Colin Platt here again, time for another blog, exploring some of the topics that Zeth, Shaun and I found interesting.

It has been a year since we focused on the SEC’s settlements with Paragon Coin, DJ Khaled and Floyd Maywhether. How time flies.

Although it’s not something we’ve spent too much time on here, regulators haven’t lost interest in cryptocurrencies. Regulators around the globe have announced actions and settlements on a number of projects, large and small. Beyond these, after having been awakened from their slumber by Facebook and Libra, lawmakers have tasked regulatory bodies with getting to the bottom of what is happening with stablecoins. Investigations into risks, and rules of these projects have been hotly debated by the G7, Bank for International Settlements, IMF and more.

Perhaps the loudest story was that of Canadian texting application, Kik, which raised $100 in a SAFT offering. In June, the SEC announced that it was suing Kik for selling unregistered securities to US investors. Amongst the allegations were that Kin tokens traded at half of the value that they were sold to investors at, that they had been marketed as an investment opportunity, and had no functionality. The complaint included details about how Kik had developed basic “minimum viable products” which could be purchased for Kin tokens, including their famous “Let’s Jam” honey badger:

Immediately prior to the news of the lawsuit being made public, Kik announced plans to sponsor a “Defend Crypto” fund which sought to raise funds to support crypto projects from regulatory actions. Upon the news of the SEC lawsuit many early supporters quietly withdrew support for the initiative.

Kik has denied wrongdoing and is challenging the SEC’s complaint. In the meantime, Kik let their Tel Aviv based team go in September. Kik CEO, Ted Livingston was accused, in what was later found out to be a hoax, of having drunkenly texted a journalist with doubts about the project.

The autumn crypto legal action season kicked off with a bang on 30 September, as Block.one (the founders of EOS) announced a settlement with the SEC related to their $4bn, year-long ICO that ended in June 2018. The SEC’s complaint claimed that the EOS tokens, originally launched as ERC-20 tokens on the Ethereum network and sold to the general public, were unregistered securities. This is perhaps the main regulatory concern that projects conducting token sales have when raising capital from the public, so the news of SEC action was widely followed. Not only were onlookers surprised that the SEC was finally coming after larger ICOs, but the amount of the fine, $24 million, surprised many. While a significant number in absolute terms, this settlement, which did not require that Block.one admit guilt to the claims made by the SEC, was less than 1% of the total amount raised by the EOS token pre-sales. Many commented that this was a very light fine, while several legal professionals suggested that circumstances including cooperating with the investigation and relative values raised from Americans could have contributed to calculating the amount of the fine.

While the Block.one managed to snatch the headlines, just one day later, the SEC announced another settlement, this time with Boston-based Nebulous, the company behind the 2014 launch of Siacoin. The settlement, which also did not admit fault, resulted in disgorgement and penalties amounting to $225k. Though this number is significantly smaller, the 2014 raise amounted to approximately $120k (all of which was subject to disgorgement). Nebulous went on to raise a further $1.5 from investor in 2018 under a Reg D sale.

As September ended on a note of, “well it could have been worse”, October saw a much larger, more notable action. On 11 October, the SEC filed a complaint against Telegram’s TON token sale, requesting the court grant an Emergency action, preventing TON from converting SAFTs (Simple Agreements for Future Tokens) to Gram tokens available for resale to the general public. This action was particularly notable for a few reasons, first is that it was one of the largest, well known projects in the space, having raised $1.7 billion from sophisticated investors.

Many projects issuing SAFTs had hoped that by raising money from qualified investors, developing their project and only then releasing tokens for a functional project, they could avoid having their tokens classified as securities.

In early September of this year, Telegram released a basic testnet and blockchain explorer for TON. While this clearly demonstrated that progress had been made, this network is not currently at a state that the tokens could be considered to have any actual utility.

Perhaps sparked by the TON testnet announcement, and subsequent realisation that the SAFTs would be converted by the end of October, and potentially released to the general public –without appropriate filing for registration of such issuance of securities– the SEC sought to halt the conversion process.

Following this announcement and the granting of the restraining order by the court, Telegram asked SAFT holders to grant an extension of its 31 October 2019 deadline, which was accepted by SAFT holders. In addition, Telegram formally responded to the SEC allegations, in which it claimed to have been in regular communication with the SEC and to have been caught in the 11th hour by this emergency action. Additionally, they argued that Grams should not be considered as securities, comparing them with currencies or commodities, and asked the court to deny a preliminary injunction which would have the effect of halting their plans.

The Telegram news showed that regulators were not going to go lenient on all token sellers, and that the rule of law still applied.

