Prior to eight years ago I did not intend to read and/or review blockchain-related books. See the full list here.

The first one I published covered The Age of Cryptocurrency, a book I thought was so bad that it immediately needed a second edition.1 And no one would believe me if I simply tweeted that.

So I manually typed up all of the passages I thought were inaccurate and boy what a chore. To save time I should have just gotten the Kindle version, will try to do so going forward.

The second book reviewed, Digital Gold, is a solid book even though its review is longer than both Blockchain Revolution and The Business Blockchain, neither of which were good.

It will sound strange but I think the critique of Cryptoassets itself mostly aged well (spoiler alert: it was not a good book) but that the lead author – Chris Burniske – is someone who I think has turned the lemon into lemonade. Can’t say that I agree with everything he opines on today, but of all the “bad books,” he seems to have had the most positive growth as a commentator/investor. I probably just jinxed everyone by saying that.

The Truth Machine is about as bad as its predecessor: The Age of Cryptocurrency.

The Cryptopians was a pleasant surprise and contained virtually no errors which is accomplishment due to its length and a testament to Shin’s effort to independently fact-check the manuscript.

The Billionaire’s Folly was a fun breeze written by one of the few people that I met at pre-Covid events who didn’t immediately come across as a scammer.

This summer, after I published the review for Popping the Crypto Bubble, I spoke with one of the co-organizers (“Bob”) of The Financial Times sponsored anti-blockchain event. Even though Diehl – one of the co-authors of the book – was a speaker at the event, Bob said he still hadn’t read Diehl’s book but stated that my review was outrageously long. I responded: if you had read the book you would have seen it was filled with errors every other page.2

And last but certainly not least is Number Go Up, another pleasant surprise. It was an informative page turner, or as I call it, a palate cleanser after having read a pretty bad take from some anti-coiners – Easy Money – just a couple weeks earlier.

Obviously these are my opinions, however I try to back up each counterclaim/argument with a link or reference. So readers can fact-check my fact-checking.

What are the numbers thus far?

Below is each title listed in chronological order of review with the paperback/hardback page length in parenthesis followed by how long my review was.

1. Age of Cryptocurrency (368 pgs) – 23100 words in the review
2. Digital Gold (435 pgs) – 7500
3. Blockchain Revolution (368 pgs) – 7100
4. The Business Blockchain (393 pgs) – 5800
5. Cryptoassets (368 pgs) – 39900
6. The Truth Machine (320 pgs) – 27700
7. The Cryptopians (496 pgs) – 9000
8. The Billionaire’s Folly (264 pgs) – 500
9. Popping the Crypto Bubble (308 pgs) – 46900
10. Easy Money (304 pgs) – 42100
11. Number Go Up (444 pgs) – 21000

What does this look like?

In general, the longer the book, the better it is. But the longer the book review, the worse the book was. In fact, 5-out-5 worst books I have reviewed all exceeded 23,000 words. Coincidence, I think not. That was not intentional on my part, rather, it illustrates just how many mistakes those authors made. In fact, if anything, the most recent reviews have been atypically longer due to wanting to include longer passages from the book so the reader can have more context and not just rely on a pithy snippet.

Not too dissimilar from the Anna Karenina principle, the worst books (above) flopped in different ways.3 For instance, (9) and (10) were more ideologically driven then empirical driven; making claims without sources went downhill fast. (5) Used poor analogies (such as the adoption of Twitter) to compare Bitcoin’s adoption rate. (1) and (6) were written by the same authors but Casey’s jump from topic-to-topic without firm conclusions – in both – comes across like Ian Bremmer.

With apologies to Tolstoy above, one common overlap: most of these lemons were written by people with a vested interested in pushing the narratives across the finished line. For instance both (5) and (10) were written by guys who later disclosed their bags; one of them had his phone hacked and lost money and told the NYT, the other took out a $250,000 short on coins and lost money and told The Guardian.

In contrast, the top four books I have done a review, as of this writing, all had a few things in common: a single author, which reduced the need for reconciling differing tones and voices. It probably helped that three out of four were already journalists.

These were largely non-ideological explorations of a cast of characters – and subject matter experts – central to a given coin ecosystem. Digital Gold focused on the early years of Bitcoin; The Cryptopians and The Billionaire’s Folly described the Ethereum world; and Number Go Up primarily looked into Tether and all of the things it touched. All four were written for a mainstream audience yet didn’t treat the audience like unsophisticated rubes.

Be sure to grab these for the holiday season:

• Digital Gold
• The Cryptopians
• The Billionaire’s Folly
• Number Go Up

Are you an aspiring writer looking to fill a void left in the book marketplace?4

I think there are at least a few topics that still haven’t gotten much attention:

• Non-hagiographic, non-shilling exploration of the world of proof-of-work mining. The market needs an author willing to visit these facilities and not play footsy with NDAs like the Easy Money authors did. Currently we’re left with an emboldened industry lobby and a seemingly out-to-lunch WWF.
• A dressing down of the top 20 ICOs from the 2016-2018 boom and bust cycle. Where are they now, what have they delivered, what funds do they still have, did they spread the wealth and/or enrich themselves, how often do their (co)founders engage on social media now versus then? How decentralized is the base layer infrastructure? What law firms did they use to get deferred prosecution agreements from law enforcement? How many former prosecutors joined defense counsel in obtaining them? Which of the ICO boom/bust influencers received a proffer (“queen for a day”) from prosecutors? What PR firms did they hire back then and currently work with today? If it worked for them, why not tell the world how to do it?
• An exploration into the partisan world of the Horseshoe Theory. Recall that some Bitcoin maximalists and anti-coiners often use the same a priori cudgel to brow beat their audience. Who is funding each of their narratives? For instance, in the U.S., how much money (from “institutes”) has been spent on lobbying state and federal government agencies on behalf of miners? How many independently wealthy anti-coiners fund opposing efforts? What PR firms do either group(s) currently work with today?
• Coin lobbyists. There are probably more coin lobbying organizations than actual users on most layer 1 blockchains. Yet there is little insight into the level of coin donations they receive and where it goes. Are those who received BTC and ETH years ago sitting on large treasuries? Apart from playing with their Tungsten cubes in their large homes, what else do the lobbyists spend their gains on? How many expats are funding them?
• Romance-scams. One of the strengths of Number Go Up was the author flew out to Cambodia to see first hand what “pig butchering” scams looked like (trigger alert: they are compounds guarded by guys with guns and filled with slaves who sext message you). What other romance scams rely on cryptocurrency-specific infrastructure?
• Great success(es)! If any.5

Or maybe those are just the topics I think are interesting, that the marketplace lacks, but there is little demand for it. Maybe I’m, as that anonymous coward on Twitter recently said, an imbecile.

I dunno though. An investigative journalist flying out to Tbilisi to follow-up on this mining story could win a prize that rhymes with mulitzer. Give it a thought.

Endnotes

1. One of my former colleagues at R3 regularly sent me the XKCD comic, Duty Calls, whenever I started fact-checking. [↩]
2. As an aside, it is a little odd that few people have reviewed the book since Diehl’s views go largely uncontested by any side of the aisle. For example, a portion of the ending was cribbed by the anti-Web3 letter (he also co-authored) word-for-word, two weeks after the book was published. That is astroturfing. [↩]
3. Obviously “flopped” means it did not win my thumbs up. I’m sure several of these became New York Times Best Sellers. [↩]
4. And if you’re counting at home, that leaves two books that reside in purgatory. Let’s let them simmer as they are closer to bad than good. [↩]
5. Even writers who have formed their priors should spend time in the trenches to look at existing product-market fit and infrastructure-market fit. It can be boring and often relies on speaking to people working at FMIs. [↩]

Since there are still a lot of misconceptions about what tokens are, below is a short presentation I gave at the Web 3.1 Unconference discussing several tokenization attempts over the past decade. Note: this is non-exhaustive, as a full landscape report would involve hundreds of other examples.

See also the previous post: Tribes of maximalism

Most people uninvolved or newly involved in the world of cryptocurrency are unaware of the prickly connotations, histories, and etymology of many different memes and phrases. Below is a short explanation of a few of them.

For instance, as it relates to coins, the term “maximalist” or “maximalism” first appeared in 2014. In March 2014, Daniel Krawisz, a co-founder of the Nakamoto Institute (who was later purged for supporting BSV), wrote “The Coming Demise of the Altcoins (And What You Can Do to Hasten It).” It never said the word maximalism but used many of the same arguments and logic that maximalists would later adopt. In November of that year, Vitalik Buterin wrote perhaps the first article explaining its origin and then-usage. Subsequently, there are about a million twitter threads (in English alone) that use it in some form or fashion.

In general, its original usage was similar to how “maximalism” is used in politics, economics, sports, and other areas of human competition, with connotation similar to dominance or hegemony.

What did Bitcoin maximalism – or any coin maximalism – mean? In short, it meant that Bitcoin (or some specific coin) – for a variety of reasons – was the Highlander coin, the one coin to rule them all. And that the rest were pretenders to the throne, predestined to fail or at a minimum be a far distant number two. Uni-coin maximalism.

This all sounds silly and cultish and it truly is. Especially the “predestined” element.

Why? Because cryptocurrencies fundamentally rely on blockchains, and blockchains are run by machines that are maintained by humans. Hence the term: Soylent Blockchains. Blockchains come and go, there are hundreds of dead coins that failed for one reason or the other. Thus empirically we know that claiming a priori, one specific chain will dominate (or fail), is both fallacious and a fools errand. There is nothing mystical or supernatural about cyber coins and their underlying infrastructure. That is not to say that all chains are going to fail or that all chains have the potential to become widely used. There is a lot of middle ground in the spectrum between all dead and a popular meme coin.

But back to the topic at hand: coin tribes. Note: it bears mentioning that “tribe” itself is a centuries old term, the etymology dating back to medieval France and Roman times.

By mid-2017, mania surrounding initial coin offerings (ICOs) throttled up, resulting in not just large public capital raises, but also unadulterated tribalism. Us versus them attitudes reached fever pitch in late 2017 with dozens of coins hitting all-time highs in market value. Bitcoin peaked at just under $20,000 on December 17th.

During this time, promoters and advocates of uni-coin maximalism started exploring new ways to segment other tribes. Often this involved smearing one or more coins, loudly, repeatedly calling someone or some project fraudulent or scams. Paying for twitter bots to brigade threads with nonsense or defamatory claims or both. FUD, inglorious FUD.

Arguably the worst offender was the attempt to segment specific clusters of people who held similar views into arbitrary categories that were at a minimum, demeaning pejoratives.

