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GARY GENSLER: So let's
turn to this world

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of initial coin offerings.

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And so we're going to chat
about it today and next Tuesday.

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Next Tuesday, we'll come back
to the regulatory side of this.

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And in fact, there were
some new things out

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of the Securities and
Exchange Commission

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even last week on
initial coin offerings.

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But we're going to spend a
little time on ICOs today.

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00:00:47,970 --> 00:00:53,010
And so of course, we've
talked about Bakkt already.

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00:00:53,010 --> 00:00:55,360
And we'll talk about
their characteristics.

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00:00:55,360 --> 00:00:57,090
What is an initial
coin offering?

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00:00:57,090 --> 00:01:00,160
What is this new
form of crowdfunding?

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How to evaluate initial coin
offerings-- and some of this

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will be familiar,
because it's how

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to really evaluate any
blockchain technology

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00:01:07,990 --> 00:01:10,390
project in some regard.

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And then I'm going to
share some statistics,

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and then hopefully wish you
all a Happy Thanksgiving

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00:01:16,270 --> 00:01:17,200
and call it a day.

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00:01:20,980 --> 00:01:24,940
So the study
question was, what is

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this new form of crowdfunding?

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Does anybody want to tell me?

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00:01:28,240 --> 00:01:31,390
What is an ICO in
the easiest way?

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You're going home for
Thanksgiving and somebody says,

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00:01:34,183 --> 00:01:35,350
what have you been studying?

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00:01:35,350 --> 00:01:36,640
And you say ICOs.

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What is an ICO?

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00:01:39,190 --> 00:01:40,687
Yeah?

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00:01:40,687 --> 00:01:42,770
AUDIENCE: It's a startup
that sells its own crypto

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00:01:42,770 --> 00:01:45,070
token to raise money.

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GARY GENSLER: So it's a--

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00:01:46,605 --> 00:01:51,460
AUDIENCE: Sells its own
crypto token to raise money.

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00:01:51,460 --> 00:01:54,280
GARY GENSLER: So it's a way
to raise money with a crypto

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00:01:54,280 --> 00:01:56,623
token, pretty simple.

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00:01:56,623 --> 00:01:58,040
AUDIENCE: And in
addition to that,

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it gives people an expectation
that the token's value

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will go up in the future.

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GARY GENSLER: Did anybody read
the optional reading for today

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about the dude that actually
came up with this idea?

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Do you remember his name?

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|

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AUDIENCE: JR.

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GARY GENSLER: JR,
Willett, is it?

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AUDIENCE: Yeah.

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00:02:14,990 --> 00:02:16,570
GARY GENSLER: Yeah.

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I mean, I don't know if
anybody watched the video,

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but this individual
in 2010 came up

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with an idea of saying
Bitcoin is out there.

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I mean, Bitcoin was
selling for like $0.06,

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$0.10 a Bitcoin or something.

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He said, if you could put
something on top of Bitcoin--

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I don't even know if you
use the term smart contract.

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But he did say, if you
could put an application

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on top of Bitcoin-- it
was before Vitalik Buterin

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came along with Ethereum.

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He said, you could
raise a lot of money.

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And he went to conference
after conference

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and tried to convince people.

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And there's even
this one feedback

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where somebody said to
him in an email exchange,

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you're probably
breaking the law.

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This can't be legal.

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But he couldn't get
anybody to adopt this idea.

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And he's not wealthy now either.

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He missed the whole ICO
way, but he was basically

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the inventor of this
initial coin offering,

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saying that the
technology of Bitcoin,

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even the scripting
language, was enough

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that you could maybe raise
money on top of Bitcoin

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with an application layer.

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And we'll sort through.

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Now, I'm going to see if I
can do a little video for you.

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This shouldn't be
too hard for me.

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So this is a two minute
video of all the ICOs

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that have ever happened.

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And Elementus, I've
shown you this picture,

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but you know there wasn't much.

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Where we are we?

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Are we in 2015 now?

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Nothing.

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So you see the
first ICO that they

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mark in there is Ethereum
itself raised $18 million.

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I apologize.

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It's only going to
take two minutes,

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but you're going to see
the whole history of ICOs.

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And then there's nothing.

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It's really-- so you
can see no country,

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no official sector is really
focused on this in 2016.

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But then there's going
to be a big offering

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in the middle of 2016.

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Anybody know who that is?

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Dow.

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$168 million, and it fails.

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It spectacularly fails.
$50 million of it is stolen

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00:04:39,570 --> 00:04:43,730
and it leads to the Ethereum
fork and things like that.

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But still not a lot, and
then, by the summer of '17,

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Katy bar the door.

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Tasos and quarter billion
dollars, Filecoin,

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a quarter billion dollars.

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And then oh, I pulled the
one that finished in 2017.

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I'm sorry.

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So there's the final chart
that goes all the way

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through August.

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Now, some say that
it's not $28 billion.

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Some say it's $23
billion, because there's

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00:05:15,670 --> 00:05:18,390
no really good figures.

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But EOS raises $4.2 billion and
Telegram raises $1.7 billion,

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00:05:24,010 --> 00:05:26,560
huge amounts of money.

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And this is in a period--

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almost all of this was raised
and in about 12 months,

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from June of '17 to June of '18.

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Call it $25 billion
in that 12 months.

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And now, it's trickling off.

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Now, it's less than
$0.5 billion month.

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But that $25
billion in 12 months

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00:05:46,970 --> 00:05:48,640
compares to venture capital--

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00:05:48,640 --> 00:05:49,890
and Simone, you might help me.

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00:05:49,890 --> 00:05:53,450
But venture capital worldwide
is about $150 billion

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00:05:53,450 --> 00:05:56,930
a year in a 12 month period.

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I think the figures range
from $125 to $170 billion.

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00:06:01,480 --> 00:06:03,950
So just to give you a
sense, in this 12 month

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00:06:03,950 --> 00:06:09,200
period, it's, give or take,
20% of the size of all venture

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00:06:09,200 --> 00:06:14,400
funds, 20% to 30% roughly
of all venture funds.

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And again, it's tailing
off, but it's significant.

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If you can come up with
an idea in these 12 months

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and raise the money,
JR Willett's idea,

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00:06:28,460 --> 00:06:32,600
this was the moment.

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So what are initial
coin offerings?

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What's the more detailed
characteristics?

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Well, number one,
they're proceeds

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that help build a network.

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00:06:41,180 --> 00:06:44,060
That's what Vitalik
Buterin actually did back

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00:06:44,060 --> 00:06:51,330
in 2013 is when he published,
in 2014 is when he went live.

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00:06:51,330 --> 00:06:57,540
But he was raising $18 million,
hired a law firm, big, big law

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firm in--

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00:06:58,580 --> 00:07:01,020
I can't remember if it was
Perkins or Skadden Arps,

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00:07:01,020 --> 00:07:04,990
but a big US law firm, partnered
up with a Canadian, Joe

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00:07:04,990 --> 00:07:09,270
Lubin, who saw this
potential in a 19

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00:07:09,270 --> 00:07:13,983
or 20-year-old kid who
had great writing skills.

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00:07:13,983 --> 00:07:15,150
He knew a lot about Bitcoin.

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00:07:15,150 --> 00:07:17,275
He had been writing about
it for a number of years,

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but he also had a great idea.

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He moved off to Switzerland for
regulatory and other reasons

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00:07:23,800 --> 00:07:28,150
set up a foundation for
tax and other reasons,

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and did it in a very
professional way.

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But you can look at
their sources and uses.

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You can go back to
the original offering

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and say they were willing
to say what they were going

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00:07:36,340 --> 00:07:38,650
to use the $18 million for--

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00:07:38,650 --> 00:07:43,030
law fees and counting fees
and the usual things you

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00:07:43,030 --> 00:07:45,370
do when you start something.

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So it's proceeds to
help build up a network.

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But just like that moment,
it was before the network

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00:07:51,220 --> 00:07:51,845
could be used.

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00:07:54,760 --> 00:07:58,390
So that was pre-functional.

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00:07:58,390 --> 00:07:59,950
We're going to show
statistics later,

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00:07:59,950 --> 00:08:02,620
but anybody want to take
a gander in the last three

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00:08:02,620 --> 00:08:03,740
months.

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00:08:03,740 --> 00:08:05,320
So this isn't back 2014.

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00:08:05,320 --> 00:08:07,660
I'm talking about
third quarter of 2018.

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00:08:07,660 --> 00:08:09,490
What percentage
of token offerings

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00:08:09,490 --> 00:08:13,600
were offered before the
network is functional, fully

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00:08:13,600 --> 00:08:16,930
functional?

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00:08:16,930 --> 00:08:18,090
Alin?

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00:08:18,090 --> 00:08:20,060
AUDIENCE: 99%.

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00:08:20,060 --> 00:08:22,820
GARY GENSLER: Anybody
else want to take a--

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00:08:22,820 --> 00:08:23,990
argue with Alin?

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00:08:23,990 --> 00:08:25,940
Just because he is a
computer scientist?

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00:08:25,940 --> 00:08:26,785
Tom?

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00:08:26,785 --> 00:08:28,182
AUDIENCE: I was
going to say 95%.

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00:08:28,182 --> 00:08:29,390
GARY GENSLER: All right, 95%.

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00:08:29,390 --> 00:08:31,430
All right, so
we've got a market.

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00:08:31,430 --> 00:08:33,320
So 95%, 99%.

181
00:08:33,320 --> 00:08:40,140
Does anybody want to say that
more than 5% were functional?

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00:08:40,140 --> 00:08:40,640
No?

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00:08:40,640 --> 00:08:44,500
All right, I'll give
you the number later.

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00:08:44,500 --> 00:08:46,920
It's in between the two of you.

185
00:08:46,920 --> 00:08:49,690
It's in between the two of you.

186
00:08:49,690 --> 00:08:54,370
So it's raising money before
something is functional.

187
00:08:54,370 --> 00:08:58,180
It's like raising the
money for a Broadway play

188
00:08:58,180 --> 00:09:00,685
before you've got the
actors and the script.

189
00:09:03,980 --> 00:09:07,160
Or it's even worse than that.

190
00:09:07,160 --> 00:09:08,600
You don't even have the idea.

191
00:09:08,600 --> 00:09:10,580
But usually, you have an idea.

192
00:09:10,580 --> 00:09:13,550
Usually-- what
percentage of ICOs

193
00:09:13,550 --> 00:09:16,890
are marketed on just an idea?

194
00:09:16,890 --> 00:09:17,510
Anybody?

195
00:09:17,510 --> 00:09:20,720
I have that
statistic later, too.

196
00:09:20,720 --> 00:09:23,080
Rahim, you have a view?

197
00:09:23,080 --> 00:09:24,205
What do you think?

198
00:09:24,205 --> 00:09:26,296
AUDIENCE: I would
think maybe of these

199
00:09:26,296 --> 00:09:28,480
with an idea, maybe 60% to 70%.

200
00:09:28,480 --> 00:09:29,980
GARY GENSLER: 60% to 70%.

201
00:09:29,980 --> 00:09:30,550
Sean?

202
00:09:30,550 --> 00:09:32,040
AUDIENCE: I would say 90%.

203
00:09:32,040 --> 00:09:32,830
GARY GENSLER: 90%.

204
00:09:32,830 --> 00:09:36,290
All right, no, it's in
between the two of you.

205
00:09:36,290 --> 00:09:37,490
Rahim is a little closer.

206
00:09:37,490 --> 00:09:42,860
It's about 75%, just an
idea, or at least as defined

207
00:09:42,860 --> 00:09:47,060
by a certain tracking center.

208
00:09:47,060 --> 00:09:49,910
So it's usually you have
an idea, you market it,

209
00:09:49,910 --> 00:09:51,500
you raise some
money, or at least

210
00:09:51,500 --> 00:09:55,880
during these boom periods
in the last 15 months.

211
00:09:55,880 --> 00:09:59,750
The development, while open
source, is largely centralized.

212
00:09:59,750 --> 00:10:03,210
But in fact, in
the last quarter,

213
00:10:03,210 --> 00:10:05,420
the last three
months, well over half

214
00:10:05,420 --> 00:10:08,550
isn't even open source
technology any longer,

215
00:10:08,550 --> 00:10:12,380
partly because it's so
based on just an idea

216
00:10:12,380 --> 00:10:16,940
that people aren't publishing
their source code until later.

217
00:10:16,940 --> 00:10:19,550
They will eventually
publish some source code.

218
00:10:19,550 --> 00:10:22,670
But at the moment of the
initial coin offering,

219
00:10:22,670 --> 00:10:27,810
a majority don't even have open
source software at that moment,

220
00:10:27,810 --> 00:10:32,310
even though they say later
they'll publish this software.

