Jay Clayton may turn out to be one of us afterall. Bitcoin is a currency, not a commodity he said. If there’s someone who knows which crypto project will be hugely successful in five years, I want to speak to him, he said. So implying he has or is thinking of investing his fiat money into the people’s money.
A former lawyer to elite bankers, now the chairman of the Securities and Exchanges Commission (SEC), Clayton entered this space very much like any other politician, bureaucrat or civil servant. Cold, clueless, and prejudiced against it.
He revealed in perhaps the most fascinating interview that affects this space, maybe ever, that in his confirmation hearing in March 2017 which lasted for hours and there were hundreds of questions, there was not one question related to this space.
Just months later in June 2017 he was given a huge box of documents all about cryptos. Months later in senate hearings, we called him clueless.
Now more than a year on, we see a very different Clayton in this interview. A man that, if he is sincere – which we do not doubt – we and the American people can be very proud. Here is one of his statement that perhaps says it all:
“You know I love markets, you know I love ingenuity. One of the – and I’m not gone take credit for this – one of the wonderful things about America is: if there’s a new technology, we pour an incredible amount of energy and capital to it. And it’s a race to figure out what the best use for that technology is.
You know, there’s lots of failures and there’s some successes, but anybody who predicts with certainty where that race is going to end and who is going to emerge, I want to meet them because… you know I can tell you that I thought Webvan was going to be a great idea and Amazon was not so smart. That shows you how good I am, right.
There was this incredible race to use data and information to provide delivery. Webvan – does anybody remember Webvan besides me? – failed. Great idea, failed. Amazon, similar idea, different space, great success…
I want to try and be clear, and fair, and apply our rules to this new technology in a way where we’re not picking winners and losers, but we’re protecting investors.”
The swing vote, Andrew Ross Sorkin of New York Times called him. Clayton naturally said there is no vote, they are not trying to pick winners and losers, but this man does have great power and great influence and has been subject to many of our articles, some of which asked for him to resign or be fired.
In the absence of a loud voice for this space while some important decisions were being made, we took the microphone to speak on behalf of innovators in a year long tense public negotiation that has now effectively ended where principles are concerned.
To understand where we are, we need to go back to summer 2017 when after asking and asking for the industry to put up a self-regulating organization, and after it failed to do so and it appeared it would continue to fail to do so, we said, and we quote at some length:
“There is a reason why VCs fund companies in stages. However great an idea might be, or even the execution of it, the project might still fail for many reasons.
It may, for example, simply be the case that the timing for it is not yet right. It may be another competitor leaves them with no customers. It may be they burn-out and can’t deliver, or the management is chaotic, or whatever other reason.
So, for just a concept, you’d be lucky to get a million, or, if the team is exceptional, perhaps $10 million. The latter, however, is usually reserved for projects with users and revenue. If they do return on profits, or it seems like they are growing, investors may then give them more funds.
That’s the traditional way of keeping projects accountable and it is used because it works. So, there is no reason for ethereum to re-invent that wheel. To the contrary, it should instead make it all automatic through its smart contracts capabilities which none of the ICO projects use any longer.
That’s mainly because of the Slockit DAO hack last year, but the one lesson from that, which has recently been ignored, was that ICOs need to be capped.
They need to go further, especially the projects that have raised what is now valued in hundreds of millions. They need to provide quarterly reports on the progress of their projects, their audited balance sheets, details on how the money was spent, details on how it will be spent, what they plan to do next, etc.
It is the minimum they can do, but as they no longer need funds, they hardly have much incentive to do so.
Until, perhaps, the SEC does move in and demands it, which might have the effect of forcing ICOs to then use the smart contract capabilities whereby funds are released based on a token holders vote rather than just given up-front then fingers crossed.
Because if the latter is the main method of raising funds, then we probably do need traditional law to move in as these projects are not using the code smart contract law, therefore are not accountable nor incentivized to deliver.”
Precisely eight days later, SEC came out to say the Slockit DAO was a security. We didn’t like that report one bit, probably because we were focused on the details and their words when this had nothing to do with details, but SEC effectively exerting jurisdiction.