For instance, below is the original definition of “nocoiner”:

It is baffling that anyone would write this but we (probably) know who co-created it: Pierre Rochard and Elaine Ou, both prominent Bitcoin maximalists. Rochard is the co-founder of the Nakamoto Institute (now at Kraken) and Ou was the co-founder of Sand Hill Exchange, which was sued and shut down by the SEC.

In reading this definition it is unclear why anyone would actively want to self-identify as a “nocoiner.” Yet, it is clear by how the original authors and their close circle of friends used it: not as a term of endearment. 1 On panels, podcasts, news articles: the overtones were understood and explicitly baked into demeaning attacks up through the present day.

Care to engage and object to this definition and its intent? Ou states in her “Reject Nocoiner Orthodoxy” to “never engage a nocoiner.” Michael Goldstein, the other remaining co-founder of the Nakamoto Institute goes into further detail about the various categories (pre-coiner, nocoiner, bitcoiner, etc.) in a 2019 podcast. What is a pre-coiner? Someone who has not yet bought a coin (specifically bitcoin) but who is not a “hysterical loser” nocoiner. Rochard’s numerous interviews leave nothing to the imagination about what the intended connotation we are supposed to conjure up with these categories. Together they laid the foundation for other maximalists not just in the US — see this talk from last year — but also abroad.

Fun fact: the very first time I was called a dirty, filthy “nocoiner” was by a venture capitalist on WeChat, and it came in floods on Twitter immediately thereafter. December 2017 is an amazingly cherished month in this household!

Obviously people are free to identify how they see fit. However, it is worth reconsidering adopting terms with connotations that at the very least were originally crafted to be a hateful pejorative, a slur. And handwaving away its origins, perhaps because you have adopted it as your own identity, does not memoryhole its ill intent.

I used to write a newsletter that chronicled this behavior, perhaps at some point I will get a chance to post some of the doozies.

Is that all the major maximalists?

Oddly enough, although they often fashion themselves as “nocoiners,” a group of anti-coiners exists. Unlike the pejorative nocoiner, anti-coin maximalism can be described thusly: utilizing deduction alone, anti-coin maximalists are individuals who are against the existence of cryptocurrencies (or tokens) without any exception. Follow this group on social media and you will see many of the same set of manners and memes that coin maximalists often deploy.

Are anti-coin maximalists inherently right or wrong? Hitchens’ Razor states: “What can be asserted without evidence can also be dismissed without evidence.”

This cuts both ways: for coin promoters who claim that coin X is the best and the rest are rubbish – without providing evidence – this is just polemical and can be discarded. Similarly, a priori dismissing all crypto projects as scams – without providing evidence of each project – can be dismissed. The burden of proof is clear: the onus is on the party making a positive claim, that is how prosecutors must operate in court.

Why are not all cryptocurrency / tokenization / blockchain projects a scam?

As mentioned in Section 5 in the previous post:

This is a non sequitur though because law enforcement, regulators, and courts in multiple different jurisdictions repeatedly state that the burden of proof rests with the prosecution and must involve “facts and circumstances.”

Philosophically it is also a fallacy of composition. Enterprises big and small often use public key cryptography, append-only databases, and synchronizing distributed systems for day-to-day operations. These are the key pieces of a blockchain, so which part is fraudulent or a scam exactly? Is all tokenization a scam? Is PBFT a scam? Is Onyx a scam? Is Allianz’s project a scam? Is geth a scam? Is Tendermint a scam? Maybe they all are, but the onus rests on those making the positive claim, in this case: the anti-coiners. Continually throwing the baby with the bath water seems like an intellectually dishonest raison d’être.

The attempts at disparage tokenization includes lazily lumping all blockchains — whether they are permissioned or permissionless, or use Proof-of-Work or Proof-of-Stake — altogether as an amorphous blob. One example of rhetoric-filled declarations is that all blockchain usage will lead to the melting of glaciers. Actually it is proof-of-work chains that could eventually lead to this negative externality and unfair (and dishonest) to lump alternative Sybil resistant mechanisms in with the PoW albatross.

But it is too hard to filter through the noise to find a (semi) legitimate protocol!

Yea, it can be unforgiving work. But that is the only intellectually honest way to go about providing analysis or drawing conclusions. Contrary to the memes, harassing blockchain developers or researchers on the bird app is not a perfect substitute for writing a facts-and-circumstances-based case. It is probably not a coincidence that several of the loudest anti-coin voices today seem to have no idea what the history or lineage of tokenization is (hint: it didn’t start with Cryptokitties). Ignorance is a badge of honor!

Disagree? Still hate any and all coins? That is fine but simply disliking tokenization or blockchains because everyone you have encountered turned out to be a scam, does not automatically make all of them scams. If you think you have a good case for why each one undoubtedly is, write it up, and submit it to a three or four letter agency. I am sure they would love to have the ultimate case against all coins to use as a trump card for their next case.

Or as the old law adage goes: if you have the facts on your side, pound the facts; if you have the law on your side, pound the law; if you have neither the facts nor the law, pound the table.

Still disagree? HFSP! Kidding, kidding. It would take pages to write but worth subscribing to LedgerInsights who cover all of the enterprises and institutions attempting to incorporate blockchains and tokenization into their trade lifecycles. The DTCC are clearly scammers!

What is the main takeaway Tim?

Just like sportsball or e-gaming, it is really easy to get caught up in tribes, in us versus them mentality. And for a slew of reasons, social media amplifies the emotions and strong views that seem tightly wed to the coin world. It is not super fun but it is possible to be tribeless, to take a nuanced approach at filtering projects, protocols, and other digitalization efforts. Maybe try out anti-maximalism maximalism for the next few years! And at the very least, try not to throw the baby out with the bathwater.

1. In February 2018, Marc Hochstein wrote “The problem with nocoincers” for CoinDesk. The fact that the most recent crop of “nocoiners” – many of whom joined the fray at the height of the bubble in late 2021 – adopted the word as a brand speaks to their lack of literature review. [↩]

[Note: The views expressed below are solely my own and do not necessarily represent the views of my employer or any organization I advise.]

Stop: if you are looking for a single article to discuss price action and trading activity, I can recommend Kevin Zhou’s latest “State of the Market” from Galois Capital.

Below is my own belated, very short reflection on the past year:

(1) Back in early 2019, a reporter quoted my (critical) take regarding a high yield product from BlockFi. The genesis of that conversation started from a Twitter thread in which I was told by multiple responders that the marketed (high) yield was legit and to DYOR! I had, in fact, asked around prior to publicly commenting on this product and learned that BlockFi was reinvesting deposits into other coins and tokens. Not scandalous but not really transparent either.

Fast forward three years later: BlockFi was sued by and settled with the SEC and several US states (coordinated via the NASAA). This is not an endorsement of the settlement terms (or settlement process) rather this is a reminder that prominent coin promoters on Twitter — although paper rich — are sometimes substantively and materially wrong. In this case, BlockFi followed the path of Robinhood who in December 2018 announced with much fanfare a purported 3% yield produce that marketed as being insured by SIPC… only to have to backtrack completely after the CEO of SIPC said this claim was spurious.

Clearly I am a huge fan of low-yield boomer products! HFSP!

(2) One of my most widely cited articles happened to be on a topic that has been near and dear to myself and past and present clients: collateral-backed pegged coins. Or as I fashioned some of them: parasitic stablecoins. Parasitic because they asymmetrically rely on external financial and legal systems and infrastructure, like Fedwire and US courts.

Strangely, parts of the industry not only became vocal advocates of intermedization (commercial banks) but have spent millions donating to political incumbents (plus candidates) and lobbying organizations to sway public opinion away from options such as retail-accessible central bank accounts (e.g., FedAccounts). Why is this strange? Because the ill-fated STABLE Act, which was demonized by some coinbros, specifically provided legislators and regulators with the ability to create Narrow Bank-like entities which would be more appropriate for stablecoin issuers (versus the more onerous state banking charter).

What has happened since?

In October the BIS and IOSCO — the same two entities who drafted the industry standard PFMIs — released a consultation paper covering many of the same systemic risks (and more!) that I and others had previously identified with the rise of some pegged coins. The following month, the President’s Working Group published its own report on stablecoins.

And in the past month alone, three separate papers from Federal Reserve affiliated entities have published research reports on central bank digital currencies (CBDCs) as well as pegged coins:

• Money and Payments: The U.S.Dollar in the Age of Digital Transformation (Board of Governors)
• Stablecoins: Growth Potential and Impact on Banking (Liao and Caramichael)
• The Future of Payments Is Not Stablecoins by Rod Garratt, Michael Lee, Antoine Martin, and Joseph Torregrossa

In mid-February, the grand daddy of all systemic risk-focused regulators – the Financial Stability Board – released its own paper that analyzed the risks to financial stability.

And that is just a hand pruned set of papers, there is even more if we wade beyond regulatory circles.

My informed nuanced views can be found on the bird app. In short: in the digital era, why should commercial banks alone be granted the privilege of having access to public money, central bank money? For instance, the Bank of England, is once again allowing non-banks to have access to a master account. Why shouldn’t this access be fully liberalized allowing retail consumers to bypass commercial banks, allowing users to go straight to the source instead of dealing with intermediaries that introduce credit and liquidity risks?

One of my colleagues put it this way: the pro-intermedization argument is a bit contradictory. To be consistent, the anti-CBDC / anti-CBDA argument would conclude that we should not have central bank money at all (nada M0). Once you introduce central bank money, you end up either arguing for a system where everyone must hold money in the private sector liabilities of a privileged cartel that can have an account at the central bank, or you argue that everyone can do that, which drives commercial banks out of business and all money is a public sector produced good.

Access to a master account is arguably not arbitrary, rather it is deliberate and for a set of reasons: namely preservation of a monetary order where money and credit originate in private banks. Allow narrow banks and stablecoin issuers that same access, let them hold all their reserves in central bank money, then our current monetary order may transform into something where banks go out of business and credit originates outside the banking sector. Bankers and many economists think that is a bad thing, others think it might be a very good thing. Either way, the stakes and implications are very high which is one of the reasons why TNB has not been approved a master account.

What does this have to do with the “Overton window” today?

In the short and medium run, collateral-backed pegged coins will continue to thrive and grow, probably without even having to whitelist specific addresses (dapps). Putting aside the tactics in self-preservation, their products are sticky, provide utility to a wide range of users, and do illustrate the desirability of having a reliable on-chain settlement asset that enables some of the use cases that traditional finance has been experimenting with for 6+ years.

Separately, it is interesting to see the algorithmic stablecoin market evolve and grow, with both UST and Frax experimenting on two different approaches. But that is a topic for another day.

(3) Perhaps the funniest and saddest time waster last year was having to deal with two separate camps on the same day: coin promoters and anti-coin promoters.

