Henry Elder joins us today to talk about how real estate, one of the oldest forms of investing – around since practically the dawn of human civilization – is getting a fresh coat of paint through the application of blockchain technology and cryptocurrency.

Topics Covered in this Conversation with Henry Elder:

– Real estate as the ultimate imperishable good

– Real estate has built in scarcity

– What does it mean to tokenize real estate

– Why does real estate need blockchain technology and cryptocurrency

– Pain points and friction in the system

– Real estate is rooted in the past

– How real estate differentiates between haves and have-nots

– How tokenization creates liquidity in the market

– Initial customers will be institutional investors

– Tokenization of a real estate property in New York

– Complexity of global market and tax implications for overseas investors

– Crossing the educational hurdle

– Dealing with the high international demand for us real estate

– Maturation of investors regarding blockchain technology

– Real estate tokens are securities in terms of regulatory framework

– How he fell into the rabbit hole of real estate blockchain

– A generational way to change the way people invest in real estate

– Examples of real blockchain deals to date in real estate

– The Two Token Waterfall

– Still in the realm of the theoretical

– Fractional ownership vs. fractional investing

– Putting deeds on the blockchain

– Real estate is an archaic industry

– Level of efficiencies from blockchain technology

– Closing thoughts

Questions and Comments?

[email protected]

Guest Contact Information

Henry Elder

LinkedIn | Twitter | Telegram

Website: Digital Assets Advisors

Resource Links:

The Current State of Real Estate Tokenization

History of Real Estate

Understanding Illiquidity in Real Estate Investing

The Tokenization of the St. Regis Resort

The Tokenization of a $30 Million Manhattan Real Estate Property

Harbor Launches Platform for Tokenizing Private Securities with $20 Million Tokenization of Real Estate

This Manhattan Real Estate is Already Tokenizing Property on Blockchain

Real Estate ICOs Are Moving In, But Investors Aren’t Floored




Transcript:

Chitra: Henry, welcome to the program.

Henry: Thank you so much for having me. It's great to be here.

Chitra: It's great to have you. So I would open, I don't know why this show is making me want to use quotes, so I'm going to use a couple of quotes here. The first one is by Russell Sage, the American financier and politician. And he says "real estate is an imperishable asset ever increasing in value. It's the most solid security that human ingenuity has devised, it's the basis of all security and about the only indestructible security". Why is real estate considered a security?

Henry: Well, if I can respond in a quote, Mark Twain said, "Why real estate? Because they're not making any more of it, right?” That's why it's so secure. It is the ultimate imperishable good. There's not going to be any more real estate made. The real estate that you own will be the only real estate that ever exists there for all-time, right? Unless you build up. But the potential to build up on a piece of land just gives that land more value.

So he uses security in that sense and it kinda sounds like he's talking about investable securities, but I really think that he's talking about the security of, what's the word that I'm looking for? Bitcoin has the exact same characteristic in that it's scarce, it's scarce.

Chitra: So there's built in scarcity.

Henry: Yes, there is, it's the original built in scarcity. They're not making any more of it.

Chitra: So what does it mean then to tokenize the security?

Henry: So basically it means that you're taking the ownership interest, you are putting that ownership interest in some sort of a company and you're selling ownership of the company. And instead of investors taking that ownership interest in the form of a paper share, like you typically do, you're taking it the form of a token running on the blockchain.

Chitra: So I want to go to my second quote here, which is from President Franklin Roosevelt, and he says "real estate cannot be lost or stolen, nor can it be carried away, purchased with common sense, paid for in full and managed with reasonable care. It is about the safest investment in the world." If that is the case, why do we need blockchain technology and cryptocurrency to secure this form of real estate? What are the pain points? What's the friction in the system now? And how does blockchain technology make it safer?

Henry: So let's get back to that idea of security that the first quote brought up. It's sort of like Troy and the Trojan horse. Real estate is such a secure investment and the people who have been investing in real estate are so secure in that scarcity that they allowed in this Trojan horse of complacency thinking that look, I don't really have to worry about what goes on in the world outside. As long as I own this real estate, I'm secure.

And the problem is that the rest of the world continue to advance. And we live in this highly digital, instantaneous world now. Whereas real estate is stuck with these paper processes that are mired in the inefficiencies and a high friction of the 1950s. I mean, you could go back five, six, seven decades and talk to somebody who works in real estate back then and they would recognize nearly all of the processes that we're transacting real estate with today. It hasn't changed.

And so if you are, it's basically you divide it now between the wealthy and not wealthy. And if you're wealthy, you can go out and just purchase real estate wholesale or you can become an investor in a syndicate. And to invest in a syndicate you usually need to have in the order of hundreds of thousands of dollars at a minimum. And if you're not wealthy, your options are either crowdfunding or REITs (real estate investment trusts). And crowdfunding is not liquid and REITS, which are actually the only one of those four that I just said, buying real estate outright, investing in a syndicate and crowdfunding and REITS, REITS are the only one that's actually liquid. But the problem is that REITS are a cumbersome and expensive way to access the market for the people who actually own the real estate.

And so the only types of deals that you see hitting the market are very large deals on the order of hundreds of millions of dollars or more.

Chitra: So how does tokenization solve this problem and what does it mean to tokenize this real estate in that context?

Henry: Sure. So going back to what we were talking about before, it's you're taking the ownership of a company that owns the real estate. And this is totally normal in the real estate process. Typically if you're buying real estate, you're buying it through some sort of company. You control, if you're buying the real estate yourself, you spin up a completely new company. You create a new company, it's called a single purpose entity. And that company purchases the real estate and that company's name is what's actually on the deed. And then you own 100% of the company.

When we're tokenizing it, what we're doing is we're taking that ownership of the company and we are a encoding it into blockchain tokens and then selling those to people. In that process, what you're basically doing is you're combining the best parts of a REIT and the best parts of crowdfunding and mashing them together and creating a more efficient, less expensive process for you to access investors that's still liquid.

Chitra: And is this true for retail investors or is this primarily for institutional investors?

Henry: So it's true for both. The the adoption of this, I think, will primarily be driven by institutional investors because the companies that are doing this, that are sort of paving the way here are taking a lot of risk, right? They're trying a new technology. They're blazing a path, as they say, the pioneers take the arrows. And the safest investor for them to target first is the institutional investor.

There's a saying in the crowdfunding world, that's basically the guy who puts in $100 into your crowdfunded deal is going to be the most expensive client that you've ever acquired. Because those people, there's such a high level of education and customer service basically that they require, because they're not familiar with the tenets of investing. Whereas when you go and you find an institutional investor, they know how real estate investing works and they'll probably leave you alone for the most part to go do your thing.

So a lot of these people that are sort of blazing the trail with tokenization, I think they're probably going to be pursuing those institutional or high net worth investors first. However, the pipeline that they're creating, the technological rails effectively that they're creating to be able to do that, can easily start onboarding more retail investors once those companies have reached the size where they can deal with those investors.

Chitra: You've said to me before that tokenization is going to both globalize and democratize the real estate investing process. How is that going to happen? Especially the globalization piece?

Henry: Sure. So the globalization piece is particularly exciting for me. Earlier at the beginning of last year, actually spring of 2018, I was part of a team that tokenized a commercial real estate property in New York. And we took a $5,000,000 piece of that property and we sold it to international investors. We did that basically to prove the concept that you could use the blockchain to more easily access these investors and to allow them to more easily access real estate here in the United States.

Chitra: And how did you do that? Just simply, what was the process?

Henry: So that process, this was a little bit complex. It's interesting because, so first of all we had to build, we had to create that special single purpose entity. But the problem is that when you have international investors, they're subject to all kinds of different tax laws when they're investing in domestic US real estate. And so you have to build somewhat of a complex offshore structure in order to shield them from the effects of those tax regulations.

And so we had to build that whole structure. And then we had to go out and find these investors. Since we were one of the first people to do this there was a high educational hurdle that we had to surmount in order to get them to come on board. It's sort of funny because what we eventually ended up doing is, first of all the thesis that there is this massive unattended demand offshore that is trying to access US real estate, but that is unable to for whatever reason was proven out because every investor that we talked to was like, I want to invest in that real estate. I want to be part of this deal.

But nearly everyone that we talked to got hung up on the blockchain part of it because in early 2018 everyone was still thinking about ICOs. Everyone was still thinking about exchanges getting hacked. And Bitcoin being used for money laundering and human trafficking and whatever. And they didn't understand that the underlying technology was completely different. I mean, people get scanned on the internet all the time. That doesn't mean that email is not a good form of communication. But that connection was not there yet.

And so a lot of our investors just ended up coming in a without really caring about the blockchain side of it. Even though it did make it easier, not a lot of them realize that they were just like look, you're selling US real estate. I want real estate, US real estate, let's do it.

Over the past several months we've started to see that conversation change and we've started to see a maturation in those investors understanding of the differentiation between blockchain and ICOs and whatever stuff they're afraid of that's going on with Bitcoin or whatever, all of which I think is unfounded anyways.

Chitra: So when you do the tokenization, does that consider it a form of security?

Henry: Absolutely.

Chitra: And that's different from the traditional ICO, the utility tokens and things like that. So what's the legality of the stuff? Is it going to fall under the same kind of regulatory hurdles that have confronted utility tokens and ICOs?

Henry: It will fall under them in a different way. The difference is that ICOs and utility tokens primarily we're trying to argue that they were not securities and the SEC disagreed with quite a few of them and said no, these actually are security.

Chitra: And therefore should be regulated by the SEC or else they're illegal.

Henry: Exactly. They should be regulated by the SEC. They should either be registered with the SEC or they should comply with the registration exemption, which is also a controlled by the SEC.

The difference is that security tokens, whether they're real estate or art or equities or debt or whatever they are, from the get go we said are securities and therefore they will comply with all of the necessary SEC regulations that regulate securities. And so there was no are we security, are we not a security, but it's just these are securities and we're going to do everything that security is needed to do.

Chitra: So in terms of legality, people can feel free to invest?

Henry: 100%. They're totally legal. It's exactly the same thing as when you go on, trying to think of familiar crowdfunding websites. I know all the real estate ones. There's Fun Rise and Realty Mogul and Peer Street. And then on the other side of the equation, there's Start Engine. Indiegogo I think also does regulated crowdfunding. Those are all completely legal and those all fall under registration exemptions for crowdfunding, for accessing retail investors without having to go through the incredible hurdles of doing a full IPO.

Chitra: So how did you get involved in all of this, because I know you were kind of going about your own way and all of a sudden you saw the light on all of this real estate and tokenization and then you kind of went down the rabbit hole and then you said oh, I'm giving everything else up and this is my life. Talk a little bit about how that happened.

Henry: Yeah. And I did that after the market started going down. At the beginning of 2018 I was like, you know what, now's the time for me to jump in full-time. And I haven't looked back. I've loved it. But, so 2017 I think three security token issuances, Blockchain Capital, maybe there were four, but Blockchain Capital, Protose, Science Blockchain and I can't remember if Spice VC was 2017 or early 2018.