221
00:10:32,310 --> 00:10:35,000
But even if it's open source,
it's highly centralized.

222
00:10:38,540 --> 00:10:39,190
Please.

223
00:10:39,190 --> 00:10:42,160
AUDIENCE: I don't understand
how open source is related

224
00:10:42,160 --> 00:10:50,450
to [INAUDIBLE] if I say I'm
going to sell something,

225
00:10:50,450 --> 00:10:54,530
these are the coins you
should use to pay me back.

226
00:10:54,530 --> 00:10:57,772
Where is open source connected?

227
00:10:57,772 --> 00:10:59,230
GARY GENSLER: So
there's a movement

228
00:10:59,230 --> 00:11:03,250
in technology and
software development--

229
00:11:03,250 --> 00:11:06,130
certainly, it was
started in the 1990s,

230
00:11:06,130 --> 00:11:07,810
but it may have been earlier.

231
00:11:07,810 --> 00:11:09,820
But now, it's very
prevalent-- where

232
00:11:09,820 --> 00:11:12,220
you publish your software
and everybody can see it.

233
00:11:12,220 --> 00:11:15,070
So it's transparency
in software.

234
00:11:15,070 --> 00:11:17,160
That's called the
open source movement.

235
00:11:17,160 --> 00:11:22,510
In the blockchain technology,
when Satoshi Nakamoto first

236
00:11:22,510 --> 00:11:27,130
published the Bitcoin
software in January of 2009,

237
00:11:27,130 --> 00:11:28,320
it was open source.

238
00:11:28,320 --> 00:11:31,210
It meant everybody could
see the computer code.

239
00:11:31,210 --> 00:11:33,190
And you could even--

240
00:11:33,190 --> 00:11:35,140
it's actually
published under an MIT

241
00:11:35,140 --> 00:11:38,680
license, which meant you didn't
have to pay any fee to use it.

242
00:11:38,680 --> 00:11:42,940
Zero fee, you can copy it,
you can use the Bitcoin core

243
00:11:42,940 --> 00:11:43,780
software.

244
00:11:43,780 --> 00:11:45,880
That's the definition.

245
00:11:45,880 --> 00:11:48,160
That's the best
definition of open source,

246
00:11:48,160 --> 00:11:50,530
because it's with
an MIT license.

247
00:11:50,530 --> 00:11:53,320
But it's truly open.

248
00:11:53,320 --> 00:11:55,480
That's what I'm
referencing here.

249
00:11:55,480 --> 00:11:58,690
And the relevance is
that, though there

250
00:11:58,690 --> 00:12:01,590
is a big open source
movement in a lot of fields

251
00:12:01,590 --> 00:12:04,750
and in blockchain and
certainly in Bitcoin

252
00:12:04,750 --> 00:12:07,630
and the Ethereum
network is open source,

253
00:12:07,630 --> 00:12:13,330
many, many developments
and initial coin offerings

254
00:12:13,330 --> 00:12:16,090
don't publish their
code until months later.

255
00:12:16,090 --> 00:12:19,850
They raise the money, they're
still developing their code.

256
00:12:19,850 --> 00:12:23,500
Are you with me?

257
00:12:23,500 --> 00:12:25,854
So Brotish?

258
00:12:25,854 --> 00:12:27,854
AUDIENCE: So why do
investors put in their money

259
00:12:27,854 --> 00:12:29,271
even before the
code is published?

260
00:12:35,035 --> 00:12:36,490
GARY GENSLER: So
why do investors

261
00:12:36,490 --> 00:12:40,770
put their money in before
the code is published?

262
00:12:40,770 --> 00:12:47,300
Why do investors put
money into any investment?

263
00:12:47,300 --> 00:12:48,190
Sabrina?

264
00:12:48,190 --> 00:12:48,827
AUDIENCE: FOMO.

265
00:12:48,827 --> 00:12:49,910
GARY GENSLER: What's that?

266
00:12:49,910 --> 00:12:52,430
AUDIENCE: FOMO.

267
00:12:52,430 --> 00:12:54,710
GARY GENSLER: What's FOMO?

268
00:12:54,710 --> 00:12:56,622
Fear of missing out.

269
00:12:56,622 --> 00:12:57,680
All right.

270
00:12:57,680 --> 00:12:59,477
Oh by the way,
Sabrina and Thalita,

271
00:12:59,477 --> 00:13:01,310
I announced that anybody
that was here today

272
00:13:01,310 --> 00:13:03,860
got double credit for
participating right

273
00:13:03,860 --> 00:13:05,470
before Thanksgiving.

274
00:13:05,470 --> 00:13:07,120
So I just want to let you know.

275
00:13:07,120 --> 00:13:10,190
I live by that.

276
00:13:10,190 --> 00:13:11,450
So fear of missing out.

277
00:13:11,450 --> 00:13:14,120
Why else do people
invest in any investment,

278
00:13:14,120 --> 00:13:17,608
even if you're just
investing in Apple stock?

279
00:13:17,608 --> 00:13:18,650
AUDIENCE: To get returns.

280
00:13:18,650 --> 00:13:21,690
GARY GENSLER: To get
returns, to get a profit,

281
00:13:21,690 --> 00:13:25,400
to take risk and a return.

282
00:13:25,400 --> 00:13:26,330
Brotish?

283
00:13:26,330 --> 00:13:27,997
AUDIENCE: I think in
one of the readings

284
00:13:27,997 --> 00:13:32,090
they mentioned that one strategy
of putting money in an ICO

285
00:13:32,090 --> 00:13:35,190
is going to the board
and understanding.

286
00:13:35,190 --> 00:13:37,070
So I thought that that
was a prerequisite

287
00:13:37,070 --> 00:13:38,300
for the investment.

288
00:13:38,300 --> 00:13:41,840
I also happened to
attend one seminar here

289
00:13:41,840 --> 00:13:44,730
where there was a
company called BlockTEST,

290
00:13:44,730 --> 00:13:45,748
which is funded by a--

291
00:13:45,748 --> 00:13:47,040
GARY GENSLER: What's it called?

292
00:13:47,040 --> 00:13:48,200
Block--

293
00:13:48,200 --> 00:13:49,040
AUDIENCE: BlockTEST.

294
00:13:53,530 --> 00:13:54,780
It's MIT alumni.

295
00:13:54,780 --> 00:13:58,450
So they evaluate these
codes and run some solutions

296
00:13:58,450 --> 00:14:00,590
to verify whether
they're doing what

297
00:14:00,590 --> 00:14:01,960
they're supposed to be doing.

298
00:14:01,960 --> 00:14:04,130
So I thought that it
was a prerequisite

299
00:14:04,130 --> 00:14:05,487
for the investment.

300
00:14:05,487 --> 00:14:07,070
So that's where my
question came from.

301
00:14:07,070 --> 00:14:09,695
GARY GENSLER: So you assume that
you could always read the code

302
00:14:09,695 --> 00:14:11,740
to make the investment.

303
00:14:11,740 --> 00:14:16,210
In the fall of 2017 and
into the spring of 2018,

304
00:14:16,210 --> 00:14:18,740
I would suggest that
wasn't always the case.

305
00:14:18,740 --> 00:14:21,710
And in fact, it usually
was not the case.

306
00:14:21,710 --> 00:14:23,590
I think if these
things are to persist,

307
00:14:23,590 --> 00:14:30,010
my prediction is you'll
see more and more rigor

308
00:14:30,010 --> 00:14:32,800
in this marketplace.

309
00:14:32,800 --> 00:14:34,600
Oh, I skipped promoters.

310
00:14:34,600 --> 00:14:37,940
The people starting it keep some
of the coins for themselves.

311
00:14:37,940 --> 00:14:41,710
This is not that different
from any venture capital round.

312
00:14:41,710 --> 00:14:43,570
When you're raising
money and you're

313
00:14:43,570 --> 00:14:47,800
selling equity or selling a
preferred stock in something--

314
00:14:47,800 --> 00:14:50,680
you'll know this, any
of your taking ventures

315
00:14:50,680 --> 00:14:52,390
course or if you worked in it--

316
00:14:52,390 --> 00:14:54,560
you're going to keep equity
for yourself as well.

317
00:14:54,560 --> 00:14:57,310
So this is just how much
do you keep for yourself,

318
00:14:57,310 --> 00:15:01,300
how much do you
sell to the public,

319
00:15:01,300 --> 00:15:04,600
but just translated to a
new form of capital raising.

320
00:15:04,600 --> 00:15:07,270
Instead of it being
applied to your equity,

321
00:15:07,270 --> 00:15:12,870
you're applying it to this
new form of fund raising.

322
00:15:12,870 --> 00:15:14,710
They're fungible
and transferable,

323
00:15:14,710 --> 00:15:17,740
meaning you can sell them.

324
00:15:17,740 --> 00:15:21,010
Sometimes, you can't sell
them for a number of months.

325
00:15:21,010 --> 00:15:22,720
Technically speaking,
sometimes you

326
00:15:22,720 --> 00:15:26,620
can't sell him until the
platform is functioning.

327
00:15:26,620 --> 00:15:29,470
But often, you can
still sell them

328
00:15:29,470 --> 00:15:33,720
by private agreement,
private arrangements.

329
00:15:33,720 --> 00:15:37,510
Ethereum-- let me just mention
something about Ethereum.

330
00:15:37,510 --> 00:15:43,610
When Ethereum was first sold,
for 12 months, the only record

331
00:15:43,610 --> 00:15:45,820
you had that you were
purchasing Ethereum was

332
00:15:45,820 --> 00:15:50,110
the email return back from
either Vitalik or others who

333
00:15:50,110 --> 00:15:52,930
said, yes, you've purchased it.

334
00:15:52,930 --> 00:15:55,900
It wasn't even that you had
a private key for 12 months.

335
00:15:55,900 --> 00:15:58,480
You had an email confirmation.

336
00:15:58,480 --> 00:16:01,060
But you could, based on
that email confirmation,

337
00:16:01,060 --> 00:16:06,430
sell the right to what later
you would be issued, a coin.

338
00:16:06,430 --> 00:16:07,170
Sorry?

339
00:16:07,170 --> 00:16:09,130
AUDIENCE: Yeah, so
along those lines,

340
00:16:09,130 --> 00:16:12,460
I've seen a number of ICOs
use SAFTs, simple agreement

341
00:16:12,460 --> 00:16:14,440
for future tokens.

342
00:16:14,440 --> 00:16:16,720
And I guess I'm wondering
what the trade-offs are

343
00:16:16,720 --> 00:16:21,490
versus directly issuing the
tokens at time of the ICO.

344
00:16:21,490 --> 00:16:24,213
And then more specifically, that
just feels like you're not even

345
00:16:24,213 --> 00:16:25,630
getting the token,
you're not even

346
00:16:25,630 --> 00:16:29,890
getting the rights to the token
until the network launches.

347
00:16:29,890 --> 00:16:33,280
That seems like a second
order, really far removal

348
00:16:33,280 --> 00:16:38,230
from even close to any form
of a utility on a network.

349
00:16:38,230 --> 00:16:40,100
GARY GENSLER: Is this
an answer to the SAFT?

350
00:16:40,100 --> 00:16:41,160
AUDIENCE: Yes.

351
00:16:41,160 --> 00:16:44,510
So isn't it because
under the US--

352
00:16:44,510 --> 00:16:46,930
I mean, right now,
the coins aren't

353
00:16:46,930 --> 00:16:48,890
considered as a security.

354
00:16:48,890 --> 00:16:51,610
And if you are
doing ICOs, then you

355
00:16:51,610 --> 00:16:55,900
can only sell it to accredited
investors [INAUDIBLE]

356
00:16:55,900 --> 00:16:57,490
if you are based
in the US, and you

357
00:16:57,490 --> 00:17:01,210
can do some things other
than that outside the US.

358
00:17:01,210 --> 00:17:07,569
And so I think SAP is
trying to see if coins can--

359
00:17:07,569 --> 00:17:11,079
at some point, they can
be considered as not

360
00:17:11,079 --> 00:17:12,829
as securities.

361
00:17:12,829 --> 00:17:18,160
So I think the purpose
of SAP is to, I guess,

362
00:17:18,160 --> 00:17:20,530
expand the basically
investor base so

363
00:17:20,530 --> 00:17:22,750
that more people can purchase.

364
00:17:26,840 --> 00:17:28,620
GARY GENSLER: So
it's Jihee right?

365
00:17:28,620 --> 00:17:32,270
So Jihee's answer delved
into the regulatory,

366
00:17:32,270 --> 00:17:35,410
but I'm going to take it up
a level from the regulatory.