About two weeks after I announced I had conjured up a protocol idea – the Tau Protocol – one of the projects that attempted to implement it (BTCST) put my face on a banner that included a widely despised blockchain (Tron). I am frequently invited to speak at events, podcasts, and even TV and for the most part, don’t see the harm in speaking to a wide range of audiences… including religious maximalists or token aficionados.

Often conference organizers will include an headshot or simply scrape the internet for an older image. In this case, I answered two questions at a public AMA in the Tron telegram room and within hours was treated as public enemy number one. I did not create BTCST, I did not even chat in their own TG room, all I offered was assistance in implementing a protocol that utilized their “hashrate token.” I didn’t hack an exchange, I didn’t promote a specific coin (there is no Tau token), I didn’t advocate forcing a country to adopt a specific coin as legal tender. In fact, if you look at the actual short Tau paper, it was purposefully bland on implementation details or possible collaborations — no project was mentioned.

Alas several vocal coin promoters who handsomely profited off of ICO mania in 2017 did not bother to look at the separate parties (Tau, BTCST, Tron) and instead disingenuously lumped them altogether. Simultaneously a group of anti-coin promoters took to the bird app to echo the same defamatory comments. None seemed actually interested in actually looking at the moving parts. How do I know? Because they would have realized that BTCST (not Tau) was created by a team of Chinese miners who formally, publicly partnered with ~5 other large mining farms to create a “hashrate token” on BSC via Binance Launchpad (Poolin, the largest mining pool in the world, and a few other PoW mining outfits have launched similar projects).

So if I truly was the creator of BTCST (which both groups implicitly claimed) then I have some highly undermarketed technical capabilities: (1) I have stealthily been mining and working with global miners all while censuring PoW mining; (2) I somehow designed and got a new coin listed on a major exchange after just a couple months of ideation. Neither is true but don’t let the truth get in the way of an angry clickbait narrative. It’s pretty obvious what the goal and agenda that these groups have based on how they continue to portray the Tau idea to this day. Thanks for the snitch tags!

Unfortunately my family and I caught Covid at the tail end of March and I ended up in the hospital for a couple of days. Pushing back on these fact-free missives was clearly the top priority! What should have been an interesting project – to help beta test a path for PoW miners to move over to a proof-of-stake chain (BSC) – got purposefully butchered by two different sects bent on manufacturing narratives that fit their ideology. RIP Tau v1.

Want more details? Scroll on down to the Interviews section in the previous post, I said as much in three different interviews on this topic.

(4) Speaking of agendas and shifting narratives. In 2014-2017, proto-PoW maximalists insisted that mining does not use that much electricity or semiconductor resources. Then after the 2017 bubble the narrative shifted to whataboutisms: so what if a single chain that is infrequently used for actual payments consumes the energy footprint of a medium-sized country, whatabout this completely other unrelated industry that in aggregate wastes energy but totally is not involved in payments and actually contributes to socially useful products. Whatabout this! Or that! Whatabout pop muzik!

Spurred by political patronage, and friends like Uncle Musk, over the past year PoW maximalists have attempted to deflect additional criticism by spuriously claiming that:

(a) Bitcoin mining is good for grids because they absorb otherwise extraneous energy without concurrently recognizing the multitudinal other socially useful activities that could use that same energy

(b) hash-generating equipment are like batteries, nouveau batteries… that only consume and never re-emit because nothing is actually stored

(c) Bitcoin mining incentivizes construction of (renewable) energy infrastructure, projects that could have otherwise not been constructed in the first place due to decarbonization and that likely crowd out other productive uses (e.g., opportunity costs)

(d) Bitcoin mining incentivizes oil & gas producers to… use natural gas to power hashing equipment that would have otherwise been immediately flare; slight delayed usage and emission is obviously cutting-edge science guys! Make Flaring Great Again!

Actually, it’s nearly impossible to keep track of the stream of outrageous claims that PoW maximalists and their sycophantic armies are pumping out on a daily basis. This includes dredging up the lamest anti-proof-of-stake arguments that have been debunked for over half a decade. They are using privatized gains in dubious locales to conduct a multi-pronged information war that includes direct government subsidies, tax breaks, and even outright regulatory capture in several countries. Attempting to fact-check all of the nonsense and propaganda runs into Brandolini’s law. I have got other things to do but hopefully I’ll be able to set aside some time this summer to publish an irregular update on this topic.

(5) Tether Truthers and anti-tokenization armies unite. What started as a legitimate analysis of reserve composition and executive backgrounds has morphed into a new cult-like entity: USDTQ. Complete with “teThEr is a fRaUd!” capitalization bots, anonymous reply guys, and innuendo-laden podcasts all echoing the same mantras.

For background: while not the first, I was one of the earliest analysts to question the composition and business model of Tether LTD (and its relationship Bitfinex). Likewise, reporters Matt Leising and Nathaniel Popper coverage on this topic predate nearly all of the current crop of Johnny-come-lately’s who arrived just in time to add their very strident views that largely recycle what Leising and Popper already gathered (FT reporting is perhaps the exception to this morass).

The gumshoeing ultimately culminated when the New York Attorney General and the CFTC announced settlements last year with Tether LTD that included findings, such as the fact that during large portions of the time frames investigated, USDT was not fully backed or collateralized as advertised. And the executive team knew that and repeatedly lied to the public.

Instead doing a victory lap and riding into the sunset with a solid “W,” a side group of the USDTQ group doubled-down on every possible avenue of corruption real or imagined. Yet in lieu of providing evidence for cabals, we were presented with innuendos layered on innuendos. At least a half dozen predictions by prominent self-identified members were made last year and passed without occurring, including: the collapse of USDT, collapse of major centralized exchanges, collapse of the NFT market, collapse of Bitcoin, imminent arrest of Tether LTD executives and so forth.

Where’s the accountability for such bold claims? Despite predictions that have come and gone, why are they perceived as having credibility? I made a public bet with Spencer Macdonald (aka Bitfinexed) about a specific scenario he regularly claims is just around the corner. The deadline for the wager arrives at the end in January 2023. Maybe it happens, then I’ll obviously eat crow.

Yet the ultimate indication that this group is more interested in LARPing as researchers for bird app engagement and uninterested in providing evidence for their hunches: Hindenburg Research – an activist short-selling focused firm – offered a bounty of up to $1 million for information on Tether LTD. With their raucous confidence you would think that USDTQ participants would be rushing to the front of the line with detailed exposes. Easy money! Yet it is likely none of them have. Why is that? I’ve got a conspiracy theory about their grift, subscribe to my newsletter today!

The missing nuance here is that: based on information provided by the NYAG and CFTC between 2016-2018, Tether LTD and its then-executive team were lying to investors and users about the reserve composition and solvency of the organization. Yet none of the prominent Tether Truthers knows 100% for sure if Tether LTD is currently operating fraudulently. Maybe they are. If so, would be an easy fine for the CFTC and NY AG to collect since Tether LTD and Bitfinex are on the hook for meeting regular reporting requirements the next couple of years. Whistleblower forms are right here.

What does this have to do with anti-tokenization hysteria?

Coincidentally, some of the key USDTQ folks have morphed into a priori anti-blockchainers. That’s to say, by default any type of tokenization (NFTs!) or cryptocurrency or blockchain-project is either a scam or the people promoting them are deluded, or both. Nuance is thrown out the door.

This is a non sequitur though because law enforcement, regulators, and courts in multiple different jurisdictions repeatedly state that the burden of proof rests with the prosecution and must involve “facts and circumstances.”

Philosophically it is also a fallacy of composition. Enterprises big and small often use public key cryptography, append-only databases, and synchronizing distributed systems for day-to-day operations. These are the key pieces of a blockchain, so which part is fraudulent or a scam exactly? Is all tokenization a scam? Is PBFT a scam? Is Onyx a scam? Is Allianz’s project a scam? Is geth a scam? Is Tendermint a scam? Maybe they all are, but the onus rests on those making the positive claim, in this case: the anti-coiners. Continually throwing the baby with the bath water seems like an intellectually dishonest raison d’être.

The attempts at disparage tokenization includes lazily lumping all blockchains — whether they are permissioned or permissionless, or use Proof-of-Work or Proof-of-Stake — altogether as an amorphous blob. One example of rhetoric-filled declarations is that all blockchain usage will lead to the melting of glaciers. Actually it is proof-of-work chains that could eventually lead to this negative externality and unfair (and dishonest) to lump alternative Sybil resistant mechanisms in with the PoW albatross.

More to the point, attempts to tokenize wares — such as off-chain assets — predates the current NFT craze that arguably started with Spells of Genesis and Rare Pepes, both launched on Counterparty a couple of years before Cryptokitties and the existence of the ERC 721 standard.

Wait, something came before SoG and Pepes? The multiple groups that attempted to implement “colored” coins in late 2012-2014 followed by Mastercoin in 2014-2015 ran into a variety of hurdles worthy of a small book.

A couple of the lessons learned in previous tokenization attempts:

(1) the lack of widely used neutral protocol standard (e.g., 721, 1155) plagued not just trade lifecycles on public chains but also permissioned projects (and that doesn’t delve into non-technical constraints: what happens to a tokenized financial instrument as it goes between chains managed by different consortia domiciled in different jurisdictions?).

(2) intense difficulty to fuse hooks into off-chain items, especially those in the real world. Some lawyers think the latter – especially as it relates to DAOs – should be verboten because it opens up participants to an exogenous legal systems (and liabilities).

Attempting to engage in public, non-Twitter debate on these merits and demerits often meets with deafening silence, because just like Bitcoin maximalism in 2014-present day, anti-tokenization appears to be a feelings based movement driven by performative theatrics. Disagree? Let’s do a Zoom debate at your leisure!

(6) Predictions! I’ve made them in the past. Some turned out to be pretty good (look at the NFT remark!) and others not so on the mark (a couple of Bitcoin Core developers have faced civil lawsuits but nothing BSA or RICO-related). Here are my latest for 2022.

One prediction that didn’t make it into that thread: decentralized derivatives. Despite a cornucopia of well-funded players and mature products on centralized exchanges, this is where you will probably see the largest on-chain trader-led growth the next couple of years.

Why? Part of it is the inevitable desire to replicate traditional finance products and compress trade lifecycles through post-trade automation on-chain. But increasingly likely, the barriers to entry are lower for new products in part because creators do not have to jump through the expensive and time consuming gatekeeping process. Hint: the $75 annual membership to ISDA isn’t the expensive part! In addition to the Injective’s, Mango’s, and dYdX’s of the world, and non-blockchain-projects like Kalshi are worth keeping any eye on. Be sure to read Delphi’s comprehensive market research from last year too.

