Keeping track of new developments in the distributed ledger technology space.
Token Economy
#13: Regulatory FUD, Equifax, Anonymous teams, Crypto communities, Valuation frameworks, Bitmain funding & more

(also published on Medium)
🌏 Regulatory FUD
by Yannick.

Well, that escalated quickly in crypto regulatory department!

We are witnessing a domino effect where more governments feel the urge to take a position following the moves of others, as this crypto phenomenon is now too large to ignore.
Some are playing tactically, trying to trade off a heavy-handed approach with allowing innovation to flourish, others are taking more brutal actions.
🇨🇳 China

Following the leak of an internal document and an exclusive report by Caixin that anticipated the official news last weekend, on Monday Sept 4th the PBoC (+6 other govt regulators) issued a joint statement that in short:

  • imposed an immediate ban for all domestic ICOs, referred to as unauthorized illegal fund raising activity; 
  • called on Chinese trading platform to cease offering exchange services between fiat and tokens and market making in token to crypto currency pairs (this is a handy list of exchanges and tokens that will be delisted);
  • urged any persons or organizations who have completed ICOs to refund investors. Some have started refunds already, including Decentraland that is refunding more than $8M to Chinese investors in its recent ICO, making the allocation available to other international investors (will be interesting to watch if they can support such supply).
English translation of the statement can be found here.

Unlike other regulators that so far only expressed general views and guidelines or simply started studying the matter, the PBoC has stepped up and taken real action. Worth reminding that China is not new to this sort of abrupt intervention, having already attempted at stopping bitcoin back in 2013; that caused a 50% drop in BTC price, but clearly made it stronger in the long run.

The feeling across the market as the news unfolded this week was that this looked like a temporary ban, as things in Chinese ICO land were obviously spiralling out of control; effectively a way to pull the plug, let the dust settle and buy time to develop a sensible regulatory sandbox for this new funding mechanism and asset class. Which is precisely what emerged a few days later from Hu Bing of the Chinese Institute of Finance and Banking, who stated in an interview that that China will look to resume ICOs in the future once a regulatory framework has been established.

This was somewhat a relief. There is no going back from here, the crypto genie is well out of the bottle. For one, you can't technically prevent people from issuing tokens. Regulators are obviously worried about money laundering, terrorism financing, protecting investors from scams or generally ensuring that they understand the risks involved, and rightly so, but any attempt to put a halt to innovation by brute force will inevitably lead to:

  1. innovation leaking to other countries, see Naval's tweet (with Yannick's mark up🤘🇪🇺 );
  2. even more innovation, in this case more anonymous currencies, more decentralised exchanges, alternative token distribution mechanisms etc (Stefano elaborates on that further below). 
It's naive to think that China does not realise that.
The markets barely had time to recover the early week's losses that it was panic selling again. This time, in a flurry of fake news and poor translations, rumours spread that the PBoC is planning to shut Bitcoin exchanges down (again...). If true, this would be even more heavy handed as bitcoin was not an ICO. In the joint statement earlier this week the PBoC made a distinction between tokens and crypto-currencies (BTC, ETH), addressing the former. If this is confirmed would address the latter. If it goes like last weekend, we'll know if it's real by Monday.

🇰🇷 South-Korea

This one got overshadowed by the China ban, but given the volumes of trading coming from Korea, it feels important.

A task force comprising of the country’s central bank, financial regulators and digital currency companies gathered on the Sunday prior to the PBoC statement. Plans were drawn toward increased regulations for trading among the country’s domestic exchanges, while also strengthening user authentication procedures at exchanges. A possible banning of ICO platforms was also on the table for violating the Capital Market Act. Earlier in July there were reports that South Korea was working on legalising crypto currencies (BTC and ETH).

🇭🇰 Hong Kong

The day after the PBoC join statement, HK Securities and Futures Commission issued a statement along the lines of that of other regulators, stating how certain tokens issued via ICOs can be securities and therefore any party dealing with them (or selling tokens to individuals based in Hong Kong) would need to be regulated.

