his week, the Securities and Exchange Commission made an odd, veiled threat, in the form of a short notice on its Web site, “Statement on Potentially Unlawful Promotion of Initial Coin Offerings and Other Investments by Celebrities and Others.” The commission didn’t use any names, but those in the know had little doubt: its warning was meant for Paris Hilton.
Hilton had hardly acted like Bernie Madoff. She sent a tweet. It has since been deleted, but on September 3, 2017, she posted, “Looking forward to participating in the new @LydianCoinLtd Token! #ThisIsNotAnAd #CryptoCurrency #BitCoin #ETH #BlockChain.”
The Lydian Coin token that Hilton touted is one of hundreds of new digital coins that are being offered for purchase. The most famous is bitcoin, though it is now joined by countless others, such as Ethereum, Ripple, Litecoin, andmore. Most of these are designed to act much like any currency; they can be bought and sold, used for all sorts of purchases, and stored for the long term. (Whether or not they are any good at these roles is continuously debated.)
Paris Hilton’s favorite, Lydian Coin, is a newer, second-order type of digital currency, over which the S.E.C. and other governments have expressed profound concern. It is part of an initial coin offering, which is a new way for companies to raise money: rather than pitch to a venture capitalist or get a loan from a bank, the company simply announces that it is creating its own digital currency, and offers it for sale to anybody who wants it. In the case of Lydian, the company is Gravity4, whose tagline wins the award for most buzzwords in a sentence: “the world’s first A.I. big data marketing cloud.” Gravity4 offers a suite of digital-marketing products that somehow involve “neural nets” and “Bayesian belief nets” to engage an “omni-channel demand side platform,” which delivers a “personalized, always on, brand messaging experience.” I have yet to make sense of these words, other than that they seem to invoke a computer program that sends ads to people. (Gravity4 did not respond to requests for clarification.)
The firm’s newly launched Lydian Coins can be used solely to pay Gravity4 for its marketing services to promote other new digital currencies. The company hopes to raise a hundred million dollars by selling Lydian Coins at five dollars each (minimum purchase: twenty thousand dollars), and believes that it might make twice that much. It is clear why the company likes this approach: they can raise a lot of money without needing to sell ownership shares or make binding commitments to a bank. But it’s not at all clear why any person would want to convert broadly usable money into a newly formed currency that can only be spent on the products of a single company.
There are hundreds of these newly formed, special-purpose digital currencies, and dozens more are launched each week. JNetCoin is a special currency for jewelry sellers and buyers, BETM is for betting on sports, AKM is designed to be used in a global supply chain serving health-food restaurants. Think of an industry, Google its name and “initial coin offering,” and you can likely find someone trying to sell a currency that will serve it. Perhaps the most surprising thing about these new currencies is that at least some of them actually make sense, and will endure. If a company is buying and selling a very specific kind of product with a narrow group of specialists spread around the world, a specialized industry currency could be a tool to mitigate currency fluctuations, certain legal issues, and other risks. It seems equally clear, though, that right now there is a cryptocurrency frenzy, and that a lot of these things are nonsensical, have dubious value, and will soon disappear. It’s hard to know which is which, and it seems wise for most people to avoid such investments unless they are deeply informed, or have surplus money and a love of risk.
Which returns us to the S.E.C.’s gentle warning to Paris Hilton. The statement read, in part, “Celebrities who endorse an investment often do not have sufficient expertise to ensure that the investment is appropriate and in compliance with federal securities laws.” Fair enough! Also: “Investment decisions should not be based solely on a [celebrity] endorsement.” The statement is a strange mix of menace and confusion: the S.E.C. appears to be saying that tweets such as Hilton’s could break the law or could be perfectly fine. One reason for the vagueness might be that the S.E.C. has not decided on the ideal simile to use in classifying digital-coin offerings. Are they like money, which is not regulated, and which any celebrity is free to tout? (“I’m buying all the Yen I can! #yenstrong”) Or are they more like a stock or a bond—a financial security for which there are extremely strict rules about how it can be promoted?
If Lydian Coin and its brethren are securities, and if Hilton were a paid representative, then she would have had to disclose a prospectus-worth of information about Lydian Coin’s risks. (A spokesperson for Hilton e-mailed me that “she is not and has not, been involved with Lydiancoin.”) There is something mealymouthed about the S.E.C. refusing to decide what it thinks of all these coins while also scaring celebrities away from them with threats that they may—depending on where the S.E.C. ends up—be in violation of the law. It’s as if the regulator is outsourcing its anxiety about the new financial product rather than doing the hard work of determining, once and for all, what the heck these things are. China and South Korea did: both countries outlawed these initial coin offerings entirely. Japan’s regulators say that they might soon do the same.
There was a similar process of regulatory confusion occurring in Washington, D.C., on the same day as the S.E.C.’s announcement. Senior executives of Facebook, Google, and Twitter testified before several different congressional committees about the fact that they sold ads to Russians who were seeking to disrupt the 2016 Presidential election. The hearings were largely a bit of performance art, in which congresspeople could publicly show their concern, executives could be at turns defiant or apologetic, and nothing meaningful would change. The government hasn’t decided what simile to use for these Internet platform companies, either. Are they like broadcast companies, free to put forward whatever views they and their users want, but required to make public who pays for advertisements? Are they more like the phone company—a carrier of content but not a creator of it, and therefore not required to do anything in response to Russian-government meddling? Clearly, they are neither—they are some new thing, a platform of unprecedented reach and influence that has no obvious parallel and requires new thinking.
This is an old story. Throughout history, there have emerged new technologies, new ways of organizing financial relationships, new methods of communication. The very idea of stocks offers a classic model: they appear in modern form in the early sixteen-hundreds, as a novel way to fund the Dutch East India Company. Stocks were met with confusion, fear, and, eventually, overenthusiasm, which led to a massive bubble that collapsed and left many impoverished. The rules were, eventually, sorted out, and stocks became a standardized financial product (though, of course, new bubbles would appear from time to time). A similar process happened with bonds, bank accounts, the printing press, newspapers, and railroads. Fear and confusion, then over-exuberance, then formalization. What makes the current period different, though, is the pace. Those earlier cycles occurred over decades, sometimes centuries. If we consider the last decade—forget that, the last year—and think of the transformation in financial products and communications methods, and if we begin to imagine how much more change is in store, it’s clear that we need to speed up our process of assessment and formalization. At the same time, we need to create the right sort of freedom to allow for all that new invention. Somehow, we need to be at once stricter and freer. Maybe the grandstanding of Congress and the S.E.C.—flashy warnings with no teeth—is the best we can do for now.
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