On November 16th, the SEC announced the settlement of enforcement actions against Paragon Coin and Airfox (CarrierEQ Inc.), two companies that had held lucrative ICO token sales last year; fines of $250,000 were imposed on each firm, and both were required to offer refunds to token buyers, and to register their tokens as securities.
In order to learn how these developments might affect our own plans to experiment with cryptoeconomics at Popula, I spoke with Ethereum co-founder Joe Lubin at his offices at ConsenSys, the company he started in 2014. He is a well-built man in his early fifties with a calm, centered gaze. Shaved head, black t-shirt and jeans… aims to redesign the internet. Among the dozens of blockchain projects he has funded is Civil, the media company that made us the grant to found this publication; I could scarcely be less disinterested an interviewer. Popula is a proving ground for the idea I’ve been obsessed with for many years, that blockchain technology can help guarantee press freedom and speech rights.
But the headwinds so far have been pretty strong. Regulatory uncertainties have caused us significant difficulties, and as of yet we haven’t been able to launch our cryptoeconomy. The recent Civil token launch failed, largely because it was so difficult for people to participate—owing, again, to an abundance of regulatory caution, as we discuss below. (Plans are underway to create a new, simpler distribution system for CVL tokens.)
Last June, the SEC declared that Ethereum itself was not a security. With that, the government cleared the way for certain blockchain projects to move forward, but not all of them. The question we’re all facing has been: How can we make sure we are following the rules, when they haven’t yet been written? The answer is now growing clear.
Maria Bustillos: How do you feel about the regulatory climate in the wake of the recent SEC enforcement actions? From where we sit I just want Popula to have the token on the site as soon as possible, safely, so that readers can use it to do microtipping and stuff.
Joe Lubin: That’s no problem! That’s not a problem.
So the SEC has been really clear about a bunch of things. Chairman Jay Clayton said, nobody’s going to be grandfathered; we’re going to apply the securities laws that we have for decades, it seems to work well; the United States has the best investor climate in the world.
We’ve had various conversations with regulators around the world, and we feel the SEC understands what’s going on, with a pretty deep awareness of details. They haven’t taken a hands-off approach, but they’ve been taking a healthy approach. Where they’ve identified fraud they’ve gone after it, or they’ve stopped things that didn’t look so good, and I think they’re sort of making their way up the stack, to things that are just not paying proper attention to securities law—not registering, not taking advantage of certain exemptions.
Bill Hinman, the director of the SEC’s Division of Corporation Finance, on at least two occasions, has stated publicly that if you construct a token properly, if you market it properly—you don’t market it in large quantities to speculator types, you market it to people who are actually going to use it, either because they say they are going to use it,or they are constrained to use it before it’s tradable on a market—that’s going to be fine. There’s lots of examples in the world of things like that, that aren’t securities.
You won’t have trouble unless I’m buying your token in the belief that there’s going to be a return on my investment that you’re directly responsible for.
We have the utility, and we can demonstrate that people are going to use this token, something that accomplishes useful things that you can’t do with fiat. We’ve been very clear about that. But when I read about the Paragon enforcement action, the language is somewhat vague as to what constitutes a promise of appreciation. So that is where my concern is. [When we say that something is “useful,” are we also saying that it is “valuable”?]
I also don’t believe the SEC is going to go out of their way to attack good projects. I think you’re going to have to really explicitly flout the laws.
One of the big complaints I hear is that there’s been this promise of a consumer token that has not yet materialized. And you know…
That’s largely correct. I mean… Ether is a consumer token.
So, Bitcoin’s a money.
I think of it differently from a consumer utility token. The Ether token has utility, because you can put it in the slot of the Ethereum machine, and run programs and store data. So it’s different from what I would consider to be cryptocurrencies.
Ether could be a programmable cryptocurrency, if it’s used in that way… It’s a better cryptocurrency than Bitcoin because it’s so much more programmable, it takes so much less time to confirm and it’s way less expensive.
[In time we got onto the question of the token curated registry (TCR), a system for creating trusted networks and lists; many Ethereum projects, including Civil, are developing systems like these.]
It’s going to take a while for us to figure out the user interface and user experience; we just have to find a niche where there are enough people who are actively engaged.
There’s one called Coven which is just coming live, it’s a platform for open venture capitalism. A prospector can scour the world and find projects to stake on the network, and then lots of experts can come along and diligence that project, and then investors—it can be a very wide variety of investor types… The beauty of it is that you can get such a wide array of diligencers, they can get actual equity, sweat equity into projects, and so you don’t need money in order to get some stakes in these projects, and the investors will probably see a lot more projects. So they can diversify their portfolios, and you can potentially have companies with a much more diversified investor base and so, a bigger network.
I have seen so many attempts to alter the way venture capital can be raised. During the Obama years there was an attempt to create crowdfunding systems for raising capital and it was totally watered down, by the end. How do you feel about the relationship between these projects that you’re doing, and… is there a lot of pushback from the banks?
It’s not pushback. Where there’s awareness, there isn’t a huge amount of concern yet. So… I think venture capitalists are aware that nearly $20 billion went into the blockchain ecosystem… that’s pretty big.