The way it did so did anger. A generation was effectively being introduced to some bureaucrats who were having a one way conversation. They were saying this, they were saying that, they were not taking into account anything, until their sort of autorita was established with “negotiations” reaching their climax on June 14th 2018.
On that day we asked: “Has SEC Just Killed The Only Funding Method For Open Source Projects?”
Heads were turning. The whispers were becoming louder and louder voices. The article was about to go viral to the point where anyone with any interest was about to read it.
Within hours, William Hinman, Director of Corporate Finance at SEC, came out to say ethereum is not a security in laying out a general principle that a token can start its life as a security but then like a caterpillar can transform into a non security.
It could have gone either way, if we did not have leverage in jurisdictional arbitrage and/or in effectively becoming proud criminals by ignoring the law, but that led to a second stage of “bargaining.”
We hate this exception to the Securities Act 1933 whereby effectively no law applies at all if you raise money only from the rich, or as they Orwellianly call it only from sophisticated investors. Orwellian because the law says if you are rich, not if you are sophisticated.
Conceptually one can see the problem here because now Jay Clayton himself has said that in a public company or an ICO where tokens are sold to the public, one month out of every three has to be spent on compliance with the Securities Act. While for private companies or where tokens are only sold to the rich, its maybe just two days out of three months.
The implications of that are obviously barbaric, or feudalistic. So we tried our best to shout as much as we can and now Clayton says:
“I worry that our ordinary investors do not get exposure to companies until they’re very mature… you should just know that that’s on my mind as well.”
He has called for a laddered approach. A publicly traded global company should have more obligations than say a national company, a local company, or a start-up, according to the SEC chairman.
That’s effectively what we’ve been saying and obviously it makes complete sense. You know, look at this picture of the now stupendously rich Amazon founder:
You can’t ask this very smart and very innovative man to comply with libraries of books especially if he is going to the public and saying he has this great idea, I’d like just $10 million.
For one Jeff Bezos, there are thousands if not millions who became a complete failure, but that’s the nature of investing. That’s in fact the point of Initial Public Offerings.
The original idea was that there are scammers, criminals, so we needed someone to say whether it is probable that this man or woman is not a thief but a good and honest man pursuing an idea which may well fail, but might succeed.
As in the idea was that say the inventor of the airplane, if he was poor or maybe comfortable but needed some money to put upfront into whatever research or manufacturing, could go to the people and say here is this, here is what I need. It might work bigly or it might not work at all.
Over a century however that idea of whether on the balance of probabilities this is a thief or a good man has now morphed to the point where it is effectively impossible for say the basement dwelling Google founders to raise money from the public at that inception stage.
That kills capitalism, and for no reason. It is in fact, we wouldn’t be surprised if studies prove so, perhaps the main if not sole cause of the ever growing inequality and the considerable monopolies we now see in many industries.
We have to live with risk and the state has to know when to get out of the way. We need some safeguards, obviously, but it shouldn’t be effectively impossible for an impeccable start-up to raise funds from the public.
With Clayton now effectively saying so, it appears that is now the general consensus because it is completely rational.
That idea of a laddered approach, however, obviously doesn’t apply to just this space because ICOs are just a category and the crypto space is just one very innovative area among some others in biology, data, physics engineering and so on.
Meaning we won’t have specific rules for just this space, and perhaps rightly so, but general rules of how any ICO or IPO by a start-up should be asked to comply with certain requirements while at the same time making sure that even that Bezos up there in his paintless desk can comply with them.
That’s not an easy task, and if Clayton genuinely wants to tackle it, we might call him names on the way but we’ll probably fundamentally support him.
However, we don’t choose to go to the moon because it is easy, but because it is hard. Because solving that which is hard bears fruit, as well as name and fame, for decades to come.
Not that this is that hard if we look at it objectively. A start-up that wants to raise say one million or twenty million should have no responsibility but the signing of their statements under the threat of perjury and in the same fashion having a requirement to give at least a yearly report of what the funds were spent on and what they plan to do next with an additional general requirement of needing to reveal all material information.
In British law they simply call it a duty of care, as in you have to act reasonably, not lie, don’t hide things, and just kind of be honest. If you’re not, then you can get sued by the investors or SEC or if it is more serious you can be sent to prison.