But so those sort of said all right, this is possible. But nobody really caught on because ICOs were going crazy and people were just making insane amounts of money in this more unregulated market. It wasn't until early 2018 that I saw real estate security token offerings starting to come down the pipeline. And the first one I saw was Slice. And so hopped on the Slice team [crosstalk].

Chitra: And you were in real estate at the time?

Henry: I was in real estate. I was working at a private equity fund in Beverly Hills doing value add commercial real estate deals all over the country. Which means that we would work with a real estate owner who wanted to buy a 200 unit apartment building and fix up all of the apartments and then sell it three years later for more money. I mean, it's the same thing as if you have a house and you fix up the the kitchen, right? You put in a new kitchen for $20,000 and the house was worth $50,000 more, right? Exact same thing just on a larger scale.

Chitra: But then you got involved in the whole tokenization piece.

Henry: Right.

Chitra: So what was the light bulb moment?

Henry: So the light bulb moment was a little bit something that's somewhat a little bit personal to me. And then also just the incredible opportunities in the blockchain space. But my family's been in real estate in Los Angeles for four generations.

Chitra: Wow.

Henry: And so real estate is something that I was always going to go into. I was doing this job, I was loving it, I was really good at it, but as I got further and further down in the blockchain rabbit hole, I was like wow, this technology and the protocols that underlie it are basically providing us with a new opportunity for humans to change the way that they interact in a business sense. And that presents a generational opportunity for us to change the way that people do real estate. And there was no way that I was going to be able to be a part of that conversation unless I just jumped in feet first.

I loved what I was doing beforehand, but it's something that I would have just done for the next 40 years and nothing would have changed. Or if it changed, it would have changed without me. And if the conversation was going to change, if it could change, I wanted to be a part of that. I wanted to be a driving force behind that.

Chitra: Now you try, you successfully did this New York deal to show that this is possible, but it seems like a lot of this stuff is still very much esoteric in the realm of the theoretical. How many real deals that have gone down using blockchain technology and real estate and where do you kind of see, what's the trajectory for this?

Henry: Yeah. So with blockchain and real estate, I think that ours was the first, the Slice deal. But then there were a couple of follow ons. There was the St. Regis deal, the St. Regis resort in Colorado, they tokenized $18,000,000 and sold that to a syndicate of investors. And then this group out of New York called Propeller teamed up with Air Swap to create a platform called Fluidity. And they created this two token waterfall basically taking the real estate capital stack and slicing it up in this innovative way. Because typically real estate is debt and equity. And then there are different ways that you can sort of cut that up, right?

With debt, you can have mezzanine debt, you can have junior debt. With equity, you can have preferred equity, you have common equity, you have LP equity, you have GP equity. What each of them are isn't pertinent to this discussion. But what Propeller realized is that with tokenization, since you're changing the way that people do business and you're opening their mind up to different ways of doing things, you could take those different pieces of the capital stack and combine them in ways that hadn't been done before.

And they demonstrated this with their white paper called the Two Token Waterfall. And then they put it into practice on a condo project in New York for I think it was $30 million dollars, which I thought was super interesting. And then another group, Cold Harbor did a $20,000,000 tokenization of a student housing property in South Carolina. And so all of those were I think in the second half of 2018. And in total, I mean, that's like what, $100 million less of, of deals.

So like you said, we still are sort of in the realm of the theoretical. Here are people who have done this, but they've been typically just single asset tokenization and they've been fairly small on the grand scheme of things. And so a lot of the benefits that tokenization can offer have not been fully realized yet because we don't have a large enough market to realize those things.

Chitra: So I don't want to go too in the weeds, but I think maybe we should talk a little bit about the difference between fractional investing, which I guess this falls under and fractional ownership, right? There's two different things. So is it relevant and is it important for people to understand the difference and the context?

Henry: Yes. So that's an interesting conversation because like you said, what we're talking about right now is fractional investing. And when you hop on Crypto Twitter or a Medium Post, a lot of them talk about how they're excited about the advent of fractional ownership. But that is very different in the context of real estate.

Ownership means that your name is on the deed right? It means that you are the owner, you're not an investor, you're not somebody who just put in money to see that money grow and get it back. You are the person who's making the money grow. And the difference particularly in real estate in the US is that if you are the owner and you make a bunch of money on a real estate project, then you can sell that project, take all the money that you made and use it to buy another project and you don't have to pay taxes on that, but you can only do that... You do have to pay taxes eventually, but you can basically continue doing this process and defer your taxes forever.

Chitra: Indefinitely, yeah.

Henry: You could do it until you die and then your children will inherit all of that property at a stepped up basis and all of it is wiped out. They never have to worry about that deferred tax bill. And this is all... do your own research. I'm not an attorney and I don't want anybody to jump in the real estate space and come back to me later.

Chitra: We're not in the advice business.

Henry: But that can only happen if you are an owner of real estate. It doesn't happen if you're an investor. And in real estate, there's two ways of ownership. There is direct ownership and there is tenant and common ownership. In order for that to happen in the tokenized world, what you need to start doing is representing deeds on the blockchain. And once we start doing that, that opens up a fascinating new world of real estate investment and ownership.

And there are people who are working on that, on putting title on the blockchain, but it's a long process. If I think real estate is archaic, I mean title is the most archaic part of it. I mean it's literally like, so title insurance, which I'm sure you're familiar with, there are these title companies, right? And these title companies maintain a record of the ownership for a bunch of different properties. And they work in concert with the county recorder's office, which holds the original record, but the title companies have had their records as well.

And what you're basically doing is you're paying the title company insurance against the fact that their record is wrong. And it's because this is a paper-based, high friction, manually verified process. It's totally ripe for disruption. But you have this mix of public, private, which is very difficult to, you've just got a lot of bureaucracy that you have to like weed your way through in order to start moving title onto the blockchain. But once it happens, you do open up that form of fractional ownership.

Chitra: So I guess to sum up, no area of investment is probably better suited for innovation like real estate and could really use the benefits of blockchain technology. But given how archaic everything is, it could take a while.

Henry: It could take a while.

Chitra: You could be a gray beard by the time it actually [crosstalk].

Henry: I love that, that term gray beard. But I certainly hope that I'm not, although I already have quite a few gray hairs, I'm very proud of them.

Chitra: All brought on by this.

Henry: Yeah. And I'm also like almost entirely incapable of growing a beard. I've tried several times. It's not something you want to see. But I would like to think that once people start to see the efficiencies, and was actually just talking about this yesterday at a real estate conference. I don't think that blockchain is necessarily going to give us 10x or 100x process efficiencies in real estate. But I am absolutely 100% certain that it will give us 5%, 10%, 15% efficiencies. And when you extrapolate that across the hundreds of trillions of dollars of real estate across the globe, that's a massive amount of money. That is huge. Like unfathomably huge.

And so once people start to realize that and they see oh wow, I can do this 10% better, I think the change is gonna come pretty quickly. The title thing is different, but the transactional part of it, tokenizing securities in real estate, I think that once you hit that hurdle of terminal velocity, I mean it's just like, it's going to go crazy from there.

Chitra: Great. Do you have any closing thoughts or key takeaways for people?

Henry: Yeah. I mean, number one is I jumped into this space eight or nine months ago and it feels like it's been multiple lifetimes. But I have to say I could not be happier that I did that. You hear a lot, like you'll go on YouTube and you'll see influencers and whatever and they're like oh, quit your job, blah, blah, blah, you'll be fine. And it's really difficult to make that leap and be like oh wow, maybe I really should do this thing.

But if you create a plan, save some money and you have something that you know you're really good at and you think it's gonna change the world and you can make a difference, I would definitely say, maybe you don't have a mortgage and you don't have kids. I noticed that I do, I do have those benefits. Then go for it. Go for it. There's no better time than now. And if you want to change the world then you should probably start yesterday because either you do it or somebody else is going to do it and you're just going to get left behind. And it's better to just be a part of that.

And so yeah, I'm happier than I've ever been and super excited to be a part of what's going on in this space.

Chitra: That's great to hear. That's a great closing thought. Where can people learn more about you and the work that you're doing?

Henry: Oh sure. On LinkedIn, I'm LinkedIn/in/henry_elder. And then my company's website, which is www.digitalassetadvisors.io or daa.ninja if that one's too long.

Chitra: Awesome. Thanks so much. Great having you.

Henry: Thanks Chitra. Yeah, awesome to be here. Thanks.

Guests: Calley Nye and Alison Burger

Title: Record Date: August 16, 2019

Air Date: February 7, 2019

Topic: Crypto Security Best Practices

In this special two-guest edition of Running with Unicorns, my guests, Calley Nye Founder of Syren.io, and  Alison Burger, Co-Founder of Women of Crypto, join us today to talk about security best practices in crypto investing. If you’re just starting to invest in crypto or even if you’re a veteran, these simple do and dos will help you avoid costly mistakes and protect your digital assets. This is a valuable primer with specific and practical recommendations to help you get started immediately on a path to safe investing.

Topics Covered in this Episode:

– Most valuable advice they received when becoming new investors

– On keeping it simple and playing it safe, but not to safe

– Avoiding the fear factor and dipping your toes in the market

– Different ways to store digital assets and security implications of each

– On keeping your hot and cold wallets safe

– Sobering moments they’ve had in tracking their crypto

– The difference between public and private keys and why that’s important

– The various points at which crypto security hygiene comes into play

– On the importance of protecting your phone and email address

– Call-to-Action on things to do TODAY to keep your crypto safe

– What to do when things go wrong despite your best efforts

– How to build a community of advisors

– You have to start somewhere sometime. Why not now?

– One thing they wish they’d known when getting started

– Their top three tips on safe crypto investing

Links and Resources:

• Crypto Security: Best Practices
  
• The Ten Commandments of Crypto Security
• 8 Cryptocurrency Best Practices (Keep Your Crypto Safe!)
• Crypto Security: How to Safely Own a Digital Asset
• Identity Thieves Hijack Cellphone Accounts to Go After Virtual Currency
• “My Crypto Got Hacked!” – True Stories About Security Breaches Leading to Devastating Losses and How These Can Be Prevented
• Lessons Learned from the Biggest Crypto Hacks in History
• The 8 Worst Cryptocurrency Hacks and History (And What Exactly Happened)
• Nearly $1 Billion Stolen In Crypto Hacks So Far This Year: Research
• 2018: A Record-Breaking Year for Crypto Exchange Hacks
  
• List of Cryptocurrency Exchange Hacks
  
• Coincheck Confirms Crypto Hack Loss Larger than Mt Gox
• Cryptocurrency Anti-Money Laundering Report
• This man's lost bitcoin are now worth $75m – and under 200,000 tonnes of garbage
• Military grade Swiss bunker opens vaults to crypto investors
• Crypto Exchanges Are NOT Your Banks

Questions and Comments?

