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, then they use the money to grow their businesses.
Obviously, this is exactly what happens in crypto: a couple of whiz kids get an idea for a new product, they create a new token and sell it to investors, then live off the money while they build the product into something great (or not).
This is so obvious that 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. As 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.
But legally, 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, under the current laws, is hard. Really hard.
To raise money from the general public in an Initial Public Offering 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 are 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 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 does not work.
So when blockchain-based tokens came along, it was a revelation. Here was a way to quickly raise money, so you could have some run room to build a product and see if it 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 law, most “tokens” are actually “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 into finding ways to make tokens not securities … and thus started the Great Lie.
“Most” Does Not Mean “All”
When we say “most tokens are securities,” please remember that “most” does not 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 are not securities. Big difference.
But 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, since most tokenholders 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 a token that functions like a share of stock, and watching the price on tickers that look exactly like a stock exchange:
A path toward crypto honesty starts with three principles:
- Most tokens are unregistered securities;
- To avoid securities law;
- 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.” 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 that 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; the laws are 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, $100,000). They can then use these tokens to bootstrap the network, and build something useful or great.
What is wrong with that?
What the people want is the ability to use tokens for fundraising. That’s the huge, obvious, elephant in the room. I believe we can do this, and protect investors at the same time.
The laws don’t work: they are unnecessarily restrictive and prohibitively expensive for small companies and entrepreneurs to follow. Just 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 is an enormous untapped potential of small business creativity and entrepreneurial talent. Better laws will 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 your Senator. You can copy and paste this form letter:
Dear Senator [NAME],
Our current securities laws do not work.
As a crypto investor, I urge you to work with your fellow Senators to find better laws to govern digital assets, so that honest investors like myself do not feel like criminals for investing in bitcoin, Ethereum, and other tokens.
I believe in the power of these technologies to change the world, and I 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 allowing crypto investors to participate.
[YOUR NAME HERE]
Let’s be honest: this is what we really want. Let’s just come out and say it.
The worst they can say is no. But the best they can say is YES.
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