One addition to a prediction in that thread: tokenized projects on public chains (e.g., art-related NFTs) will increasingly attempt to store digital assets (e.g., SVG art) on-chain such that the only off-chain involvement are trading venues (CEXs). Several NFT projects have spearheaded that effort last year including Chain Runners, Anonymice, and OnChainMonkey.

Why is this important? Party because of IP claims and disputes which have arisen (e.g., after you mint an NFT and sell it, do you still have commercial rights to it?). Efforts like Mintangible are attempting to create easy-to-use NFT license agreements to protect both creators and collectors.

(7) Lastly, your moment of zen for 2021. A US-based managing partner of a US-based coin fund stating that he is betting against the US, along with a former partner of a major US-based VC fund (who was a candidate to lead the FDA and later immigrated to Singapore). The new non-aligned movement owned by a handful of coin promoters and miners, sounds like a win-win for democracy and the rule of law.

Here are most of the public engagements I’ve been involved with over the past year or so. Unfortunately due to parenting a toddler during the pandemic, I had to cancel all F2F invitations but hopefully the coming summer will bring a respite to virtual-only meetings.

Interviews / panels

• What is Crypto discussing “The Problems with Mining” recorded January 16, 2020
• The Bankers’ Plumber discussing “The Consortium Conundrum and all things DeFi” recorded March 24, 2021
• CryptoCoinShow discussing the “Tau Protocol” recorded April 5, 2021
• Blockhash discussing the “Tau Protocol” recorded April 19, 2021
• DEV Community discussing “The Environmental Impact of Digital Currency” recorded April 21, 2021
• The Decrypt Daily discussing the “Tau Protocol” recorded June 2, 2021
• When The Music Stops discussing “Enterprise Blockchains” recorded September 8, 2021
• YBlockchain? discussing “Decentralizing the Financial System: Innovation and Regulation” recorded on September 30, 2021
• The FinReg Pod discussing “Cryptocurrency 2021 Year in Review” recorded on December 30, 2021

Quoted

• Blockchain is no silver bullet against the black market from Financial Times on June 30, 2019
• Money Laundering Might Taint NFTs Too, Prepare For Tighter Controls from CryptoNews on March 27, 2021
• Stablecoin strife: crypto assets face calls for tougher oversight from Financial Times on May 12, 2021
• China Digs a Hole for Bitcoin Miners from The Wire China on June 13, 2021
• Decentralised finance: Latest front in crypto’s hacking problem from Reuters on August 16, 2021
• The Coinbase Spat With the SEC Ups the Ante in Washington’s Crypto Fight from Bloomberg on September 16, 2021
• ‘Fat finger’ $24m charge exposes fragility in crypto market from Financial Times on October 2, 2021
• Untethered from Slate on October 19, 2021
• Billionaire Holds World’s Biggest Crypto Fortune from Bloomberg on January 9, 2022
• ‘Let’s Go Brandon’ Crypto Coin Turns Into Total Dumpster Fire from The Daily Beast on February 11, 2022

Cited

• The Anti-Money Laundering Act and Crypto Collide: Non-Fungible Tokens by King & Spalding at JD Supra on May 19, 2021
• After China causes bitcoin to crater, threat of new U.S. regulations loom over crypto market, experts say from MarketWatch on June 21, 2021
• U.S. needs a ‘strong regulatory framework’ for stablecoins, Fed’s Powell warns crypto investors from MarketWatch on July 14, 2021

Presentations / guest lecture

• Fireside Chat on stablecoins with the Federal Reserve “DLT” research team on March 3, 2021
• “Parasitic stablecoins and revolving doors” at Boston University on April 20, 2021
• “DeFi’s dependency on the U.S. banking system” at SORA Economic Forum on April 22, 2021
• “Collateral-backed stablecoin landscape” in Law, Money, Technology seminar (Fall 2021) at Willamette University College of Law on November 3, 2021
• “Discussion of cryptocurrenies and stablecoins” in FE 442, Capital Markets and Economic Activity at Boston University on November 4, 2021

[Note: the short TAU paper is available here]

Outside of my day job (at Clearmatics) I have spent the past couple of months designing a new synthetic asset protocol that uses a rebase technique to stabilize an asset at a target level. I call it the (τ) TAU Protocol.

Frequent readers have probably seen my writings on stablecoins, mining, and DeFi- related topics. For TAU, I started the process in reverse: I knew what I wanted to stabilize but wasn’t quite sure how to get there. What do I mean?

The landscape of synthetic asset-focused projects is something I have discussed multiple times. My most recent pinned tweet was an entire paper on a specific type of stablecoin that relies on exogenous banks to provide utility.

As a thought experiment, what if instead of trying to stabilize around $1 USD, the protocol tries to stabilize an existing cryptocurrency but do so on a separate blockchain… and do so with as little manual intervention as possible. In steps rebasing.

Note: in 2014 several proposals were published on the idea of stabilizing bitcoins price with respect to the U.S. dollar:

• Hayek Money: The Cryptocurrency Price Stability Solution by F. Ametrano
• Inv/Sav Wallets and the Role of Financial Intermediaries in a Digital Currency by M. Morini

My boss (Robert Sams) wrote a paper around the same time called “Seigniorage Shares,” which outlined a way to stabilize a PoW coin using endogenous information. The idea would later spawn a couple dozen (mostly broken) efforts now live on a couple of public chains.

One notable exception to these failures is FRAX (thus far), which uses a reserve fund partially collateralized in USDC. This is an interesting workaround.

One of the problems with rebase protocols is that once the peg declines from the 1.0 target level it can be hard to credibly move it back up: if it goes above the target the process is a bit easier, solved via inflation.

So to recap: the goal is to synthesize an asset (tAsset) and maintain its target value relative to its facsimile on a different blockchain… and to have a credible way of supporting the rebasing process. How would you go about stabilizing a tAsset in practice?

One way is to follow the model of FRAX or other (partially) collateralized stablecoins: with a fund. But setting up a fund of coins that reside on one blockchain to be used on another is hard. For instance, Bitcoin only resides on the Bitcoin network, right?

Actually over the past couple of years there have been ways to tokenize or “wrap” assets from one chain and shuttle them over to another. However, these often involve new trust models (and attack surfaces).

To-date about 1% of all mined bitcoins have been tokenized or wrapped and “transported” over to Ethereum. But to interact with WBTC on Ethereum mainnet can be expensive at times. Back in January I thought: has anyone tokenized hashrate itself onto another chain? Yes it has.

After some googling I came across a paper from Alex Zhao at BTCST. They had figured out how to tokenize hashrate onto a fairly inexpensive EVM chain (BSC). I reached out to explain what I had in mind for a new Protocol idea. And they decided to try and implement it.

Another quick reminder: a Protocol is separate from an implementation. For instance, in Ethereum the “Yellow paper” provides a neutral Protocol specification from which independent parties can build client implementations of. For TAU, I am striving to reuse a similar model.

Today, the initial Protocol idea (and paper) was announced for TAU. Next week the BTCST team will implement it live. Note: while I am currently assisting them as a protocol advisor I want to make it clear that this isn’t my day job and that others can build implementations.

Lastly, I have some additional ideas for how to expand and enhance the Protocol in the future and am keen to see what kind of feedback and modifications the larger cryptocurrency community may have, especially if it includes ways to minimize manual inputs.

Was recently talking to a close friend who has been working on an insurance-focused technology company the past couple of years.

I gave him this list of projects and asked him how he would categorize them:

1. Nexus Mutual
2. Cover Protocol
3. Tidal Finance
4. Etherisc
5. Armor Finance
6. Nayms
7. Unslashed Finance
8. Protekt Protocol
9. Risk Harbor
10. Soteria Finance

At first glance he thought there were roughly two buckets: protection against loss, theft, and smart contract failure versus DeFi insurance platforms and parametric risks. But then Nayms is a platform and marketplace so what are other nuances?

According to him, a lot of “insurance” above is really just a derivative product so in practice most of these are basically just prediction or options markets: you are betting a contract will not fail and hoping the pseudonymous claims committee rules in your favor.

A counter-argument is that all insurance is like that conceptually. But in reality, insurers try to underwrite the risk which then leads to a pricing exercise, but the prices are grounded first and foremost in risk and then market forces adjust pricing. As opposed to a pricing exercise which seems a bit divorced from the risk but mainly driven by the price action of a coin.

Other categories

• Parametric risks (such as Etherisc)
• Centralized Insurance (only a handful of stealth providers)
• DeFi Insurance (theft, loss, smart contract failure)
• DeFi “Insurance” (similar to an option: if this thing doesn’t work I pay you monies, but it’s not designed as an insurance product…a subtle but important difference)

What are some other projects and categories to add in the future?

For more context, I highly recommend this thread on “DeFi insurance” from Lucius Fang (who is a trained actuary).

Lastly, I reached out to Stephen Palley, a cryptocurrency-nerd / attorney who specializes in suing insurance companies. According to him:

So the big issue for me — and I am planning on doing a long form piece on this — is that people who sell insurance are subject to a maze of state level regulatory and licensing requirements that they so far have seemed happy to ignore. If/when/as this gets bigger, people will go to prison.

It’s a huge opportunity for people who want to do things the right way. But as is typical, you have a lot of people who are jumping in who don’t actually know eff all about the foundations they are building on.

Over the past couple of years there has been a lot of activity not just in DeFi but in the evolution of on-and-off chain platforms for trading derivatives and perpetual contracts.

Below is a non-exhaustive table that attempts to segment and differentiate who some of the major players known. It is a work in progress and likely is missing some parts. For instance, of those listed: Synthetix and uSTONKS are the only ones that track indices and Mirror (built on Terra) attempts to track real world assets. A notable company excluded from the list: FTX (a large CEX) trades tokenizes equities and indices.

What is missing, what should be added, what nuances should be made?

Below are list of interviews, presentations, panels and other public facing engagements I have been involved with the past couple of years.  Taking care of a newborn (now toddler) during a pandemic has dampened some of the external engagement relative to prior years.