[email protected]


Transcript:

Chitra: Welcome to Running with Unicorns, your portal into the world of cryptocurrencies. I'm Chitra Ragavan, Chief Strategy Officer at Gem. This podcast is recorded at the Gem Studios here in Los Angeles. The topic of today's discussion is security best practices in cryptocurrency investing. Joining me are two amazing guests, Calley Nye, Founder and CEO of Siren.io and Slumber Party.io. And Alison Burger, who is the Co-founder of Women of Crypto, the Instagram, Facebook, and Telegram communities.

Thank you so much for joining us.

Calley: Thank you for having us.

Alison: Thanks for having us.

Chitra: My first question is, what was the most valuable advice you received when starting investing and that you'd like to pass along, Alison?

Alison: Yeah, I would say that the best advice I got when I first started was to invest slowly. Go on to a main exchange, buy the main tokens, only invest like a hundred dollars at a time. Kind of play around with the market and see what's happening before going all in on any one coin, or any one investment, and kind of get your feet wet slow. Keep everything all in one place I think is important when you're just getting started, because otherwise it can be confusing.

Where did I leave my Ether, where did I put my Bitcoin, what did I do with that Litecoin. Keep it all in one place when you're just starting out. You can keep it on an exchange, in a wallet. Don't start selling too much, hold on to it, I think that's important too because eventually you're going to have to start reporting all of your transactions for tax purposes. So keep it simple, play it safe, I think those are my best tips.

Calley: That's good. I'd say don't be crippled by fear. It's good to have a healthy amount of fear when you're going into these things, but acknowledge it and own it, it is part of the process. Don't hold out too long, take chances, but take small chances, still be afraid of general risks and stuff like that. But generally, just acknowledge fear as part of the process.

Chitra: All great advice. So let's step back for a minute and ask, what are the different ways to store crypto assets? What are the security implications of each of those?

Calley: I'd say there's a few. Obviously there are hot and cold wallets. Hot wallets meaning they're connected to the Internet, cold wallets meaning they're not connected to the Internet, and there are also exchanges. They all have different risks. I like to diversify, so I have some in exchanges, the risks there are that somebody can get your login and steal all your money and send it out, and they can't do anything about that, or that the exchange itself is compromised in some way.

Calley: For hot and cold wallets, generally one of the biggest risks is that you can just lose your private key or lose access to it, because it's custodial. You're owning it, so it's your responsibility which is always kind of a scary thing to have that much responsibility. So, yeah. I would say keep everything diversified, and keep it in a few different places, that's the safest way, because nothing is really that safe.

Alison: I mean, I think she covered all of it, but I'll just leave everyone with one last thought, which is, wallets these days are their own banks. So they're super, super important because we're used to having our money backed by the Federal Reserve in bank accounts, which can easily be recovered if we call and say, "I didn't spend that money." So, I think it's super, super important to think about wallets and where you're going to keep them, and also I would say having a physical hardware wallet is probably the safest, but also the most prone to, "Oops, I don't know what I did with it. Where did it go? I put it in the safe, but then someone was in my house so I took it with me somewhere, and oh my gosh, what did I do with it?"

So, always have a back up there.

Chitra: I recently had that experience. I couldn't kind find what it is I wanted, a couple of moments of panic there. But it seems like the sense of responsibility and ownership seems to be one of the things that really defines crypto investing compared to traditional investing, that you are really responsible for your wealth.

Calley: That's the scariest part honestly. That it's all on you. There's not anybody to blame, that you're not gonna call your mom and say, "This bank is so stupid." It's all on you, and it's really hard to have that kind of responsibility, and we're just not used to it. I like it, I think that I trust myself and I trust my abilities more than other people's. So I like having that aspect, but a lot of people can get scared by it. It's also just so new to understand... you can't call somebody and say, "I forgot my password or I don't know how to access my account. Someone stole my money.” There's nobody to answer the phone.

Chitra: Is there any moment when you had that realization early in the game?

Alison: Yes, but not through a physical wallet issue, another issue, where I thought I had transferred a certain amount, but I didn't see the whole amount go into the other exchange, and I'm not sure where it went, and I tried to track it. Yeah. When you start exchanging coin-for-coin instead of buying fresh with USD it starts to get confusing.

Calley: Yeah. I remember there was one time I sent money on GDAX. I think I was just sending it from GDAX to MyEtherWallet. I was still early on so I was still managing the private key, which was so stressful to have this private key that you would have to paste before I got my Ledger.

And I remember. That was right when I sent it, GDAX kind of went down. So I spent six hours just in utter fear that I had screwed up, and it wasn't gonna get there.

Chitra: GDAX being the exchange for beginners, GDAX being the exchange, the private key.

Calley: It's actually technically Coinbase Pro, I keep forgetting that now, but yeah I was... that's how you convert to USD, so I was getting paid in Ethereum at the time. So I was putting large sums of money in Ethereum that I would have to transfer all at once. So…

Chitra: And define private key for those who are just starting out.

Calley: Well private key... When you think about the private and public keys, your public key is like your bank account number and your private key is like your ATM pin. That's the one you're not gonna be sharing with everybody. And one is just the identifier where the money is going and one is how to access. It's the control. So that's one. MyEtherWallet is a really popular tool and they have such heavy warnings when you sign in because they're like, "Please, please,” it's like a 12-page pop-up that's like, "Are you sure you understand that this not a bank?" And so before the Ledger Wallet, I was copying and pasting my private key. And it just really stressed me out - that whole process - that it could've been hacked or if I could've been sending money to somebody else. It was very very stressful. So, yeah.

Chitra: When I first saw that extensive disclosure on MyEtherWallet…

Calley: Yeah.

Chitra: I just exed out of the browser and just decided not to do anything for a few weeks.

Alison: Abort mission.

Calley: Yeah.

Chitra: Yeah. But so you find kind of this pathway - right - through which people invest. What are the different points where your security best practices come into play?

Alison: I would say immediately, of course. Even when you're just starting out and say you want to create an account on Coinbase. At that point, I think the very first thing to do is go into Gmail, create a new email account that no one ever will know - a very secret account that you only use for your crypto-exchanges, wallets, transactions. Even online banking you can put there. Things like legal documents for corporations and what not; and companies and LLC's; medical records, things like that. Or just your crypto. That's fine, too. But I think even just when you're first getting your first exchange, your first account with your first exchange, get that email set up. That's very important. And at the same time, you might as well get a Google Voice account, right then and there.

Get a different number. Make sure you'll be using that number for any sort of public page that's gonna display your cell phone number or your business cards, your website, something like that. And then, remove your personal cell phone number from all of your Gmail accounts and all of your email accounts, really. Those are some really good first steps in the very beginning of the process.

Calley: Yeah and in my experience, people have - women especially, in my experience... Because with Slumber Party, I talk to a lot of women who are just starting out in their crypto-journey. They use all these security best practices and things like that. It's kind of an excuse to not start. They're kind of scared off by the idea. So I say it's usually pretty safe just putting 20 bucks in Coinbase. Just download the app and put in 20 bucks and see how that goes. And then if you're still willing, it gets you excited and you're still willing to put more in... Then as you progressively add more money, you can progressively get safer as you go. If you lose 20 bucks, who really cares? The longer you get into it, the more money that you get, the more you should take an interest.

I started out, I was working a broke startup job. I was starting a new company and was making very very little money per year, so I was basically saving like 5 dollars a week. And I was putting $5 a week in my Coinbase account. And after like 4 months of that, when Ethereum was 7 dollars... So after a few months of it and it hit 300 and I had a thousand dollars. So it was like... That's when I was like, "Now I have to start getting serious about this.” And around then is when I bought my first Ledger Wallet and I started playing around with exchanges and I started cracking down on everything. But there's people who have millions of dollars in crypto who have lighter security practices than the people who are getting crippled with $100. So, kind of keep it in perspective too. The email one is just a super easy one to do. You might as well just do that. But the other thing is the hardware wallet. You don't have to go overboard at first.

Chitra: Yeah. So if there was a call-to-action to everybody listening and watching this, what would that one thing be that everyone should do today?

Alison: I would say the most important thing is to secure your phone number, your personal phone number and get a Google Voice number and to actually secure your phone number. Call your provider and say, "Hey, I'm trying to avoid my account being ported, my number being ported. Can you turn... " I think some providers can actually disable the ability to port a number and you can ask them for that. But also add another level of security onto your phone number so if someone tries to call and reset your password or get access to your phone number, you can then have a private key that they actually won't know.

Calley: Yeah. I would just agree with that.

Chitra: You would disagree?

Calley: Yeah, I would agree with that.

Chitra: Oh, you would agree with that?

Calley: Yeah.

Chitra: Okay. So despite all of our best efforts, something happens. How do you recover and what are the kinds of things that can happen, that can go wrong in this process?

Calley: Well I would say, definitely don't give up because... Kind of accept it as a loss and rebuild from there. But if you stop, then that's just a loss. But from obviously resetting everything, wiping your phone, starting from scratch, even maybe wiping your computer cause you never know what kind of malware that can cause that... Changing your passwords everywhere, moving everything to new wallets... It's super easy to create new wallets and move everything over, buy a new Ledger, basically reset everything. And really take a look at... Obviously, it depends on what happened, if you can diagnose what happened. And learn from those mistakes.

Chitra: Do you have any advice…

Alison: All awesome advice. Another thing that I would do - or probably the first thing that I would do - would be to call one of my best friends who's a tech genius guru - knows everything, blockchain, and just tech in general - and ask for his/her support.

Chitra: Cry for help.

Calley: Yeah.

Chitra: Or call for help, I guess.

Alison: He's kind of a hacker so he would know.

Calley: Yeah. One of my favorite things about crypto is that it's decentralized, which means we would have to rely on each other for the system to work. So communities are really important. So going to your favorite community and having a community, in the first place, is a good preventative step too. Cause they'll always... You can learn lessons from them, through them, pass on this tribal knowledge, and maybe prevent things before they happen. Like if somebody else gets hacked, you’ll know. Then they know how to prevent it the next time for you. So being involved in communities is a really important step and especially when you're going through something like that. Going to the community and asking them for their support is always helpful.

Chitra: That's great. And in closing, looking back at when you were first starting, is there one thing you wish you had known or something you'd have done differently if you had the opportunity to start with a clean slate?

Calley: I probably would've started sooner. I think I probably waited 2 years before I felt comfortable enough to do it. And I think it would be really different if I didn't wait. So if you're thinking about it, just dip your toe in. You don't have to jump in, yet. Dip your toe in and be tentative, but brave. There's a lot to learn. There's a lot to do. It's really fun. So I wouldn't... I would tell everybody that and I wish I could tell myself that 3 years ago.

