Money Stuff

ICOs, Marxism and Credit Reports

Also Venezuela, crime tips and scalability.


It's worth explaining why you would do an initial coin offering. I mean, the most common reason to do an initial coin offering is to raise a lot of money from bitcoin enthusiasts without having a working business model or complying with securities regulations, but that's not why you should do an ICO. No, the better reason to do an ICO is to fund the development of a network that will one day exist without you. Angel investor Naval Ravikant tweeted yesterday:

ICOs are funding development of the next generation of open Internet protocols. They might create more good for humanity than venture. Previously open protocol development didn't get funded. Everyone free rode on volunteers and academics.

If you want to build a cloud-storage business, you can just raise money from investors, and spend it on servers, and store files on them, and charge fees, and make a profit, and return the profits to the investors. But if you want to build a decentralized cloud-storage network, in which people can use an open protocol to buy and sell file storage directly from each other, then that fundraising model doesn't make sense. You're not building a business, for you; you don't plan to take a cut of all the cloud-storage fees. You're building a protocol, a way for other people to trade cloud storage without relying on tech giants like Inc. And also without relying on you. 

The popular analogy is to email. Email is a good system for sending messages to people over the internet. It is also a universally available protocol. People invented and developed it, but no one owns it. Anyone can build software that uses it. Twitter, meanwhile, is also a good system for sending messages to people over the internet. Twitter Inc. owns it, though, and makes money from it, and constantly tweaks it, and can exercise its power over the system in arbitrary ways. A lot of technology and media people, frustrated with this situation -- and with the particular ways in which Twitter exercises its power -- wish that Twitter had been a protocol. But of course if the founders of Twitter had just released it as an open protocol they wouldn't be fabulously wealthy now. And their venture capitalist backers wouldn't have made tons of money. And so those VCs wouldn't have backed them. And so there wouldn't be Twitter.

So ICOs are a way for the next Twitter -- or file storage network, or whatever -- to (1) be an open protocol and (2) get funded. You think up a network protocol that you expect to be valuable to a lot of people, you pre-sell some of that value to people who might use the protocol (or who want to speculate on its adoption), you use the proceeds to build the protocol (and reward yourself for your labor), and you get out of the way. You fund yourself from people who expect to get value from using the network, rather than from venture capitalists who expect to get value from owning it. I am not convinced that that is a great fundraising method for a business. But the point of an ICO, done right, is that you are not building a business; you're building an unowned system for everyone to use. There are not many other good ways to fund that.

Anyway that's the nice version. The next question is: How many open internet protocols do we need, and how many ICOs are there? Whatever is going on with Wu-Tang Coin, or Cream Cash, or Jesus Coin, or a hundred other ICOs, they are not building the next generation of open internet protocols. They are simple investments in businesses, or crowdfunding for weird stunts, or jokes, or worse. "Cue the outrage from ICO haters who think that because some ICOs are bad, all ICOs are bad," Ravikant went on, but I suspect that the right analysis is that (1) ICOs as a concept are powerful and fascinating and potentially good for humanity but (2) like 90-plus percent of ICOs are bad?

The main question to ask of any assortment of financial-industry-blockchain buzzwords is: Why do you have to do this on a blockchain, rather than in a central database? The main question to ask of any ICO is: Why do you have to do this as an ICO, rather than an equity sale? Often the answer is "because people will give me so much money and I don't have to bother complying with the law." But sometimes there's a good answer; sometimes the ICO really is solving a problem that couldn't be solved otherwise.

Now something for the haters: Former Tottenham Hotspur/Birmingham City/etc. manager Harry Redknapp has hooked himself up to an ICO, and it's a fun one. It has a glorious name -- "Electroneum" -- and, as Kadhim Shubber points out, "it features innovations like 'sending and receiving payments with the convenience of simple QR code scanning' and the right number of decimal points":

Cryptocurrencies often have relatively low coin numbers. For instance, Bitcoin only has a maximum of 21 million coins. What this means is that the whole coins tend to have a large value and thus real world transactions for small amounts of money tend to look rather strange to humans. We are quite used to swapping coins for things, but if you bought a can of Coke with Bitcoin at the moment (June 2016) you would pay something like 0.000391 Bitcoin. This is not a very “human” number. We have made Electroneum’s blockchain have 21 billion coins, which will move the decimal places forwards.

