  • And subsequently, they have been slowly selling

  • and they're now down to 61%.

  • But their revenue model on XRP is, in essence,

  • selling the XRP.

  • They only came up with a real use case of XRP

  • in 2018 in a prototype called XRapid.

  • They had XCurrent, which was a messaging system prior that

  • didn't need to use XRP at all.

  • So for four years, you had no use of XRP,

  • as I understand it zero use.

  • Today, it's the second highest valued cryptocurrency.

  • It's past Ethereum with the fall-off of the value

  • of Ethereum and Bitcoin.

  • And at $18 billion, I couldn't tell you what it's worth.

  • I can tell you that's what coinmarket.com or .cap says

  • they're worth.

  • But their revenue model is selling XRP in that case.

  • And so many of them, their revenue models

  • are the initial ICO, keep a bucket, whether you keep 10%,

  • or in that case it was 80%, and then try to monetize and sell

  • it over time.

  • And even in Ethereum, which was, in essence, an ICO,

  • they kept about 9% in the Ethereum Foundation.

  • They're down to 1% ownership in the Ethereum Foundation.

  • So they don't receive-- and when Ethereum

  • moves around the network, the Ethereum Foundation and Vitalik

  • Buterin don't receive any of that.

  • But I'd have to look at Filecoin to see whether, in essence,

  • they burn any.

  • In essence, does any of it go back to the issuer?

  • I don't think so, but I'll check.

  • Take this, and then we'll move on to a couple statistics.

  • AUDIENCE: I was wondering who is regulating the ICO.

  • GARY GENSLER: All right.

  • So who regulates the ICOs we're going

  • to talk a lot about on Tuesday after Thanksgiving, when we

  • can thank and eat some turkey.

  • So can we hold that for Tuesday?

  • But it really depends on the jurisdiction.

  • Here in the US, it would be the Securities and Exchange

  • Commission, because most of these

  • are really non-compliant securities offerings.

  • And last Friday, the SEC put out a release.

  • I mean, they've put out many, many releases.

  • But last Friday's, maybe we'll put that up.

  • Sabrina and Thalita if you remind me,

  • I'll shoot you a link and we'll put it into Canvas.

  • But it's only two or three pages.

  • But for the first time, they really

  • talked about illegal securities offerings.

  • So they used the word illegal.

  • And they're starting to get to the place

  • where they're shutting some of these down that were not

  • necessarily scammy or fraudy, but just

  • saying you didn't register.

  • But generally speaking, it would be securities regulators,

  • if it's regulated.

  • In some jurisdictions, it's not.

  • So this is the most important thing.

  • Can you assess the viability of token use case?

  • You remember my little slides.

  • But again, it's the strategic questions.

  • And these are the same questions I'm asking you to think about

  • in your final papers.

  • Basically, what's the value creation proposition

  • or pain points?

  • What are competitors doing?

  • How are competitors facing off in this?

  • And if you're looking at any ICO,

  • just think about the competitive landscape.

  • Some of them are quite populated with a lot of competition.

  • File storage, Filecoin is not the only one,

  • so you look at the others and see how they're

  • addressing the same issues.

  • And really, why is a blockchain technology or native

  • token even the solution?

  • And then you get digging into it.

  • Why do you need an append only log?

  • What verification and networking cost are actually addressed?

  • What transactions are actually recorded on a ledger?

  • I mean, these are the basic building blocks

  • that if you take anything away, hopefully it's

  • this one page of questions to have some critical skills

  • as you go off and somebody says, well, I've

  • got this great blockchain idea or great token.

  • And then not to forget all the darn challenges that we still

  • have-- scalability, performance, privacy, security, network

  • coordination, and interoperability.

  • I know only you say there's no challenges of interoperability.

  • AUDIENCE: No, no, no, don't put words in my mouth.

  • GARY GENSLER: So these, I'm not going to rereview,

  • but they're going to be in Canvas

  • if you want to grab them.

  • I mean, this is the same conceptual framework for an ICO

  • or even in a permissioned blockchain,

  • which I sense a lot of you are thinking about doing.

  • So some statistics, and then we'll close it out.

  • And these are just fun charts that will all be in Canvas.

  • And I just went around finding different websites.

  • I don't know that you can trust any of these numbers,

  • but they're the best numbers out there.

  • So here are some of the industries.

  • 23% is infrastructure.

  • That's $5 billion of raised, but most of that, I think,

  • is the EOS.

  • I think that's called an infrastructure project,

  • infrastructure because EOS is trying

  • to compete with Ethereum.

  • Finance communication trading and investment payments,

  • you see some consistency, a lot of financial sector use cases.

  • Gaming, and then you're down to 2% and 3% slices.

  • So there's just a little sense of some of the industries.

  • And again, this will all be on Canvas.

  • Here's published ICOs.

  • We peaked at about 500 a month, 400 or 500 a month

  • in February through April.

  • We're down to about 200 a month now.

  • Now, this means published.

  • That doesn't mean they've necessarily raised.

  • We're just under about 5,000 that have been published.

  • Maybe 3,000 give or take have raised some money.

  • And only about half of those actually

  • exist today, or that you can find them somewhere and so

  • forth.

  • The market-- this is the third quarter based on a website

  • called ICO Rating.

  • They publish a quarterly report.

  • I'm not saying it's completely exhaustive.

  • 1.8 billion ICOs raised down 78% from Q2,

  • just to give you a sense of the size.

  • But $1 billion of blockchain VC raised in the same quarter.

  • ICOs surpassed VC investment in blockchain

  • in the third quarter of '17.