Alison: I definitely agree with that. I think all of us on planet Earth are kicking ourselves that we didn't do it... That's a big one, for sure. What else? Probably getting myself secure sooner, too. Right now is actually one of the best times to get started and buy and get involved because the markets are down, by the dip. You know? That's a real thing. Right now, I'm buying more. I recommend that everybody else buy more and hold on to it because we're here for the long-run. It's not just about gains. It's not just about making money. It's about so much more.

Chitra: So they shouldn't look at the fluctuations and think, "This is not a good time" and…

Calley: Yeah, I think there's this paradox that this technology is gonna change the world and it has the power to do so much for so many people and so much good that we can't just look at the numbers. It's not just those numbers. Those numbers can represent the larger, the whole, but the volatility - if anything - is gonna be what prevents it from being great. Because the volatility is what prevents people from actually taking action with it and from it being a viable currency. So eventually the volatility will die down and it will become more stable. So I see this as a good thing. This volatility thing is kind of evening out to a certain extent. It's a good thing in the long term for the technology. It may not be good for our portfolios but I'm in it because I believe in the technology and I believe in what it can do. So I'm in it for the long haul.

Chitra: We've talked about a lot of things today, given people a lot of advice. What are the top 3 tips that you would like to share that they should take away?

Alison: Yeah. I would say top 3 takeaways and action items from today would be phone number, making sure your phone number is secure, meaning removing it from all your emails as a backup, getting a Google Voice number and replacing all of your listings of your phone number on any public place. Start giving that phone number out on your business card, things like that. I would also say number two is going to be get a secret email account that no one else has access to or even knows exists. Use that for all of your crypto-logins. And number three, make sure to have some sort of password-saving application on your computer. So even something like a LastPass or 1Password, which comes with Mac and have a master password for that that's never touched the internet anywhere. Make that the most secure password that you have. Save all of your passwords there.

You can also save your public keys and other two-factor authentication passwords inside of LastPass in the note section which is like extra extra hidden away, which obviously you need a password to get into. And then also have a Google Authenticator on your phone and use that for all of your accounts.

Calley: To add on to that list - because those are all great - I would say that in any type of technical system, the biggest vulnerability is you and humans. So basically, there's always these things that we have to be extra careful of. There's one thing that we haven't really talked about but is plaguing, ends up in people losing their crypto, is scams. And so when you are sending money to anybody, make sure you're triple, quadruple sure that this is the right person, the address is secure. I've seen it a lot with the token sales that I've worked on. We have a lot of fake people messaging. People were in the Telegram group saying, "Hey, we have this special deal for you because you've been here for so long. You're such a great member. All you have to do is send your Ethereum to this number.” And I know that some token sales have had more money scammed than actually raised for the technology. So be extra careful of those types of things. It's not just technology or hackers. It's sometimes you being not as smart. So just be super clear about all those things.

Haves secure passwords. It doesn't necessarily mean that they're hard to remember. A character is a character to a machine, so numbers and special characters don't really make that much of a difference. So it's better to have a longer password. So if it's a sentence or if it's a longer thought, it's a little bit easier for us to remember and also harder for a computer to crack. And again, just don't be so afraid.

Chitra: That's great and have you learned lessons the hard way? Have each of you lost money or had your phones hijacked or afraid that they were about to be hijacked? Have you ever had a close-call or have you been practicing these things and you've managed to be safe?

Alison: I've had close friends be hacked so that almost feels like it's close enough for me. Thank goodness I have not been hacked or ported or anything like that yet.

Calley: Yeah, I - knock on wood - I haven't been hacked but as a community manager, I've had to be supportive of a lot of people who've lost money in different ways. But for the most part, another thing that's really important is to be really cognizant of how your technology works. Don't take it for granted like your phone. Usually you have these patterns that you have your phone... By the end of the day it's at 30 percent, you plug it in on your nightstand. That's a pattern. If that pattern never changes, then that's something you have to be afraid of. So that's one of the things that you have to look out for. So sometimes if my battery's running too hot or if it's running out too fast, I'll just reset my phone to factory settings just to make sure that there isn't anything sneaking on there. I do the same thing with computers.

I used to be a coder so I'm pretty on top of keeping everything really safe and secure. So I think I'm lucky but also pretty good at protecting myself so everybody just needs to do the same. But I've seen a lot. It happens to the best of us, even the best hackers I know have been hacked.

Chitra: Which goes to your point of having a community and having friends, people you can trust. You can call and say, "Hey, my computer's running super hot. Should I be worried?" or "There's this suspicious thing going on on my laptop. What should I do?" And for those of us that are lucky to be surrounded by people like that at work or with friends in community, it's really easier. But there are probably a lot of people that are out there who don't have that so who can they turn to? Do they just build that community over time?

Calley: I'd say these communities are really open. There are a lot of great communities of Facebook and Telegram. There's really... There's no reason to not be in any of them and they can be really great. I work with one company called Coin Vision and they have a community on Discord that's really helpful and I've learned so much from just being in that community. I have a community for women on Facebook called Slumber Party. These communities are easy to access. They're usually looking for more people and those are communities where you can feel safe. You don't have to feel like you're asking a stupid question or that anyone's gonna laugh at you or mock you. It's obviously something that happens on other places on the Internet, Reddit... No matter what you use, there's some place. There's some crypto-community that you can reach out to and they'll be happy to have you.

Alison: I agree. Just get involved. Find a community if you're not in one already.

Calley: Yeah, don't be afraid.

Alison: You can join Women of Crypto, or Slumber Party. There are so many.

Chitra: That's great.

Calley: Yeah.

Chitra: Anything else I haven't covered that would be worth noting?

Alison: I think that's it for me.

Chitra: Awesome. Well, thank you so much again for joining us.

Calley: Thank you.

Alison: Thank you.

Chitra: Looking forward to having you on again, soon.

Calley: Yeah.

Alison: Thanks.

Calley: Thanks for joining us. Thanks for watching. Join us again next time for another edition of Running with Unicorns. Until then, enjoy your crypto journey, unicorns.

Guest:  Matt Smith

Title: Crypto Prediction Markets: The Good, the Bad, the Ugly

Record Date: 1/9/2019

Air Date: 1/31/2019

Topic: Crypto Predictions Markets

Matt Smith joins us today to talk about how crypto prediction markets work, how blockchain technology is being used to modernize online gambling, which essentially allows people to speculate on the outcome of all kinds of future events. We discuss some of the common applications of these prediction markets and their pros and cons. And we dive into some of the deep implications of the more controversial betting markets on these platforms, such as assassination markets and mass casualties in future unknown terrorist attacks. It’s a fascinating discussion. Join us!

Topics Covered in this Episode:

– Sports gambling is very much in the news

– Brief history of sports gambling laws in the United States

– 2018 Supreme Court decision giving power to states on sports gambling

– Will online sports gambling be next step of legalizing gambling?

– How traditional prediction markets work

– Prediction markets and how they utilize the “wisdom of crowds”

– Different formulations of prediction markets

– Crypto prediction market as a new twist on an age-old idea

– Benefits of decentralized prediction markets – better security and censorship resistance, global pool of liquidity

– Could shape future of online sports gambling

– Core innovation – gambling good way to bootstrap new crypto networks, uncover information otherwise hidden, inject data verifiably into the blockchain ecosystem

– NJ Refund of bets example

– How these platforms actually work? How do you place bets and create markets?

– How censorship resistant decentralized betting platforms such as Augur work, interacting directly with the markets, using the blockchain

– On killing the kill switch of this network and what that means

– On assassination markets and the potential implications of that

– On political bad actors and how they could manipulate assassination markets

– Where all this is heading, maybe to the courts

– How dispute resolution works on these platforms

– Some recent disputes such as the recent US midterm elections and baseball and how they are being resolved

– Closing thoughts

Links and Resources:

• Betting on the national anthem: An American tradition
• Biggest Super Bowl LIII bets
• 2019 Super Bowl Betting Odds: Spread, Total & Prop Betting Action Update
• Supreme Court Ruling Favors Sports Betting
• MURPHY, GOVERNOR OF NEW JERSEY, ET AL. v.NATIONAL COLLEGIATE ATHLETIC ASSN. ET AL.
• US Betting Sites
• Sports Betting May Soon Be Legal in New York, but Only 4 Casinos Upstate Would Offer It
• Will Sports Betting Transform How Games Are Watched, and Even Played?
• Prediction Markets
• Four Prediction Market Platforms Compared
• The Weirdest Prediction Markets on Augur Right Now
• Crypto Prediction Market Augur Is Gearing Up for Its First Major Upgrade
• The First Augur Assassination Markets Have Arrived
• The Weirdest Prediction Markets on Augur Right Now - Yahoo Finance
• What are Blockchain Prediction Markets?
• Decentralized Prediction Markets: the Opportunities, the Threats, and
• Prediction markets are hot AF right now. – Hacker
• As Crypto Meets Prediction Markets, Regulators Take Notice
• Decentralized Prediction Markets: How Blockchain Crypto Betting Works?
• Why You Should Try Decentralized Prediction Markets Right Now
• If the "Which party will control the House after 2018 U.S. Midterm Election?" resolves to anything but 'Democrats' I'm never using Augur again
• Augur Betting, Over 2 Million for the US Election
• N.J. sports book refunds bets from Saints game after blown call

Questions and Comments?

[email protected]

Transcript

Chitra: Welcome to the show, Matt. It's great to have you.

Matt: Thanks, Chitra. It's always good to be at Gem.

Chitra: Wonderful. Before we go into what crypto-based prediction markets are, let's talk a little bit about what are prediction markets and how do they work?

Matt: Yeah sure. So a prediction market is a market like any other. It's a place where commerce happens, where things are bought and sold. The name can be a little misleading because you're not buying predictions. What you're buying are stake, you're buying a stake, like a position, in the outcome of some event. The thing that's unique about a prediction market is that you can bet on the outcome of any event. So say I care a lot about sports and I want to put money on my position that the Yankees are absolutely gonna beat the Red Sox, obviously, and maybe that's illegal where I do it, but I'll go to my bookie and I'll say hey I think the Red Sox are gonna win, I've looked at the stats, they're gonna win so I'm gonna put this much money on it, give me some odds. Then whenever that event resolves, I get money back if I'm right and then I lose my money if I'm wrong.

Chitra: Okay. So there's a lot of science and math behind this because it essentially goes to the notion of the wisdom of crowds. That an individual's intelligence gathering is a lot less powerful than that of a number of people. So it's essentially aggregating of information.

Matt: Yeah. It's not necessarily just that like you get 100 people in a room and those people are gonna make a better decision than one person in isolation. What these markets really do, if they are liquid and highly available, if you have access to a large number of people, there's gonna be people in that crowd that have some insight. That maybe have inside information or have studied the mechanics of whatever is gonna drive the outcome of the result. A prediction market can enable those people to monetize that knowledge, that insight. So people that don't know really any information about the Red Sox or the Yankees, they're not gonna bet on it because they don't know who's gonna win, it would be a very risky proposition for them, but someone that has inside information like their best hitter got injured but they haven't announced it yet, he's got a real strong incentive to go and make a big bet on the Yankees.