🇷🇺 Russia

On Friday, Putin's Finance Minister announced plans to regulate cryptocurrencies like securities.

A significant departure from China's position (and from Russia's original views) and most likely a chess move in the Protocolitics wars:

“The state understands indeed that crypto-currencies are real. There is no sense in banning them, there is a need to regulate them”.

🇮🇲 Isle of Man

On Wednesday, the Isle of Man's Department of Economic Development announced it has created a regulatory framework to allow for token sales compliant with AML and KYC regulations.

The IOM regulator was early in moving towards creating a favourable regulatory environment, starting as early as 2014,  concerned about the prevalence of scams in the space (9/10 they claim).

🏴󠁣󠁡󠁱󠁣󠁿 Quebec

Quebec's regulator for financial institutions took a big step in encouraging compliant crypto projects by accepting Impak Finance and its upcoming ICO into its regulatory sandbox, alleviate some of the requirements and burdens related to issuing a security. This would constitute the first regulated ICO in Canada, in line with guidance issued by CSA on August 24th, and a great example of learning by doing in a controlled environment.

Around the same time, Kik announced the harsh decision of not allowing investors from its home country Canada to participate in the upcoming $125 million ICO. They blamed weak guidance from the Canadian regulator, who views Kin ICO as a security offering, and we suppose didn't want to go through the same sandbox as Impak.

🇺🇸 US

SEC co-director Steven Peikin used some pretty figurative language at a panel at NYU on Tuesday:

"As with any kind of newsworthy event, roaches kind of crawl out of the woodwork and try to scam money off of investors", he said referring to the ICO craze, encouraging regulators to do more to protect mom-and-pop investors against frauds.

SO. As the regulatory landscape for ICOs and tokens continues to undergo strict scrutiny, as it should, entrepreneurs in the trenches will not just sit on the sidelines waiting for the dust to settle. This FUD will lead to even more innovation and experimentation, from the underlying tech to token distribution mechanisms that don't involve the selling of securities (eg. airdrops, bootstrapped minable tokens etc.)
☠ Equifax and the death of centralized financial services
by Stefano.

What. A. Mess.

Mark September 8th, 2017 as the day centralized information gathering died.

It's just impossible to overstate the fuckup of Equifax. Probably the worst leak of user data in the history of the US, with 44% of the population being impacted.

This is a company who's sole and only purpose is to handle extremely sensitive personal information.

And they fucked it up.
So, today, in 2017, we are in a situation where a company you might never have heard of and you aren't a customer of, just leaked your sensitive to some random hackers.

But that wouldn't be enough. Some execs inside the company, also dumped $2M worth of shares in the days after the hack was discovered (end of July) but before it was disclosed to the public.
There also seems to have been quite a lot of funny option trading going on.

The cherry on the cake is that their remedy is to offer 1 year worth of their own in-house credit monitoring / ID protection service. BUT, in order to use it you forfeit your rights to sue them!

They must be fucking kidding us.

The report to read is Krebs on Security's one, which I finally get to link from here :)
And don't bother trying to figure out if your data is exposed, if you enter "Test" and 123456 it says you're affected 🙄.

There's already one class action lawsuit that's demanding $70B. And some self-defined attackers are asking for $2.6M to prevent dumping the data.

Hopefully this is Equifax's death.


What I've been thinking about here is the following: well, who's gonna pay for this shitshow?

Unfortunately the answer is: you!

The only people really paying for this will be credit card users and merchants.

Users: high chance all of our credit card numbers have been leaked. Many people won't be aware / won't check their statements and boom.

Merchants: do you know what happens when you do a credit card transaction reversal? The merchant pays for it, plus a fee, plus the merchandise they lost.

So for Equifax's fuckup, some stores will be hit with massive card fraud and could go out of business.

If this doesn't make the case for decentralized user-controlled self-sovereign data ownership, I don't know what does.

I suddenly want to invest in every half-decent identity and data-control protocol I find.

Muneeb rightly states that on the internet every company that stores data will eventually be hacked, and its data will be leaked.