367
00:17:35,410 --> 00:17:38,360
What you said was
accurate, but there's a--

368
00:17:38,360 --> 00:17:40,730
it's selling something
for future delivery,

369
00:17:40,730 --> 00:17:45,420
because the token
currently is not usable.

370
00:17:45,420 --> 00:17:48,140
Just in the last quarter, I'm
talking about the last quarter

371
00:17:48,140 --> 00:17:51,690
of 2018, three
quarters of the ICOs

372
00:17:51,690 --> 00:17:57,680
that were started or launched
were just on an idea.

373
00:17:57,680 --> 00:18:01,130
So they hadn't yet
written the code.

374
00:18:01,130 --> 00:18:02,910
A token wouldn't even be usable.

375
00:18:02,910 --> 00:18:06,450
So you have some
economic basis to say,

376
00:18:06,450 --> 00:18:10,500
I'm trying to sell you something
that will be a future delivery.

377
00:18:10,500 --> 00:18:15,510
When Vitalik Buterin even did
Ethereum, you got an email.

378
00:18:15,510 --> 00:18:19,530
It was not called a simple
agreement for future token.

379
00:18:19,530 --> 00:18:22,830
Is that what SAFT is?

380
00:18:22,830 --> 00:18:25,980
But it was a simple
email for a future token.

381
00:18:25,980 --> 00:18:29,730
I mean, it was, in essence,
an economic arrangement

382
00:18:29,730 --> 00:18:33,420
where you exchanged
Bitcoin for an email.

383
00:18:33,420 --> 00:18:36,240
And that email, some
12 months later,

384
00:18:36,240 --> 00:18:40,390
you would get a private key
when the genesis block happened.

385
00:18:40,390 --> 00:18:42,270
And most of these
still had to deal

386
00:18:42,270 --> 00:18:44,880
with that economic arrangement.

387
00:18:44,880 --> 00:18:48,330
Then a law firm
here in Boston took

388
00:18:48,330 --> 00:18:53,150
an arrangement that was
handled in securities offerings

389
00:18:53,150 --> 00:18:56,400
and they created something,
and they put out, in essence,

390
00:18:56,400 --> 00:18:58,600
a legal white
paper, if you wish,

391
00:18:58,600 --> 00:19:02,460
called a Simple Agreement
for Future Tokens, SAFT,

392
00:19:02,460 --> 00:19:04,320
to try to address,
they thought--

393
00:19:04,320 --> 00:19:07,098
they thought-- I think they
were wrong, by the way.

394
00:19:07,098 --> 00:19:08,640
But they thought
they were addressing

395
00:19:08,640 --> 00:19:15,090
a bunch of regulatory issues
that somehow this SAFT, this

396
00:19:15,090 --> 00:19:19,710
would be maybe have to register
under the securities laws

397
00:19:19,710 --> 00:19:20,910
in the US.

398
00:19:20,910 --> 00:19:23,520
But when you finally
got the token,

399
00:19:23,520 --> 00:19:28,590
maybe later it would not have
to be a registered security.

400
00:19:28,590 --> 00:19:32,760
And they were trying to do
a two-tiered arrangement.

401
00:19:32,760 --> 00:19:37,860
But even before you got to this
Boston law firm that did this,

402
00:19:37,860 --> 00:19:39,810
you still had the
economic reality

403
00:19:39,810 --> 00:19:42,780
that you were trying
to raise money

404
00:19:42,780 --> 00:19:45,600
today to get a token later.

405
00:19:45,600 --> 00:19:50,842
And then the lawyers
got involved to try to--

406
00:19:50,842 --> 00:19:52,300
I would say they
were trying to get

407
00:19:52,300 --> 00:19:55,750
between the wallpaper and
the wall of regulation

408
00:19:55,750 --> 00:19:58,510
and say, we'll register
the first thing,

409
00:19:58,510 --> 00:19:59,900
we'll give it a fancy name.

410
00:19:59,900 --> 00:20:00,950
We'll call it a SAFT.

411
00:20:00,950 --> 00:20:03,280
We won't register the second
thing when you finally

412
00:20:03,280 --> 00:20:05,390
get the token 12 months later.

413
00:20:05,390 --> 00:20:08,340
I think they'll probably
end up mistaken on that.

414
00:20:08,340 --> 00:20:13,050
But I think that
was the background.

415
00:20:13,050 --> 00:20:14,760
Let me hit a couple
other points.

416
00:20:14,760 --> 00:20:17,760
Scarcity is usually,
but not always, fostered

417
00:20:17,760 --> 00:20:20,030
through some monetary policy.

418
00:20:20,030 --> 00:20:26,370
If we go back to Nakamoto
consensus and Bitcoin,

419
00:20:26,370 --> 00:20:28,400
what's the monetary
policy there?

420
00:20:28,400 --> 00:20:30,360
Anybody remember that monetary?

421
00:20:30,360 --> 00:20:32,220
I call it monetary
policy, but it's

422
00:20:32,220 --> 00:20:37,600
the control of the supply
of the money supply.

423
00:20:37,600 --> 00:20:40,750
So what's the money supply
algorithm in Bitcoin?

424
00:20:40,750 --> 00:20:41,470
Eilon?

425
00:20:41,470 --> 00:20:43,333
AUDIENCE: [INAUDIBLE]

426
00:20:43,333 --> 00:20:44,125
GARY GENSLER: Half?

427
00:20:44,125 --> 00:20:45,330
Half of what?

428
00:20:45,330 --> 00:20:50,010
AUDIENCE: [INAUDIBLE]
reward for the blocks.

429
00:20:50,010 --> 00:20:51,540
GARY GENSLER: So
there's a reward.

430
00:20:51,540 --> 00:20:54,750
The Bitcoin monetary
policy is a reward of--

431
00:20:54,750 --> 00:20:57,345
anybody remember
the reward today?

432
00:20:57,345 --> 00:20:58,220
AUDIENCE: 12.5 coins.

433
00:20:58,220 --> 00:20:59,940
GARY GENSLER: 12
and 1/2 coins today.

434
00:20:59,940 --> 00:21:04,550
It started at 50 coins
every how many minutes?

435
00:21:04,550 --> 00:21:06,770
10 minutes on average.

436
00:21:06,770 --> 00:21:10,400
But every 200,000
blocks, it halves.

437
00:21:10,400 --> 00:21:12,740
So somewhere out in
the 22nd century,

438
00:21:12,740 --> 00:21:15,740
it will cap at 21 million coins.

439
00:21:15,740 --> 00:21:19,210
But way before that,
the monetary policy,

440
00:21:19,210 --> 00:21:23,330
it's slowing and slowing
and slowing the growth rate.

441
00:21:23,330 --> 00:21:27,950
So embedded in the algorithm of
Bitcoin is a monetary policy.

442
00:21:27,950 --> 00:21:30,420
Is it immutable?

443
00:21:30,420 --> 00:21:35,340
How many people would say
that's hard coded and immutable?

444
00:21:35,340 --> 00:21:36,150
Not a hand.

445
00:21:36,150 --> 00:21:40,250
How many people would say
it's actually not immutable?

446
00:21:40,250 --> 00:21:41,330
So what can change it?

447
00:21:41,330 --> 00:21:43,180
Alan, you didn't raise
your hand either way.

448
00:21:43,180 --> 00:21:46,850
AUDIENCE: It depends how
you define immutable.

449
00:21:46,850 --> 00:21:50,877
GARY GENSLER: Yes,
I'm listening.

450
00:21:50,877 --> 00:21:52,710
AUDIENCE: If you change
the monetary policy,

451
00:21:52,710 --> 00:21:53,878
you're going to have a fork.

452
00:21:53,878 --> 00:21:55,670
You're going to have
the old folks sticking

453
00:21:55,670 --> 00:21:56,890
with the old policy
and the new folks

454
00:21:56,890 --> 00:21:58,098
sticking with the new policy.

455
00:21:58,098 --> 00:21:59,855
And now, what has changed?

456
00:21:59,855 --> 00:22:01,980
Some people argue nothing
has changed, while others

457
00:22:01,980 --> 00:22:03,022
argue something has seen.

458
00:22:03,022 --> 00:22:04,022
GARY GENSLER: All right.

459
00:22:04,022 --> 00:22:06,350
So Alin's pointing out not
everybody will go along

460
00:22:06,350 --> 00:22:07,980
with the new monetary policy.

461
00:22:07,980 --> 00:22:10,130
But I would note on
Ethereum, they've

462
00:22:10,130 --> 00:22:12,680
changed their monetary
policy two or three times.

463
00:22:12,680 --> 00:22:15,530
And they haven't had
to use a hard fork.

464
00:22:15,530 --> 00:22:19,130
So they've changed
their block reward.

465
00:22:19,130 --> 00:22:23,870
And in changing a block reward,
by lowering the block rewards,

466
00:22:23,870 --> 00:22:26,390
by consensus, they
effectively are

467
00:22:26,390 --> 00:22:29,660
changing their monetary policy,
because they're changing,

468
00:22:29,660 --> 00:22:33,520
in essence, their
inflation rate.

469
00:22:33,520 --> 00:22:38,230
But most initial coin
offerings have some algorithm,

470
00:22:38,230 --> 00:22:42,550
some built in, what we'll
call, money supply policy

471
00:22:42,550 --> 00:22:46,470
or monetary policy,
but not all of them do.

472
00:22:46,470 --> 00:22:48,030
Some, if you read
them closely, they

473
00:22:48,030 --> 00:22:51,480
can issue as much as they
want whenever they want

474
00:22:51,480 --> 00:22:52,620
and so forth.

475
00:22:52,620 --> 00:22:56,550
But I would say the majority
have a monetary policy.

476
00:22:56,550 --> 00:22:59,100
If this space, if this
world really took off a,

477
00:22:59,100 --> 00:23:03,660
lot of monetary policy
economists would study it.

478
00:23:03,660 --> 00:23:05,610
But there's not a
lot of deep research

479
00:23:05,610 --> 00:23:08,070
yet on what works,
what doesn't work.

480
00:23:08,070 --> 00:23:10,590
It's a playground
or a sandbox if it

481
00:23:10,590 --> 00:23:14,700
were to ever take
off as to exploring

482
00:23:14,700 --> 00:23:16,290
hard monetary policies.

483
00:23:16,290 --> 00:23:17,110
Sean?

484
00:23:17,110 --> 00:23:20,130
AUDIENCE: So just based
on those six criteria,

485
00:23:20,130 --> 00:23:21,660
maybe apart from the last one.

486
00:23:21,660 --> 00:23:22,800
It looks to me like--

487
00:23:22,800 --> 00:23:23,580
GARY GENSLER: You want
to get rid of that one?

488
00:23:23,580 --> 00:23:23,940
AUDIENCE: Yeah.

489
00:23:23,940 --> 00:23:25,520
It looks to me
like a Kickstarter.

490
00:23:25,520 --> 00:23:26,430
GARY GENSLER: Like a what?

491
00:23:26,430 --> 00:23:27,430
AUDIENCE: A Kickstarter.

492
00:23:27,430 --> 00:23:29,040
GARY GENSLER: A Kickstarter.

493
00:23:29,040 --> 00:23:31,110
So this looks like
Kickstarter to you?

494
00:23:34,210 --> 00:23:40,590
But does Kickstarter
give you something else?

495
00:23:40,590 --> 00:23:41,442
Anything?

496
00:23:41,442 --> 00:23:45,670
AUDIENCE: It depends on how
you structure the terms.

497
00:23:45,670 --> 00:23:49,680
Basically, most of the items
that are posted on Kickstarter,

498
00:23:49,680 --> 00:23:54,240
they use the funding
to build their product.

499
00:23:54,240 --> 00:23:56,600
It's before it's
actually functional.

500
00:23:56,600 --> 00:23:59,115
And it's also open source.

501
00:23:59,115 --> 00:24:02,160
It's pretty much the same.

502
00:24:02,160 --> 00:24:03,093
GARY GENSLER: Shimon?

503
00:24:03,093 --> 00:24:04,760
AUDIENCE: There's a
very big difference,

504
00:24:04,760 --> 00:24:07,670
which is that Kickstarter,
you fix the price

505
00:24:07,670 --> 00:24:11,240
and you let the market
determine the quantity, right?

506
00:24:11,240 --> 00:24:13,670
And arguably, you
fix the quantity

507
00:24:13,670 --> 00:24:16,730
and you let the market
determine the price.

508
00:24:16,730 --> 00:24:18,860
That's a big difference
between those two,

509
00:24:18,860 --> 00:24:23,460
and the fact that there's
a secondary market, right?

510
00:24:23,460 --> 00:24:26,980
You can also sell your items,
lieke the super early bird

511
00:24:26,980 --> 00:24:29,600
items in a secondary market.