Quotes and interviews

• Stablecoins are crypto sector’s next big bet from Financial Times on November 15, 2018
• Former Goldman partner struggles to build crypto bank in bear market from Financial Times on November 22, 2018
• Geron’s Take: Crypto Hijacking Exposes Vulnerability of Digital Coins from The Wall Street Journal on January 8, 2019.
• JPM Coin’s focus on B2B breaks the bitcoin mold from Payments Source on February 14, 2019
• Coinbase Risks Losing Users After Buying a Firm With Spyware Ties from Bloomberg on March 4, 2019
• Cryptocurrency Diehards Turn to Interest Bearing Accounts from Bloomberg on March 20, 2019
• ‘DeFi’ movement promises high interest but high risk from Financial Times on December 29, 2019
• Boom or bust? Welcome to the freewheeling world of crypto lending from Reuters on August 22, 2020
• Is PayPal’s crypto move a game-changer for bitcoin? Probably not, say experts from Reuters on October 22, 2020
• Bitcoin Resurgence Leaves Institutional Acceptance Unanswered from Bloomberg on October 24, 2020
• Another bitcoin bubble? This time it’s different, backers hope from Reuters on November 18, 2020
• Bitcoin on the balance sheet: Once hostile to the digital asset, Wall Street is warming up from The Logic on February 25, 2021
• Climate concerns to crime: Bitcoin’s dark side draws scrutiny from Al Jazeera on March 17, 2021

Events, presentations, and interviews

• Panel: Future of Blockchain & Crypto hosted at Sheppard Mullin & Richter by FinTech Silicon Valley in San Francisco on December 11, 2018  (video) (interview)
• Interview: After the blockchain bubble – The future of blockchain & bitcoin from Sirius XM on December 17, 2018
• Interview: “Regtech and Blockchain Technology” at U.C. Berkeley meetup, on December 18, 2018 (video)
• Interview: The Un-Truth Machine: Tim Swanson on Bitcoin and Those Controlling the Narrative from CoinSpice on March 6, 2019
• Panel: JetBlue Blockchain in Travel Summit on March 20, 2019 in New York City
• Panel: The First New York Fed Research Conference on FinTech on March 22, 2019 in New York City
• Interview: Episode 90. The ‘real’ bitcoin market from 11:FS on March 28, 2019
• Panel: Where is Blockchain Industry Heading? at Deconomy on April 4, 2019 in Seoul, South Korea
• Presentation: Distributed Financial Market Infrastructure hosted by the Silicon Valley Ethereum Meetup on April 9, 2019
• Panel: “Global Capital Flows into the DeFi Ecosystem” in Seminar on Sustainable De-Fi hosted by IIEL on February 17, 2021. See also memo: “Global Fintech Investments” in IIEL Issue Brief Series
• Presentation: Global Fintech Investments + Regtech at Boston University Questrom School of Business on April 22, 2020
• Presentation: “Good and Bad Use Cases for Blockchain” for the Blockchain Live Event Series at MIT Horizon on May 27, 2020
• Discussion: “Cryptocurrency and Initial Coin Offerings” for the Duke Law FinTech Discussion Series on June 4, 2020
• Interview: “Cryptocurrency 2020 Year in Revie‪w‬” from The FinReg Po‪dcast on January 11, 2021‬
• Debate: Is Bitcoin in a Bubble? The ‘Coin Toss’ Debate from CoinDesk TV on February 24, 2021

Cited

• Blockchain Technology: Possibilities for the U.S. Postal Service from The U.S. Postal Service Office of Inspector General (OIG) on May 23, 2106
• Bitcoin Will Burn the Planet Down. The Question: How Fast? from Wired on November 5, 2018

[Note: this memo was written for the IIEL Issue Brief Series for Seminar on Sustainable De-Fi]

It’s been about six years since I began tracking the fintech space through my market research role at a couple of different firms.  Fads have come and gone, a few have stayed.  For instance, in the United States, P2P lending was all the rage in the early part of the last decade but has wasted away, despite a growing economy.  In China, P2P lending became intertwined with the informal ‘shadow’ banking sector which not only blew up, but led to now notorious multi-billion dollar Ponzi schemes.

We can partially see this illustrated via The Disruption House (TDH), a data and benchmarking analytics firm focused on the financial sector, which found that some of the fintech exuberance peaked almost five years ago.

Source

While this is not a fully comprehensive or exhaustive survey (TDH primarily focuses on wholesale capital markets), what has led to this particular decline?  Part of it is unrealistic expectations that promoters failed to manage during the initial marketing phase… such as blockchains killing banks!

Another recurring issue is capital costs.  Contrary to the narrative that a couple of bros with laptops in a Silicon Valley café can whip together an app that finally crushes too-big-to-fail banks, most, if not all of the fintech sectors require large capital investments to build out and eventually integrate Widget X, or Base Layer Y, into the existing financial infrastructure.

For example, last fall Apple humblebragged about its partnership with Goldman Sachs for the Apple Card, where on the one hand Apple tried to take credit for creating the product as a tech company but didn’t mention that Goldman also spent $300 million to develop it.

In response, Yakov Kofner, a managing partner at Gartner who focuses on payments and fintechs in general, mentioned last month that: “FSIs love to PR its Agile culture and open banking scale, but when it comes to launching a new product it somehow still requires hundreds-of-million budget and thousands of developers.”

Most startups, irrespective of geographic region, simply do not have the runway to build out these types of products, at least if we’re talking about apps with actual users and not mockups solely intended as Powerpoint viewership.

Another recurring issue is, even after launching a product, a lack of continued traction.  Typically, a company that is actually experiencing real continual growth will boast specific metrics, milestones, and KPIs.  But in the fintech world, we often see obfuscation:

Source

In some corners of the financial press (like Alphaville), fintech became synonymous with simple user-interface facelifts, or at worst scams.

Despite this possibly cynical take, there are some bright spots of actual engagement.  For instance, a couple weeks ago Zelle announced that it processed $56 billion in payments involving 230 million transactions during Q4 2019.  This amounted to growth of 14% and 17%, quarter-over-quarter.  Altogether they processed $187 billion in payments involving 743 million transactions in 2019.  This amounted to growth of 57% and 72% year-over-year.

Yet according to a payments expert, Zelle may be double counting some send-receive volume and that growth is mostly legacy transfers moving to a new rail rather than some new payment use case or business model.  In addition, in the United States, Venmo (and others including Square Cash) which is slowly catching up to Zelle in volume, arguably created a new use case, payment model, and improved customer experience (CX).  Will these apps eventually vacuum in other features, pulling a reverse of what WeChat did over the years?

To be holistic, let’s look at some other relevant charts from other regions.

Source: CB Insights

CB Insights is an analytics company that, like TDH, tracks venture funding into startup ecosystems.  In contrast to TDH, CBI saw increased activity globally in 2018, largely due to the Ant Financial raise.  According to an analyst at CBI: “Fintech deals are down year over year, and the deals happening are at later stages.”  Note: TDH looks narrowly at the European market whereas CBI’s remit is wider.

Lest we be accused of having an American-centric view (which obviously we do), FTPartners provided some already dated numbers… because the UK is no longer part of Europe as of a few days ago.  Will Brexit impact local fundraising?

Source: FTPartners

An easier way to visualize this is via colorized bar charts:

Source: FTPartners

And how does European fintech deal activity compare to the rest of capital raises in other sectors throughout Europe?

Source: Dealroom

According to Dealroom, since 2013 fintech-related companies have “created over 2x more value than any tech sector in Europe.”  That is interesting considering that venture rounds (and valuations) in Europe are often stereotyped as lagging their peers at the same stage in the United States.

But as we see below, for the past few years, that stereotype appears incorrect.

Source: Dealroom

It bears mentioning that the Dealroom stats do not include biotech in health.

And what happens with these companies in the long-run?  What’s the exit?

Source: Dealroom

According to Dealroom, traditional banks are not able to acquire their way into fintech because “they do not have the mandate as their valuation multiples are too low and synergies are likely limited.  Instead, financial institutions and other corporates are more involved via partnerships or by investing in minority stakes.”

As someone who has previously worked for a company (R3) that became bank (majority) owned, I find it unusual that some of these companies aren’t fully acquired by a bank or two.  But we’ve been told, especially in terms of lending platforms, that some banks – at least in the short run – have found it as an alternative source to try and generate revenue from.  So maybe this is just an experimental era?  It also bears mentioning that the track record of such acquisitions, or setting up captive fintech subsidiaries, is abysmal, with many ending up being shut down altogether.

China is a touchstone today, more so than other times because of the ongoing coronavirus epidemic.  This has also turned a bit personal as my wife is from northern China, as is our au pair.  While we are all hoping for the best and for a speedy recovery, it is likely that deals and deal flow this year will look a lot different than they have in the past few years.

Source: CB Insights

Perhaps the most well known of the most recent exits (and coincidentally largest) is ZhongAn, an insurance company, who exited at an inflated valuation.  How do we know?  Because it has lost more than 60% from its peak after going public in late 2017.

We could, but won’t, go into the topic of P2P lending, but we’d like to give readers an idea of what happened aside from the aforementioned Ponzi schemes.  According to the South China Morning Post: due to rampant fraud, all of China’s 427 remaining P2P lenders (from 6,000 back in 2015) will have to either close down within two years or become qualified small loan financial institutions.

Worth pointing out that this sector, P2P lending, meant the original fintechs before that word became popular.  While they all started as P2P, they quickly pivoted to institutional capital.  Many of them also promised incredible data insights by using social media feeds only to later default back to good old credit scores and cash flow analysis.

Does that mean all of the companies in the CBI chart above will suffer the same fate?  No, but remaining grounded and realistic in the face of relentless positive press releases might be the balanced approach.

To round out this important region, let’s look at a larger breakdown.

Source: FinTech Global

According to FinTech Global, fintech investments between 2014-Q1 2019 in China reached a cumulative $60.1 billion.  The largest aggregate was payment and remittances companies, which received $24.7 billion in funding.  It’s also worth pointing out that one company, Ant Financial, distorts the overall number as it raised $14 billion in its series C and is currently valued in the private market at around $150 billion.  Is this another WeWork valuation or a more legitimate Plaid valuation?

Conclusion

From the charts above it appears we are too early to say much other than the fintech world as a whole has a lot of work to do to deliver the claims it made to users.  Capital seems ample but identifying legitimate operators, as in any sector, appears to be one of the largest ongoing challenges.

It is generally faux pas to add a new factoid in the conclusion of an article, but we’ll self-certify this exception.

Source: CBI

The spastic world of cryptocurrencies and blockchains arguably has yet to deliver on its ballyhooed promises beyond speculation, ransomware, and get-rich-quick schemes.  

In aggregate, despite the billions in deals, as shown in the diagram above, there is a marked decrease in the word “blockchain” during earnings calls in 2019 compared to the previous year.  

Why?  Hype is subsiding.  If we measure success based on user growth, increased revenue, and acquisitions (or public listings) we do not see much new activity outside the realm of mining, trading on exchanges, and throwing large conferences.  And most activity targeting “the enterprise” is hovering around the relatively mundane documentation management and provenance arenas.

