TL;DR: Yesterday, the Securities and Exchange Commission (SEC) announced its settlement with Block.one for $24 million. The company was accused of “conducting an unregistered initial coin offering of digital tokens (ICO) that raised the equivalent of several billion dollars over approximately one year,” 2017-2018. No fraud was alleged. The only potential crime was not cutting the SEC ‘in’ on the EOS project fundraiser. It’s time to call out regulators for what they’ve become: mafia thugs.
Block.one Settled With SEC Mafia, and it’s Bad News
A day later, Block.one confirmed it had indeed “reached a civil settlement with the U.S. Securities and Exchange Commission (the ‘SEC’) in connection with the company’s sale of an ERC-20 token between June 26, 2017 and June 1, 2018. Under the settlement, Block.one will pay a one-time fine of US$24 million, whilst neither admitting nor denying the SEC’s findings.” Most responses to the penalty were ones of outrage directed at the SEC for issuing so small a fine compared to the billions raised by the Block.one initial coin offering (ICO).
Because the company is so closely associated with the cryptocurrency EOS, many pundits signaled this to be a reprimand of the EOS concept itself, piling-on about the SEC’s penalty as further proof the project is a scam. However, EOS didn’t exist at the time of the supposed violation, and as Block.one explains, “The settlement relates specifically to the ERC-20 token sold on the Ethereum blockchain during the aforementioned period, which is no longer in circulation or traded, and will not require the token to be registered as a security with the SEC. The settlement resolves all ongoing matters between Block.one and the SEC.”
Furthermore, around summer of 2017, the US regulatory guidelines for ICOs were hardly clear, and they’re certainly not clearer in the present day either. The SEC hints at this subtle truth in their chest-beating press release, “Block.one’s offer and sale of 900 million tokens began shortly before the SEC released the DAO Report of Investigation and continued for nearly a year after the report’s publication, eventually raising several billion dollars worth of digital assets globally, including a portion from US investors.”
You catch that? Their silly Report, which is the supposed guide to such matters, was issued after Block.one launched the very ICO in question. That bit of information is tucked deep in the press statement, buried within a sentence bent on leading readers to phrases like ‘billion dollars,’ surely intending a skewing of perspectives.
So what exactly happened? Block.one and EOS have made a lot of enemies, haters. They took the ICO idea to unmatched heights, and established a worldwide company spread from Virginia to Hong Kong. And EOS is an uber-technical iteration on the blockchain and cryptocurrency idea. They’re experimenting in a number of areas, governance issues to online gambling dApps. My guess is projects not nearly as successful ran to the SEC and implored it to act, to do something to stop such freedom from daring to take place. It’s more than a guess, actually, but I’ll discuss that later.
Just to get this out there, I am not a fan of EOS, have never owned the coin, and haven’t used any of Block.one’s products. But that’s not the point. Again, all that company did was innovate on the financing side without permission, without official sanction. A bunch of people participated, many of them probably first-time investors shut out of legacy finance. Far from being a problem of free markets or too little regulation, it was regulators getting caught unawares as usual, asleep (as usual) at their charge of at least in being up-to-date on industry trends. They’re trying to catch up, save face (as usual) in the barrage of headlines screaming about a multiple-billions dollar ICO happening under their noses, and projects like Block.one have to pony up $24 million in the process. Where do think that money goes? Back to the poor? College scholarships? Please.
Lawyers Love This Case
ICOs were a partial answer to the scourge of lawyered-up initial public offerings (IPOs), which are so convoluted, so friction-filled in the US hardly any company looks to them anymore — and a lot are skipping traditional filings altogether, leapfrogging into straight listings as a result. No wonder IPOs are down historically. They’re too expensive, crowding the average investor or smaller businesses completely out.
That’s of course by design. And that’s what worries me most about the Block.one affair. It looks ever-more like we’re back to begging government bureaucrats for scraps, back to standing hat-in-hand, hoping they’ll say we’re good boys and girls. The ecosystem has become as much about lawsuits and compliance as it is now about technological advancement and electronic cash.
Attorney Stephen Palley put it exactly right, “It’s a signal to market participants that they will have a better chance of surviving if they approach the SEC and work out a deal than if they kick shins and fight a legal fight,” and he juxtaposed the plights of Block.one when compared to Kik’s notorious battle. Palley’s point is that enthusiasts are probably going to need their own consiglieres to navigate these new, very active mafia waters (my characterization), their own Tom Hagen. Deal with mafiosos now, pay tribute, or maybe end up at the bottom of a lake with cement shoes. Gabish? Here’s $24 million, parasites, now go shine your shoebox.
Hate on EOS all you’d like, down its tech, find its team or associates creepy. But let’s stop with the rush to become useful idiots for regulators, yes? All it does is further empower middlepersons, walls, laws, cops, courts, judges, and bureaucrats. My colleague at CoinSpice, Linzerd, pointed out how Cardano’s (ADA) Charles Hoskinson basically waved a reg flag at the end of last year, hoping and praying the SEC would hunt Block.one. Read the takeaways. It’s eerie how close it comes to what eventually transpired. I don’t like this turn in the cryptocurrency world. In fact, I hate it. I want the open-source days back. I want cooperation, the Code is Law ethos working its way through the ecosystem’s veins again. This bitching and moaning and running to big daddy government will not end well, and it goes against the very creation of our brave new industry … which would have never happened if we asked for the SEC’s blessing.
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