A Response to Chris DeRose' Article on ICOs & Token Sales

A few weeks ago Chris DeRose published an article titled "Dear SEC: ICO's & 'Tokens' are killing innovation". The article was widely shared and praised in the bitcoin community, and much maligned by others (particularly from within the ethereum community). A journalist on twitter, who had shared the link and received criticism for casting Chris in a positive light, mentioned that he would be interested in reading a non-ad hominem response to the piece. Said journalist has since deleted the tweet asking this (or at least I couldn't find it), so I don't mention his name here.

I ended up writing a brief email to this person, and thought I would turn it into a blog post here, lightly edited.


First, I agree in principle with some of Chris' concerns. Some ICOs are scams or get-rich-quick schemes, designed to take advantage of a hot market and some investors' lack of technical sophistication. Some tokens are very likely to be securities, and anyone working in this space should be cautious and work closely with legal counsel. Improving this market - by building tools and services to help investors make better decisions and identify scams before they get started, and perhaps even some form of regulation to deal with the worst abuses - is something I support.

That said, I do not think that every current ICO is a scam. I think that in the long term this is a powerful new capability for an open-source financial network that will eventually mature into a safe, useful form of fundraising.

The primary flaw with Chris' argument is that it does not recognize the distinction between a technology and the uses of that technology. The whole piece is guilty of cherrypicking examples of particularly bad ICOs, and then asserting that definitionally, all ICOs must be just as bad, without actually making that argument for specific projects. This would be like asserting that because one bank was used to launder drug money, all banks are necessarily fraudulent. Or like arguing that because some people use bitcoin to buy drugs and weapons, there is no legitimate use for a censorship resistant global currency. These are poor arguments.

With that in mind, here are some specific responses to sections of the piece that I thought were particularly wrong or poorly argued:

The word ICO is merely a synonym for an ‘unlicensed security’. ICOs are released to investors under a pretense of venture equity, but with the specific purpose of circumventing SEC authority and control.

The label ICO is an unwise one, as it directly compares tokens to equity. However, declaring that an ICO is always an unlicensed securities offering is... un-credible. Any lawyer telling you that it's settled law that tokens are securities would be lying. Even very well-informed lawyers who take the opinion that tokens are very likely securities would not make this claim, because it is not true. Chris is not a lawyer, and does not provide any argument to support this claim. He likewise provides no evidence that the only purpose of issuing tokens is to circumvent the SEC. This is obviously not true for ICOs based outside the US and which prevent US participants from purchasing, to give one example.

Retail Investors are left holding these worthless securities in lieu of real world assets, unable to comprehend what risk they’ve agreed to

I haven't seen much evidence that retail investors make up any significant portion of the people buying into ICOs. Chris has not provided any evidence that this is true. My best informed-guess is that BTC and ETH-rich persons, who have recently made a lot of money, are trying to diversify their investment. We know, for instance, that many recent ICOs have been dominated by a small number of whales who have invested very large sums. Recent ICOs have been so competitive that only people running their own node infrastructure or manually setting high transaction fees are able to reliably participate. This suggests to me that retail or "blue collar" investors make up a very small portion of the total investment.

I agree that this is a real concern in the medium and long run - eventually retail investors will be participating in ICOs, and we should be concerned about whether they are being taken advantage of.

It is unclear why ‘blockchain’ is needed for any of these projects, other than as a mere label, in which to dodge regulatory enforcement.

Not sure where to start with this one. Chris starts from the perspective that every use of blockchain technology other than bitcoin is a scam, fraudulent, fake. This is a position he's held for a very long time. If one actually believes this to be true, then I see how you reach this conclusion. If you believe that bitcoin is the only possible or legitimate use of the technology, then I won't be able to convince you otherwise here. If Chris can propose a way to design a decentralized prediction market that does not require a token, I'd be very interested to see it (as would the Gnosis and Augur teams).