512
00:24:29,600 --> 00:24:30,550
Sure, you could.

513
00:24:30,550 --> 00:24:34,940
And again, this is nothing--

514
00:24:34,940 --> 00:24:36,130
yes, you can.

515
00:24:36,130 --> 00:24:39,050
I mean, I would argue that
it's a lot harder, right?

516
00:24:39,050 --> 00:24:43,390
But it also is the case that,
if I'm selling a new widget,

517
00:24:43,390 --> 00:24:48,450
I'm not going to sell the
early birds for $30, right?

518
00:24:48,450 --> 00:24:50,480
That's the price, right?

519
00:24:50,480 --> 00:24:53,490
And here, you're letting--

520
00:24:53,490 --> 00:24:56,018
the auction is for the
price not for the coin.

521
00:24:56,018 --> 00:24:58,310
GARY GENSLER: So there are
similarities to Kickstarter.

522
00:24:58,310 --> 00:25:02,150
There's similarities to other
crowd funding mechanisms,

523
00:25:02,150 --> 00:25:07,740
but there's also some real
distinctions in terms of--

524
00:25:07,740 --> 00:25:09,890
one, of course, this
is all digital assets.

525
00:25:09,890 --> 00:25:12,610
And Kickstarter often there
is a service or a good,

526
00:25:12,610 --> 00:25:16,070
a physical good, or a
service you're getting.

527
00:25:16,070 --> 00:25:18,290
But also, what Shimon does?

528
00:25:18,290 --> 00:25:19,242
Hugo?

529
00:25:19,242 --> 00:25:21,200
AUDIENCE: Just to push
back on that last point,

530
00:25:21,200 --> 00:25:23,510
often the ICOs are
priced in theory.

531
00:25:23,510 --> 00:25:26,690
And then only on the secondary
markets do the prices change.

532
00:25:26,690 --> 00:25:29,000
Isn't that the case?

533
00:25:29,000 --> 00:25:31,430
If you want to spit
in an ICO, they'll

534
00:25:31,430 --> 00:25:38,240
be like, oh, here's 1,000 points
for 0.1 F. And that, I guess,

535
00:25:38,240 --> 00:25:41,603
varies based on price
fluctuations in US dollars,

536
00:25:41,603 --> 00:25:43,020
if you're still
taking US dollars.

537
00:25:43,020 --> 00:25:46,500
But since you're using
Ether to pay for the ICO--

538
00:25:49,798 --> 00:25:51,590
GARY GENSLER: Hugo's
saying it's not really

539
00:25:51,590 --> 00:25:58,080
that price is variable until it
gets to the secondary market.

540
00:25:58,080 --> 00:26:02,030
But I would contend that one
big difference between most

541
00:26:02,030 --> 00:26:04,310
of what's done on
Kickstarter, not everything

542
00:26:04,310 --> 00:26:07,610
but most, and here
is here the investors

543
00:26:07,610 --> 00:26:10,610
really are looking
and anticipating

544
00:26:10,610 --> 00:26:12,960
profits and returns.

545
00:26:12,960 --> 00:26:14,480
And when I think
of most people that

546
00:26:14,480 --> 00:26:15,938
are going into
Kickstarter, they're

547
00:26:15,938 --> 00:26:22,100
getting one product, one unit
of something as a reward.

548
00:26:22,100 --> 00:26:25,360
And they're not looking
for a significant profit

549
00:26:25,360 --> 00:26:27,740
or appreciation.

550
00:26:27,740 --> 00:26:29,887
They could-- maybe a
modest, but not a--

551
00:26:29,887 --> 00:26:31,220
AUDIENCE: The secondary market--

552
00:26:31,220 --> 00:26:33,470
the super early birds in
the secondary market--

553
00:26:33,470 --> 00:26:36,470
GARY GENSLER: Super
early birds, yeah.

554
00:26:36,470 --> 00:26:39,710
So there is monetary
policy and this last point,

555
00:26:39,710 --> 00:26:42,050
that purchases really
are anticipating profits

556
00:26:42,050 --> 00:26:44,810
through appreciation.

557
00:26:44,810 --> 00:26:46,280
So that's what I think of.

558
00:26:46,280 --> 00:26:48,150
Now, how to you evaluate ICOs?

559
00:26:48,150 --> 00:26:50,720
You're not going to be
surprised by my first one.

560
00:26:50,720 --> 00:26:54,170
It's what we've talked a
lot about in this class.

561
00:26:54,170 --> 00:26:57,090
Assess the viability
of the token use case.

562
00:26:57,090 --> 00:27:00,440
Like, does it make any sense?

563
00:27:00,440 --> 00:27:03,710
Does it make any sense?

564
00:27:03,710 --> 00:27:06,590
Do you need to use
an append only log

565
00:27:06,590 --> 00:27:08,810
with a consensus among
a bunch of parties

566
00:27:08,810 --> 00:27:12,200
that can write to a ledger?

567
00:27:12,200 --> 00:27:14,520
So append only
logs and consensus,

568
00:27:14,520 --> 00:27:17,860
throw a bunch of
cryptography in there, too.

569
00:27:17,860 --> 00:27:20,800
And do you need a native token?

570
00:27:20,800 --> 00:27:23,020
Those basic
fundamental economics

571
00:27:23,020 --> 00:27:25,600
that we've talked about
a lot this semester,

572
00:27:25,600 --> 00:27:27,820
hopefully, will save
you off from investing

573
00:27:27,820 --> 00:27:31,480
in really bad ICOs.

574
00:27:31,480 --> 00:27:35,230
But beyond that, which I think
is over 50% of what you should

575
00:27:35,230 --> 00:27:39,970
do, read the white paper.

576
00:27:39,970 --> 00:27:44,670
I tell you, if anybody could
read the Telegraph white paper

577
00:27:44,670 --> 00:27:48,030
that they raised $1.7
billion and please tell me--

578
00:27:48,030 --> 00:27:49,562
feel free to tell
me what they are

579
00:27:49,562 --> 00:27:51,270
going to use that
money for, because I've

580
00:27:51,270 --> 00:27:55,342
read it a number of times
and I wouldn't invest in it,

581
00:27:55,342 --> 00:27:57,300
because it felt like they
could raise the money

582
00:27:57,300 --> 00:27:59,040
and do almost anything
they want with it.

583
00:28:01,860 --> 00:28:03,570
I mean, they're an
incredible company.

584
00:28:03,570 --> 00:28:05,430
They've got hundreds
of millions of users.

585
00:28:05,430 --> 00:28:09,758
And they have incredible
resources to draw upon,

586
00:28:09,758 --> 00:28:11,550
but I'm still not sure
what they're using--

587
00:28:14,100 --> 00:28:16,880
what I will ultimately be
able to use the coin for,

588
00:28:16,880 --> 00:28:19,420
what service I
can get from that,

589
00:28:19,420 --> 00:28:21,290
and what they're
using the money for.

590
00:28:21,290 --> 00:28:23,330
So I would say, read
the white paper.

591
00:28:23,330 --> 00:28:24,950
And if there's
source code, which

592
00:28:24,950 --> 00:28:28,335
is less than half the
time there's source code,

593
00:28:28,335 --> 00:28:29,960
have somebody you
trust read the source

594
00:28:29,960 --> 00:28:32,140
code if you can't read it.

595
00:28:32,140 --> 00:28:34,490
Who's the team?

596
00:28:34,490 --> 00:28:38,320
Just like any venture
capital investor,

597
00:28:38,320 --> 00:28:39,760
you want to know who's the team.

598
00:28:39,760 --> 00:28:40,840
What's their history?

599
00:28:40,840 --> 00:28:42,860
What's their experience
and so forth?

600
00:28:42,860 --> 00:28:46,120
But I start with the
economics and the white paper

601
00:28:46,120 --> 00:28:50,380
before I get to the
team and the website.

602
00:28:50,380 --> 00:28:52,930
Is there venture
capital involvement,

603
00:28:52,930 --> 00:28:56,290
and who and which ones?

604
00:28:56,290 --> 00:28:59,890
Now, VCs often will
take part of the--

605
00:28:59,890 --> 00:29:03,370
at this stage will take
part of the equity and also

606
00:29:03,370 --> 00:29:05,170
part of the coin round.

607
00:29:05,170 --> 00:29:07,780
So they're doing
hybrid investments.

608
00:29:07,780 --> 00:29:12,070
It's very rare, now
in November of 2018,

609
00:29:12,070 --> 00:29:13,570
that a venture
capitalist will only

610
00:29:13,570 --> 00:29:16,330
take a part of the token round.

611
00:29:16,330 --> 00:29:19,510
In late '17, there were still
some they were just getting

612
00:29:19,510 --> 00:29:23,830
on this parade and
taking parts of the pre--

613
00:29:23,830 --> 00:29:26,890
basically, the
pre-round of the tokens.

614
00:29:26,890 --> 00:29:31,990
But now, they want part of
the actual equity and tokens.

615
00:29:31,990 --> 00:29:34,330
Erik, were you asking?

616
00:29:34,330 --> 00:29:37,240
AUDIENCE: No, it's just
that's exactly what we

617
00:29:37,240 --> 00:29:43,780
got from a VC that mentioned
that they go with a free ICO

618
00:29:43,780 --> 00:29:46,600
round of investment
first as a means

619
00:29:46,600 --> 00:29:51,160
to assess the capability
of the full body offering,

620
00:29:51,160 --> 00:29:53,363
and then go through
the ICO again.

621
00:29:53,363 --> 00:29:55,030
GARY GENSLER: But
their first investment

622
00:29:55,030 --> 00:29:58,295
is either preferred or an
equity-like instrument.

623
00:29:58,295 --> 00:29:59,170
AUDIENCE: Absolutely.

624
00:29:59,170 --> 00:30:01,750
And I feel like it changes
completely the time

625
00:30:01,750 --> 00:30:04,080
from the investment for a
venture capitalist, which

626
00:30:04,080 --> 00:30:07,840
normally would for
five to 10 years.

627
00:30:07,840 --> 00:30:10,460
And here, it's like
you're going to hide

628
00:30:10,460 --> 00:30:15,910
for the next few months, and
then just resell the coins

629
00:30:15,910 --> 00:30:17,050
right after.

630
00:30:17,050 --> 00:30:18,190
What is the time frame?

631
00:30:18,190 --> 00:30:21,370
GARY GENSLER: So
Alexis's observation

632
00:30:21,370 --> 00:30:25,330
is this might shorten the time
frame for venture capitalists.

633
00:30:25,330 --> 00:30:29,530
I would say yes during
this 2017-2018 period.

634
00:30:29,530 --> 00:30:32,510
I don't know if
that will persist.

635
00:30:32,510 --> 00:30:36,770
But yes, I think that, for
venture capitalists saying,

636
00:30:36,770 --> 00:30:39,680
well, I can be taken up
by selling the company,

637
00:30:39,680 --> 00:30:43,580
I can be taken out
of my investor term--

638
00:30:43,580 --> 00:30:47,000
how am I going to sell my
investment, my take out?

639
00:30:47,000 --> 00:30:51,650
I can take the company public,
I can sell the company, or maybe

640
00:30:51,650 --> 00:30:57,960
I can ICO, and if
you can do it sooner.

641
00:30:57,960 --> 00:31:02,060
And what happened a lot in
the fall of '17 and into '18

642
00:31:02,060 --> 00:31:03,710
is many venture
capitalists changed

643
00:31:03,710 --> 00:31:08,060
their standard contracts and
their standard documentation

644
00:31:08,060 --> 00:31:11,390
when they were
investing in start ups

645
00:31:11,390 --> 00:31:14,740
to say also that they could
participate in the ICO round

646
00:31:14,740 --> 00:31:17,630
and that they could participate
in the early rounds.

647
00:31:17,630 --> 00:31:19,442
But if you're assessing
an ICO and you're

648
00:31:19,442 --> 00:31:20,900
thinking about
investing in it, you

649
00:31:20,900 --> 00:31:23,530
want to know what venture
capitalists are backing it.

650
00:31:26,390 --> 00:31:29,150
And then a big thing
that folks look at--

651
00:31:29,150 --> 00:31:31,970
I put it fifth on the
list, as you can see--

652
00:31:31,970 --> 00:31:33,770
is what's the community.

653
00:31:33,770 --> 00:31:35,480
How many Redis
post, Medium posts?

654
00:31:35,480 --> 00:31:38,385
How many people are following
Bitcoin talk, et cetera,

655
00:31:38,385 --> 00:31:39,260
et cetera, et cetera?

656
00:31:39,260 --> 00:31:42,370
There's eight or 10 of
these talk channels.

