The Fall of Juicero and ICO Fever
I spent some time over the long weekend thinking about how I will one day explain Juicero Inc., 2017's great metaphysical phenomenon, to my grandchildren. "You see," I will probably begin, "it was a $400 machine that squeezed juice out of bags of produce that were connected to the blockchain." But wait! That's wrong! It seems like it would be, but actually Juicero is not on the blockchain, which may be why it said on Friday that "it will suspend sales, offer refunds to customers and search for a buyer for the company."
A Wi-Fi-enabled, internet-of-things-connected, QR-code-reading $400 machine to squeeze bags of vegetables now strikes everyone as faintly ridiculous, especially after Bloomberg News discovered that your hands could squeeze the bags of vegetables just as well as the machine could. But in Juicero's glory days, last year, things were different. "It’s the most complicated business that I’ve ever funded," said a Google Ventures partner, one assumes admiringly, about a business that after all consisted of chopping vegetables, putting them in a bag, and then squeezing the bag. It's not not complicated! Your hands are miraculous contraptions, honed by millions of years of evolution into perfect devices for squeezing bags of vegetables, and I guess the juicer is nice too.
But why make squeezing vegetables so complicated? Why does your blender have to be connected to the internet? Why do your vegetables have to have a QR code?
A deep aim of Silicon Valley is to find some abstract, legible, tractable, controllable representation of the real world, and then to substitute that abstract representation for the real thing. Facebook Inc. is of course the great paradigm here: It started out by mapping your offline friendships, and ended up replacing them. But it is not alone: The appeal of the "internet of things" -- Wi-Fi-connected thermostats and toasters and juicers -- is that, if you understand and control the internet, you can understand and control the things. You build an abstract layer of code over messy reality, and then you throw away the reality and focus on the code. If your focus gets too myopic, you might forget that people still have hands, and can squeeze your juice bags without connecting to Wi-Fi at all.
Some of this is standard corporate-bureaucratic stuff, and some of it is an unsurprising effect of giving a lot of money and power to a homogenous clique of young computer engineers. Some of it is sort of science-fictional: You can see how Silicon Valley would develop an obsession with the "simulation hypothesis," the idea that our reality is just a simulation being played out on some vast computer, given that so much of Silicon Valley's day job consists precisely of trying to replace reality with computers.
But some of it is also magical. It affirms that your things -- your food, your house, your blender -- don't just exist in this dull sublunary physical world, that they share a numinous connection to the spirit world, that they are imbued with magic, mana, life force. But what that life force is keeps changing. There was a time when the way to give vegetables a connection to a higher power was by slapping a QR code on them. Now you need to put them on the blockchain. A blockchain-enabled juicer would probably still be making a go of it.
Ugh honestly China has the right idea:
Bitcoin tumbled the most since July after China’s central bank said initial coin offerings are illegal and asked all related fundraising activity to be halted immediately, issuing the strongest regulatory challenge so far to the burgeoning market for digital token sales.
The People’s Bank of China said on its website Monday that it had completed investigations into ICOs, and will strictly punish offerings in the future while penalizing legal violations in ones already completed. The regulator said that those who have already raised money must provide refunds, though it didn’t specify how the money would be paid back to investors.
There is no analysis of whether an ICO token is a "security" or just a "utility token," no parsing of multi-part tests, no analyses of disclosure obligations or investor accreditation. It is just: Enough, stop it with the ICOs. Really the only way to improve on this outcome would be to also strictly punish talking about ICOs.
But here in America I guess we have a constitutional obligation to keep talking about ICOs forever? There is ... just ... so much. Here's one for "Synthetic Rhino Horn Aphrodisiac, Tokenized on the Ethereum blockchain." Here's one that's being touted by teen-trader-Trumpist-YouTuber Jacob Wohl ("Although blockchain has been implemented by many industries, payment processors have virtually ignored the technology"). Here's one that apparently plagiarized its white paper. Here's a story about a guy who "was fooled by a scammer posing as a TokenCard representative in an online messaging forum" and sent $20,000 to the scammer rather than to the company whose ICO he wanted to buy, though, in the long run, should he care?
Here's one called LydianCoin (good name!), "The First A.I. Big Data Marketing Cloud for Blockchain," which is being touted by Paris Hilton, and that is not even close to being the silliest thing about it. That would be the three-minute promo video, which is just a sequence of motivational clichés set to pulsing music, with no logical connection to each other or to an AI big data marketing cloud. "That's the big secret of life: You fall down, you get up," is I guess as good a reason to buy into an ICO as anything else.
