Why A Florida Orange Grove In 1946 Is The Key To Understanding Regulation Of ICOs

Tracy Alloway (0:08)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:13)

And I'm Joe Weisenthal.

Tracy Alloway (0:15)

So Joe, I got an interesting email earlier this week.

Joe Weisenthal (0:19)

Was this that thing you tweeted?

Tracy Alloway (0:21)

Yes, it was. Well, you could say that about practically any email that I received, but-

Joe Weisenthal (0:26)

Because we both just tweet all of everything that's in our inboxes right away.

Tracy Alloway (0:30)

That's really sad, isn't it? Okay, but one thing in particular I tweeted about, and it was an advertisement for an upcoming ICO, an initial coin offering.

Joe Weisenthal (0:41)

Right, I think anyone who's been on the internet in recent months, particularly if they're into tech or finance, has been inundated with ads for initial coin offerings. I get them all the time. I used to get them on Facebook. I get them in my Gmail. I got to, it's like, this new token and get a 10% discount on this token that will give you access to Wi-Fi or whatever it is. Actually, that's probably one of the more linear ones.

But I don't think like anyone really has any idea what these are or what the deal is. It's also weird and new.

Tracy Alloway (1:14)

This one in particular was illustrated with a little cartoon rocket.

It also said the company had signed an agreement with the world's largest NASDAQ exchange, whatever that is. But the thing that got me the most about this particular ad was it said, we received the approval of US. Securities and Exchange Commission, and US. Securities and Exchange Commission is in quotes.

Joe Weisenthal (1:40)

Everything about this is so beautiful. Look, I'm not going to judge this, ICO, but if I were an investor, to me, this would be some at least caution signs just from how you described it.

Tracy Alloway (1:52)

All right, but the reference to Securities and Exchange Commission, and I'm doing air quotes right now, and you can't see me doing that over the phone, obviously, got me thinking about ICOs and regulation, because obviously, this is a perennial issue. How are ICOs regulated, and are they actually securities in the eyes of the US legal system?

Joe Weisenthal (2:15)

Right, because the basic idea is companies are, you could say, issuing their own de facto currencies, selling them, and they want to do that as freely as possible, or many of them would like to sell for any amount to anyone in the world.

But they would say, okay, we're not really selling securities. These are tokens that give access to a network or something. But if they are securities, then from a regulation standpoint, that would impose upon them a lot of obligations in terms of disclosure and who can buy. And so the question of whether these are actually securities and the law governing whether these are securities or not is of pretty big stakes for a lot of people.

Tracy Alloway (2:53)

Huge stakes, and it actually gets to some really interesting legal theory, which we are now going to go on to discuss. And I think you have the guest with you, right?

Joe Weisenthal (3:04)

Yes, I'm very excited to bring in Peter van Valkenburgh. He's the head of research at Coin Center, which is a cryptocurrency think tank in Washington, DC. He is going to help us wade through the thicket of regulations, which may or may not apply to ICOs.

So, Peter, thank you very much for joining us.

Peter van Valkenburgh (3:24)

Hey, thanks for having me, guys. I've been chuckling this whole time listening to you guys. I also work with the SEC in quotation marks.

Joe Weisenthal (3:32)

Do you work with the SEC not in quotation marks as well?

Peter van Valkenburgh (3:38)

Hopefully.

Joe Weisenthal (3:39)

I can only imagine, Peter, that for as many ads as Tracy and I get on social networks and in our email, you must see 10 times as many of these pitches for ICOs than basically anyone else in the world.

Peter van Valkenburgh (3:55)

I tell you, ad blocking software is important when you have my job and my Google search history. It's really critical. It's not just a luxury. And I don't mean to starve the media companies of their revenue, but I just can't look at this stuff all day.

Tracy Alloway (4:08)

So before we dive into securities law and how these decisions are actually made, Peter, maybe you can just give us an overview of where we stand right now when it comes to the legal definition of ICOs.

Peter van Valkenburgh (4:21)

Yeah, okay. So there just isn't one. And that makes sense. And it's not too surprising because it's a brand new thing. And it's sort of an informal term that the community came up with. I don't know who in the community, somebody who I really would love to have a stern talking to about two years ago because it sounds like IPO. And somebody said, oh, well, we're going to create an initial batch of these new tokens or coins. And we're going to release them to the public and have an offering. And so we'll call it an initial coin offering and it won't confuse anybody. And people will be excited about it, which I think really is terrible branding. Because if you have a good faith argument that your thing is in a security, and some people do, and I think some people don't, but if you have a good faith argument that your thing is in a security, why the hell would you use the term or, you know, a head nod to the term for the thing that the SEC regulates as securities, IPOs?