657
00:31:42,370 --> 00:31:45,020
And I don't know
the ratios anymore,

658
00:31:45,020 --> 00:31:47,750
but it used to be
if you could get

659
00:31:47,750 --> 00:31:51,530
to like 7,000 to 10,000
folks following you on Reddit

660
00:31:51,530 --> 00:31:53,300
and Medium and
everything, you knew

661
00:31:53,300 --> 00:31:55,910
you could raise
a successful ICO.

662
00:31:55,910 --> 00:31:59,000
Like in the heyday, if
you could get your numbers

663
00:31:59,000 --> 00:32:02,820
to a certain
following, then that

664
00:32:02,820 --> 00:32:07,920
was enough momentum to raise
your $15 to $30 million.

665
00:32:07,920 --> 00:32:11,030
I think that's probably
a little less so now.

666
00:32:11,030 --> 00:32:11,660
Tom?

667
00:32:11,660 --> 00:32:14,160
AUDIENCE: I mean, this is just
the definition of the greater

668
00:32:14,160 --> 00:32:15,570
fool theory, right?

669
00:32:15,570 --> 00:32:18,980
If enough people believe
that your token is valuable,

670
00:32:18,980 --> 00:32:20,610
then it's valuable.

671
00:32:20,610 --> 00:32:23,490
So I get that it's the fifth
thing on the list for a reason.

672
00:32:23,490 --> 00:32:24,323
GARY GENSLER: Right.

673
00:32:24,323 --> 00:32:26,100
But if you're a
momentum investor

674
00:32:26,100 --> 00:32:27,420
and you're just saying--

675
00:32:27,420 --> 00:32:29,730
or if it's FOMO
investing as Sabrina

676
00:32:29,730 --> 00:32:33,988
said, to see how big
the community is.

677
00:32:33,988 --> 00:32:35,280
And is there an interest in it?

678
00:32:35,280 --> 00:32:36,860
Does this have a following?

679
00:32:39,480 --> 00:32:41,850
I said I'm neither a
maximalist nor a minimalist.

680
00:32:41,850 --> 00:32:43,260
I'm just not--

681
00:32:43,260 --> 00:32:45,150
I'm not trying to--

682
00:32:45,150 --> 00:32:47,320
but this is real economics.

683
00:32:47,320 --> 00:32:51,630
If you had 100,000 people
following in a community,

684
00:32:51,630 --> 00:32:53,760
probably more likely
it's a successful ICO

685
00:32:53,760 --> 00:32:54,960
in terms of raising money.

686
00:32:54,960 --> 00:32:58,840
It doesn't mean it's going to be
successful as a token later on.

687
00:32:58,840 --> 00:32:59,490
Here?

688
00:32:59,490 --> 00:33:05,960
AUDIENCE: You don't actually
use it as a specific criterion,

689
00:33:05,960 --> 00:33:10,650
but you can use it maybe as
a filter, the first filter.

690
00:33:10,650 --> 00:33:12,990
If you have that
the person who's

691
00:33:12,990 --> 00:33:15,750
publishing the white
paper has not been posted,

692
00:33:15,750 --> 00:33:18,540
he's never been
there, then it raises

693
00:33:18,540 --> 00:33:19,840
a little bit of suspicion.

694
00:33:19,840 --> 00:33:23,760
And then you have to
go on and do some more

695
00:33:23,760 --> 00:33:28,860
research on the paper, on the
idea, on the guy, whatever.

696
00:33:28,860 --> 00:33:31,230
GARY GENSLER: It is a way
to see whether there's

697
00:33:31,230 --> 00:33:34,485
other people even tuning
in and showing interest.

698
00:33:37,045 --> 00:33:38,670
And it could be the
greater fool theory

699
00:33:38,670 --> 00:33:41,940
just because if Tim
Draper, Mike Novogratz

700
00:33:41,940 --> 00:33:45,960
is invested, who are both
very savvy investors and very

701
00:33:45,960 --> 00:33:49,030
successful investors, you
might say, do I want to be in?

702
00:33:49,030 --> 00:33:52,050
Or is that my time to
say it's not to be in,

703
00:33:52,050 --> 00:33:54,750
because they've already
gotten the best of it.

704
00:33:54,750 --> 00:33:59,090
Either way, I mean, they're
still good investors.

705
00:33:59,090 --> 00:34:01,430
What's their monetary policy?

706
00:34:01,430 --> 00:34:03,830
Again, how's it
going to affect--

707
00:34:03,830 --> 00:34:07,760
can they-- is it one
of the majority that

708
00:34:07,760 --> 00:34:09,324
has a fixed monetary policy?

709
00:34:09,324 --> 00:34:10,699
Or is it one of
the minority that

710
00:34:10,699 --> 00:34:14,800
has no monetary policy at all?

711
00:34:14,800 --> 00:34:16,449
How did they
distribute the tokens?

712
00:34:16,449 --> 00:34:17,545
And I mean in two ways.

713
00:34:20,500 --> 00:34:24,590
Basically, some will actually
disclose a cap table,

714
00:34:24,590 --> 00:34:27,699
a capitalization table of
the tokens, the same way

715
00:34:27,699 --> 00:34:31,159
you can think of a
capitalization table of equity,

716
00:34:31,159 --> 00:34:35,320
but who owns the tokens
pre-sale and post-sale.

717
00:34:35,320 --> 00:34:37,690
So that's what I mean
by token distribution.

718
00:34:37,690 --> 00:34:42,752
Are they keeping 10% for the
founder or 80% for the founder?

719
00:34:42,752 --> 00:34:45,880
It might change your
view on all of it.

720
00:34:45,880 --> 00:34:48,850
But also token distribution
is how are they selling it

721
00:34:48,850 --> 00:34:54,100
during what's usually a 30 to
60 day period or 15 to 60 day

722
00:34:54,100 --> 00:34:54,940
period.

723
00:34:54,940 --> 00:34:58,270
The longest that I am
aware of is 350 days.

724
00:34:58,270 --> 00:35:00,940
EOS sold over 350 days.

725
00:35:00,940 --> 00:35:04,940
Every day was a form
of a Dutch auction.

726
00:35:04,940 --> 00:35:09,610
It was a remarkable way
that they sold 4.2 billion.

727
00:35:09,610 --> 00:35:12,220
I doubt that anybody who
did EOS at the beginning

728
00:35:12,220 --> 00:35:14,262
thought they were going
to raise over $1 billion.

729
00:35:14,262 --> 00:35:17,500
In fact, maybe nobody thought
they'd raise over $100 million,

730
00:35:17,500 --> 00:35:21,270
because they started
in the summer of '17.

731
00:35:21,270 --> 00:35:24,360
But they did a
distribution over 350 days.

732
00:35:24,360 --> 00:35:28,270
Most, though, are done
over 15 to 60 days or so.

733
00:35:28,270 --> 00:35:28,920
Please.

734
00:35:28,920 --> 00:35:32,670
AUDIENCE: So you
mentioned [INAUDIBLE]

735
00:35:32,670 --> 00:35:34,470
how are ICOs accounted for?

736
00:35:34,470 --> 00:35:37,950
Do they go as equity
on their revenue?

737
00:35:37,950 --> 00:35:39,192
Where do they fall?

738
00:35:39,192 --> 00:35:40,650
GARY GENSLER: So
terrific question.

739
00:35:40,650 --> 00:35:46,640
How are ICO proceeds
accounted for?

740
00:35:46,640 --> 00:35:47,550
Who's our accountant?

741
00:35:47,550 --> 00:35:49,590
Aviva?

742
00:35:49,590 --> 00:35:50,627
AUDIENCE: No idea.

743
00:35:50,627 --> 00:35:52,460
GARY GENSLER: All right,
no idea from Aviva.

744
00:35:52,460 --> 00:35:54,930
I want to try to
answer it, but anybody?

745
00:35:54,930 --> 00:35:57,560
AUDIENCE: I think that's
another important feature.

746
00:35:57,560 --> 00:36:02,150
It's the token economics, how
you use potential incentive,

747
00:36:02,150 --> 00:36:07,310
[INAUDIBLE] and for the
profit of the project,

748
00:36:07,310 --> 00:36:11,540
the project would
repurchase their tokens

749
00:36:11,540 --> 00:36:14,108
in a way similar to a dividend.

750
00:36:14,108 --> 00:36:15,650
GARY GENSLER: But
how do you book it?

751
00:36:15,650 --> 00:36:17,390
What's the debit and
what's the credit?

752
00:36:20,080 --> 00:36:22,700
AUDIENCE: Marketable
securities and cash.

753
00:36:22,700 --> 00:36:23,950
GARY GENSLER: What's that?

754
00:36:23,950 --> 00:36:25,580
AUDIENCE: [INAUDIBLE]

755
00:36:25,580 --> 00:36:28,545
GARY GENSLER: I hope this works.

756
00:36:28,545 --> 00:36:31,280
You know of the
T account, right?

757
00:36:31,280 --> 00:36:32,280
We've got the T account.

758
00:36:32,280 --> 00:36:36,368
Over here's cash, right?

759
00:36:36,368 --> 00:36:38,410
Because you receive cash
when you sell something.

760
00:36:38,410 --> 00:36:40,410
What's the credit item?

761
00:36:40,410 --> 00:36:41,410
AUDIENCE: Question mark.

762
00:36:41,410 --> 00:36:42,460
GARY GENSLER: What's that?

763
00:36:42,460 --> 00:36:43,410
AUDIENCE: Retained earnings.

764
00:36:43,410 --> 00:36:45,190
GARY GENSLER: You think
it's retained earnings?

765
00:36:45,190 --> 00:36:45,773
AUDIENCE: Yes.

766
00:36:45,773 --> 00:36:48,450
GARY GENSLER: You think
it's just retained earnings?

767
00:36:48,450 --> 00:36:50,480
AUDIENCE: They're
selling nothing.

768
00:36:50,480 --> 00:36:51,480
GARY GENSLER: All right.

769
00:36:51,480 --> 00:36:53,760
So the question
is, is it earnings?

770
00:36:53,760 --> 00:36:56,520
Is it a revenue item
when you sell it?

771
00:36:56,520 --> 00:37:00,400
Or some people book it
as deferred revenue.

772
00:37:04,740 --> 00:37:06,660
So there's two ways
you can book it.

773
00:37:06,660 --> 00:37:09,260
You could also book
it as a liability,

774
00:37:09,260 --> 00:37:13,650
but it's either deferred
revenue or current revenue.

775
00:37:13,650 --> 00:37:16,080
All right, what could
motivate you to book

776
00:37:16,080 --> 00:37:19,710
it as a deferred revenue
instead of current revenue?

777
00:37:19,710 --> 00:37:20,367
What's that?

778
00:37:20,367 --> 00:37:21,450
AUDIENCE: Taxes, probably.

779
00:37:21,450 --> 00:37:22,650
GARY GENSLER: Taxes.

780
00:37:22,650 --> 00:37:24,660
So some book it as
deferred revenues,

781
00:37:24,660 --> 00:37:27,390
because they don't
want to book taxes.

782
00:37:27,390 --> 00:37:31,320
And God knows whether
that's really the right way

783
00:37:31,320 --> 00:37:32,340
to book it.

784
00:37:32,340 --> 00:37:39,380
And others book it right as
a revenue item right now.

785
00:37:39,380 --> 00:37:41,800
But I don't know of anybody,
whether they're booking it

786
00:37:41,800 --> 00:37:45,600
as deferred revenues or
current revenues, that

787
00:37:45,600 --> 00:37:49,770
wants to book it to trigger
that it's a security.

788
00:37:49,770 --> 00:37:53,640
So most law firms that I
understand, they're not they're

789
00:37:53,640 --> 00:37:57,000
not accountants, but they
don't want their clients

790
00:37:57,000 --> 00:38:02,630
to book it in a way that will
make it look more like equity.

791
00:38:02,630 --> 00:38:05,630
So it's either deferred
revenue or current revenue.

792
00:38:05,630 --> 00:38:07,760
Some, I've heard, have
called it a liability,

793
00:38:07,760 --> 00:38:10,730
but I think that's the minority.

794
00:38:10,730 --> 00:38:12,730
AUDIENCE: I don't know
if it takes too much time

795
00:38:12,730 --> 00:38:18,760
to go through a use case to
make these examples tangible.

796
00:38:18,760 --> 00:38:21,070
If I'm promising
to deliver a good,

797
00:38:21,070 --> 00:38:27,220
then the company is getting
back the tokens, right?

798
00:38:27,220 --> 00:38:32,310
How do you put it back
out again in the market?

799
00:38:32,310 --> 00:38:34,560
GARY GENSLER: So the question
is what is the use case.