Here is Balaji Srinivasan:
By say 2025-2030 I expect that there will be multiple jurisdictions that allow the tokenization of virtually any scarce resource, all the way down to personal tokens. That is, like Upstart.com, you may eventually be able to take a stake in an individual's tokens, giving them a lump sum of digital currency today in exchange for a smart-contract-enforced percentage of their future earnings.
I would bet a large smart-contract-enforced percentage of my future earnings against an equivalent percentage of Srinivasan's that that won't happen, but here I want to stress what an old and dull idea this is. "People should be able to sell equity in themselves" is a perennial Finance 101 dorm-room musing -- as I've mentioned before, I wrote a paper about it in law school -- that has been tried repeatedly and never really gone anywhere, because (1) no one wants to sell equity in themselves and (2) no one wants to buy it. The obstacles are not technological but human, but people are going to keep trying to solve them with new technologies until human nature finally changes. You won't sell equity in yourself for dollars, but for ether, sure, knock yourself out. Cryptocurrency will give every dubious financial idea a second act: It didn't work before, but what if we tokenized it?
Oh and here is Robert Shiller calling bitcoin a bubble, and an "idea epidemic":
I’m arguing that there’s a fundamental deep angst of our digitization and computers, that people wonder what their place is in this new world. What’s it going to be like in 10, 20, or 30 years, and will I have a job? Will I have anything?
Somehow bitcoin fits into that and it gives a sense of empowerment: I understand what’s happening! I can speculate and I can be rich from understanding this! That kind of is a solution to the fundamental angst.
And here is Preston Byrne's "Bear Case for Crypto."
We have talked before about Merrill Lynch's "leveraged conversion" trades, in which it loaned money to a customer, the customer used the money to buy stock from Merrill, and the customer then sold the stock right back to Merrill. The mechanics of the trade were more complicated than that, but not by much; the basic idea was that there'd be a flurry of trades that would leave everyone in the same place where they had started. Except for one thing! The flurry of trades would allow Merrill to tell the Securities and Exchange Commission that the customer owed it money, which allowed it to reduce the amount of money it needed to set aside for customer protection under SEC Rule 15c3-3, freeing up that money to be used for other, more profitable purposes.
You are not supposed to do this sort of thing, though it can be a little tricky figuring out why you're not supposed to do it. After all, you can lend a customer money, you can sell stock to the customer, you can buy it back, and you can even delay settlement on the repurchase so that technically your risk-free loan to the customer remains outstanding for a while. Even the combination might be fine -- economically vaporous, but fine -- so long as the customer really wanted it. Sometimes customers want to own stock for a little while without any economic exposure, for reasons of their own, and banks are there to facilitate it. On the other hand if you're doing the whole combination just in order to reduce your own regulatory cash requirements -- if you are recruiting customers to do these trades and paying them fees for their trouble, as Merrill Lynch was -- then it's the sort of thing that the SEC clearly frowns upon. And so last year Merrill Lynch paid a $415 million fine to the SEC over these trades, which it was doing both before and after it was acquired by Bank of America Corp.
On Friday, the SEC settled with William Tirrell, the former head of regulatory reporting at Merrill Lynch, who settled without paying any financial penalty and without admitting any wrongdoing. One weird thing about these trades is that Tirrell ran them by the SEC and the Financial Industry Regulatory Authority before Merrill did them. You might think that presenting the details of the trades to the SEC and Finra for approval would mean that they were okay, but a series of miscommunications nullified the regulators' approval. Most awkwardly:
Due to insufficient coordination among control groups, including Regulatory Reporting, Tirrell incorrectly understood that the purpose of the trade was to meet client – not firm – needs, and he presented the trades as such.
Tirrell apparently thought he was pitching a client-facilitation trade, not a regulatory-arbitrage trade: He thought the point of the trade was to get clients a product that they wanted, rather than to get Merrill Lynch relief from regulatory requirements. And apparently Finra and the SEC also thought that (because it's what he told them). It is a little strange, first of all, that this misunderstanding happened: These trades were pretty non-substantive, so you might have expected Tirrell or the SEC or Finra or someone to have said, well, wait, why does the customer want to do this? But it is also a little embarrassing for everyone that so much turned on this difference: If the regulators correctly understood how the trades worked, but not why Merrill Lynch wanted them, it almost feels like that should have been enough.
