Did Your Shitcoin Break the Law? [Part 2]
Irreverent spirit and rebellious fervor
In the movie Alladin, Jafar wishes to be a genie because of their incredible might and power. Alladin proclaims, “You wanna be a genie? You got it!”
At that moment, Jafar skyrockets up to form a giant, formidable genie, but, in a flash, shackles and a lamp appear, and, despite his enormous size and stature, he is quickly contained into the tiny lamp.
Jafar has made a grave mistake. Wishing to be a genie has cost him his freedom.
CHAPTER TWO: Shitcoins hit the fan
Bitcoin, perhaps by virtue of spending the first half of its life under the radar, has managed to effectively conduct open source governance as well as prove the durability of its network and the decentralized nature of its protocol. The token supply, while far less balanced than most global currencies, has no central entity that can (single handedly) filter transactions or dilute the value of the token.
Shitcoins are another story.
The majority of their tokens are controlled by a single source (generally the same bros who issued to token in the first place), their blockchains are vulnerable, and their products and services are…well…jankity.
Attorney Andre Sartor of ICO Class Action explains,
For the majority of the ICOs the disproportion between what has been delivered and the cashed money is massive.
One example, Sirin Labs, promised a revolutionary phone featuring blockchain and a trading tool for crypto.
They delivered a junky handset for $16,500, to be paid in tokens.
There are many reasons why crypto companies might not be performing.
Maybe they’re an exit scam
Maybe they’re inexperienced, disorganized, and incompetent
Or...maybe...companies that were funded on the premise that they would use blockchain to solve a problem that could not be solved without it, are finding that blockchain is actually a pretty crappy solution to most problems.
There are many companies in this space with talented, experienced individuals that have done their *absolute* best with the cards they were dealt, and their solution is still much worse than what’s currently available.
AND, even if the companies turn around and start producing some great stuff, it doesn’t really mean anything for the token because tokens aren’t shares in the business and are unnecessary in pretty much every functional business model.
Consumer Protection Laws
Consumer protection laws make it illegal to take someone’s money and give them something other than what they paid for. That’s fraud.
If you buy a hotel room and then you show up and they are like, “shit, dude, this whole hotel project never really came together,” you get your money back. The hotel room was not as described. But that’s exactly what happened with utility tokens. The emperor could have sworn he was buying clothes.
It’s no secret that the products and services coming out of crypto companies are substandard, and the industry as a whole is having to face the reality that these companies likely will never perform to plan.
Steven Masur explains,
"for tokens, the fraud takes place because whatever you were told the token would do it does not do, so the promised product or service is never delivered."
Nowhere to run, nowhere to hide, no safe harbor here.
The safe harbor protection doesn’t exist for consumer goods. Consumer laws are strong pretty much everywhere, even in places like Singapore, Malta, and the BVI where securities laws are lenient.
What’s more, if governed by consumer laws, crypto companies will have to deliver on *everything* that was described in the *original white paper*, or the seller has breached contract.
There is no wiggle room.
Even the sale itself is a fraud. Selling a consumer product or service that you’ll deliver in the future is called “crowdfunding.” Crowdfunding must be licensed. One more tick mark on the looooooong list of fraud charges.
Where’s the risk? Criminal or Civil?
Justice departments and Interpol will likely get involved and make arrests in the most egregious of cases, but, other than that, criminal prosecution is unlikely. However, depending on the state or country in which you reside, consumer protection agencies could very well get involved.
Steven Masur advises early, growth, and enterprise stage companies in emerging industries, and has seen a marked uptick in blockchain fraud claims.
Civil enforcement comes in two flavors: private lawsuits and class actions.
Private lawsuits require the means to bring a fraud claim, which is no problem for large crypto whales (aka rich dudes) or VC firms, but won’t be accessible to the average ICO investor.
For the rest of us, waiting for a class action to get financed is our best bet, but we shouldn’t hold our breath. Law firms will only choose to take the risk of dedicating major time and resources to a class action if the juice is worth the squeeze. If there’s any doubt that the funds either don’t exist or can’t be recovered, the business model doesn’t support moving forward.
Under the current system who gains and who loses?
Exit scammers and dotards are slipperier targets than the startup trying to do it right.
A scummy criminal off in the Caymans with stolen funds and the negligent music man who mismanaged his business are, for the most part, beyond the reach of the law.
Who is the biggest loser? Retail investors.
Unlike rich people who invested early and can afford to sue, retail buyers have no legal recourse if the tokens they buy (even on regulated U.S. exchanges) become worthless as opposed to appreciating.
In fact, most of the ICO tokens that were listed have become worthless, and most anticipate a similar trajectory even for tokens that have yet to be listed. Retail buyers will never be made whole.
Without effective oversight, exchanges can continue to list worthless assets without consequences, insiders can continue to dump on outsiders, and people, believing the hype they are served, will be irreparably harmed.
Honest startups that registered with the SEC would be off the hook and under no obligation to deliver. They could say “hotel project never came together” and “hotel project is different than initially described” and they’re a-ok because they disclosed the risk upfront!
Wait...wasn’t there something earlier about orange jumpsuits? STAY TUNED FOR THE FINAL CHAPTER.
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