Outside of token sales, Facebook and Libra have been in the headlines, not just the crypto ones but everywhere. The US Congress, central banks, the G7 and even the BIS have called them in to testify, speak, and make the case why they should be allowed to proceed with their plans. We won’t go into too much depth on these well publicised proceedings, except to note that one side-effect of this focus has been that regulators are looking at if and how rules and regulations should be adapted for stablecoins generally. Regulators have noted a number of risks from these products, and some have called for stablecoins to be regulated as securities.

As is often the case, this space continues to look incredibly exciting and innovative. Increased regulatory focus doesn’t change this, but does reinforce the importance of understanding the rules of operating in financial services, even if things are dramatically different from what came before.

As always, nothing here should be construed as financial advice, recommendation or endorsement of any project or cryptocurrency.

Interview with Bob Summerwill, Executive Director, ETC Cooperative

Colin Platt, here, and I managed to line-up an amazing conversation with an amazing individual, Bob Summerwill, the Executive Director of the ETC Cooperative. The ETC Cooperative is a non-profit dedicated to supporting the Ethereum Classic (ETC) protocol. Bob also serves as the CTO of Varro Technologies, and as Community Ambassador for CryptoChicks. Bob has a history of being at the centre of things in this space, at the right time, having been involved in the Ethereum Foundation in 2016, moving over to ConsenSys to launch the Ethereum Enterprise Alliance in 2016. He’s also held technical and developer roles at EA, Sony and Sweetbridge. In short, Bob is a great person to speak to if you want to know where we’re going.

CP: Hi Bob, great to catch up again, it’s been a busy year for you. Thanks for taking the time to speak with me, and for sharing your insight. Could you share a bit about who you are and what you do?

BS: For sure! So the majority of my career was as a software engineer in the videogames industry, with over 15 years at Electronic Arts, mainly working on EA Sports titles, with roles on game teams, in central technology and on collaboration projects across the company, “peaking” when I was appointed the first Architect for EA Sports as a whole.

I went down the blockchain rabbit hole in 2014, including meeting Vitalik for the first time, and from 2015 onwards I plunged full-time into the Ethereum ecosystem and have never come up for air since!

CP: Let’s start with a big topic that you and I have discussed. Communities and cooperation across projects in this space. Why is this important?

BS: When the Ethereum Foundation was being rebooted, following the departure of the previous Executive Director, I contacted Vitalik and offered to help with the transition. I had been a part of the Foundation before my time at ConsenSys and worked with the C++ team. Vitalik suggested to me that I try to identify what “good would look like” for the Foundation. As I dug into the possibilities of what the Foundation could do, I also started to stumble across some of what led to the previous bumps in the Foundation. At the outset, before the Foundation launched, there were two camps, one seeing a path for what would become the non-profit Ethereum Foundation, and another that saw a for-profit company sitting in the middle of Ethereum as the best approach. Unfortunately, these two ideals led to a significant level of distrust amongst the two camps, with those championing the idea of a for-profit being demonised by those who supported the non-profit approach. This led to the former seeing the latter somewhat as an “attack on Ethereum”. As sometimes happens, this led to something akin to people supporting a sports team, where logic became less important than backing your side.

CP: The relationship between the Ethereum (ETH) and the Ethereum Classic (ETC) communities have been tense historically. Why do you think that these relations were complicated?

BS: My view has always been that Ethereum is a technology stack, and that’s what originally attracted me. Currently we use the Ethereum technology in the mainnet (ETH) as well as several testnets. There are also people working on Enterprise Ethereum projects. Do people necessarily see those as an attack on Ethereum? Most would say “no”. Coming back to our history, in 2016 when the DAO hard fork occurred, some members of the community decided to keep the original, non-forked, chain alive and it became known as Ethereum Classic, or ETC. Unfortunately, as some of the supporters of ETC had already been blacklisted by the community that followed the hard-fork [ETH], it was seen by some as an “attack” on the fundamentals of the [ETH] project.

CP: You talk a lot about the importance of the human ingredients to the Ethereum story. What do you think that this can explain as to how it has developed?

BS: I think to get started, it’s worth noting that while we have some differences of opinions, crypto is still an extremely small niche, and isn’t load bearing for society, if crypto got wiped off the face of the earth tomorrow it’s not like the world would even notice. My second point is that most people in crypto objectively probably all agree on most things, even if we have differing opinions on some topics, and very importantly there aren’t bad people in crypto, just a bunch of flawed human beings trying to build a dream. We’re all altruists, dreamers and technologists.

