Sunday, July 30, 2017

On Crypto-currencies, the S.E.C., Howard Marks and more

  • Last week, the U.S. Securities and Exchange Commission said it “is aware that virtual organizations and associated individuals and entities increasingly are using distributed ledger technology to offer and sell instruments such as DAO Tokens to raise capital. These offers and sales have been referred to, among other things, as “Initial Coin Offerings” or “Token Sales.” … 
  • "Those who offer and sell securities in the United States must comply with the federal securities laws, including the requirement to register with the Commission or to qualify for an exemption from the registration requirements of the federal securities laws. The registration requirements are designed to provide investors with procedural protections and material information necessary to make informed investment decisions. These requirements apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology… 
  • "Distributed ledger and other emerging technologies have the potential to influence and improve the capital markets and the financial services industry. Interest in and funding for these technologies appears to be growing at a rapid pace. We welcome and encourage the appropriate use of technology to facilitate capital formation and provide investors with new investment opportunities. We are particularly hopeful that innovation in this area will facilitate fair and efficient capital raisings for small businesses. We are also mindful of our obligation to protect investors and recognize that new technologies can offer opportunities for misconduct and abuse."
  • Separately, Howard Marks (manager of $99 billion in assets at Oaktree Capital) said, “it is my firm view that the ability of these [digital currencies] to gain acceptance is just one more proof of the prevalence today of financial naiveté, willing risk-taking and wishful thinking … 
  • "In my view, digital currencies are nothing but an unfounded fad (or perhaps even a pyramid scheme), based on a willingness to ascribe value to something that has little or none beyond what people will pay for it. But this isn’t the first time. The same description can be applied to the Tulip mania that peaked in 1637, the South Sea Bubble (1720) and the Internet Bubble (1999-2000)."

  • It is likely that some (perhaps many) organizations currently pursuing an Initial Coin Offering (ICO) strategy will need to comply with SEC regulations if their tokens are sold and/or purchased within the U.S.
  • While still at an early stage of their evolutiondigital/virtual/crypto currencies along with distributed ledger and “smart contract” technology represent the next stage in how we purchase and exchange products and services.
  • However, long-term success will require 1) executing transactions in a secure and timely fashion, 2) providing services that are easy to use and access, 3) adapting to a growing community of users, 4) addressing the challenges of cyber-crime, 5) complying with various laws and regulations and 6) confronting competition from incumbent financial players as well as payment service introductions by firms such as AlibabaAmazonAppleGoogleFacebookPayPalSquareTencent and others.
  • Regarding Howard Mark’s comments – His concerns about  “financial naiveté, willing risk-taking and wishful thinking” in today's market seem valid.


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