Chitra: Right. So there's a lot of value to this.

Matt: Yeah. So you can absolutely uncover information that would otherwise remain hidden. That's why we call it a prediction market because the market as a whole for the outcome of some event predicts what the outcome will be.

Chitra: These are binary decision making right on sort of discrete events?

Matt: There are actually a bunch of different formulations, different constructions you can do for models. Binary is probably the most common, easiest to understand. Like this is gonna happen or this is gonna happen. One of these two things is gonna happen. That's available on most of the prediction markets we're gonna talk about today. You can also do categories, like multiple choice A, B, C or D. Or you can do like a scale or range, a numerical range. Like it's gonna be somewhere between this value... You can have a curve where the payout is proportional to where it falls on this graph. Those are a little bit more complicated so maybe it's easier to talk about the binary option. Binary options are fairly interesting because binary option is an existing financial instrument, and prediction markets as a class sort of mimic their pay where there's a threshold, and one thing happens or the other thing happens and then you pay out accordingly.

Chitra: So now let's talk about crypto-based prediction markets. Now, prediction markets are very old. They go back to like 1884 or something like that. So are crypto prediction markets basically a new twist on a very old idea?

Matt: That feels like a leading question, Chitra. Totally - they are. We've seen political election markets way, way back, people do things like buy votes because there's a financial incentive to make their party win because they had bet a lot of money on this one candidate winning. So, yeah, people definitely do this and that's why we see regulations emerge around what you can bet on, what you can't bet on. Crypto prediction markets are interesting because we get a lot of the, after what you see in blockchain and decentralized applications that are well suited to the form, which means that they eliminate counterparty risk.

Chitra: What does that mean?

Matt: So when I go to bet on the Red Sox or the Yankees and say it's illegal. I think there are regulatory changes in the US where maybe sports betting is okay now, but until very recently at least it was illegal to bet on sports in most jurisdictions. So if I'm gonna go and place that bet, I'm gonna be going to a bookie who's breaking the law. Because this is like a shady area, there's a chance that when I give him my money and tell him to give me more money back if I'm right, there's a chance that he just doesn't do that. I'm still right, but he just goes away. My risk is that my counterparty, the person I'm interacting with, this guy, is going to abscond.

This risk exists in most centralized systems, not just in these fringe ones or these illegal markets where it's definitely much more risky because there isn't regulatory oversight, but even if you're trading on a normal financial exchange, foreign exchange or something. There's still a risk that your counterparty person that you're trading directly with through this intermediary won't be able to satisfy the order and you'll be left out in the cold.

Matt: So there's a counterparty risk, and we can eliminate this, we do this in decentralized exchange protocols, like the 0x protocol and Ether Delta and these other applications. The other thing that we get by using a blockchain is we get this censorship resistance. So like I said, it's illegal on these jurisdictions to gamble on a lot of things like political elections, it's illegal almost everywhere to gamble on them because it sort of undermines the integrity of the election. So you can't really do that. But in a decentralized prediction market, it's really hard to enforce those rules. You can't really say no you can do you can do this but not this. You sort of do whatever you want. Maybe that's a good thing because there are some jurisdictions where your access to financial markets in general is restricted.

This is a mechanism that maybe some corrupt governments might use to keep certain segments of the population from accessing the broader financial markets. Like we can look at the currency controls in China. They have limited access to international markets. Prediction markets are cool because you can use them to emulate almost any financial instrument. I can make a prediction market for what will the price of the British pound versus the US dollar be on such and such a date? Then I can basically create this synthetic forex market out of this decentralized platform. So they're very versatile. And because they're censorship resistant, they're also international. I can reach across borders. I've got this huge global pool of liquidity. Everyone in the world that wants to bet on the Red Sox versus the Yankees can do it in this one place.

Chitra: So someone in China could make a prediction on who's gonna win the World Cup or something like that.

Matt: Absolutely. Yeah, absolutely. That's a cool thing because normally these sort of markets, especially when they're illegal, are localized. They're focused on a small local area. Or they're run by a centralized online exchange, and those we saw with the dark web Silk Road markets and those kind of things, those are very vulnerable to people absconding with money because that's what you've ascended to. So the conflicts of those three factors are what make these really uniquely valuable in terms of a betting market or trading exchange kind of thing.

Chitra: So what's the core innovation here? What's the true value of these decentralized platforms do you think? If you were to sum it up.

Matt: Gambling is a good way to get network, bootstrap network. Because everyone likes to gamble. We've been doing this forever. Dice is a really old kind of game people bet on. It's something people want to do and it's something that governments tend to restrict people's access to. So we can get a lot of people on this platform to start using it. But the results of using these markets is we get two really cool things out of these prediction markets.

The first thing is that we can uncover information the world has at large but isn't able to voice about what's going to happen to the world. We were talking about earlier, maybe it's something trivial like the Red Sox versus the Yankees, or maybe it's something much more meaningful, and I struggle to find a good example because I didn't prepare well enough, but we can sort of see, maybe we're talking about an election or something, and maybe there was some key insight about what's gonna happen in this local election that a few people have. So we might be able to give them a financial incentive to reveal that information monetarily, and potentially anonymously if you're very careful, so they get rewarded for telling the world that they feel very strong, they feel this many dollars strongly that this is gonna happen. So we get this information service.

The other thing that we get out of these platforms is specifically in the blockchain space is that we get this information from the outside world, like Yankees versus Red Sox or who won the election, and we are able to inject it in a trusted verifiable way into a blockchain ecosystem. This maybe will get a little technical, but the way smart contracts on most blockchain platforms work is that they're what's called deterministic. There's no opportunity for them to have any sort of randomness. They just sort of are a pure result of whatever the inputs to the function of this smart contract program is. That's cool, but what it restricts you to is that you can't get any non-deterministic sources. So you can't reach out to the normal Internet. You can't go to like Weather.com and then figure out what is the weather today?

So there's no really great way for you to write programs that run in a decentralized application that act on these external real-world events. You can do it with what's called an oracle. There are a few sites and services that will do this, where you say like take the information that's published on this webpage and then insert it into the blockchain. That is one way to address a problem. The problem with it is that you have to trust the service that's doing that. One person is publishing a transaction that says the weather is 95 degrees today. The cool thing about these prediction markets when they run on this blockchain is that there are financial incentives to make sure that everyone that's participating agrees this is actually what happens. It was actually 95 degrees that day. Trump actually won the election.

Chitra: So basically you're putting money behind it so it makes a difference.

Matt: Right. You're putting an incentive for everyone that knows that this thing happened to say this is the thing that happened and they will lose that money if they lie. This is really powerful because other smart contracts can leverage these platforms. They can point at these prediction market contracts and say okay I'm interested in the outcome of this result, I want to know what happens. I want my contract to do something in case Trump wins, in case Hillary wins or whatever. Which is something you couldn't really very verifiably or trustlessly do before these sort of decentralized oracles existed. That I think is really powerful and it amps up what we can do with these decentralized applications.

Chitra: Let's talk about how these markets actually work. There are a handful of these crypto prediction markets, Augur being one of them. How do they actually work? How do you make a bet? If I were a betting person.

Matt: Yeah if you were a betting person, Chitra. It's not too dissimilar from how you would log into a normal betting website I guess. It's not very much like a casino where you go play online poker. I have not used that many actual gambling applications, so I don't know what the UI looks like. But basically what you're gonna do is you're gonna go to some website that is gonna be running a server with a connection to the blockchain. Or you're gonna download an application that connects to the blockchain. Maybe there's some sync time. People are familiar when you download the Bitcoin wallet, the main bitcoin log, it takes ages to sync and stuff. You might run into that depending on how you access it, but there are ways around that.

So you get to basically just a web page. It's gonna have a list of all these markets that exist, maybe they'll be categorized. They'll say like these are the sports betting markets, these are the political markets, these are financial markets and stuff. You can go and you can see which markets have been created. Anyone can go and create a market. Anyone can be like I want to create a market for this thing that I want to know about, and that I think I have insight on and I'm gonna bet on myself. So you look at all these and you say okay Yankees, Red Sox, I'm interested in this. So you click on the thing and then you can see that there's a price. So Yankees v. Red Sox, Yankees, Red Sox. There are gonna be two outcomes and you'll see shares for each of these outcomes. So there are yes shares, there are Red Sox shares and there are Yankees shares.

So you can buy either of those and each of those will have a price in Ether. Eventually when we have more stable coin support, you'll be able to buy it in a USD token. But it'll be a cryptocurrency. It will also run on that same blockchain network. So you'll have a blockchain wallet, Metamask, or the Edge Wallet, something like that. Then you're going to say I want to buy such and such Boston shares, Red Sox shares. They'll have some price in Ether and then you go and you buy it.

Another thing that you can do is you can take one Ether and then you can deposit it into the market in some models, and then you'll get equal, you'll get one of both shares, and then you can sell the share that you think's not gonna happen. So there are a couple different mechanisms for that. Basically you're buying shares in the outcome of this market.

Chitra: And using crypto to do that.

Matt: And you're using crypto to do that.

Chitra: Okay.

Matt: So then what's gonna happen is there's gonna be a time when it's set to resolve, like whoever created the market is gonna say this is happening on such and such date. And when that time comes, he or somebody is gonna put in an initial report on what the outcome was, and there's a dispute phase where we sort of... The blockchain comes to an agreement, we come to a consensus on what the outcome of the market was. Once it's decided, everyone with the Boston shares, those Boston shares are now worth 100 percent of the total Ether put into the market, and all the Yankee shares are worth nothing. So if you are stuck holding a bunch of Yankee shares you're like oh that's great. This is blockchain evidence that I made a bad bet. Then the other people get their money.

Chitra: If you didn't already know that you made a bad bet, you have…

Matt: Yeah now you have verifiable evidence.

Chitra: Your empty wallet being an example of having made a bad bet.

Matt: Exactly. But the winners will get that money back into the wallet they used to interact with the protocol. It's pretty straight forward as a trader. The ones that are live, Augur is maybe the biggest one that people talk about right now because it's live and you can actually use it. So their UI is fairly straightforward to use if you're just betting on things. You just see graphs, you see yes no, you see percentages, how many of these token exists and how many you can buy in the network and stuff. So it looks a lot like if you go to a normal exchange where there are a bunch of little mini exchanges.

Chitra: Okay. So we've talked about some of the more straightforward applications, sports, politics, weather. But some of these prediction markets have also some pretty weird and controversial use cases. You've heard about these assassination markets on Augur where people are prediction on celebrity killings, of politicians and other famous people. You've got, what are some of these examples and how did that come about? You've got terrorist attacks, predicting how many mass casualties will happen as a result of an attack.