So the case of asking for better security is moot. The only case we should be making is decentralizing and encrypting the information.

Power to the people. 🌸✌️
🎭 Anonymous crypto projects
by Stefano.

This is something i'm really struggling with, and I'd like to talk about it.
This is like therapy isn't it?

So here we go:
I've been thinking a lot about crypto projects and the need for a public identifiable team.

Bitcoin clearly changed the rules all at once, we still have absolutely no clue who invented it, and I'd guess 99% of the users have no idea who the core team is and how decisions are being made.

Vitalik changed the rules too, by just being a random dude on the internet that no one had really heard about previously and asking for money for a new blockchain.

Today the consensus seems to have shifted more towards the old-school model: you need a solid team of people that have done something before.

But is that really the case?

The question for me stems mostly from Radar Relay.

We wrote about it in previous issues, but quickly: Radar Relay is a decentralized order book relayer built on 0x.

The peculiarity about it is that we have absolutely no idea who's building it.

Their website lists no about or team, there isn't anyone on Twitter or Linkedin, and all of their communication comes from the company profile.

From the Slack we know that a "joe" with no image is a community manager, and that's about it.

The reason that this specific case of anonymous project has been getting in my head, is the absolutely outstanding quality of it.

Which in turns made me understand that: I don't care who's doing it!
I can recognize things of value and quality, and this is one.
I can recognize teams that ship, and this is one.

Radar Relay has launched this week on the Kovan testnet, the app is stunning and  their technical overview is clearly solid.

In this case, based on the quality, I'm betting on an experience SF-based founder with some solid VC backing. But the amazing thing is that it could be a random crypto millionaire in Uganda who hired a team of amazing designers.

Is this how the future will look like? I especially care from an investor perspective here obviously.
Will we just stop caring about real team names and will we just evaluate them behind pseudonyms and thanks to their execution quality?

I think this is a non-remote possibility, and I'm starting to get used to it. This clearly only works for some specific types of projects (eg. if you're running an enterprise sales company, you probably need the CEO and other team members meeting with customers quite often), but for open source infrastructural projects? Should be all good.

The advantages are clear: there is an immediate leveling ground in terms of personal background. We instantly remove all biases based on prejudice and subconscious pattern matching.
Doesn't matter your color race gender physical appearance and maybe even accents and so on.
As long as you ship and write sensible things, it's all good.

I could work with that!

We'll see if more projects will adopt this approach. But here's again to crypto just doing stuff differently and making our brains work so much more than just looking at another saas tool. 🥂

Everyday grateful to be part of this world. 🙏
📌 Token Economy
Despite most slides being out of date the moment they are written, this 115 page deck is the state of the crypto union as of Q2 2017.

If you listen closely, you can hear screenshots getting pasted into crypto fund pitch decks.
A great post from Primoz Kordez on fundamental token analysis.

He's one of the first ones to ask important questions like "what ratio of investors relative to actual consumers should a particular network economy consist of?" albeit with no answer.

But Primoz makes some new and great points.

"I believe there should be more focus on analyzing network output rather than on market/network capitalization. As shown, capitalization of a network doesn’t actually tell you much. When we compare economies we usually compare capabilities to produce, not how much economy “costs to acquire”. We don’t measure market capitalization of euro."

So much more thinking is needed here, and it's great to start seeing someone do it. I promise I'll try to finish my medium drafts about this too.

BONUS: On this topic, Lou Kerner from Flight Ventures organised a conference call with Chris Burniske, Ari Paul, Ryan Selkis and Stephen McKeon each bringing their perspective to valuing cryptocurrency. The recording and the slides can be found in Lou's summary blog post "The 7 Things You Need To Know From The Valuing Cryptocurrency Conference call".
Vitalik has started drafting three different whitepapers explaining Casper (Ethereum's PoS model).

1. Casper the Friendly Finality Gadget - basics
2. Incentives in Casper the Friendly Finality Gadget - how to handle deposits (stakes) and when to forfeit them
3. Automated Censorship Attackas Rejection - dealing with 51% attacks.
Ben Tossell, who was at Product Hunt till recently, explored the topic of Crypto-Community.

