Why ICO self-regulation can’t work

Last week Ryan Selkis proposed a mechanism of ICO self-regulation, to avoid that state authorities like the SEC step in with their own. Reading the piece, my intuition was that the proposal is a good idea, but would never work — in principle.

Imagine that today, in 2018, the consumer protection agency of the US government stood up and expressed concern about the uptick in websites that are popping up on the internet that pose threats to consumers, and advised the website community that it’d better self-regulate; otherwise the agency itself will have to step in and lay down some internet website regulations.

In 2018, we’d collectively roll our eyes, and react with ridicule to the suggestion.

  • We’d note that, in the first place, the internet is global, and that any legal regulations applicable in the United States would simply put website owners there at a competitive disadvantage to the rest of the world, given the cost of compliance (whatever that might be).

  • We’d also note that the sheer number of websites on the internet, and the acceleration of their increasing appearance, would make any attempt at self-regulation as impractical as the hope that every operator of an e-commerce site would add that little “Secured by Verisign” graphic at the bottom of the checkout page. Consumers might have looked for that back in the day, but nobody does today.

  • We’d probably ask the consumer agency what they even mean by “the website community” in the first place?

But we might not have reacted like that in 1998. Back then, website builders considered themselves to be a community. US senators said if things didn’t slow down a bit, they might just shut the damn thing off. And many visionaries believed the appearance of internet “malls” was inevitable, where you go to shop at a variety of “online stores”—not related, of course, but that’s how good we were at envisioning where things were going!

So I believe today’s ICO situation is similar to the internet and the appearance of service-offering websites back in 1998. And just like the evolution of the internet that we’ve all now experienced, I believe the ICO landscape will play out similarly:

  • We’ll eventually have millions of ICOs, given that their issuance is permission-less, and executing on one will become as technically easy as getting a website online is today. The shape and mechanics of ICOs will evolve into derivative things we can’t even imagine, and which will continually widen the gap in similarity between an ICO and the issuance of securities. The sheer scale and complexity will make self-regulation of ICOs as impractical as self-regulation of websites, and will also end the sense we have today that a crypto or ICO “community” is even a thing.

  • The SEC will initially attempt to regulate ICOs—because there’s a clearer mapping of an ICO to a security issuance that there was between a website and anything regulated in 1998—and the consequence will be that, for a period of time, the issuance of ICOs will simply happen outside US borders, and Americans (as well as citizens of other countries whose governments have acted similarly) will be excluded, as we already see happening today. The SEC, under pressure from Americans and the growing difficulty of even articulating what exactly is being regulated, will eventually be forced to roll-back policies in order assuage the disadvantage placed on its citizens.

So my feeling is that an explosion of ICOs, and expansion of their form, is inevitable, and attempts at either self- or governmental regulation are simply wastes of time.

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