Matt: Yeah. So like we said, it's a censorship-resistant platform, like Augur we'll take as an example. The software is built by a company called the Forecast Foundation, and they just deployed these smart contracts on the network. They created this token REP, which stands for reputation. There's a fixed supply of those. Those are the people that get to report on outcomes of events. So that's all they really... They put the contracts out there and they created software where you can use this platform to create your own prediction markets. But they didn't create any, they don't control, they don't run like a centralized server where you can go and interact. It's like you download the app and you interact directly with the blockchain protocol.

So they're sort of hands off. You can do whatever. They did for a short period of time have a killswitch when they were first pulling the network to make sure everything went okay. But they burned that killswitch. It's done now. Nobody can turn this off. It's just there. Unless somebody hacks it, and that happens. But so what that means is nobody really has any control over which markets can be created. Anyone can create whatever market they want. There's a small fee to create a market or whatever and if you're willing to stake that, create a market for it. Then anybody that sees that market can go and bet on it. So that's cool because it gives a lot of people access to instruments they wouldn't otherwise be able to get exposure to, and it lets us bet on things that maybe we should be allowed to but for whatever regulatory reasons we can't.

But it also means that we can bet on things that for good reasons we aren't really supposed to. So the assassination markets are a really good example. Basically people create a market that says will such and such political figure die by the end of such and such time frame? The problem with that is it's not just an event that's out of everyone's hands that will sort of occur, this is true with sports betting too which is one of the reasons sports betting is illegal in a lot of jurisdictions. Having a market where you can go bet on one of those outcomes, political figure A will die, creates an incentive for anyone to go and affect that outcome. So I would go and bet yes, I would not, a person might go and bet yes and then go actually commit that murder. Then he would have a big financial incentive.

So that's why we call them assassination markets rather than just a normal prediction market on what's gonna happen. Will he die of natural causes or whatever? It creates this incentive to do this. This is actually really kinda scary. These existed on Augur, but it's not really a big deal because no one's betting on them. So no one's gonna interact with a market if the liquidity is really low because the potential reward is very low, correspondingly low. Most of these markets on the Augur platform which is the only one that I think that is live, are below a thousand dollars total stake opened in these markets. That's a fact because there are a bunch of them. Anyone can create one so you have a bunch so there's this big overload of all these markets you can bet on.

So it hasn't been a problem yet. But if I say I'm a very well funded political actor. Like I'm a state actor or I'm a political opponent, and I have access to a lot of funds, what I can do is I can create that market and then put a lot of money on the opposite side. So will my opponent die? And then I bet no. I put millions of dollars on no. That is effectively a million dollars bounty on that head that anyone can go and fill. All they need to do is buy a bunch of yes shares and then go pull the trigger.

So this is really bad if you think about cyber warfare. You think about well-funded nation states. We've seen a lot of news being reported of questionable veracity about North Korean and Russian hackers using cryptocurrency in some of their schemes. So they maybe have access, they have a deep understanding of how these networks well. They have the ability to do this kind of thing, and it allows you to basically put an open bounty, a public open bounty, on someone's head from overseas and anonymously. It's really scary that you can do that.

Chitra: Isn't someone gonna do something about this? Do you foresee any kind of legal or regulatory issues, liability issues?

Matt: Yeah definitely. It's really hard to say how it's gonna happen because you can't shut it down. The network runs the way it does, the smart contracts are deployed. There's no killswitch on this, so you can't shut it down. It's just there so you can use it. What you can do is go after the people that interact with it. We might see governments outlawing Augur specifically and that's kind of hard to regulate because it's just transactions on a blockchain platform. But again, blockchain records are immutable so I have a disincentive to do anything if I think it can be associated with my identity. There's a very high bar to interacting with most of these public blockchain networks, truly and honestly.

So it's dangerous and there's a disincentive there. But the other thing that we can see regulators do is go after the people that create these systems, which in Augur's case wouldn't really help the problem. Augur's still gonna be there even if you go after the founders or the Forecast Foundation or whatever. But we did see something like that happen with a centralized exchange called Ether Delta. We saw the SEC, I believe the SEC sued the creator of Ether Delta, this decentralized exchange, just because he created the software and was responsible for running a web UI, a server that just served the UI for interacting with these smart contracts, which you didn't have to use but you could. He settled out of court. But this kind of weird pseudo precedent where regulatory bodies can go after developers even that just create this software, create the facility for people to go and create markets that create this opportunity for malfeasance and for dangerous actions.

I think we will definitely see this getting negotiated in court and in the court of public opinion.

Chitra: Yeah. A lot of legal funds will be spent even though the underlying problem can't go away because you can't get rid of the system.

Matt: Yeah. Lawyers will make money for sure. It's really a big question mark and that's one of the things that's probably depressing engagement with Augur. Like Augur does get used but it's not, and I think maybe right now there's maybe a couple million dollars of open stake across all the markets. So that's one of the big question marks.

Chitra: And it's just one of the platforms. There are other platforms.

Matt: Other platforms.

Chitra: You're gonna see a lot of these similar problems and challenges confronting…

Matt: Yeah. And if we see regulators move quickly then that can stifle those other creators. The other platforms that are coming out, there's one called Gnosis which I'm actually a big fan of that team. They've produced a lot of really high quality software. But Augur was the first in the market. It might be more difficult for new competitors to enter the space if they're afraid that they're gonna be liable just by the fact of creating a software that could be used for good things, but could also be used for bad things.

Chitra: Let's talk a little bit about dispute resolution because the immutability of a decentralized platform like this is its strength. But when it comes to dispute resolution it also raises questions of how do you resolve disputes when there's a bet? And how does it affect the core value proposition of a blockchain based platform.

Matt: Yeah. So that's a great question because what we really are trying to do with these platforms is inject truth into the immutable blockchain record. We want to figure out what actually happened for all these things people cared enough to bet on. We can't just say that whoever creates the market imports the outcome because he probably has an incentive, one way or the other. We have to know what actually happened. So the way that most of these systems work is that there is a dispute resolution process. That's why we need this REP token in Augur's case. We need this token that represents financial investment in the network as a whole at its market perception. If people consider Augur to be good and useful and valuable, then that token will go up in value.

So they acquire these tokens and then if you hold some amount of REP and you see a market get resolved with an incorrect decision, a decision you believe to be not what actually happened, you can open a dispute by staking, you take your 100 REP and you say no the Red Sox didn't win, it was the Yankees that won. If you get to a certain threshold, this will kick off this dispute resolution process. Basically it's this incrementing scale, in Augur's case specifically. The amount of REP that has to be staked to dispute even a dispute... We have the initial report, someone disputes it and says no it's Red Sox, Yankees, I say no, Red Sox. Then if somebody else is like no it was the Yankees, this guy is messing with us. He just put up 100 REP, he's just messing with the system, he has to get 200 REP from him and all the other people that are watching the network to say no it was the Yankees. This can go back and forth for a long time.

Chitra: There's some real examples of this, one with the recent elections and one with the Yankees, I guess.

Matt: Yeah. This came up because one of the most high profile markets last year on Augur, it launched last year, the US midterm elections. There was a market created for who will control the House of Representatives after the 2018 midterm election. This got at least a million, maybe two million dollars, of open bets placed on this outcome, which right now it's worth maybe a little bit under a hundred million dollars after depreciation. But a lot of people bet on this. I was watching the election, I was watching the platform. I didn't interact with it but I knew a guy that was like yeah it looks like the Democrats are gonna take the house. Democrats are gonna take the house.

So everybody's betting on this. Democrats have a strong advantage because we knew fairly early in the polls it was likely they were gonna take a bunch of House seats. Everyone's watching 538.com and the other CNN.com, and as each state goes in, right up until the end, people are still trading on this market. It was set to resolve on December 10th, so the resolution date was... This is enough time for all the House races to get resolved because some of them would drag on for weeks. So we finally get, Republican shares were worth like one percent of the value and 99 percent of the value is Democrat shares. By the end of the night, Democrats had taken the House.

So everybody's getting chill. It sort of settles down. Everybody's just waiting for December 10th so they can get their money. Then like December 7th or something, a couple days before the resolution date, the guy who created this market, he's the creator, and the creator gets a small fee of whatever share of the market, he posts on Reddit and the tagline is I think it just says ‘I am sorry.’ He explains that the goal of this market was always to reflect who will control the House of Representatives immediately after the midterm elections, not who will control the House on January 1st when the newly elected House of Representatives takes office. So it was the only option, according to the way it's worded, I have to report Republicans because they still currently as of today, as of December 10th, still control the House of Representatives. I think the top comment was something like you just want to watch the world burn don't you? Because that's ludicrous. It was very misleadingly worded market question. So this has a lot of implications.

This of course got disputed but you have to think about it for a second. What actually did happen? If you look at the exact wording, yeah the Republicans controlled the House on December 10th. But that was obviously not the intent of the market, not what everyone understood it to be. So what is the right result? So this guy reports Republicans. And then we go into dispute. Somebody puts up a dispute bond for it was the Democrats. I think we're in the fourth dispute, this still isn't resolved. We're in the fourth dispute round, maybe like I think 700 or 1,000 REP has been staked on aggregate outcomes, and we could see this drag on for a long time.

Chitra: So timing I guess is everything when it comes to some of these things. It's how you word the language, what time zone these things are in, how people interpret it and then you dispute it I guess if you don't agree.

Matt: Yeah but it's also, it's not clear what the right answer is. It's sort of like you're dealing with this adversarial malicious genie that will grant your wish but in a way that kills you. You have to, I'm very concerned about this when I saw this happen. It was kind of morbidly funny, but at the same time it was concerning because this is gonna make a lot of people very, very afraid to interact with this platform if they don't trust that somebody's trying to trip them up with careful wording. So this is a dangerous platform to interact with. So that's sort of a gray area. But what we're gonna likely see based on the chit chat and stuff that we're seeing online is that a lot of people are committed to making sure that the Democratic outcome wins because that's what people understood it to be.

There's also another option. There's an option that can be marked invalid. People can say this is an invalid market because the wording was vague or there was no chance, one of the options was never gonna happen. That is built into the platform, and different prediction market protocols have different ways of dealing with this. But we'll probably see a fair resolution out of this. But if we don't, if we see the Republican outcome win because of this literal wording, then the market creator probably bought a lot of those Republican shares real cheap and is gonna make a bunch of money. So good for him, but bad for the entire network because it's gonna really affect the perspective on Augur.

Chitra: Well, lots to talk about. Fascinating conversation. Do you have any closing thoughts? Where can people learn more about you and the work that you're doing?