To be fair, there is a fundamental difference between conventional fintechs and the wild anarchic world of cryptocurrencies. There are definitely fintechs which brought massive value – and markedly improved CX – to businesses and consumers, including Lemonade, Next Insurance, and of course Ant Financial.  Besides, valuations may not be the best measurement of the success of an industry.

Let’s follow-up in a couple of years to see what infrastructure is used and sustainable business models have silenced critics.  Until then, a healthy dose of skepticism is warranted and seems justified in an era of anonymous twitter accounts reliably documenting… VCs congratulating themselves.

[Note: this article was first published at FintechPolicy on November 2, 2018]

For self-serving reasons there has been an enormous amount of revisionism that Satoshi built Bitcoin in direct response to the Great Financial Crisis.  But Satoshi explained that the coding for it began in mid-2007, which was months before any of the now notorious investment banks faced the brunt of the crisis or grappled with existential issues.

Either way, Bitcoin itself does not directly solve any problem that Lehman or Bear Sterns had, or for that matter, anything that mortgage loan originators had as well.  The two behemoths did not collapse because of a payments (transactional) problem.  Or a double-spending problem between pseudonymous participants.  There wasn’t even a problem with digital signatures being reversed or some other strange technological edge case.  

Instead it was a combination of many “off-chain” issues: lax lending standards, over leverage, unrealistic valuations, rubber stamp ratings, improperly assessed risk models, lack of proper documentation, special interests lobbying, imprudent oversight, and a laundry list of other culprits.  None of those were things that Bitcoin itself could have fixed.

Perhaps hypothetically an industry-wide blockchain or some kind of commonly used distributed ledger could have maybe sorta helped with reducing reconciliations which could have maybe sorta lead to quicker identification of rehypothecation, but it is not accurate to say that a cryptocurrency like Bitcoin would have prevented the GFC.  Let’s put that faux narrative to rest.

Garbage in, garbage out: blockchains cannot magically fix the underlying information — behind the representations — being inserted into blocks, that’s not what they are designed to ameliorate.

Pittsburgh

A year after Lehman collapsed, leaders from the G20 and several other international organizations met in Pittsburgh to reflect on and iron out additional methods of shoring up the decentralized yet highly concentrated and intermediated financial system.  One of the decisions – potentially fatal in the long run – was to require that all standardized derivative contracts be cleared through what are known as central counterparties (CCPs), frequently referred to as clearing houses.  Unlike exchanges, most CCPs are not common household names, but they are an order of magnitude systemically more important than even the largest of traditional exchanges.

Some of the older CCPs absorbed the additional derivative clearing routes and simultaneously new clearing houses were created around the world.  Most legacy market infrastructure providers were welcoming to this new mandate as it meant additional business lines and fees.  Regulators were also – at first – welcoming to this set of clearing requirements too because it meant that they could more easily observe and measure aggregate values and risks in just one or two physical places.

But being the bright reader you are, you are a step ahead and realize that the unseen consequence is that CCPs have actually created additional concentration of risk in a market with scarcely a few single points of trust.  Some of these CCPs are to date, arguably undercapitalized relative to the risks they bear.  If even one of them collapsed, you probably would not have time to sell your magic internet coins on the KYC-less exchanges you love to use before the shockwaves reached it first.

But this article isn’t so much about traditional systemically important financial institutions and infrastructures so much as it is about the topic everyone reads fintech zines for: coin scuttlebutt.

Matryoshka Stablecoins

“Stablecoins” have become a catch-all term for a type of coin or token that is marketed as having parity with some kind of exogenous unit-of-account, typically the USD.  In some cases the issuers are unlicensed e-money transmitters, although most market participants (traders) do not seem to care.

What problem are they solving and for whom?   Is it for banks?  

Probably not.

When speaking with banks about back-end payment issues, they do not lack general solutions either in-house or via 3rd party.  From a compliance standpoint, some of their challenges are how to build solutions that satisfy AML regulations.  One of the biggest unknowns about online-only money transmission businesses (e.g., PayPal, Transferwise) is whether they have not been in AML news because:

1. they are much better at building those solutions 
2. because they are still small enough to stay under the radar 
3. have been getting breaks by regulators and law enforcement

But regardless of fintech, the creation of a stablecoin doesn’t automatically improve AML surveillance by and for government agencies.  

In fact, stablecoins as an aggregate may actually be expanding obfuscation of identity across borders because many exchanges, especially outside of the US, do not require stringent KYC, AML, and CTF checks.

The funny thing about the current mania around stablecoins is that a small group of us talked about and gestated their warts and all back in 2014 and 2015.  For example, during that time Vitalik Buterin penned a comprehensive post on the topic and Robert Sams authored a short paper entitled “Seigniorage Shares” which a couple current stablecoin projects have unceremoniously cribbed on.

But the 50-odd proposals that are currently floating around in one form or fashion aren’t actual solutions to existential questions around intermediation and finality.  At best, they are quick fixes to the desirability of reducing volatility whilst day trading in coin bucketshops.  At worst, they create a new systemic risk to both cryptocurrency markets and traditional financial markets.  And we know this because of who the credit risk is: commercial banks.

You see, contrary to the cartoonish explanations on cryptotwitter, today there is probably just one form of money: reserves sitting inside a central bank.  Everything beyond coins and notes and money equivalents is arguably a credit risk.

Even a deposit made by companies into a commercial bank account ultimately bears the credit risk of that specific bank: it could collapse, force a haircut onto depositors, freeze assets at the request of the court, decide to shut down accounts, and at least a handful of other issues.  We all witnessed the consequences of these risks first hand with the sorrowful collapse of retail and commercial banks during 2008 – 2009.

In contrast, the only potential stable form of currency within an economy is the one that a central bank issues and/or fully backs.  But in order to access this today, you have to be an approved bank.  On the wholesale side – with the advent of central bank digital currency (CBDC) and central bank digital account (CBDA) – who has access to these reserves could begin to include non-bank organizations and enterprises.  It is unclear if or when a retail equivalent will exist, although several Narrow Bank proposals effectively provide roughly the same utility.  

It is probably a little unfair to say that all cryptocurrency-focused venture funds would invest in a rope-making startup that could hang the entire economy so as long as they could get a quick exit.  But it is clear that every VC firm that has invested in “stablecoins” is wanting to extract and privatize specific rents called seigniorage.  

These VCs would like a healthy cut of the cash flow that a central bank would normally collect and remit to the national treasury which then pays for social services.  In the case of VCs, it would flow through the management structure and then to the LPs who then would reinvest into increasingly cleverer sounding stablecoins.  Just like Matryoshka dolls.  

Source: Larry Cermak

The line graph (above) represents a one year chart showing weekly exchange traded volume (measured in USD) of three stablecoins:  Tether, Dai, and TrueUSD.  Note: there are allegations that Tether’s volume are manipulated (e.g., trans-mining), but that is a conversation for a different article.

Too big to fail anarchic chains

If you are a developer or investor and you really wanted users to have access to stability without reintermediating the payment system, you should explore alternative platforms that have access to CBDCs, CBDAs, and Narrow Banks.

But that is annoyingly time consuming, right?  Who wants to spend time sitting around with some fuddy duddy suits when you could be spinning up tokens with coinbros and “thought leaders” at coin festivals?  

Last year I penned an accurate prediction of what would happen this year: the cryptocurrency world would become increasingly reliant on the unit-of-account of actual money, in this case, the USD.

We see this desirability for a stable U-o-A with the dozens of aforementioned stablecoins that have been concocted, some with the approval of state regulators.  And all attempt to maintain parity of some kind relative to a traditional currency.

Consequently, we see the confluence of the problem highlighted in the section above, namely credit risk, with Tether (USDT).  For those unfamiliar with Tether Ltd, it is a company that issues USDT which are – depending who you talk to at the company – supposedly pegged 1:1 to USD held in reserve somewhere.  Ignoring the likelihood that they are not in full compliance with the BSA regime, Tether Ltd and its owner Bitfinex, keep losing access to commercial banks.  Their accounts are shut down and as a result, the peg breaks because it is not a real peg.

While Tether currently trades at a credit discount arguably it still serves its original purposes (e.g., quasi-cash leg, tax free harbor for intra-day gains).  But an ongoing issue is that the quality remains transparent to insiders and opaque to outsiders.  Another issue is that aside from the lack of end-to-end KYC and AML surveillance, it really serves no purpose that couldn’t be better offered by collateral management solutions.

While everyone likes to claim that newer fully collateralized stablecoins that have been approved by state agencies are going to be better because they comply with BSA and BSA-equivalent surveillance requirements, this is untrue for at least two reasons:

1. The credit risk still involves commercial banks, not central banks (there is a difference).
2. The chains they reside on do not provide definitive legal settlement finality.

If you have read my material in the past you probably think I sound like broken record.  But consider that about half of the 50+ stablecoin proposals exist as ERC20 tokens on Ethereum.  The remaining half piggy-back on top of Bitcoin or other anarchic cryptocurrency.

None of these chains are unforkable, by design.  That is to say, they only provide probabilistic finality.  And that presents an existential risk to not just the everyday user transmitting coins, but also any derivative – like stablecoins – that sits on top, reliant on a functioning unforked network below.  This is not a new observation, I even wrote a lengthy paper about top-heavy issues three years ago.  To put it another way: by design, block producers on these anarchic networks are rewarded an endogenous value (seigniorage) to secure the network.  Adding ad hoc exogenous value atop of the network weakens and dilutes the overall security of a network which could lead to a compromise or fork. 

At this point, if Bitcoin and other cryptocurrencies somehow disappeared, there will likely be no systemic impact because they do not yet have a large functioning ecosystem of derivative instruments and leverage behind it.  So it is a bit of a moot point for now.  But if the demand for stablecoins – which parasitically sit atop of anarchic chains – grew and expanded significantly to include credit, the chances of related 2008-like crisis within the cryptocurrency world would seem much higher.  It is still a matter of debate as to how a cascading failure of these parasitic assets from a forked network would impact the traditional financial system.  

Recall that for obvious reasons there is enormous amount of oversight for financial market infrastructures (FMI) like payment and clearing systems.  If they ever achieve the critical size that VCs publicly claim they will, could cryptocurrencies such as Bitcoin that process and secure transactions for stablecoins eventually be considered systemically important and thus fall within that regulatory mandate? 

According to the latest FSB report, Bitcoin and other “crypto-assets” do not pose risk to financial stability at this time.  In the future, crypto-assets may pose risk to financial stability (see Appendix 1 of the report), but that would not, by itself, bring within scope of regulatory mandate.  Obviously one critical issue with Bitcoin is – what jurisdiction does this fall within? ASIC in Australia is already developing an approach that touches on this.

In the event that occurs, this could turn these anarchic networks into expensive chimeras, permissioned-on-permissionless chains.  But that is a topic for a different article.