His main aspects to consider are:

  1. How can this team create and develop the inner-community
  2. How does the outside world view this team, company, cryptoasset

After having been on many different Slack's and other "community tools" for a while, I've actually formed a much different and probably very contrarian belief: it's better to not do any of that!

Building stuff is hard!
As an early stage team building product, you most certainly don't have time to spend on Slack all day long to talk to random strangers! Specifically if those strangers are speculators that don't understand/care what you want to build (99% of the time if you've ever been in a crypto-project-specific Slack).

To me, having a Slack where there is meaningful activity from the founders who are answering questions about the token, the sale, etc. etc. is actually a negative signal. It means that the founders care more about the token rather than the product itself.

Now, when you generalize you obviously miss a few of the good cases, and I feel there are a very select few Slacks where the team only focuses on the product.

But even then, it feels like Slack or similar tools are just the worst possible choice. They bump up the noise to the max, while adding very little signal.

It's ok to be outspoken, community-oriented and all, but that doesn't mean you have to hang out if 20k+ppl groups.
You can achieve that engaging with all the right people on Twitter and answering to all the right questions on Reddit (like Vitalik does for example).

If all the top cryptocurrencies don't have an official community tool to "engage" with everyone and yet be the most valuable, I think everyone else can do it too.

I'm really sorry if I always have to be the out-of-choir voice, I promise that I try to think like everyone else but just fail at it. - SB

OpenBazaar leader Brian Hoffman delivers a heartfelt post about how hard it has been to build OB1 to this day, and what the future holds.

I think this is a piece to read for all of the mega-ICO founders, which still have to build it all.

Ooook, so we now have finally some clarity.

It looks like the amount raised in the pre-sale is included in the amount Filecoin is displaying on their website.

Protocol labs has filed two Form D's with the SEC. One for the presale and one for the public ICO. This latter one amounts to $148M, while the first one was $51M. So there we go.

Total Filecoin ICO is ~$200M.

Remember Estcoin? Well, turns out it might not be happening after all. 
"No member state can introduce its own currency. The currency of the euro zone is the euro."

Fair enough.
This is interesting, as I think we've all been waiting for something like this.

0x plans on building a sort of mashup between Etherscan and MEW, together with some OTC or other 0x-enabled exchange mechanism.
This isn't fun summer reading material.

Researches explore how smart contracts, or better phrased Criminal Smart Contracts, could be used to enable many more criminal activities (on top of "standard' BTC ransomware).
Big deal. Fortune is launching a whole new publication / area of its main site covering all things blockchain. They're throwing in fintech in there too, which is a bit meh.
🚨 Growing pains

So apparently IOTA rolled their own crypto hash function, and fucked up.

Researchers were able to find collisions very easily. The problem has been fixed but the post is a must read for anyone in the space.

We need to be thinking more about security now that we're building in public, and it's insane that no-one had thoroughly evaluated IOTA's code, a project that almost reached a $3B market cap. 
Ripple apparently gave an option to R3 to buy XRP at a specific price until 2019, which would net R3 around $1B at current XRP prices!
What an amazing deal.

BUT, Ripple isn't giving any options to R3 because it thinks they didn't deliver on their end of the bargain.

So now they're both suing each other. Fun times!
🤡 ICO madness
This company just raised $25M and I still have no idea what it does.

“We help implement token/blockchain tech to businesses in a way that businesses can add value to the tokens they issue,” CEO Takao Asayama told TechCrunch. “We will be a catalyst or I would say a conduit between the decentralized public blockchain world and the centralized, legit and working businesses.”

From the little I understand, it seems to be a clone of Coinlist, with the whole range of consulting services on top.

"The scope of ICO work will span developing the initial white paper (similar to a pre-IPO prospectus), to technical integrations, managing the sale process and even community management and marketing."