The ‘rights’ offered to shareholders are shockingly limited. There is generally no pretense of signing legally valid documentation for profit sharing, voting, auditing, or corporate rights of any kind - despite the fact that promoters often promise that their schemes will permit these things.

It's not clear what he is talking about here. He would prefer promoters offer a "pretense" of legally valid documentation? I think he's misusing that word, and probably means something like "there is not even a pretense of legally valid documentation".

More substantively, this argument is just a re-statement of a point he's already made - that these tokens might be unlicensed securities. If those tokens are securities, then the problem is that they are unlicensed securities, not the lack of a share certificate. If those tokens are not securities, then it doesn't matter.

When ICO’s deliver 100% of the company’s expected receivables at launch, founders are incentivized to leave their project immediately thereafter

This is a problem with the design of a specific ICO, not with ICOs in general. You can structure a token sale to lock funds for arbitrary periods or put in place other protections to deal with this issue. For instance, for funds to be locked into a multisig account that is only released by a trusted third-party on certain conditions - for instance, that the team has met certain milestones that they pre-committed to during the token sale.

No pretense of accuracy or responsibility for claims have led to ornate perpetual motion schemes receiving funding, at expense to humbler better-grounded offerings.

I'm not sure what this is supposed to mean. Is he saying that there are other projects ("better...offerings") that aren't receiving funding, because of ICOs? I would be interested to see that argument, but it is not being made here.

Incumbent and regulated VC models are no longer sustainable fundraising options, as the returns from ICO ponzis are starving out capital and perverting investor expectations

This is an extraordinary claim that requires extraordinary evidence. Is Chris really suggesting that ICOs have made VC funding unsustainable? That ICOs are "starving out" capital? US software companies raised $33B in VC in 2016. The total value of all ICOs listed in his piece + Bancor is ~1% of that total. Blockchain companies continue to raise traditional capital despite the existence of ICOs. I see no evidence, and Chris has supplied none, that this claim is even remotely true.

By the end of the piece, Chris hasn't provided any arguments to support the supposed point of his article: that ICOs are "killing innovation". He's offered many arguments that some ICOs are scams, and that the practice can be used poorly to harm people. The only point that actually connects to this idea that ICOs are harming innovation in the blockchain ecosystem is his argument that ICOs are "starving out capital", which is impossible to take seriously given no evidence was offered to support it.


This brings us to the, uh, less charitable part of the post.

It's become popular in bitcoin circles to oppose the use of ICOs, to argue that they are illegal or immoral, that the core developers of the ethereum platform are responsible for any fraud committed using the technology and, more recently, to support some kind of harsh regulatory response.

It's been very strange to watch. In the early 2010's, the bitcoin community took great offence when outsiders pointed out that bitcoin was used to purchase illegal goods, from drugs to weapons to worse. The fact that people will use a technology for bad ends, they argued, could not be an indictment of the platform as a whole, and certainly not a moral responsibility of the developers who helped build the technology. The bitcoin community is largely made up of people who oppose regulation almost by default, who believe in open financial networks free of government control or censorship, who might even believe that the state itself should not exist.

It seems very unlikely to me that this group of people have developed overnight a sincere concern for the sanctity of US securities regulation. There are genuine concerns around how securities law treats tokens, ICOs, token sales. But if I wanted to gather informed perspectives on this issue, I wouldn't ask a bitcoin maximalist and self-described anarchist whose concern for the law dates back to the moment it became a useful cudgel to wield against a competing platform.

Chris has a pretty clear pattern. He makes absurd, uninformed claims and is rude and often hostile to other people, especially women. When he's challenged on anything he has said or done, he responds by inviting that person onto his notorious youtube show. If the person refuses, it is proof that they are morons, "ethtards", snowflakes, etc. If they say yes, Chris has succeeded in booking a guest that will produce a lot of clicks and pageviews. Rinse, repeat.

He's a troll. Don't take him seriously.

© 2017