In repy to: http://decentralizedlegal.com/crowdsales/ether-is-a-security

Chris,

This is a nicely written article but in my view involves misrepresentations and omissions regularly used by securities lawyers who argue crypto falls into their line of business — notwithstanding that these types of arguments might very well succeed in misleading and agitating the SEC so they take action against those involved in open protocols. In fact, the growing clamor among securities lawyers in the US for open protocol tokens to be classed as securities gives crypto industry people good reason to consider using Reg S and blocking the US wherever possible even though there should be no need!!!

Of course, this kind of thing is not in the national interest of the US. In the crypto sector Silicon Valley is in danger of losing its leading position — the Ethereum team based themselves in Europe for good reason — and in the future its residents may be blocked from early participation in open protocol projects too. I have spoken to people at the SEC and I do not believe they want to damage the sector, notwithstanding that most egregious scams aren’t actually open protocols and so securities law does in fact apply to the people behind them.

Let’s discuss what the misrepresentations are. Firstly, let me be clear I’m talking about the bootstrapping of networks (protocol instances) by (i) creating a not-for-profit foundation to promote a decentralized protocol described in a paper, which must necessarily mediate participation using tokens such as “ether” (ii) accepting donations for the foundation and reusing them for the purpose of promoting the protocol, including by developing software that enables its use, and (iii) when the technology is sufficiently advanced the foundation recommending the community launch a network/protocol instance using a genesis block that makes initial allocations of participation tokens in proportions that reflect early contributions and donations. When I talk about a protocol I mean something akin to morse code that is run between client computers. There are no controlling servers.

“Issuance”…

You regularly talk about securities issuers, and here you see the Ethereum Foundation in that role. But notice that it is not within the power of a foundation to issue anything at all. It can recommend that some community starts a network instance from some genesis block, which includes initial allocation of participation tokens, and that’s all. The community — or some community — can use the protocol and supporting software to create any network they like (and they do!). In the case of Ethereum, a large and geographically diverse community of miners adopted the Ethereum Foundation’s recommendation for a genesis block and used it to bootstrap a decentralized network instance creating the participation tokens (“ether”) at that very moment. These tokens did not exist before and were created by an independent community spontaneously choosing to adopt a recommendation. This surely is manifestly different to the Ethereum Foundation “issuing” securities. Please can you show me case law where securities have been issued by a similar recommendation that has no force and is made to independent parties.

“Securities”…

You like to talk about Ether tokens as though they are securities. But securities grant some kind of legal right or financial interest in a common enterprise. This is manifestly not the case. A stateful decentralized protocol run between client computers over the Internet does not grant or involve legals rights. You choose to talk the protocol. It is a sequence of communication steps. No guarantees that the protocol instance will persist are given, and if it vanishes, any tokens you have, which are simply facets of a running network/protocol instance, will disappear completely. A foundation cannot issue (or create) tokens, nullify tokens, provide rewards to token holders or anything else. The network is in fact completely independent of the foundation and only a manifestation of community action— as demonstrated by the recent ETC split. This means that the tokens exist purely by merit of independent parties running the protocol over the Internet and no individual, organization or cartel is behind them. While they exist the tokens are basically commodity-like. Please can you show me case law where securities involve no legally defined financial interests, and have no hooks into backing organization(s) or assets.

nb. for those of you that are interested I wrote my views here.

Thank you.

Best, Dominic