Conclusions

Cryptocurrency promoters often speak nostalgically of how the Great Satoshi solved a sundry of computer science and economic problems on Halloween 2008.  But on closer examination, Satoshi proposed one way of transmitting e-cash and bypass existing payment providers without having to comply with the BSA-regime. 

When she disappeared in late 2010, the cryptocurrency world up to that point was still relatively disintermediated and decentralized.  There were a couple of semi-pro mining pools and deposit-taking exchanges as well as a few custodial wallets, nearly all of which got hacked and pilfered.

Those first victims had no legal recourse and probably didn’t care enough at the time to sue anyone because just about everyone playing around with Bitcoin and its clones understood that there were no terms of service or end user licensing agreements, it was (and is) caveat emptor.

Fast forward 10 years and what is commonly referred to as the “cryptocurrency space” is heavily intermediated.  The vast majority (80%) of all transactions last year flowed through some kind of third party.  Nearly everyone hedges their trading positions in just a couple of underregulated exchanges.  And it is rumored that the main reason the largest off-shore exchanges have not been shut down is because of the access they provide to certain law enforcement agencies regarding suspicious accounts involved in illicit activities.

In other words, while Satoshi had attempted to create an alternative payment system, her followers have not only recreated the same concentration of risk and intermediation as the financial world she apparently wasn’t a fan of, but this new one lacks nearly all of the safeguards, accountability, recourse, and broad oversight that civilization has collectively placed on SIFIs.  

The Black Mirror episode we live in today is even more strange and perverse once you account for:

1. the environmental toll, the negative externality that proof-of-work mining creates… where seigniorage gains are privatized and the degradation is socialized 
2. the same nouveau riche coinbros and broettes who enriched themselves off unsophisticated retail investors by publicly shilling and flipping ICOs last year are now funding more than a handful of coin lobbying organizations to convince regulators to keep their statist hands out of this highly centralized yet opaque market

Creating systemically important cryptocurrency networks is likely the most ironic phenomenon to have arisen from an anarchic experiment started on a mailing list ten years ago.  Yet here we are.

If you are interested in participating in something that doesn’t merely enrich existing coin holders at the expense of society and the environment, highly recommend reading Ray Dillinger’s recent interview and also looking into dFMI.  And then circle back to the CBDC report from the BIS this past March. 

[Note: this was originally published at Diar.co]

Beginning in late 2014 through early 2015 a small group of startups in the US and UK independently began to lay the ground work for what is often marketed as “permissioned” distributed ledgers.  Or DLT as it became known.

I am acutely aware of their journey because I wrote the key, widely cited paper that unfortunately popularized that exact term (a term first invented by Robert Sams from Clearmatics). 

I say unfortunately because that DLT acronym – while well-intentioned – quickly became a gimmicky “marketing term” by many of the large consultancies around the world trying to capitalize – and frankly scare – clients into buying high-priced toys, none of which gained any meaningful traction.  Conjoined with images of a Candyland nirvana, there were (and are) a slew of “me too” vendors that flooded the market in late 2015 and early 2016 all searching for big pay days and funding from deep pocketed enterprises that had no clue as to what DLT as an acronym actually meant; subsequently some of these flash-in-the-pan ambulance chasing vendors have repivoted to doing things like an ICO or just fading away entirely.

How to visualize this?  If shrink-wrapped box packaging was still en vogue, we could imagine “Now with DLT!” brightly stamped in neon colors on the side of the latest version of some wares. 

For example, some finger-pointing can be done at various software companies, though not all of them.  Lured by a number of their clients who wanted to remove reconciliation but maintain the same intermediated business model, more than a few vendors deconstructed the concept of a byzantine fault-tolerant, globally shared state capable of enabling P2P transfer of value into something arguably less meaningful: bilateral states using the same old financial intermediation to solve the double-spend problem.  In some cases it was boiled down to digitally signed message passing integrated into legacy market structure.  Useful yes, but not revolutionary.  Calling it a “distributed ledger” makes boring software products sound sexy but it ultimately confuses anyone who makes the effort to figure out what it all means.

And because there’s plenty of blame to go around: various coin maximalists religiously latched onto and dutifully created umpteen strawmen arguments using contorted disingenuous views of what DLT meant to them.  The two specific cartoonish examples that stick out the most are the horse-buggy meme and the naive “sewer rat” analogy that is occasionally regurgitated on reddit.  Why are these shortsighted?  Because at the time of their genesis, they both assumed that the only type of blockchain (or distributed ledger) that can or should exist, is the Bitcoin blockchain or derivative thereof.  It is entirely self-serving, dogmatic, and void of empirical reflection.

In all instances – big consultancies, starry-eyed startups, large software companies, and ideological zealots – they eventually butchered the acronym into an indistinguishable pile of mush.  By late 2015 as this was happening, I explained that it was basically the same thing that happened during the “no gluten” marketing mania of the early-2010s.  No one could really tell you what gluten is, but every food vendor was quick to add that their products do not have it.  A bit like cloudwashing endured too.

Due to their collective inability to manage expectations, by mid-2017 nearly the entire “DLT” ecosystem found itself in the abyss of the trough of disillusionment.  A handful never fully fell in and a couple have clawed their way out, without the aid of retail coin flippers or religious troll armies.  Others attempted quick fixes or rebrand such that they were no longer classified as a DLT company hoping that definitionally they couldn’t be in the trough of disillusionment.

A good couple books could be written on the trials and tribulations of the vendors that made the headlines during these first few years.  Eventually the DLT term has fallen out of disfavor for something only slightly less abused: “enterprise chains.”  It’s only marginally better than DLT in that it is shorter when written out and hasn’t been gentrified by VCs or demonized by coin peddlers.  But it’s not really accurate because the tools that are being built, aren’t just for use by enterprises. 

|| Onwards and upwards

This brings us to: DLT is an acronym that has served its initial use and should evolve with the times. 

What then, can we use to describe the utilization of technology to re-architect organizational processes and business models?  Automating networks is generic and while accurate, is not nuanced enough.

While it would take a bit more length than this article form allows for, there are some salvageable ideas worth transplanting in the years ahead. 

For starters, there is something rather mundane but simple: automating the principles for financial market infrastructures (PFMI).  As I – and others – have described elsewhere, PFMI are decades old standards by which operators (and overseers) of financial market infrastructure ought to follow; in most jurisdictions operators are legally required to follow them.  Basically a list of do’s and don’ts for running systemically important things like payment and settlement systems.   Like, how to identify risks and hold those who touch risk accountable when something goes wrong.  This is a bundle of seemingly boring but existentially important frameworks.

Which principals can be automated or should be automated?  Unfortunately, that’s beyond the scope of this short article.

What is being briefly proposed – and built – is what can be labeled “dFMI”: decentralized financial market infrastructure.

Funnily enough, FMI today is typically distributed and not fully centralized.  In the case of the EU there is a supranational payment system, but this is an exception to the rule that each developed, and most developing, country has one or more payment, clearing, and settlement system for both cash and securities.  The majority of these systems were set up and created heavy intermediation (single point of trust) due in part to technological limitations of the 1970s.  The CSDs such as DTCC and even exchange operators exist the way they do today – as systemically important institutions – partly because of an era in which mainframes and ‘minicomputers’ were the only available options.

What if we could safely and securely disintermediate market structure, reduce single points of trust, and remove monopoly rents, all while following PFMI?

It is a bold vision, but one that does not involve standing on tables saying it is the greatest thing since the invention of the internet or preying on unsophisticated retail investors in order to flog the coin-of-the day to some other retail punter.

It’s easy to be cynical towards an ecosystem that has proportionally attracted as many snake oil salesmen as the various coin groups have the past few years.  And it is hard to fulfill the promises that are hyped at events.  For example, the Sibos “New Kids on the Blockchain” video from 2015 is illustrative of those difficulties: just a couple of the panelists still work for the same company they did at the time and all of the groups represented in the video have had uphill battles to stay afloat today.

In conclusion, instead of playing identity politics with lightning bolts in a social media handle, motivated developers genuinely looking to help transform market structure can crack open a copy of the PFMI handbook and immerse themselves with a world that keeps civilization from falling apart. 

Coupled with tools and libraries first conjured up within the ill-defined drama-filled blockchain world, real market structure changes can be made and society will be better off for it.  Best of all, it doesn’t need to involve burning mountains of coal to secure either.

It’s not sin to still use DLT as a term-of-art but dFMI is arguably a more expressive acronym, providing more context for both practioners and users alike.

[Note: this was originally published at Diar.co]

SEC Director Hinman gave a public speech about three weeks ago which was subsequently affirmed by testimony from Chairman Clayton the following week.  A key point in his speech for many was his observation that ether (ETH) was no longer a security because it had become sufficiently decentralized.

In Hinman’s speech, he also provided an ad hoc checklist for issuers to go through to make sure they do not fall afoul of securities registration requirements.

But in doing so, the guidance does not really seem helpful as it raises more questions than answers which are discussed below.  Note: the discussion for how – if at all – the rules are updated or changed is not within scope of this short article.

|| Forks

The first is technical and pedantic: ETH as we know it, is actually the first major fork of Ethereum Classic (ETC).  Recall that following The DAO attack (hack) in June 2016, key participants in the Ethereum ecosystem coordinated a hard fork which resulted in two separate chains – what we now call ETH and ETC – and that ETC represents the original chain.  So transitively, does Hinman actually mean ETC is sufficiently decentralized too?  Or is it just a property for the fork, ETH?

While most people are aware that it was the exchanges — specifically Poloniex — which decided to recognize and associate specific chains with specific ticker symbols, exchanges were also key – existentially critical — during the first moments after The DAO attack (hack) was discovered.

How integral were they?  And how did they coordinate? 

A public chat log from June 17, 2016 details the coordination between core Ethereum developers and exchanges.  One such dialogue is the following:

Source: https://pastebin.com/aMKwQcHR

The specific passage highlighted above shows how key developers requested that exchange operators stop trading ETH and after some discussion, the major exchange operators – such as Poloniex – temporarily acceded to the request.  It bears mentioning that the chat above is missing some additional context around locked DAO tokens (which were still locked up for several more weeks) and that this provisional trading freeze was being done to protect all coin holders.

This wasn’t the first time that core developers attempted to coordinate with exchanges after a mistake has occurred.  In March 2013, a group of Bitcoin developers, miners, and exchanges did something perhaps more glaring – coordinated off-chain to stop a hard fork — in an IRC chat room during an unintended hard fork of Bitcoin.

If you follow the dialogue in either chat room, it is clear that a relatively small set of participants has influence and especially in the Bitcoin fork instance, arguably administrates the chain and its governance during these critical time periods.