Matt: Sure. In closing I would encourage everyone to check out the Augur.net and just see what kind of markets are being discussed there. Because there's another thing that you can do. You can just report. You don't have to bet. You can just report on what happens and there's an opportunity while liquidity is low to make money that way. You just make money from reports saying yeah this is what happened, this is what happened, this is what happened. It's a really easy way to interact with the crypto ecosystem and add value to a network and make sure that we have this really robust powerful accurate way of figuring out what happens, which we know is important in this age of questionable facts and false truths. So this maybe is a way to address that, which we probably should talk about more but... I work at Spring Labs, SpringLabs.com. We're not really consumer facing, but if people want to see stuff about identity verification and credit reporting with blockchain stuff, that's what I do.

Chitra: Great. And how can people reach you if they want to talk to you more?

Matt: My name's Matt Smith. I used to not like that name but now I do because it makes it a little bit harder to Google me.

Chitra: Thanks so much. Great having you.

Matt: I appreciate it, Chitra.

Kelley Weaver joins us today to talk about the factors that influenced Facebook, Google, Twitter, and other digital advertising giants to institute sweeping bans on cryptocurrency and ICO advertising on their platforms. We talk about how these crypto businesses are faring as a result of these restrictions (some blanket bans have been recently relaxed to varying degrees) and what impact they’ve had on the bottomline and survivability of these crypto businesses. We talk about the creative ways in which companies and ICOs are navigating these ad bans and getting their story out to potential customers and investors. And we look ahead to the long-term effects of the ad ban on the industry as a whole.

(Disclosure: Gem’s portfolio app marketing was adversely affected by the ad ban.)

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Topics Covered in this Conversation with Kelley Weaver:

– The ICO gold rush and resulting scams, frauds, and nefarious schemes

– The ad ban as a way to protect innocent retail investors

– Both sides of the ICO equation, the good and the bad

– How the ad ban will help investors but also hurt legitimate businesses

– Walking the fine balance between protecting investors and helping innovation

– Companies are turning to other ways of getting the word out

– Using the power of story-telling and platforms such as Telegram

– The rise of influence marketing to replace ad campaigns

– How the public relations industry is evolving to adapt to crypto and ICOs

– A pause in action and the breath of fresh air in the post-ICO frenzy is a welcome change for PR firms

– The importance of due diligence for PR and marketing firms in vetting ICOs from a liability perspective

– Moving the narrative from the hype of ICOs to the promise of blockchain technology and cryptocurrency

Questions and Comments?

[email protected]

Guest Contact Information

LinkedIn | Twitter | Website

Resource Links

• Big Tech Are Banning Crypto And ICO Ads - Is There A Reason to Panic?
• Twitter Will Ban ICO Ads Starting Tomorrow
• Twitter Confirms Ban On Cryptocurrency Ads
• Facebook Lifts Ban on Crypto Ads; Will Other Sites Follow?
• Facebook is reversing its ban on some cryptocurrency ads
• The Hustlers Fueling Crytpocurrency’s Marketing Machine
• MailChimp's Ban on Cryptocurrency Marketing Is Causing Collateral Damage
• Cryptocurrency startups bypass Facebook ad ban with sly marketing tricks
• Breaking: Google to Reverse Crypto Ad Ban for Exchanges Advertising in US, Japan
• Google Partially Reverses Crypto Ads Ban
• Twitter, Google and Facebook have banned cryptocurrency ads — but these networks still haven’t
• Here's Why The Cryptocurrency Market Is Not Too Spooked About Google's ICO Ad Ban
• What no One Tells you about Google-Twitter Crypto Ad Ban
• Which Social Media Sites Still Allow Crypto Advertising?
  

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Chitra: Hello and welcome to Running With Unicorns. Your portal to the world of cryptocurrency. I'm Chitra Ragavan, Chief Strategy Officer at Gem. The topic of today's discussion is the crypto ad ban by Google, Facebook, Twitter, and other social media giants. My guest is Kelley Weaver. She's Founder and CEO of Melrose PR and host of the popular podcast, Crypto Token Talk.

Welcome, Kelley.

Kelley: Thanks so much for having me, Chitra.

Chitra: It's great having you. As you know, in January when Facebook announced that it was going to ban cryptocurrency companies and ICOs from advertising it created quite a wave in the industry. And then Google followed to Twitter, Linkedin, now even have Reddit and MailChimp. They're all jumping on the bandwagon and saying that cryptocurrency and ICOs can't advertise on their social media platforms. So when Facebook said that these companies are engaged in misleading and deceptive promotional practices, what were they talking about?

Kelley: So I think when we... Last summer or in the past 18, 24 months, you've seen a huge shift in the way that capital is being raised via these ICO campaigns, which stands for Initial Coin Offering. I'm not sure how familiar your audience is. And there was sort of this gold rush mentality of I need to raise money for my project. And there was a lot of innovation happening. A lot of amazing ideas. World changing ideas for how to implement this novel blockchain technology for projects. But then there was also... It was a global rush to raise money and culturally I think... Not that any specific culture is to blame, but there was this mentality of, oh, it's so easy to raise money right now. I might as well throw together an idea, launch an ICO. It must be so easy to raise money. And there was a lot of money being raised for the sake of raising money as opposed to money being raised for the sake of fostering innovation. And maybe some... I think there was also a middle ground of some teams that maybe had a great idea and had the purest of intentions, but didn't have the expertise in terms of how to organize a team to make that happen once you raise in the millions of dollars. What do you do to make that... Bring that idea to life.

So in other words, the backstory was that there was all this money being raised and not necessarily all this innovation happening just yet. It was too early to tell. Now I think what happened unfortunately was we saw a variety of the different types of things that I talked about. So we had teams that had the purest of intentions that really were going to develop technology that could change the world and are still heads down building that. We had teams that had the purest of intentions that once the money was raised, weren't necessarily able to deliver on that. And then we had teams that only raised money to by a Lamborghini or for selfish reasons. And I do think that culturally one of the reasons that Americans were maybe spooked is that there is a sort of I would say an ethics bar or an expectation bar around fundraising in the US. If you raise money in Silicon Valley, for example, you have benchmarks for success. And in other countries, maybe that wasn't... Maybe it is okay to go and buy yourself a car when you raise all this money. But here, I feel like there's a moral standpoint where that wouldn't really fly. That wouldn't...

So unfortunately, because all of this was happening and there was so much of the latter of what I was talking about about money being raised maybe not for the right reasons that unfortunately a lot of uninformed excited enthusiasts who wanted to jump in and they were maybe hearing that their neighbor had put in $10 and now had $1000 worth of this cryptocurrency or this new coin that they had that people were uninformed and basically buying what they believed would... Something that would increase in value. And so I think ultimately Facebook made a call to protect the greater public from misleading information. Now, some of that was purely misintentioned. And some of that may not have been. Does that make sense? So I think there was a combination. But ultimately Facebook was trying to protect the mom and pop investors from making decisions from I suppose impulse buying when they didn't have all of the context. And because it was such a new wild west of fundraising.

Chitra: Yeah there was this Wall Street Journal investigation that showed that 20% of almost 1500 ICOs turned out to be scams. So there's definitely an ethical reason for companies like Facebook to say let's pause for a minute and see are we serving the public good when we do that. But on the other hand, there are people who say that cryptocurrency is a very revolutionary kind of technology. blockchain technology is gonna change the world. And when you come down hard in this way, you are essentially chilling innovation. You're having a chilling effect on innovation. So who's right?

Kelley: Yeah. No, it's a great question. And I do see both sides because ultimately there are companies who are building the future of how we're gonna transmit financial assets, and how we're going to transact with each other in the future, and how we're gonna store information. And that shouldn't be stifled. And unfortunately, by Facebook putting the ban on ads relating to cryptocurrency and blockchain, not only are they preventing the potential ICO scammers who are saying, "Buy this. 10X returns." They're also potentially preventing companies who are very legitimate. Like your company, Gem, for example. From being able to run a legitimate campaign that has nothing to do with raising money. It has much more so to do with engaging a community and generating a user base who might be actually interested in what you're offering.

Chitra: And launching a product.

Kelley: Exactly. So it's tricky because yes, the ban was very wide spread. And so it was ultimately... It affected both those who were out for the good and the negative. But I think at the time when this ban came down in January, it was sort of the, I would say, the wave was cresting at the height of the just exhaust... Us as a service provider, were just simply exhausted with the amount of noise that was happening that didn't really have merit. So ultimately, I think that this was maybe a positive step in the right direction. But was it the right long term? Are there better ways? Potentially could they look at maybe you can't sell your investment but maybe you can talk about your product or your technology. Or maybe there's some middle ground where it's not…

Chitra: Mm-hmm (affirmative). Well as you know in July, Facebook then said, "Okay, we're going to now partially reverse what we did and we're going to allow a limited set of companies, legitimate companies, if we deem them to be legitimate, to be able to advertise." So that raised another fire storm because then people were saying, "Well, they realized there's so much money to be made so that's why they're now allowing companies to advertise. But I think if you kind of step back from kind of being this close to the debate, you kind of see this David versus Goliath kind of philosophical battle between the centralized social media giants like Facebook and Google. And then you have kind of the decentralized new movement. The crypto innovators. The scrappy little startups. And so you kind of see this philosophical battle too and the question is who's gonna win it?

Kelley: I'm not sure who's gonna win. But I ultimately think that Facebook is doing... Is making decisions that they believe are in the best interest of everybody at play here. And I think that they're not trying to. They maybe recognize that they might be stifling innovation, but they're not trying to so that's... It is tricky. As a centralized entity, they're going to have to make decisions about what they can and cannot have on the platform. Can they have terrorism, for example, or things like that. They have to make some calls either way. Right or wrong. But ultimately I think that as the industry matures ... We've seen a lot of maturity happen. Even since January when that call was initially made. There's a much greater awareness from companies that are even performing ICOs or fundraising that they can't just sell securities to the greater general public. Many companies are offering security offerings only to accredited investors. We weren't seeing that last fall, for example. So the industry is maturing. And as such, my hope is that company centralized institutions that are sort of calling the shots here are going to say, "Okay, as the industry matures, we believe in these companies that are really trying to innovate here and we're going to support them," is my hope.

Chitra: Yeah. So I was just gonna add. It's a perfect segue to looking at how this is all going to evolve. Will Google, for instance, look at what Facebook did and say, "Yeah, maybe as things... As the dust settles, we can maybe relax our rules a little bit." And there are a lot of social media platforms that are saying, "We don't believe in an ad ban. And we are going to support advertising." So where do you see all of this headed?

Kelley: It's interesting because as a public relations professional and marketing, we don't do as much on the advertising side. But I do remember ads that I was being targeted with, for example, last fall. And it would be like buy this ICO, 10X returns. And that needed to end. So they had to start somewhere. So I support the big... Them for making a move. But how companies will innovate around this, I think that companies are having to turn to other methods to engage their audience as opposed to just advertising. So while that may pose a challenge, it also provides opportunities for them to get scrappy, like you said. Scrappy startups are using other methods. They're harnessing the power of communities on platforms like Telegram. They're utilizing Twitter to deliver messages. They're-

Chitra: And influencer marketing. Or turning to companies like yours.