800
00:38:34,560 --> 00:38:37,750
So some use cases,
the token is issued

801
00:38:37,750 --> 00:38:40,340
and it's really
for the community.

802
00:38:40,340 --> 00:38:43,130
And some tokens come
back to the company.

803
00:38:43,130 --> 00:38:46,970
So a file storage,
Filecoin, for instance,

804
00:38:46,970 --> 00:38:52,490
they raised $250-some
million, the equivalent of.

805
00:38:52,490 --> 00:38:54,230
And in that case,
I think the token

806
00:38:54,230 --> 00:38:57,680
would be used
within the community

807
00:38:57,680 --> 00:39:01,010
rather than back to the company.

808
00:39:01,010 --> 00:39:03,290
So even like
Ethereum, when you use

809
00:39:03,290 --> 00:39:08,690
Ethereum as a form of
buying computing power,

810
00:39:08,690 --> 00:39:11,800
it doesn't go back to
the Ethereum Foundation.

811
00:39:11,800 --> 00:39:15,750
So the most dominant--

812
00:39:15,750 --> 00:39:19,550
and that's why it really should
be booked as current revenue,

813
00:39:19,550 --> 00:39:23,330
because it's not even that the
software provider is providing

814
00:39:23,330 --> 00:39:26,240
a service later.

815
00:39:26,240 --> 00:39:30,850
The most dominant use
case is, like in Ethereum,

816
00:39:30,850 --> 00:39:36,620
that you're using the Eth for
other people in the network.

817
00:39:36,620 --> 00:39:39,890
It's a monetary unit
that's not coming back.

818
00:39:39,890 --> 00:39:42,880
There are some
where it comes back,

819
00:39:42,880 --> 00:39:48,910
and then it's basically returned
to the corporate treasury.

820
00:39:48,910 --> 00:39:52,176
So it's two different models.

821
00:39:52,176 --> 00:39:53,807
Have I lost you or
are you with me?

822
00:39:53,807 --> 00:39:54,682
AUDIENCE: [INAUDIBLE]

823
00:39:54,682 --> 00:39:56,470
GARY GENSLER: All right.

824
00:39:56,470 --> 00:40:01,020
One way is that it gets
returned to the company.

825
00:40:01,020 --> 00:40:04,740
That's the more narrow case.

826
00:40:04,740 --> 00:40:07,390
Usually, it's you're selling
a token that will be used.

827
00:40:07,390 --> 00:40:09,660
And I'll give it to
Eilon, because Eilon

828
00:40:09,660 --> 00:40:11,510
gives me file storage.

829
00:40:11,510 --> 00:40:13,200
Eilon will give it
to Tom, because Tom

830
00:40:13,200 --> 00:40:14,730
gives Eilon file storage.

831
00:40:14,730 --> 00:40:18,570
In Ethereum, it literally
keeps going around

832
00:40:18,570 --> 00:40:21,540
and it doesn't get returned to--

833
00:40:21,540 --> 00:40:26,680
it never gets burned and
never gets extinguished

834
00:40:26,680 --> 00:40:28,300
and handed back to the company.

835
00:40:28,300 --> 00:40:34,900
AUDIENCE: And the pricing
strategy on that first issuance

836
00:40:34,900 --> 00:40:37,510
depends then on the value
of, if it's storage,

837
00:40:37,510 --> 00:40:40,330
on the value of storing--

838
00:40:40,330 --> 00:40:42,050
GARY GENSLER: Well, in theory--

839
00:40:42,050 --> 00:40:42,700
it's theory.

840
00:40:42,700 --> 00:40:46,210
I think that a lot of this has
been on speculation and FOMO

841
00:40:46,210 --> 00:40:51,610
and things like that and a
bubble, a 15 month or 18 month

842
00:40:51,610 --> 00:40:52,510
bubble.

843
00:40:52,510 --> 00:40:54,700
But on theory,
yes, it should be--

844
00:40:54,700 --> 00:40:56,740
to be in equilibrium,
it should be

845
00:40:56,740 --> 00:41:01,480
a discount to the
future value of storage,

846
00:41:01,480 --> 00:41:04,930
because today you're
buying a token that you

847
00:41:04,930 --> 00:41:07,530
might be able to use tomorrow.

848
00:41:07,530 --> 00:41:09,580
But because there's a
probability weighting

849
00:41:09,580 --> 00:41:13,610
that you won't be able to
use it if they don't complete

850
00:41:13,610 --> 00:41:17,300
the software, if they
don't complete the rollout,

851
00:41:17,300 --> 00:41:19,520
it should sell at
a-- in equilibrium,

852
00:41:19,520 --> 00:41:26,730
it should sell at a discount
to its eventual utility value.

853
00:41:26,730 --> 00:41:29,170
That would be where it
would be in equilibrium.

854
00:41:29,170 --> 00:41:30,550
Shimon?

855
00:41:30,550 --> 00:41:31,900
AUDIENCE: So this is a question.

856
00:41:31,900 --> 00:41:37,840
Even in the bad
use case, they're

857
00:41:37,840 --> 00:41:41,160
not pre-determining
what one unit of coin

858
00:41:41,160 --> 00:41:43,017
is good for, right?

859
00:41:43,017 --> 00:41:44,100
GARY GENSLER: Usually not.

860
00:41:44,100 --> 00:41:47,040
Some white papers
do, but usually not.

861
00:41:47,040 --> 00:41:49,140
AUDIENCE: Because
it's not just--

862
00:41:49,140 --> 00:41:51,480
if they told you,
OK, one unit will

863
00:41:51,480 --> 00:41:53,933
buy you one terabyte of
storage, now, of course,

864
00:41:53,933 --> 00:41:55,350
the value of a
terabyte of storage

865
00:41:55,350 --> 00:41:57,558
would depend on the electricity,
cost of electricity,

866
00:41:57,558 --> 00:41:59,623
and hardware, and all
that stuff in the future--

867
00:41:59,623 --> 00:42:01,790
I don't know-- and the
supply, and blah, blah, blah.

868
00:42:01,790 --> 00:42:09,360
[INAUDIBLE] It's very hard to
pin down the fundamental value

869
00:42:09,360 --> 00:42:15,080
of that coin outside of
how it's going to scale

870
00:42:15,080 --> 00:42:18,090
and how the community will
be and all that stuff,

871
00:42:18,090 --> 00:42:22,980
because there's no
clear allocation

872
00:42:22,980 --> 00:42:25,500
between the coin and the
service that you would get.

873
00:42:28,375 --> 00:42:29,250
Does that make sense?

874
00:42:31,328 --> 00:42:32,370
GARY GENSLER: Let me see.

875
00:42:32,370 --> 00:42:36,095
You're asking absolutely
the right question.

876
00:42:36,095 --> 00:42:38,220
It's one that I've been
kicking around a little bit

877
00:42:38,220 --> 00:42:42,120
with a couple other faculty
members in the finance group

878
00:42:42,120 --> 00:42:46,590
here, with Antoinette and Leonid
who have done a lot of research

879
00:42:46,590 --> 00:42:47,770
in this area.

880
00:42:47,770 --> 00:42:50,100
And we're all like,
we're not sure exactly.

881
00:42:50,100 --> 00:42:52,230
And these are some
of the most world

882
00:42:52,230 --> 00:42:54,950
class talented finance faculty.

883
00:42:54,950 --> 00:43:00,990
Like, how do you really get
to the value of a token, one,

884
00:43:00,990 --> 00:43:03,720
when there's so little
written in these white papers

885
00:43:03,720 --> 00:43:06,590
about this specificity?

886
00:43:06,590 --> 00:43:09,540
And I gave one reading, which
was Christian's reading,

887
00:43:09,540 --> 00:43:11,960
and I apologize, because
it has a lot of formulas

888
00:43:11,960 --> 00:43:13,230
and everything.

889
00:43:13,230 --> 00:43:15,390
But he grapples with this.

890
00:43:15,390 --> 00:43:17,220
Where is it in equilibrium?

891
00:43:17,220 --> 00:43:18,942
What's the equilibrium price?

892
00:43:18,942 --> 00:43:20,400
And the equilibrium
price should be

893
00:43:20,400 --> 00:43:22,560
some discount to
that future value

894
00:43:22,560 --> 00:43:24,920
of the service or the good.

895
00:43:24,920 --> 00:43:28,670
And if there is more uncertainty
of what that service or good,

896
00:43:28,670 --> 00:43:31,880
it almost has to be
a greater discount.

897
00:43:31,880 --> 00:43:34,780
And yet, it appears that the
market has been pricing it

898
00:43:34,780 --> 00:43:35,600
at a way premium.

899
00:43:38,320 --> 00:43:40,920
So I think, if you
didn't take anything

900
00:43:40,920 --> 00:43:42,920
from Christian's paper,
that's what I was trying

901
00:43:42,920 --> 00:43:45,740
to-- that the market
has been at a premium,

902
00:43:45,740 --> 00:43:48,710
even though it probably
should be discounted.

903
00:43:48,710 --> 00:43:50,300
And that's why issuers--

904
00:43:50,300 --> 00:43:53,720
that's why entrepreneurs have
tapped into it, because it's

905
00:43:53,720 --> 00:43:56,910
a form of cheap financing.

906
00:43:56,910 --> 00:44:00,438
It's been a remarkable
area of cheap financing.

907
00:44:00,438 --> 00:44:00,938
Please.

908
00:44:03,690 --> 00:44:07,997
AUDIENCE: So as we look
forward to Filecoin [INAUDIBLE]

909
00:44:07,997 --> 00:44:10,080
so if we look at that and
we flash forward to when

910
00:44:10,080 --> 00:44:12,900
it's actually functional
and whatever--

911
00:44:12,900 --> 00:44:15,210
GARY GENSLER: And
it's no longer SAFT.

912
00:44:15,210 --> 00:44:17,250
AUDIENCE: When it
actually ever comes out,

913
00:44:17,250 --> 00:44:19,706
so is the idea that
Filecoin at that point

914
00:44:19,706 --> 00:44:21,450
would transition to
realized revenue?

915
00:44:21,450 --> 00:44:25,200
And then if I pay
Don, three Filecoins

916
00:44:25,200 --> 00:44:28,470
or whatever the unit is for
storage, that he books that

917
00:44:28,470 --> 00:44:31,380
as income and is taxed on that?

918
00:44:31,380 --> 00:44:35,580
Has there been any
thought as to how--

919
00:44:35,580 --> 00:44:37,230
GARY GENSLER: If Don
is selling files,

920
00:44:37,230 --> 00:44:40,020
yes, he would have to book
income, as I understand it.

921
00:44:40,020 --> 00:44:44,280
And you're transferring a coin,
just like you're transferring

922
00:44:44,280 --> 00:44:47,940
a euro or a yen or a dollar.

923
00:44:47,940 --> 00:44:53,520
And at the time, the IRS
has spoken to this five,

924
00:44:53,520 --> 00:44:55,020
six years ago.

925
00:44:55,020 --> 00:44:58,170
It's marked to
market value the day

926
00:44:58,170 --> 00:45:02,700
that you, in essence,
deliver the service

927
00:45:02,700 --> 00:45:03,960
and receive the coin.

928
00:45:03,960 --> 00:45:06,030
I mean, I'm not
entirely sure what

929
00:45:06,030 --> 00:45:07,800
happens if you get
the coin a day later,

930
00:45:07,800 --> 00:45:12,690
but it's basically
the market value

931
00:45:12,690 --> 00:45:18,330
at an exchange rate that day
back to Fiat, always translated

932
00:45:18,330 --> 00:45:22,380
back to the Fiat currency,
in this case the US dollar.

933
00:45:26,233 --> 00:45:27,900
AUDIENCE: So if you
extend that example,

934
00:45:27,900 --> 00:45:30,570
where does Filecoin gain
revenue on the transaction

935
00:45:30,570 --> 00:45:31,580
between Andrew and Don?

936
00:45:31,580 --> 00:45:33,775
Are they charging
a transaction fee?

937
00:45:33,775 --> 00:45:34,900
GARY GENSLER: I don't know.

938
00:45:34,900 --> 00:45:37,290
I'll try to figure that
out by next Tuesday,

939
00:45:37,290 --> 00:45:40,590
because we get ICOs twice.

940
00:45:40,590 --> 00:45:44,290
I'll dig in and try to answer,
and if anybody else knows.

941
00:45:44,290 --> 00:45:50,290
But the revenue models vary
with thousands of these.

942
00:45:50,290 --> 00:45:53,970
Whether, in essence,
Filecoin's entire revenue model

943
00:45:53,970 --> 00:45:54,835
was the ICO?

944
00:45:58,740 --> 00:46:00,620
No?