And at least one question arises from this: is the ongoing success of the system (and the token’s value) reliant on the ongoing efforts of others?  If not, why not.

Arguably the answer is yes for most of these public blockchains.  And based on the handy “arewedecentralizedyet” chart we can see that similar – and probably more – types of centralization exists for many other cryptocurrencies too.

But recall that Hinman’s speech seems to assume that ether was a security at one point and then through some process that is still not explained, is no longer a security.  What day did that transition take place?  Was it before or after the ICO in 2014?  Before or after the coordinated hard fork in July 2016 (as a solution to The DAO attack (hack))?  Before or after <insert other milestones or forks>. 

For those counting at home, following the July 2016 hard fork, this means that the ETC chain was actually created twice and in both cases was the work of a small group of known people, some of whom continue to maintain it.  After all, blockchains don’t automagically fix themselves.

Is it possible for a coin or token to become un-decentralized?  And if so, do the maintainers get something like a 90 day grace period to make it re-decentralized otherwise the coin is sent to some kind of securities purgatory?

While we wait for more clarity and specific answers to these questions, another potential issue is with HoweyCoins.

|| Parody

HoweyCoins is a parody ICO website published by the SEC on May 16, 2018 – right smack in the middle of “Blockchain Week” in New York City.  The website is supposed to serve as a lampoonish illustration to coin issuers of what not to do when fundraising – and also serve as a warning to investors for what to look out for as red flags such as early participation discounts.  It’s definitely good fun – my friends and I frequently refer to it in jest.

And while Hinman’s speech explicitly punted on how Ethereum was initially funded, the Ethereum public sale back in July 2014 also relied on discounts (or bonuses) to early investors during its six week sale.  The first two weeks, participants received 2,000 ETH per BTC, which linearly declined until the final epoch in which investors received 1,337 ETH per BTC.  Were the designers of the HoweyCoins website aware of this discounting?

In looking at the actual HoweyCoins whitepaper there is no technical meat that issuers or investors alike can count on for guidance.  That is to say: there is no technical attributes describing the functionality of how HoweyCoin mechanically works.  In its 8 pages it describes a couple use-cases but – like most ICO whitepapers – is very vague at how it will accomplish or achieve them.

But ignoring the Ethereum initial fundraising period and its Terms and Conditions, a problem that is not resolved in either Hinman or Clayton’s recent speech and testimony is that HoweyCoins, for all of its vague promises of high yield returns is a strawman that does not really help provide guidance as it relates to the facts and circumstances around how Ethereum – or any crowdfunded coin – can become sufficiently decentralized. 

After all, what is to stop someone from spinning up their own blockchain called “HoweyCoins,” raise ~$17 million through a public sale  and 12 months later, formally launch the mainnet (as Ethereum did)?

The wording and justification for why Ethereum is not still a security – that it somehow at some point became sufficiently decentralized – seems ripe for debate and will surely be gamed by future coin and token sales.  Without explicit parameters, if Ethereum is sufficiently decentralized, then so to – at some point in the future – could HoweyCoins.  And then it’s no longer a parody.

|| RICO

A third and final point is that while Hinman alluded to them, even if these chains are finger quote “decentralized,” and thus not falling strictly under the “common enterprise” in the literal sense (i.e. where there is literally a single legal entity determining the success), how does a “community enterprise” present less risk to investors?   Tangentially, isn’t this the same type of argument that mob bosses frequently used and as a result RICO Acts were created to pierce through?

If we take the view that the spirit of the regulations (1933, 1934, 1940 Acts) which led to the Howey ruling was actually to protect small investors, does a non-singular, and quasi-independent, but systemically important influential organization actually reduce risk? 

If that is the view that they are taking, it would be helpful to see how the commission has come to that conclusion.   

After all, it is plain as day to see that most coin foundations are heavily influential in the maintenance and success or failure of a coin.  And representatives from investment groups like DCG are routinely making statements which have the single effect of moving the price and/or direction of coins such as ETC.  Even if these groups are superficially independent of the mining and operation, on the day-to-day they are directly traceable to the volatility in the market and to a large extent the success or failure of projects. 

Most, if not all of the coin foundations, market and advertise milestones which depend on the coordinated effort and work of developers that are paid with investors’ money.  Coin foundations typically register and own trademarks and other IP so (theoretically) they could force exchanges to associate a specific ticker symbol with a specific chain.  And often there is a hierarchy within a coin foundation with respect to the “community” it manages and oversees: it owns IP, controls investor funds, manages the verified social media accounts, and empirically calls the shots. 

Look no further than Nano and dozens of other coin projects that have been hacked or “exit scammed” because of how centralized the command and control structures typically are.  Another instance just last week, EOS block producers got on a conference call and paused their network (and later proposed scrapping their constitution).  Ignoring their year-long $4 billion ICO, is that series of actions sufficiently decentralized?

|| Conclusion

To be fair, the SEC has an unenvious role to try and regulate something (a network-based coin) in just one jurisdiction whereas these coins are also trading and custodied in other jurisdictions.  For instance, the FCA doesn’t currently regulate tokens (e.g., that are not equity or debt instruments).  And the Howey test is not applicable in the UK. 

Perhaps opening a public comment period to provide suggestions could be helpful in conceptualizing objective measurements and quantifying decentralization (assuming it is not an oxymoron).  Though, that inbox would likely just get spammed so maybe just start with credible opinions such as those of the BIS.

In closing, a hypothetical HoweyCoins and its benevolent overseers and thought leaders at the HoweyCoins Foundation could mimic other sufficiently decentralized projects and host an annual HoweyCon; simultaneously emceed by none other than Howie Mandel and Howie Long.  If and when this occurs, is the only thing that HoweyCoins did “wrong” was promise to provide discounts to early investors? 

Maybe not, at least if they donate some of their proceeds to coin lobbying groups to help explain to policy makers and regulators that HoweyCoins is not a security, because it is sufficiently decentralized (e.g., more than one Howie exists).  Either way, I bet there will be some amazing schwag at HoweyCon, really looking forward to it.  There may also be an announcement about the forthcoming HoweyCoins Classic fork. 

Stay tuned.

Just a quick note: this site was hacked and all of the content was removed yesterday.  It was all restored yet we’ll see if the host fixed the alleged vulnerability.  I made a brief comment with a few more details on a reddit thread about it.

It is pretty easy to find people who are strictly bullish or bearish on a particular asset or idea (or philosophy).  It is another to find people who take the time to look at the details and also give of their time to help educate you.

Over the last few weeks, I’ve had the fortunate chance to speak with a diverse group of experts, entrepreneurs and educated contrarians.  And without their feedback, my thought processes and writings would be much weaker, poorly structured and lacking data.  This is not to say I am correct in my analysis — perhaps just slightly less wrong!

Below is a list of these individuals.  I should point out that their inclusion does not mean they endorse my own views, in fact several strongly disagree.  These are the people who are creating or trying to create the future in the roller coaster world.

• Taariq Lewis
• Petri Kajander
• Jonathan Levin
• Dave Babbitt
• Dave Hudson
• Jack Wang
• Ron Hose
• Raffael Danielli
• Preston Byrne
• Oliver Bruce
• Chris Turlica
• Karl Holmqvist
• John Ratcliff
• Adam Stradling
• Robert Sams
• Robby Dermody
• Joseph Chow
• Andrew De Gabriele
• Peter Todd
• Mike Hearn
• Andrew Poelstra
• Bryan Vu
• Steve Kirsch
• Ryan Orr
• Matt Wilson
• Daniel Cawrey
• Pamela Morgan
• Pete Rizzo
• Jon Southurst
• David Shin
• Sidney Zhang
• Stephanie Murphy
• Adam B. Levine
• Greg Simon
• David Mondrus
• Andrew White
• Martin Harrigan
• James Duchenne
• Mark DeWeaver
• Byron Gibson
• DC, Cukeking and David S

Need to close some tabs, here are some links of interest:

• Quickcoin an HTML 5 wallet built into Facebook
• Neuroware – neat stack from Mark Smalley over at the 500 Startups accelerator
• The Digital Path: Smart Contracts and the Third World by Mark S. Miller
• Truthcoin – decentralized prediction market (wonder if they have spoken with lawyers?)
• Bitcoin TOP-500 Richest – not the most definitive list, just the top 20
• Lighthouse from Mike Hearn (decentralized crowdfunding platform built on the Bitcoin protocol)
• Proof of deposit – an alternative to Proof of work
• How a floating blocksize limit inevitably leads towards centralization comment from Peter Todd
• Transfer Infrastructure – New Generation Protocols from IceCubed
• Kenya’s BitPesa Launches Beta Test of Remittance Service from The Wall Street Journal
• Bitreserve (talk to lawyers?)
• Mintchalk (I’ve met with the two devs, looks real —  now if only Ethereum would actually ship production code and indemnify the users…)
•  Fawkescoin, Mixcoin, Permacoin from Andrew Miller et al.
• CryptoNote and Bytecoin
• Game Theory, Assurance Contracts, and Crowdfunding with Bitcoin by Arianna Simpson
• Bitcoin Trading Platform Atlas Partners With National Stock Exchange from The Wall Street Journal
• The story of NEA and CloudFlare: From sandwiches to $1B valuation from BizJournal
• New Data on Twitter’s Users and Engagement from RJMetrics (look at that hockey stick curve)
• Secrecy, Authentication, And Public Key Systems by Ralph Merkle (his original thesis)

In addition to existing projects such as Tor(oken) and FreeNet and future developmental projects like Bitcloud and StorJ, there is a new decentralized system being released in the next few months: MaidSafe.

I have a new piece over at Bitcoin Magazine that discusses some of how it works.  Suffice to say, if they can execute on the targets outlined in the article, it could have long-standing ramifications for a plethora of industries (e.g., SaaN providers, ISP margins, start-up costs, Dropbox-style companies, reduced overhead at NGOs/NPOs, etc.).

An old business school student I used to teach in Anhui recently sent me an email about economic development and created a new word that actually makes a lot of sense.  See if you can spot it.

On the other hand, some claims made by others include the assertion that releasing the city’s burden cannot solely rely on moving big companies out. It is a convenient life that drives people to live in downtown, such as easy access to educational resources and health care. However, this alone is not convincible, especially in the fast developing society, it unlikely to become a problem to build up those necessary facilities in a new community.

I recommend Language Log if you enjoy the twists, turns and the art of wordcrafting.

My younger brother got married to his lovely girlfriend a couple months ago.  Looks like the photos were so good that they’re getting linked around by others.  Thus as they say from my old stomping ground: take a gander at these.

Congrats again hermano!