So they’re aware that things are changing. But I think they will just largely just reposition themselves to make use of the technology. Our platform is one good way to do that. Raising funds, whether for investment or sort of as revenue, pre-revenue, has been immature in the blockchain space. We had this notion on the Ethereum project that we’d only really ever get one shot at it, it was really one and done, so we had to get it right.
An exciting moment.
Yeah. So that was great, and it worked really well for that particular project. But it also set an unfortunate example—maybe that was true of the Ethereum project, that we couldn’t do a bunch of rounds, but then so many other projects felt hey, we have to do everything, go big as possible right now, because we’re not going to get a second chance.
When there’s just so much know-how and technology in the venture capital space—by technology, meaning sort of legal technology, and how to structure these things—it makes sense to put some money into a project, and validate it, and put some more money into a project and validate it at the next step. So we need to apply all that learning from the VC space on these new, better trust foundation platforms. They have a lot to bring.
Also—it’s going to be a lot less siloed, it’s going to be more democratic, more participatory. Some of our friends from the SEC are acutely aware that certain people who are basically shut out of investing in good projects shouldn’t be shut out. Whether there’s this notion of a technically accredited investor who can demonstrate that they know the base technology, they know the details of this project, which is what we were trying to construct with the Civil 44-step token launch, the overly rigorous system that we designed, and so we sort of intentionally went too far, because we were having those discussions with regulators.
So we need to pull that back a little bit, but still preserve this notion, that these new kinds of platforms—you should be able to get into them, participate in them and create more value for yourself and others in them—but it’s not a security.
And yet that’s the very thing you can’t say.
Yeah you have to be careful of the language, unfortunately, right now, because how you market it influences how they perceive it. It would be great if I didn’t have to worry about saying the word, “investment.” I should be able to make an investment in a consumer utility token, and I’m investing my time, and my energy and my attention too.
Yeah! You’re concerned in it.
I can invest in barrels of oil or wheat or something like that, and none of those are securities.
When you say even that you’ve invested in a friendship, you’re getting something back, right, you’re talking about the return of something you value, and that’s how we should be able to talk about this—how I’d like to talk about it—and yet it creates problems.
The languaging around token launches will probably liberalize; I think we’ll probably be able to use the i-word at some point soon without being incarcerated.
Okay. So, please tell me about some promising consumer token projects that people might be using, in the next year. [Aside from CVL!]
Most of the activity is in the gaming space, so it’s with non-fungible tokens. It’s digitally scarce swords, or skins basically, other kinds of elements—are you familiar with that space at all?
There are games coming online or are already online, on Ethereum, that are making use of Layer 2 technologies, either state channels or sidechains technology… Say you’ve got one blockchain system for your game… and you’ve got another one for an exchange, so different applications, and they basically checkpoint their state to the base one trust layer—Ethereum—and so they can go much faster. In SF we just ran our Tachyon Accelerator, and one of the sixteen awesome teams that was in it built one of these Plasma systems for an exchange, and they were getting 65,000 transactions per second.
And that’s going on, that’s live.
So if I’m on Steam, and one of these games becomes available, would I just have a MetaMask account that would interface with the game?
I think they have an in-game wallet for you. But because it’s on Ethereum, because lots of standards are on Ethereum, standards for fungible and non-fungible tokens—evolving standards, beyond ERC-20—so if you point your wallet to it, your wallet will be able to understand it.
Do we have the name of a game I can tell people to look out for?
So I can play these now?
They’re in betas.
I can tell people to look out for these, like next year?
[Not many days ago I had the opportunity to test Civil’s archiving system, whereby publishers on the network will be able to preserve their work on the Ethereum blockchain, without fear of tampering or erasure. This—ah. Well.]
Oh, I have to tell you. You know, I got a chance to test the archiving thing. It was a very moving—
Ohhhh, you don’t even know. It’s been so many years since I first thought about this. And just… it’s gonna happen.
Yeah. It’s happening!
Are you aware of the Sojourn project? One of our teams based in Raleigh-Durham… basically it’s a notebook for reporters, but also some of the other niches, where you can type your notes and have them instantly encrypted and put on the blockchain so that they are uncensorable, and you can release encryption keys so that you can prove, at some point in the future, that hey, I knew this then, or this was mine, at some point. Essentially it protects journalists like in certain contexts.
The stuff we’re seeing right now; I mean. This cannot come a minute too soon.
I know. I was just in Hong Kong, and the mood’s changed…There are people I’ve spoken to who are very sad for their child’s future, because of the inevitable political transformation. I was at a New York Times event, and the station chief and others are not getting their normal work visas, they’re getting very abbreviated visas, and everyone’s just…
And then what happened in Turkey; it’s just insane.
Well… Things can turn on a dime. It never occurred to me that there was the remotest chance that the Berlin Wall would fall in my lifetime. I grew up thinking that was impossible…
So I am hopeful. If you look at it from the point of view of strengthening the relationship between journalists and readers, and publishers, all in a pool benefiting each other, you know, where our interests are aligned. Then you can really create a sustainable, ad-free experience, I think.