Anyway here's another miscommunication:
On December 14, 2009, Tirrell emailed FINRA staff to advise them that the SEFT desk “would like to  use unlisted options as it provides greater flexibility” and that these proposed Trades “would still be written on large Cap stocks.” “I don’t see this as a material change to the current arraingement [sic],” Tirrell stated in the email, “but wanted to ensure you are in agreement.” Tirrell attached to his email the outdated transaction diagram that had previously been presented to regulators. FINRA staff’s spam filter quarantined this e-mail, and FINRA staff did not receive it.
I assume that was inadvertent, but still, it suggests a path for regulatory engagement. What you do is, you write a nice formal carefully lawyered email explaining in detail what you plan to do. Your email ends with a conclusion that your proposed action is just fine, and that you are going to do it unless the regulators object. And then you make the subject line of your email "MAKE MILLIONS WORKING FROM HOME ON P3N1S ENL4RGEMENT." If you ever get in trouble, you can say: Look, we told you what we were doing, and we gave you a chance to object; it's not our fault that you lost the email! (It goes without saying that this is not legal advice, though it also doesn't matter, since this newsletter is now in your spam folder anyway.)
How's Martin Shkreli doing?
Here you go:
Just a month after being convicted of securities fraud, notorious pharma-bro Martin Shkreli is selling off his one-of-kind Wu Tang Clan album, which he bought from the legendary Staten Island hip hop group two years ago for $2 million.
The embattled former drug-company exec listed the sole copy of the CD “Once Upon a Time in Shaolin” on eBay Tuesday night for a starting price of $1. Within an hour, the bidding hit $55,000 and 100 offers.
Here is the eBay page; bidding still seems to be well short of the $2 million that Shkreli paid for the album back in 2015. "I have not carefully listened to the album," reads the listing, and: "At any time I may cancel this sale and I may even break this album in frustration."
People are worried that a piece of a missile might fall off and drop into an apartment building or somewhere.
Look I don't know but here's Art Cashin on North Korea:
"If they keep testing the missiles, the markets are concerned that they fly over a populated area and come apart. You know, drop a piece of a missile into an apartment building or somewhere where it raised the ante in this greatly," Cashin, UBS' director of floor operations at the New York Stock Exchange said on "Squawk Alley."
I love the quirky specificity of the markets' worry. Mr. Market has an aunt who lives in Sapporo, and it's worried that a bit of a missile will fall into her bathtub.
People are worried that people aren't worried enough.
You might think that with all the missiles-in-bathtubs worries, people would have stopped worrying that they weren't worried enough. But not quite! People who run black-swan hedge funds, for instance, are worried that investors have stopped investing in black-swan hedge funds, because (in the managers' view) they have gotten complacent. ("Some of these fund managers say investors are dropping their guard when they are at their most vulnerable.") Still, generally speaking, the pendulum seems to be swinging away from worrying-about-not-worrying and back toward regular old worrying. "Array of Threats Stir Up Markets" is the headline here, and generally when you have an array of threats, complacency isn't one of them.
People are worried about unicorns.
I am worried that the unicorns are developing eating disorders, based on this article about "The Silicon Valley execs who don't eat for days: 'It's not dieting, it's biohacking.'" There is a pleasing universalism to the Silicon Valley technology industry: If a venture-backed Bay-area company does something, then that something is "tech," even if it is delivering groceries or whatever. Similarly, if a Silicon Valley executive does something, it is "hacking." Doing your laundry? That's a life hack. Eating lunch? A biohack. Not eating lunch? Sure, yes, also a biohack.
Steve Cohen’s Comeback Begins. 1MDB Stolen Funds Witnesses Are Scared to Talk, FBI Says. ‘Too Big to Fail’ Label May Shrink for Some Firms Under Trump. United Technologies’ Deal for Rockwell Collins Faces Skepticism. Wall Street Migrates to 'T+2' Settlements. Nasdaq's Latest Deal Shows That Data Reigns Supreme. Wells Fargo Accounts Settlement in Question as Victims Swell. Houston Rockets Sell for $2.2 Billion, Breaking NBA Record. Author Michael Lewis Says Hollywood Won’t Adapt Flash Boys Because It Has an Asian Lead. The Lonely Lives of Silicon Valley Conservatives. Lending without creditor rights, collateral, or reputation – The “trusted assistant” loan in 19th century China. "I was gonna be a revolutionary, and then I had that first massage." "As an example of how smart I am, here is some money." German man breaks world record for most beer mugs held at same time. Mario Is Officially No Longer A Plumber.
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