945
00:46:00,620 --> 00:46:03,050
The second big piece
of the revenue model

946
00:46:03,050 --> 00:46:06,990
is retaining some ownership.

947
00:46:06,990 --> 00:46:09,330
So let's look at
Ripple, the company.

948
00:46:09,330 --> 00:46:12,390
Ripple, the company, though they
did their genesis block back

949
00:46:12,390 --> 00:46:18,270
in 2013, they basically
distributed 20% of their tokens

950
00:46:18,270 --> 00:46:20,970
and kept 80%.

951
00:46:20,970 --> 00:46:24,000
And subsequently, they
have been slowly selling

952
00:46:24,000 --> 00:46:26,980
and they're now down to 61%.

953
00:46:26,980 --> 00:46:29,700
But their revenue model
on XRP is, in essence,

954
00:46:29,700 --> 00:46:33,310
selling the XRP.

955
00:46:33,310 --> 00:46:36,400
They only came up with
a real use case of XRP

956
00:46:36,400 --> 00:46:40,580
in 2018 in a prototype
called XRapid.

957
00:46:40,580 --> 00:46:43,840
They had XCurrent, which was
a messaging system prior that

958
00:46:43,840 --> 00:46:46,660
didn't need to use XRP at all.

959
00:46:46,660 --> 00:46:51,810
So for four years,
you had no use of XRP,

960
00:46:51,810 --> 00:46:55,190
as I understand it zero use.

961
00:46:55,190 --> 00:46:59,320
Today, it's the second
highest valued cryptocurrency.

962
00:46:59,320 --> 00:47:02,990
It's past Ethereum with
the fall-off of the value

963
00:47:02,990 --> 00:47:04,936
of Ethereum and Bitcoin.

964
00:47:04,936 --> 00:47:09,110
And at $18 billion, I couldn't
tell you what it's worth.

965
00:47:09,110 --> 00:47:13,660
I can tell you that's what
coinmarket.com or .cap says

966
00:47:13,660 --> 00:47:15,900
they're worth.

967
00:47:15,900 --> 00:47:20,770
But their revenue model is
selling XRP in that case.

968
00:47:20,770 --> 00:47:23,030
And so many of them,
their revenue models

969
00:47:23,030 --> 00:47:29,330
are the initial ICO, keep a
bucket, whether you keep 10%,

970
00:47:29,330 --> 00:47:33,140
or in that case it was 80%, and
then try to monetize and sell

971
00:47:33,140 --> 00:47:35,880
it over time.

972
00:47:35,880 --> 00:47:40,110
And even in Ethereum, which
was, in essence, an ICO,

973
00:47:40,110 --> 00:47:44,920
they kept about 9% in
the Ethereum Foundation.

974
00:47:44,920 --> 00:47:48,570
They're down to 1% ownership
in the Ethereum Foundation.

975
00:47:48,570 --> 00:47:50,370
So they don't receive--
and when Ethereum

976
00:47:50,370 --> 00:47:54,000
moves around the network, the
Ethereum Foundation and Vitalik

977
00:47:54,000 --> 00:47:55,740
Buterin don't
receive any of that.

978
00:47:58,530 --> 00:48:01,600
But I'd have to look at Filecoin
to see whether, in essence,

979
00:48:01,600 --> 00:48:03,120
they burn any.

980
00:48:03,120 --> 00:48:06,330
In essence, does any of
it go back to the issuer?

981
00:48:06,330 --> 00:48:07,770
I don't think so,
but I'll check.

982
00:48:10,720 --> 00:48:13,766
Take this, and then we'll move
on to a couple statistics.

983
00:48:13,766 --> 00:48:17,100
AUDIENCE: I was wondering
who is regulating the ICO.

984
00:48:17,100 --> 00:48:18,100
GARY GENSLER: All right.

985
00:48:18,100 --> 00:48:19,750
So who regulates
the ICOs we're going

986
00:48:19,750 --> 00:48:22,750
to talk a lot about on Tuesday
after Thanksgiving, when we

987
00:48:22,750 --> 00:48:27,520
can thank and eat some turkey.

988
00:48:27,520 --> 00:48:28,990
So can we hold that for Tuesday?

989
00:48:28,990 --> 00:48:32,848
But it really depends
on the jurisdiction.

990
00:48:32,848 --> 00:48:35,140
Here in the US, it would be
the Securities and Exchange

991
00:48:35,140 --> 00:48:37,760
Commission, because
most of these

992
00:48:37,760 --> 00:48:41,560
are really non-compliant
securities offerings.

993
00:48:41,560 --> 00:48:47,587
And last Friday, the
SEC put out a release.

994
00:48:47,587 --> 00:48:49,420
I mean, they've put out
many, many releases.

995
00:48:49,420 --> 00:48:52,060
But last Friday's,
maybe we'll put that up.

996
00:48:52,060 --> 00:48:54,430
Sabrina and Thalita
if you remind me,

997
00:48:54,430 --> 00:48:57,670
I'll shoot you a link and
we'll put it into Canvas.

998
00:48:57,670 --> 00:48:59,230
But it's only two
or three pages.

999
00:48:59,230 --> 00:49:00,688
But for the first
time, they really

1000
00:49:00,688 --> 00:49:02,970
talked about illegal
securities offerings.

1001
00:49:02,970 --> 00:49:05,860
So they used the word illegal.

1002
00:49:05,860 --> 00:49:07,810
And they're starting
to get to the place

1003
00:49:07,810 --> 00:49:11,530
where they're shutting some
of these down that were not

1004
00:49:11,530 --> 00:49:16,800
necessarily scammy
or fraudy, but just

1005
00:49:16,800 --> 00:49:18,330
saying you didn't register.

1006
00:49:21,480 --> 00:49:25,050
But generally speaking, it
would be securities regulators,

1007
00:49:25,050 --> 00:49:27,320
if it's regulated.

1008
00:49:27,320 --> 00:49:30,110
In some jurisdictions, it's not.

1009
00:49:30,110 --> 00:49:31,610
So this is the most
important thing.

1010
00:49:31,610 --> 00:49:36,600
Can you assess the
viability of token use case?

1011
00:49:36,600 --> 00:49:38,340
You remember my little slides.

1012
00:49:38,340 --> 00:49:41,410
But again, it's the
strategic questions.

1013
00:49:41,410 --> 00:49:44,220
And these are the same questions
I'm asking you to think about

1014
00:49:44,220 --> 00:49:46,050
in your final papers.

1015
00:49:46,050 --> 00:49:48,510
Basically, what's the
value creation proposition

1016
00:49:48,510 --> 00:49:49,350
or pain points?

1017
00:49:49,350 --> 00:49:51,060
What are competitors doing?

1018
00:49:51,060 --> 00:49:54,060
How are competitors
facing off in this?

1019
00:49:54,060 --> 00:49:55,620
And if you're
looking at any ICO,

1020
00:49:55,620 --> 00:49:57,480
just think about the
competitive landscape.

1021
00:49:57,480 --> 00:50:00,960
Some of them are quite populated
with a lot of competition.

1022
00:50:00,960 --> 00:50:04,180
File storage, Filecoin
is not the only one,

1023
00:50:04,180 --> 00:50:06,180
so you look at the others
and see how they're

1024
00:50:06,180 --> 00:50:09,390
addressing the same issues.

1025
00:50:09,390 --> 00:50:12,090
And really, why is a
blockchain technology or native

1026
00:50:12,090 --> 00:50:13,920
token even the solution?

1027
00:50:13,920 --> 00:50:15,900
And then you get
digging into it.

1028
00:50:15,900 --> 00:50:19,200
Why do you need an
append only log?

1029
00:50:19,200 --> 00:50:24,660
What verification and networking
cost are actually addressed?

1030
00:50:24,660 --> 00:50:28,010
What transactions are
actually recorded on a ledger?

1031
00:50:28,010 --> 00:50:32,060
I mean, these are the
basic building blocks

1032
00:50:32,060 --> 00:50:35,210
that if you take anything
away, hopefully it's

1033
00:50:35,210 --> 00:50:41,060
this one page of questions
to have some critical skills

1034
00:50:41,060 --> 00:50:43,100
as you go off and
somebody says, well, I've

1035
00:50:43,100 --> 00:50:48,980
got this great blockchain
idea or great token.

1036
00:50:48,980 --> 00:50:53,120
And then not to forget all the
darn challenges that we still

1037
00:50:53,120 --> 00:50:59,060
have-- scalability, performance,
privacy, security, network

1038
00:50:59,060 --> 00:51:02,360
coordination, and
interoperability.

1039
00:51:02,360 --> 00:51:06,750
I know only you say there's no
challenges of interoperability.

1040
00:51:06,750 --> 00:51:09,757
AUDIENCE: No, no, no, don't
put words in my mouth.

1041
00:51:09,757 --> 00:51:11,840
GARY GENSLER: So these,
I'm not going to rereview,

1042
00:51:11,840 --> 00:51:13,978
but they're going
to be in Canvas

1043
00:51:13,978 --> 00:51:15,020
if you want to grab them.

1044
00:51:15,020 --> 00:51:19,250
I mean, this is the same
conceptual framework for an ICO

1045
00:51:19,250 --> 00:51:22,220
or even in a
permissioned blockchain,

1046
00:51:22,220 --> 00:51:24,880
which I sense a lot of you
are thinking about doing.

1047
00:51:24,880 --> 00:51:26,930
So some statistics, and
then we'll close it out.

1048
00:51:26,930 --> 00:51:30,110
And these are just fun charts
that will all be in Canvas.

1049
00:51:30,110 --> 00:51:33,620
And I just went around
finding different websites.

1050
00:51:33,620 --> 00:51:37,970
I don't know that you can
trust any of these numbers,

1051
00:51:37,970 --> 00:51:40,350
but they're the best
numbers out there.

1052
00:51:40,350 --> 00:51:43,210
So here are some
of the industries.

1053
00:51:43,210 --> 00:51:45,320
23% is infrastructure.

1054
00:51:45,320 --> 00:51:49,730
That's $5 billion of raised,
but most of that, I think,

1055
00:51:49,730 --> 00:51:50,960
is the EOS.

1056
00:51:50,960 --> 00:51:54,290
I think that's called an
infrastructure project,

1057
00:51:54,290 --> 00:51:56,120
infrastructure
because EOS is trying

1058
00:51:56,120 --> 00:51:58,230
to compete with Ethereum.

1059
00:51:58,230 --> 00:52:01,710
Finance communication trading
and investment payments,

1060
00:52:01,710 --> 00:52:07,140
you see some consistency, a lot
of financial sector use cases.

1061
00:52:07,140 --> 00:52:12,080
Gaming, and then you're
down to 2% and 3% slices.

1062
00:52:12,080 --> 00:52:14,640
So there's just a little sense
of some of the industries.

1063
00:52:14,640 --> 00:52:16,420
And again, this will
all be on Canvas.

1064
00:52:16,420 --> 00:52:18,980
Here's published ICOs.

1065
00:52:18,980 --> 00:52:22,520
We peaked at about 500 a
month, 400 or 500 a month

1066
00:52:22,520 --> 00:52:25,010
in February through April.

1067
00:52:25,010 --> 00:52:28,290
We're down to about
200 a month now.

1068
00:52:28,290 --> 00:52:29,910
Now, this means published.

1069
00:52:29,910 --> 00:52:32,490
That doesn't mean they've
necessarily raised.

1070
00:52:32,490 --> 00:52:35,910
We're just under about 5,000
that have been published.

1071
00:52:35,910 --> 00:52:39,360
Maybe 3,000 give or take
have raised some money.

1072
00:52:39,360 --> 00:52:41,160
And only about half
of those actually

1073
00:52:41,160 --> 00:52:45,360
exist today, or that you can
find them somewhere and so

1074
00:52:45,360 --> 00:52:46,330
forth.

1075
00:52:46,330 --> 00:52:50,490
The market-- this is the third
quarter based on a website

1076
00:52:50,490 --> 00:52:52,710
called ICO Rating.

1077
00:52:52,710 --> 00:52:55,320
They publish a quarterly report.

1078
00:52:55,320 --> 00:52:57,750
I'm not saying it's
completely exhaustive.

1079
00:52:57,750 --> 00:53:03,040
1.8 billion ICOs raised
down 78% from Q2,

1080
00:53:03,040 --> 00:53:05,560
just to give you a
sense of the size.

1081
00:53:05,560 --> 00:53:09,400
But $1 billion of blockchain
VC raised in the same quarter.

1082
00:53:12,180 --> 00:53:16,770
ICOs surpassed VC
investment in blockchain

1083
00:53:16,770 --> 00:53:18,660
in the third quarter of '17.