Let’s put some colour to this, at the end of the day, cryptocurrency is an incentive mechanism for a world without trust. It naturally follows that the people originally attracted to this, and actively building this, are people with trust issues themselves. Many of them fear control by the elites, and experiment with the tools that they have to attempt to break from this relationship. Sometimes this also led to “cargo-culting”. Coming back to my earlier note, this also has the side effect that “non-believers” in this vision can be seen as an attack on the early adopters.

Amongst those experimenting with this, many ended up with the “decentralisation disease” trying to remove all semblances of hierarchy and control. We had lots of people making mistakes on basic things, because they had a “phobia of professionalism”, and those coming in with basic tools for things like project management and product delivery were seen as trying to take over. Unfortunately, we’ve also seen a lot of “cultural tourism” with people who aren’t really interested in the underlying technology showing up with an opinion.

CP: Aside from the obvious catalyst of the hard fork, what are your senses of what’s similar and what’s different between these communities and the aims of the ETH and ETC projects?

BS: One of the things that is important to me is learning from the lessons of what works generically and not trying to always rebuild from scratch. Certainly, there are new things that we don’t have a tried-and-true path for, but many things already have the tools and we shouldn’t reject them out-of-hand.

With ETC our approach ultimately started from a philosophical issue with the DAO hard fork, but the underlying message is deeper and more important. If you have a technocracy, that may be worse than the current system because those in control were never elected and have no accountability. ETH currently views that the DAO hard fork was ok, and there is a social consensus around future hard forks, but you also have a mob democracy, without a voting system, and no constitution. While I wouldn’t say that outside of the powerful early adopters the rest are serfs, but it still isn’t great.

There have also been those reciting an anti-ETC “purity pledge”, reading Vitalik’s comment following the hard fork, that –even if ETC outpaced ETH– he would concentrate 100% of his effort on ETH. I don’t think that was a negative comment on ETC per se, but a reflection of where he spent his time. It’s a nuance, but it’s important nonetheless.

The view in ETC is that there are some basic hardlines that we don’t cross, and that the base layer should be fixed with minimal changes. While it could be debated whether to allow the DAO HF or not because many viewed it as theft of funds that would have gone to developing the ecosystem, interventionism was a dangerous and slippery slope. In ETC this type of thing was strongly rejected. This also extended to issuance, ETC opted for a fixed upper limit of tokens to be created over time, like Bitcoin, because people were upset with the continuous changes they saw in ETH. The hope is that this will give people looking to build on ETC the certainty that things will remain stable for decades.

Some people have called this sociopathic, I don’t think that is fair, there is a strong social layer, and people respect the adherence to principles.

CP: You took the ED role at ETC Cooperative earlier this year, can you tell me about a few things that you are most proud of so far?

BS: There have been some big technology priorities that ETC has been taking on, and we’ve done a lot as a community to catch-up with the technology in the ETH stack. At the same time these changes are done in a way that minimises the impact on the protocol and reduces backward compatibility issues. Some examples of this have been rejecting gas price changes that were accepted by ETH, rejecting ProgPOW –which I believe has corporate profit motives and lacks strong technical justifications. We hope to catch up with the latest EIP (Ethereum Improvement Protocols) by mid-2020, and even implement some features, like EVM versioning before Ethereum, which we believe will prove extremely important.

After that we expect ETC to be objectively better as a technology stack than ETH, and with that show the Ethereum Foundation what good looks like. Unfortunately, due to the Ethereum Foundation shifting their focus to ETH 2.0, they haven’t properly focused on, or funded ETH 1.0 development, which gives us an opportunity to show people that a lot of the promises are still possible. Of course, this will also force projects to move up to layer-2 solutions, which we believe is positive. In addition, ETC benefits from not having the ICO bloat that beset ETH, which even if things pick up on layer-1 won’t necessarily suffer with a greater number of transactions.

In addition, as a community, I am proud that we have teams that are properly funding ideas and projects. It really feels like 2015 in Ethereum, but with better technology.

CP: Looking forward, we’re having a conversation this time next year. What are the milestones that you look at to say that we’ve have a good last 12 months?

BS: As our technology matures at a faster rate than ETH 1.x, and we properly fund development and projects and learn from the lessons of Ethereum and from other parts of industry, I look forward to new projects deciding that ETC is the right place to build.

CP: Bob, thank you very much for coming to speak with me and sharing your wealth of knowledge, I feel like there is a lot more that we need to talk about and hope that you’ll come back again soon.

BS: Thank you, this has been great, and I’d be happy to come back anytime.

As always, worth mentioning that nothing in this should be construed as an endorsement, or enticement to invest in any of the instruments or projects mentioned. We are big fans of crypto but cannot be relied on for financial advice. Please make sure to do your own research and consult a professional before making any investment decisions.