We don’t really care about the regulatory framework for funds raised above $20 million. Say to $50 million maybe there should be some sort of evidence, but then $100 million and above is sort of, not of a concern to this space.
Yet it is quite important in our view, if a reasonable regulatory approach is implemented, for the little dedicated smart guy to have the ability to tap into the public markets in a way investors can be reasonably sure he/she is not fooling them at the same time as the little guy has the means to show so if we assume he/she is of the middle class or even poor.
The original idea of ICOs was to provide the above in a way that they don’t have to trust you because they don’t hand you the money, but to the smart contract. Collectivly they could then decide how much money they wish to give you from the smart contract fund. Meaning no trust requirement to the same level of just handing over the money.
Devs, however, have not yet been brave enough to have a second bite at the DAO, so we need to have a more analogue form of accountability which can work and work very well if a reasonable approach is taken whereby it has in mind investor’s protections as well as investor’s need to invest and have many choices for diversification.
Clayton has now suggested this is what we can expect and we of course will keep him to it. If he can deliver, then America has effectively legitimized this space and is even quite supportive of it.
In short, we won the debate. Cryptos now are in the process of becoming a “trusted” space with the seal of approval of regulators who are still in the process of fleshing out the details, but generally have laid out what we can expect.
If you want to raise funds from the public to build a product, then the public has to trust you with their money and therefore has to make sure that you don’t run away with it. So you have to complete some form and send it to SEC at a cost of perhaps $100,000 for an ICO. Then you need to tell people what you’re doing with this money and how the delivery on that promise is going. Once the product is built, then the product is no longer a security if it is sufficiently decentralized as in just a ticket to buy a movie rather than a ticket to build the movie.
Just how much you have to tell or just what are your obligations probably depend on how much you raise. Up to say $20 million, which is the amount that all ICOs should have been capped, then perhaps you don’t have to reveal much, except for some of the basic figures with disclosure maybe once a year.
Up to $100 million, then disclosure twice a year, audits and so on. No start-up needs more than that initially and no start-up needs more than $20 million really, so above that amount we don’t care.
The other angle to this new regulatory framework is exchanges. Almost all of them offer securities and will want to in order to remain competitive. They thus have to register with the SEC. They’ll have to implement surveillance and so on to prevent price manipulation and they’ll have to become basically like Nasdaq.
That probably includes decentralized exchanges as well which are not really decentralized, but just so in name as they have an important centralized aspect. For truly decentralized exchanges, code is speech protected by the constitution so they can’t have licensing requirements.
The way Clayton puts it is if something goes wrong, then who is responsible for it and if the answer is no one, then it better be nothing goes wrong.
For the Slockit DAO, something did go wrong, so SEC says they are a security. For ethereum, nothing has gone wrong, so it’s not a security.
The question now is what happens to ICOs that occurred prior to SEC exerting jurisdiction. As SEC knows, a lot of people invested a lot of money so they obviously don’t want pitchforks in front of their headquarters, meaning they’ll probably be sensible and take an approach that is minimally disruptive to the price of currently traded tokens.
If we were SEC, the approach we would take would be to say Bitcoin, Ethereum and this, this, this, as well as that, is not a security. The rest have to register by whenever. There will be no liability for ICOs prior to this date, full enforcement for ICOs after.
That’s the approach they’ve kind of already implied and they’re perhaps waiting for projects themselves to consult lawyers and/or SEC to see whether they have to register.
We would say honest projects, if they look at it impartially, would probably by themselves know whether they should register or not. If they should, they’ve raised plenty of money, so why not.
You can say perhaps because of the compliance matter where it takes one month out of three to comply, but as SEC has stated that’s not a sensible approach, then we should expect clarification on what compliance requirements apply to what are effectively start-ups, sort of two men and or/women in a garage kind of thing.
On a final note, SEC has not yet “approved” any ICO. They’ll have to now if they want to show good will because we do obviously want to work with them as we certainly don’t want to see our parents being scammed, but at the same time we do want the ability to invest in a start-up without being a billionaire.
That’s what Jay Clayton has promised, and if he delivers, then we might call him man of the year at some point, and if he doesn’t, then we’ll definitely probably call him the worst man of the year at some point.