1084
00:53:18,660 --> 00:53:22,340
Before that, VC
raise was higher.

1085
00:53:22,340 --> 00:53:23,670
And I think it's coming back.

1086
00:53:23,670 --> 00:53:27,930
And it's a reasonable shot that
in one or two more quarters,

1087
00:53:27,930 --> 00:53:30,660
the VC number will be
higher than the ICO number.

1088
00:53:30,660 --> 00:53:34,830
But this is just a hunch
as to where we're headed.

1089
00:53:34,830 --> 00:53:38,635
Some other statistics--
of the 600,

1090
00:53:38,635 --> 00:53:43,350
this is one quarter, about 200
a month or 600 for the quarter

1091
00:53:43,350 --> 00:53:47,820
that they tracked, 84% are
on the Ethereum and platform.

1092
00:53:47,820 --> 00:53:52,620
Almost every data source I can
find ranges from 80% to 85%.

1093
00:53:52,620 --> 00:53:56,450
So it's still highly focused
on Ethereum platform.

1094
00:53:56,450 --> 00:54:00,600
And I would say as the
ICO boom comes off,

1095
00:54:00,600 --> 00:54:02,670
it's probably also
one of the reasons

1096
00:54:02,670 --> 00:54:06,120
that Ethereum, the price
and valuation of Ethereum

1097
00:54:06,120 --> 00:54:12,520
has come off as well, just
because of the relationships.

1098
00:54:12,520 --> 00:54:15,490
Only 4% of these
600, or 24 of them,

1099
00:54:15,490 --> 00:54:19,310
got listed on an exchange,
that they raised enough money.

1100
00:54:19,310 --> 00:54:20,290
But look at that.

1101
00:54:20,290 --> 00:54:24,750
57% raised less than
$100,000 a piece.

1102
00:54:24,750 --> 00:54:27,410
So it's highly
concentrated in a small--

1103
00:54:27,410 --> 00:54:33,430
67% percent of the DApp
ICos were unsuccessful,

1104
00:54:33,430 --> 00:54:35,320
whatever their measurement
of unsuccessful.

1105
00:54:35,320 --> 00:54:39,850
They didn't raise money or they
raised a little bit of money,

1106
00:54:39,850 --> 00:54:41,260
but the website went dark.

1107
00:54:41,260 --> 00:54:44,520
That's all within three months.

1108
00:54:44,520 --> 00:54:47,970
And again, I can't speak to
how they measure success.

1109
00:54:47,970 --> 00:54:53,470
But 76% were just an idea.

1110
00:54:53,470 --> 00:54:55,540
This is, again,
based on ICO rating.

1111
00:54:55,540 --> 00:55:00,715
And 1.37%-- you were at 1%?

1112
00:55:00,715 --> 00:55:03,320
You were at 5%?

1113
00:55:03,320 --> 00:55:05,510
But 1.7% had their code.

1114
00:55:05,510 --> 00:55:09,850
So 3% were either fully ready
or had their source code.

1115
00:55:12,470 --> 00:55:15,140
So you want to read the white
paper if you're really curious.

1116
00:55:15,140 --> 00:55:18,830
But 76%, you might say how can
you raise money on an idea?

1117
00:55:18,830 --> 00:55:20,710
This is really prefunding.

1118
00:55:20,710 --> 00:55:24,020
And this is even after
the bloom is off the rose.

1119
00:55:24,020 --> 00:55:29,190
This is the third quarter 2018.

1120
00:55:29,190 --> 00:55:32,220
Here's the industries again
for the third quarter--

1121
00:55:32,220 --> 00:55:35,590
exchanges and wallets,
financial services, trading.

1122
00:55:35,590 --> 00:55:43,550
So it's deeply finance, a little
bit health care, and so forth.

1123
00:55:43,550 --> 00:55:44,213
And let's see.

1124
00:55:44,213 --> 00:55:45,880
I think I have one
or two more of these.

1125
00:55:45,880 --> 00:55:47,500
Oh, this is how they've done.

1126
00:55:47,500 --> 00:55:48,800
This is interesting to me.

1127
00:55:48,800 --> 00:55:51,040
This is the returns
in the third quarter.

1128
00:55:51,040 --> 00:55:53,340
Now, I know this is
actually before the sell-off

1129
00:55:53,340 --> 00:55:56,400
for the last week and a half.

1130
00:55:56,400 --> 00:56:00,000
The only sector
that went up is--

1131
00:56:00,000 --> 00:56:02,540
I don't even know
which ICOs these are--

1132
00:56:02,540 --> 00:56:05,710
the marketing and advertising.

1133
00:56:05,710 --> 00:56:07,552
Everything else got clobbered.

1134
00:56:10,790 --> 00:56:13,310
I've been around markets for
a long time, three or four

1135
00:56:13,310 --> 00:56:14,270
decades.

1136
00:56:14,270 --> 00:56:17,990
When you get this type
of return picture,

1137
00:56:17,990 --> 00:56:22,650
there's going to be fewer
ICOs rather than more ICOs,

1138
00:56:22,650 --> 00:56:26,940
because it just keeps cutting
down the investor enthusiasm.

1139
00:56:26,940 --> 00:56:30,380
I don't think it's FOMO anymore.

1140
00:56:30,380 --> 00:56:32,000
What's the opposite of FOMO?

1141
00:56:32,000 --> 00:56:33,347
AUDIENCE: Here.

1142
00:56:33,347 --> 00:56:34,430
GARY GENSLER: What's that?

1143
00:56:38,900 --> 00:56:43,560
So all right, so study
questions for next Tuesday

1144
00:56:43,560 --> 00:56:46,850
is just we're going
to go back to ICOs,

1145
00:56:46,850 --> 00:56:48,740
talk a little bit about
the scams and frauds.

1146
00:56:48,740 --> 00:56:50,948
We're going to talk about
the Securities and Exchange

1147
00:56:50,948 --> 00:56:51,500
Commission.

1148
00:56:51,500 --> 00:56:54,070
We've already talked a lot
about their design feature.

1149
00:56:54,070 --> 00:56:57,800
So it's going to be
like going back to some

1150
00:56:57,800 --> 00:56:59,030
of the regulatory things.

1151
00:56:59,030 --> 00:57:04,080
I'll try to look up on the
Filecoin questions as well.

1152
00:57:04,080 --> 00:57:05,840
We will drop one
more reading in,

1153
00:57:05,840 --> 00:57:07,790
which is just this
quick two-pager

1154
00:57:07,790 --> 00:57:10,030
from the SEC from
last Friday that

1155
00:57:10,030 --> 00:57:12,080
may be worthwhile looking at.

1156
00:57:12,080 --> 00:57:14,300
And this is the
best thing I could

1157
00:57:14,300 --> 00:57:17,570
do to say Happy Thanksgiving.

1158
00:57:17,570 --> 00:57:22,010
I know it's a Bitcoin
turkey, blockchain turkey,

1159
00:57:22,010 --> 00:57:23,120
and the like.

1160
00:57:23,120 --> 00:57:27,350
But I do think it's
an interesting thing.

1161
00:57:27,350 --> 00:57:30,020
ICOs are a new means
of crowdfunding.

1162
00:57:30,020 --> 00:57:32,270
And there's been so many
different ways to raise money

1163
00:57:32,270 --> 00:57:34,340
over centuries.

1164
00:57:34,340 --> 00:57:38,630
This is not equity, it's not
debt, it's something else.

1165
00:57:38,630 --> 00:57:41,300
I don't know how much of
it will last three and five

1166
00:57:41,300 --> 00:57:46,010
years from now, but the
idea that you could pre-fund

1167
00:57:46,010 --> 00:57:49,770
an idea, a deferred
revenue or some sort,

1168
00:57:49,770 --> 00:57:55,040
but it's not your revenue,
is an interesting evolution

1169
00:57:55,040 --> 00:57:57,560
in the markets of finance.

1170
00:57:57,560 --> 00:58:00,350
But I think if you can't assess
the viability of the use case

1171
00:58:00,350 --> 00:58:03,440
and figure out what
really is the benefit

1172
00:58:03,440 --> 00:58:05,170
of the token economics--

1173
00:58:05,170 --> 00:58:08,840
that comes back to, is
there really a benefit

1174
00:58:08,840 --> 00:58:11,390
to having a native
token on a network

1175
00:58:11,390 --> 00:58:16,400
for a good or a service, for
file storage, for ride sharing,

1176
00:58:16,400 --> 00:58:18,460
and so forth?

1177
00:58:18,460 --> 00:58:20,903
And then I think this will
just be looked back-- decades

1178
00:58:20,903 --> 00:58:22,820
from now, people look
back and say, well, that

1179
00:58:22,820 --> 00:58:26,630
was a small, little,
odd thing that happened

1180
00:58:26,630 --> 00:58:29,340
back there in the 2010s.

1181
00:58:29,340 --> 00:58:31,800
But it might be.

1182
00:58:31,800 --> 00:58:34,230
I'm not all the way to zero.

1183
00:58:34,230 --> 00:58:36,150
I think there might
be a reason why

1184
00:58:36,150 --> 00:58:38,850
folks want to have
a native currency,

1185
00:58:38,850 --> 00:58:43,260
a native token to
jumpstart a network

1186
00:58:43,260 --> 00:58:46,800
and to motivate a network
over time, whether it's

1187
00:58:46,800 --> 00:58:52,410
like swords and skins and
shields in a gaming site.

1188
00:58:52,410 --> 00:58:55,410
The majority of ICOs
have failed already.

1189
00:58:55,410 --> 00:58:58,607
And because they keep
failing so fast--

1190
00:58:58,607 --> 00:59:00,190
I don't know-- by
the end of this year

1191
00:59:00,190 --> 00:59:03,150
or certainly by the middle
of next year, over 90% or 95%

1192
00:59:03,150 --> 00:59:08,430
of them will have failed, like
if you take the whole total.

1193
00:59:08,430 --> 00:59:10,490
So it's pretty clear
it's going to come down.

1194
00:59:10,490 --> 00:59:12,240
There's going to be
less and less probably

1195
00:59:12,240 --> 00:59:13,820
in this ICO thing.

1196
00:59:13,820 --> 00:59:16,630
It doesn't mean that
blockchain technology is over.

1197
00:59:16,630 --> 00:59:20,070
It just means that this
wave, I think, will diminish.

1198
00:59:23,020 --> 00:59:25,325
So Happy Thanksgiving.

1199
00:59:25,325 --> 00:59:26,700
Is there a question
before we all

1200
00:59:26,700 --> 00:59:28,997
go to Thanksgiving and
airports and trains?

1201
00:59:28,997 --> 00:59:30,330
AUDIENCE: Just a quick question.

1202
00:59:30,330 --> 00:59:39,382
Does any ICO take ownership of
the company besides [INAUDIBLE]

1203
00:59:39,382 --> 00:59:41,340
GARY GENSLER: So we'll
talk about this Tuesday.

1204
00:59:41,340 --> 00:59:43,710
The question is,
can you ever have

1205
00:59:43,710 --> 00:59:48,190
an ownership right in a token?

1206
00:59:48,190 --> 00:59:50,280
The answer is yes,
you could structure

1207
00:59:50,280 --> 00:59:55,130
it to have voting rights,
governance rights, dividend

1208
00:59:55,130 --> 00:59:55,630
rights.

1209
00:59:55,630 --> 00:59:58,780
There are a handful
that have done that.

1210
00:59:58,780 --> 01:00:02,860
But after the DAO
or DAO issuance,

1211
01:00:02,860 --> 01:00:07,110
which did give some governance
rights and cash flow rights,

1212
01:00:07,110 --> 01:00:11,760
the SEC spoke to that in a paper
one year ago or 15 months ago.

1213
01:00:11,760 --> 01:00:13,110
There's very few of them.

1214
01:00:13,110 --> 01:00:16,350
Most of them are what you would
call either utility tokens

1215
01:00:16,350 --> 01:00:19,080
or service tokens,
where you have a right

1216
01:00:19,080 --> 01:00:21,780
to get a service
or a good usually

1217
01:00:21,780 --> 01:00:24,840
from the rest of that
network, rather than back.

1218
01:00:24,840 --> 01:00:28,720
I'll check on Filecoin, but the
answer is yes you can do it,

1219
01:00:28,720 --> 01:00:30,780
but it's a rare
case that does it.

1220
01:00:30,780 --> 01:00:31,380
So thank you.

1221
01:00:31,380 --> 01:00:32,730
Happy Thanksgiving.

1222
01:00:32,730 --> 01:00:34,590
Thank you for all
being in this class.

1223
01:00:34,590 --> 01:00:36,440
[APPLAUSE]