It is the pure Spinal Tap theory of money supply: Why not give everyone more coins, and make the coins worth less? Who's to say that they're wrong? My Bloomberg colleague Joe Weisenthal has his own mostly-joke cryptocurrency, Stalwartbucks, whose specification notes that "To make it easier for everyone to become a billionaire, each raw coin is designated as a Billion Stalwartbucks." It's as good an explanation as you'll get for many ICOs.

Are index funds Marxist?

Ha, never mind that, Chinese stock-market regulators are Marxist. Perhaps they have strayed a little from their Marxist roots -- after all, they became stock-market regulators -- but they're getting back to basics:

Liu Shiyu, the head of the China Securities Regulatory Commission, told fellow regulators this week that they should revisit classic Communist texts frequently, in order to fully understand and implement the “special strength” of Marxist philosophy, according to a statement posted on the CSRC website late Wednesday.

It wasn’t fully clear from Mr. Liu’s speech on Tuesday just how “Das Kapital” is supposed to help officials keep watch over China’s sometimes unruly stock markets.

Actually Volume III of "Capital" is perfectly sensible on the challenges facing China's stock market:

Titles of ownership to public works, railways, mines, etc., are indeed, as we have also seen, titles to real capital. But they do not place this capital at one's disposal. It is not subject to withdrawal. They merely convey legal claims to a portion of the surplus-value to be produced by it. ... But as duplicates which are themselves objects of transactions as commodities, and thus able to circulate as capital-values, they are illusory, and their value may fall or rise quite independently of the movement of value of the real capital for which they are titles. ...

Gain and loss through fluctuations in the price of these titles of ownership, and their centralisation in the hands of railway kings, etc., become, by their very nature, more and more a matter of gamble, which appears to take the place of labour as the original method of acquiring capital wealth and also replaces naked force. 

I do not know exactly what regulatory program that would imply, and certainly you can find critiques of China's stock market as "more and more a matter of gamble" without reverting to the original sources of Marxist thought, but it all seems fine.

Seriously, how would you run a stock market on Marxist principles? "You would not, come on," is a fairly plausible answer. "You would encourage ownership of productive capitalist enterprises by large diversified mutual funds run using the best available modern techniques of portfolio management and corporate governance, and then distribute the shares of those mutual funds equitably among all the people, in order to obtain the productivity benefits of capitalism and the distributive benefits of socialism," is I think a rather good answer? (It is essentially Matt Bruenig's answer; we have talked about it before.) "You would encourage rampant leveraged speculation while also artificially limiting price moves, and try to attract foreign ownership to make company founders billionaires without giving the broader population ownership of growing enterprises," does not strike me as an especially Marxist approach.

Elsewhere (in the U.K.): "The Case Against Free-Market Capitalism."

Credit reporting.

Here is a story about how, after the Equifax Inc. hack, Congress may require the credit reporting agencies "to phase out their use of Social Security numbers to verify consumers' identities by 2020." This seems good insofar as a Social Security number is a very insecure form of identification. But of course whatever form of identification the credit bureaus do end up using will become as economically pervasive as the Social Security number is now, so it's important that the replacement be carefully thought out and consider lots of stakeholders' interests. Hopefully Congress is giving a lot of attention to how best to hahahahaha no of course not they're literally leaving it to Equifax:

Mr. McHenry’s legislation leaves it up to the companies to formulate a more-modern method of identification, in an effort to spur the companies to innovate, according to a summary of the legislation reviewed by The Wall Street Journal.

Equifax collected data on every American with credit, left that data unsecured, had it stolen by hackers, and its punishment is that it will be put in charge of figuring out the future of personal identification in America. Congress looked around at the unsatisfactory state of identity in America, asked itself who can best fix it, and decided to leave it to the companies that broke it. That'll spur them to innovate!

Elsewhere, here is a story about how "Chinese officials have ordered provincial governments to establish online platforms naming those who do not pay their obligations." (What would Marx say?) I am not sure that a state-run name-and-shame credit-reporting system is any harsher than a privately-run leak-to-foreign-hackers credit-reporting system. At least if all our credit reports were public we wouldn't have to worry about hackers finding them. 