  • Before that, VC raise was higher.

  • And I think it's coming back.

  • And it's a reasonable shot that in one or two more quarters,

  • the VC number will be higher than the ICO number.

  • But this is just a hunch as to where we're headed.

  • Some other statistics-- of the 600,

  • this is one quarter, about 200 a month or 600 for the quarter

  • that they tracked, 84% are on the Ethereum and platform.

  • Almost every data source I can find ranges from 80% to 85%.

  • So it's still highly focused on Ethereum platform.

  • And I would say as the ICO boom comes off,

  • it's probably also one of the reasons

  • that Ethereum, the price and valuation of Ethereum

  • has come off as well, just because of the relationships.

  • Only 4% of these 600, or 24 of them,

  • got listed on an exchange, that they raised enough money.

  • But look at that.

  • 57% raised less than $100,000 a piece.

  • So it's highly concentrated in a small--

  • 67% percent of the DApp ICos were unsuccessful,

  • whatever their measurement of unsuccessful.

  • They didn't raise money or they raised a little bit of money,

  • but the website went dark.

  • That's all within three months.

  • And again, I can't speak to how they measure success.

  • But 76% were just an idea.

  • This is, again, based on ICO rating.

  • And 1.37%-- you were at 1%?

  • You were at 5%?

  • But 1.7% had their code.

  • So 3% were either fully ready or had their source code.

  • So you want to read the white paper if you're really curious.

  • But 76%, you might say how can you raise money on an idea?

  • This is really prefunding.

  • And this is even after the bloom is off the rose.

  • This is the third quarter 2018.

  • Here's the industries again for the third quarter--

  • exchanges and wallets, financial services, trading.

  • So it's deeply finance, a little bit health care, and so forth.

  • And let's see.

  • I think I have one or two more of these.

  • Oh, this is how they've done.

  • This is interesting to me.

  • This is the returns in the third quarter.

  • Now, I know this is actually before the sell-off

  • for the last week and a half.

  • The only sector that went up is--

  • I don't even know which ICOs these are--

  • the marketing and advertising.

  • Everything else got clobbered.

  • I've been around markets for a long time, three or four

  • decades.

  • When you get this type of return picture,

  • there's going to be fewer ICOs rather than more ICOs,

  • because it just keeps cutting down the investor enthusiasm.

  • I don't think it's FOMO anymore.

  • What's the opposite of FOMO?

  • AUDIENCE: Here.

  • GARY GENSLER: What's that?

  • So all right, so study questions for next Tuesday

  • is just we're going to go back to ICOs,

  • talk a little bit about the scams and frauds.

  • We're going to talk about the Securities and Exchange

  • Commission.

  • We've already talked a lot about their design feature.

  • So it's going to be like going back to some

  • of the regulatory things.

  • I'll try to look up on the Filecoin questions as well.

  • We will drop one more reading in,

  • which is just this quick two-pager

  • from the SEC from last Friday that

  • may be worthwhile looking at.

  • And this is the best thing I could

  • do to say Happy Thanksgiving.

  • I know it's a Bitcoin turkey, blockchain turkey,

  • and the like.

  • But I do think it's an interesting thing.

  • ICOs are a new means of crowdfunding.

  • And there's been so many different ways to raise money

  • over centuries.

  • This is not equity, it's not debt, it's something else.

  • I don't know how much of it will last three and five

  • years from now, but the idea that you could pre-fund

  • an idea, a deferred revenue or some sort,

  • but it's not your revenue, is an interesting evolution

  • in the markets of finance.

  • But I think if you can't assess the viability of the use case

  • and figure out what really is the benefit

  • of the token economics--

  • that comes back to, is there really a benefit

  • to having a native token on a network

  • for a good or a service, for file storage, for ride sharing,

  • and so forth?

  • And then I think this will just be looked back-- decades

  • from now, people look back and say, well, that

  • was a small, little, odd thing that happened

  • back there in the 2010s.

  • But it might be.

  • I'm not all the way to zero.

  • I think there might be a reason why

  • folks want to have a native currency,

  • a native token to jumpstart a network

  • and to motivate a network over time, whether it's

  • like swords and skins and shields in a gaming site.

  • The majority of ICOs have failed already.

  • And because they keep failing so fast--

  • I don't know-- by the end of this year

  • or certainly by the middle of next year, over 90% or 95%

  • of them will have failed, like if you take the whole total.

  • So it's pretty clear it's going to come down.

  • There's going to be less and less probably

  • in this ICO thing.

  • It doesn't mean that blockchain technology is over.

  • It just means that this wave, I think, will diminish.

  • So Happy Thanksgiving.

  • Is there a question before we all

  • go to Thanksgiving and airports and trains?

  • AUDIENCE: Just a quick question.

  • Does any ICO take ownership of the company besides [INAUDIBLE]

  • GARY GENSLER: So we'll talk about this Tuesday.

  • The question is, can you ever have

  • an ownership right in a token?

  • The answer is yes, you could structure

  • it to have voting rights, governance rights, dividend

  • rights.

  • There are a handful that have done that.

  • But after the DAO or DAO issuance,

  • which did give some governance rights and cash flow rights,

  • the SEC spoke to that in a paper one year ago or 15 months ago.

  • There's very few of them.

  • Most of them are what you would call either utility tokens

  • or service tokens, where you have a right

  • to get a service or a good usually

  • from the rest of that network, rather than back.

  • I'll check on Filecoin, but the answer is yes you can do it,

  • but it's a rare case that does it.

  • So thank you.

  • Happy Thanksgiving.

  • Thank you for all being in this class.

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