This is basically screaming: "hey, come here and do an ICO regardless of your need for a cryptographic token. We'll do everything for you"

And the first ICO on the site is.. you guessed it, theirs. Quite meta.
They want to raise $50M before anything has been developed. Obviously. 

Things like these are in my view the ones that are gonna go down in flames.

If only I could long-term short stuff like this.
😤 First they ignore you, then they laugh at you, then...
He ignored it for a while, then in his last memo he laughed at it calling it "not real". In his most recent one he claimed to have a better understand of it (which seems to be the case from his write up), yet not feeling like putting my money into it due to it being a "speculative bubble"

We give it another couple of memos before Howie drops a fresh few 100 mills into crypto.
🤑 VC corner
Rumours are that Bitmain has raised $50 million in funding from the likes of Sequoia, IDG and other unnamed investors.

Bitmain runs the largest bitcoin mining pool (Antpool and, with over 25% of the hashrate combined, and manufactures and sells its own mining hardware (with a market share in excess of 70%). Photos of its mining operations in Mongolia are mesmerizing.
It's a fully vertically integrated, highly profitable miner with little competition.  One article estimates that Bitmain will make around $250-300M in profits this year, and that was when BTC was at $1200! So you can probably make that closer to a $1B, no wonder Sequoia got in.

This funding is interesting in many ways:

- it happened in the same week as the Chinese ICO ban. "Bitcoin is still legal in China. But ICO is illegal now", although this could change rapidly given the most recent rumours;
- Its polarizing cofounder Jihan Wu has been an active proponent of increased block size (Bitcoin Unlimited was his earlier proposal, now he's backed Segwit2x) and has been thought to be the main man behind the recent fork. This institutional backing could be read as a legitimization of Bitcoin Cash;
- Part of Sequoia's investment thesis no doubt revolves around AI and Bitmain new plans for a deep learning chip called Sophon, which would allow any company to train its own neural nets by buying the chip or renting computational power from Bitmain's datacenters. This could put Bitmain in the same league as Nvidia, AMD and Google's Deepmind;
- Exchanges and miners seem to be the type of businesses old school VCs are most comfortable with, no doubt for their ability to generate revenues and insane margins. In a couple of years we could have Coinbase and Bitmain both listed on the stock market;
- Speaking of limited competition, the same week GMO Internet Group announced a $300 million investment in bitcoin mining. More on that here below.
One article estimates that Bitmain will make around $250-300M in profits this year, and that was when BTC was at $1200! So you can probably make that closer to a $1B, no wonder Sequoia got in.

So obviously whenever you see that kind of profit and margins, competitors will show up. 
The first one to publicly come out is GMO Internet Group, based in Tokyo, which normally does incredibly boring things like registering domain names and hosting web services.

They will invest 10% of their non-current assets into basically cloning Bitmain by creating a completely new mining chip with 7nm nodes to reduce consumption by a wide margin, creating a huge new mining facility (in Northern Europe 🤘🇪🇺) and also renting the facility out.

I always thought that mining was a losing game because you'd have to always constantly invest just to keep up with the competition, but this goes to show that if you do develop your own specific hardware, the margins are insane.

And if GMO is able to do what they want, everyone else will have to put down a lot of money if they want to continue being in the game.

Consensys has been one of the main driving forces behind the development of Ethereum and decentralized projects, and is now putting a more formalized structure around its external investment activities.

The new $50M Consensys Ventures will be headed by Kavita Gupta, which believes blockchain technology to be central to solving all of UN's global issues.

Here's to hoping she's right! 🤞

Our friend Brayton at Boost is looking for companies building the infrastructure for the token mania.

Specifically looking at project solving:

We're happy to introduce you :)
😯 Crypto deviations
Nice article about the return of the city-state.

Good tangential theme to cryptocurrency to get interested in.
ℹ️ About us
Token Economy is written and curated by Stefano Bernardi and Yannick Roux.

If you're building a new fundamental piece of technology for the future, please reach out 🤙
Please send links to include in the next issue, or any comments you might have on this one!
Token Economy · The Dolomites · 38121 Trento TN · Italy
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