Anna Gelpern tries to game out an eventual restructuring of Venezuela's bonds, noting that Venezuela has multiple bonds with different voting requirements, and that "bonds that require 100% of the holders to consent to an amendment of financial terms have fetched a higher price than comparable bonds with so-called collective action clauses, or CACs, which can be amended by either 85% or 75% of the holders, depending on the bond issue." But she is skeptical of the market's views: The 100 percent bonds require 100 percent approval for only a very narrow range of terms, leaving them "thoroughly susceptible to exit consents." That is, if Venezuela can convince the holders of 51 percent of those bonds to restructure them, then it can get them to vote to change those bonds' pari passu rights and governing law to make the holdouts' 100 percent claims basically worthless. On the other hand, 85 percent bonds have "a mile-long list of matters that require 85% approval" precisely to guard against exit consents. 

Elsewhere in sovereign debt, would Catalonian bonds be governed by Spanish law if Catalonia became independent?

How to do crime.

This is a few weeks old, but pretty solid: The U.K.'s National Crime Agency caught charged five men with money laundering, and "Officers also seized a hand-written step-by-step guide to money laundering, which contained instructions on how to move money to accounts at various banks and notes on which accounts had been blocked by bank security." I assume that the last step on the guide was "destroy your hand-written step-by-step guide to money-laundering," but the criminals were caught before they could get to that step. Perhaps it should have been earlier on the list.

Meanwhile in Florida, "a man arrested on a bank robbery charge told deputies he did a Google search for 'how to rob a bank' prior to the incident." That's the sort of dead-giveaway Google search that I tend to criticize around here when insider traders do it, but it's hard to care that much in this case. If you (allegedly) rob a bank on camera and then confess when you are arrested, the Google search is the least of your problems.

People are worried about unicorns.

The most powerful concept in the technology business is scaling. If you can do a thing once with software and charge a dollar, you can do it a billion times and charge a billion dollars, without your costs increasing that much. But sometimes you run into limits to scaling: Your business might be limited by the number of the atoms in the universe, or by the number of people in the world. Fortunately tech is good at abstracting away from those problems: If you draw a line showing your user growth, why not just extend that line? Don't worry too much about where it crosses the line representing the number of people in the world. I can only assume that was Facebook's underlying thought process when it claimed that it reaches more people than there are people. Why should a person's mere nonexistence prevent you from serving an ad to her? You have built a scalable technology platform; it hardly seems fair that your growth should be limited by the human species's comparative lack of scalability.

That's not quite what's going on at medical-office-advertising unicorn Outcome Health, but there are some apparent similarities:

Somewhat less real were aspects of some deals Outcome cut with pharmaceutical advertisers, say former employees along with several advertisers. Interviews with these people as well as internal documents and other material from Outcome reviewed by The Wall Street Journal show how some employees misled pharmaceutical companies by charging them for ad placements on more video screens than the startup had installed.

Actually installing video screens in doctors' offices is hard to scale: You have to pitch each doctor, and then install each screen. Serving more ads is just software; you can do as much of it as you want without really increasing your costs. You can see how the ads might end up appearing on more screens than there were screens. "Silicon Valley's greatest blind spot," I once said: "that human beings have bodies and exist in a physical universe." It's a problem even for medical startups.

Elsewhere: "We built a hypothetical DCF range for SpaceX, valuing the company somewhere between ~$5 bn and $120 bn+," cool cool.

Me elsewhere.

I wrote a critique of a critique of Bridgewater Associates LP's Form ADV, which is about as niche as it sounds, so if you come here mostly for the unicorn jokes you might consider giving that one a miss.

Things happen.

BofA Posts Best Profit in Six Years as Rising Rates Lift Revenue. (Earnings release, presentation, supplement.) HSBC Names John Flint as Chief Executive. SEC to Review Guggenheim’s Bob Diamond-Linked Investments. Goldman Sachs to Lend to House-Flippers. JPMorgan’s Jamie Dimon eyes Paris for post-Brexit job moves. Credit derivatives market woes deepen after ICE exit. Does Going Easy on Distressed Banks Help Economic Growth? The Case for Speeding the Merger Process. U.S. Corporate Tax Shake-Up Could Fuel Tension With Allies. Harvey Weinstein Contract With TWC Allowed for Sexual Harassment. Irish Whiskey Is Following Scotch’s High-End Strategy. "Men’s backpacks have gotten more executive." Raccoon leans out of car window to catch raindrops.

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