Kelley: Yes. Yes.

Chitra: To get the message out in other ways.

Kelley: Yeah, reaching out to podcasters and influencers in the space. They're utilizing Medium and blogs. Blog posts to generate thought leadership. And LinkedIn for really putting out great content. And they're not sitting around waiting for companies like Facebook to reverse their policies. They're moving forward and trying to tell their stories using other methods. Which I think is really clever and smart. And ultimately, I think what companies... At least what we educate our clients about is sometimes they come to us and they say, "How do I market my offering because I'm gonna be a security token offering," for example. And we say, "It's really not about what you're offering to the market. It's about..." Well, in terms of the investment standpoint, we really like to talk about the power of the technology that you're going to be delivering to market. The power of the problem that you're solving here. A lot of times educating about the issue at hand initially.

So it's really about the greater story about what you're bringing to market as opposed to how you're selling the investment. Because ultimately you want to generate awareness whether or not the person that you're marketing to is going to be a potential investor or not. So it's much more about storytelling and generating those great angles than it is about pedaling your token. And so that doesn't really... Ultimately doesn't really... Ultimately the storyline is going to be similar throughout. Does that make sense?

Chitra: Yeah. And I guess the market has to mature too. The industry has to mature in terms of how it's delivering these messages and how to get it across to the right communities.

The other question is when you have a marketing ban like this, an advertising ban, is the average Joe investor, Joanne investor out there actually protected or are they actually ill served by not being able to get access to information or not being able to be marketed to? Where do you come down on that?

Kelley: My feeling is ultimately, especially right now that they are being protected. What I was seeing over the holidays, for example, and in the fall was a lot of people just wanting to jump in. How do I get my hands on some bitcoin? What are these ICOs? I heard my neighbor made 10X returns, how do I get in on that? And when you have that kind of crowd mentality, that's not the type of people who are in it for the right reasons, who are seeing it as a long-term investment, who are taking the time to educate themselves on what this is. So I do think that for the time being, they are definitely being protected. Because I do think it's a dangerous and a slippery slope for them to have access to marketing information that might be misleading.

Chitra: And you've seen this industry evolve over the last few years in terms of the blockchain industry, cryptocurrency industry. And you've been right in the middle of it in terms of being able to market, provide a help to companies. How have you seen sort of your own business evolve, and the work that you're doing evolve, and getting that story out in the right way?

Kelley: So it's interesting. We've also seen a shift with reporter coverage. So I think reporters are a lot more skeptical, rightfully so. They want to protect their audience from making irrational investments or from misleading information. So they really have to do their own due diligence on these projects too. So as such, the stories that they're writing are much more thought through. They're doing a lot more background research to make sure that this is something that they want to... That they feel... Excuse me. That they feel like it's in the greater public's best interest to put out there. And so-

Chitra: Because you definitely saw a lot of companies make a tremendous amount of money based on coverage. The initial kind of height filled coverage in late last fall and late summer and fall.

Kelley: Right. So ultimately it's a lot harder to get reporters' attention these days. So as that relates to our business, that is our business. So we still have amazing relationships with the press, but we're really having to prove our clients that much more. And one of the ways that we're not sitting around and waiting for the press to write about our clients. But really saying to our clients, "You have to be in the driver's seat here and tell your story and really put out the message that you want to hear in the press." So we're really doing a lot more thought leadership, content development. So Medium is a great place to put out content. And we're seeing our clients using it more and more and it's syndicated to places like Entrepreneur, and Forbes, and different things. Quora is another platform we use. Steemit, which is specific to the crypto community, which is a blockchain backed Medium type of platform. So we're seeing our clients understand that and really realizing that we can't just wait for earned media. We have to put out our own media.

Chitra: And I think the other change also is when... Last year when you were right in the thick of it with all of the ICO frenzy that was going on and it just seemed like there was all of this. You had to really learn how to market these companies while protecting yourself too. Because there was so much that was unknown. And there was so much hype, and so much frenzy, and so much money. And you really had to kind of evaluate things above and beyond. And now with the SEC weighing in, it just seems like... With companies getting into legal trouble, it seems like the crisis management piece is also something that you have to handle.

Kelley: It's been a bit of a breathe of fresh air recently because it's been less of a gold rush. But in the fall particularly, we were being hit up left and right. Which was a wonderful... From a business perspective, a great place to be in. But also a challenging place to be in because we had to be very selective. And I'll be the first to admit that we made some wrong decisions with the clients that we ended up working with. And oftentimes, I think about five times, we had to walk away. And that was really challenging because ultimately when we were working with them, we uncovered that maybe they weren't doing this for the right reasons or didn't have the proper expectations around things. Or didn't have the infrastructure to be able to work with us, let alone develop the technology that they're promising to the world. So we had to quickly put in due diligence framework as a service provider, which is a bizarre and wonderful place to be in. But bizarre. It's almost like the roles are reversed where you're doing diligence on the clients that are inbound as opposed to them... So it's almost like they're pitching to us as opposed to we're pitching to them because we found ourselves in a unique position where we were one of the only firms in the world that had experience within this specific industry and successfully running campaigns for people.

So now it's been nice as the industry has matured slightly, we definitely have seen that it's less of a gold rush. There's more thoughtful teams coming to the table. We're having to be less picky and selective because we're not seeing as much of the riff raff. So I do feel like things are shaking themselves out. But it was an interesting time where we had to also protect our own reputation with the press because ultimately our whole business is based on relationships with the media. And so if we're pitching them something that turns out to be a scam, that's not good for our reputation, right? The next time we try to pitch them something, they're like, "Oh, gosh. Melrose is trying to pitch me that other thing and that didn't go so well." So it really was an interesting time. I do feel like that time luckily has subsided where at least we're only getting things that seem to be more reputable.

But I mean, we have a funny example that we talk about in our office. Someone hit us up because they wanted to do an ICO around shrimp farming. We're like, "Okay, does blockchain really need to be related to the shrimp farming specifically industry?" And that was sort of representative of the type of wild requests that we were getting. It was like any idea would fly and just slap ICO on it and it seemed like a great idea. And so we're not gonna be pedaling shrimp farming solutions any time soon.

Chitra: Are there any other examples like that?

Kelley: I mean, there were just some silly examples of things that nobody would want in the real world, let alone add a token to it and then make people have to buy ether on a Coinbase to exchange it for this new token. It's like why don't we just go down to step one which is do people even want the thing that you're bringing to market before you try to make them jump through hoops to buy Monopoly money to make that happen.

Chitra: So now do you have a standard due diligence process to evaluate these companies? I know there are fewer of them probably, but by no means, has the ICO trend... I mean, it's slower now, but I think companies-

Kelley: It's different.

Chitra: It's different. Not slower. Companies are still raising, but in a different way. So how do you adapt to that?

Kelley: Yeah, it's been a lot quicker because we're able to recognize things a lot faster. I think from personal experience, with what's worked for us. We're also having to be really selective because ultimately even if it is a great team that has a great potential product, are they going to be able to deliver that? Is it something where we think that we can generate stories? Because it is earned media that we're dealing with so we really need to make sure that the reporter context that we have, we have to keep them in mind as we take on new clients. Are they going to be interested in this? Because if they aren't, then we can create content all day and we can create our own stories, but we can't necessarily guarantee earned media coverage.

So I think it's become quicker for us because we're more intuitively knowing whether there's good stories there. Ultimately the leads that are coming our way that we pick up on right away are usually coming from... We're pretty connected within the industry so it's coming from sources that we know and trust. And so ultimately there's a few steps. Especially for ICO type related clients. And we do handle a lot of blockchain infrastructure clients too. So it's not just ICOs. But as it relates to ICOs, usually they're working with a token advisory company or someone to help structure their offering a couple months before they come to us. And so if they've had a good experience working with them and it's someone that we trust, it's easier for us to say this is gonna be an interesting project that we will like to work with.

Does that make sense? So I think it's become sort of quicker. But we do look for who is the team? Are they going to be able to deliver on this idea that they're promising? Are they going to... Do they have any partnership announcements with big companies that are recognizable that the press might like? How likely to succeed do we think they're going to be? Because ultimately if there are big fundraising events, that is news to the media. Which is sort of a slippery slope I feel like. But the media does say that if they raise a big amount, that can be news. Do they have a minimum viable product or a prototype that works that we can have the press play around with to see that this works in principle? Is the problem that they're solving a real problem? Can we talk about that in thought leadership type pieces? So those are the things that we look for.

Chitra: And it seems like those are the exact sets of questions that investors should be looking at and also companies like Facebook and Google when they're trying to evaluate these companies to see whether or not they should allow them to advertise and to market their products. The basic baseline of questions.

Kelley: I totally agree. I sympathize for the bigger companies like Facebook because how do you do that at scale? It's something where we're a small company and we're still... We've come up with our own systems. But how do you... There has to be some framework for what does and what doesn't. And to make it fair for everybody.

Chitra: And ultimately there's so much money at stake. You wonder if that's going to make a difference in terms of Facebook, and Google, and other companies saying, "Yes, there are issues, but we can't say no to this."

Kelley: Well, I think there's so many companies that are doing... That... I don't want blockchain. We're such big believers in this technology. And I don't want ultimately... Yes, we're in this cycle of heads down, let's build. We're in this skeptical press cycle where the articles that are like bitcoin's going to zero are getting a lot more clicks, let's say, than the articles about the innovation and the 20 year old who's gonna change the world. So it's tricky because I would hate to see this really slow down the innovation and slow down the interest. Because we've seen... It's not dead. But we've seen less interest in people coming to meetups and things like that because there's just less talk about it. I think the wind is out of people's sales a little bit. They thought that they... I suppose those who thought that they could make a quick buck have kind of realized that maybe that's not the case.

And so there's just a sort of an overall fatigue in the market. And so I'm hoping that there's some great innovation of the actual technology and some actual use cases that come soon that are talked about because I think that will re-energize everybody for the right reasons. And I think ultimately let's move away from the fundraising component. You know what I mean? Yes, we need to raise money to be able to put these things together. But if we can turn the narrative away from that and the consciousness away from how much money can I make to how is this gonna change how I handle my medical records of the future?

Chitra: Yeah, what value am I gonna provide?

Kelley: Right. Then we'll be in the right direction. That's my hope is that this doesn't deter companies that are creating solutions for enterprise and that are really gonna help consumers. But maybe not for five or ten years, but they're really going to help. My hope is that those stories can still be told during this time.

Chitra: And those are the stories you're telling more of, I think.

Kelley: Yeah, we're really looking for those stories because that's what's exciting about this technology is really how it can change people's lives. In third world countries, here in America, everywhere. How can this technology really change the way that we do business, the way that we communicate, the way that we view our data, the way that we have access to things. Those are the exciting stories and that's what gets me fired up about the technology. Not about the money that can be made. Although that can be fun as well, of course, but it's only a small piece.

Chitra: Great. Any closing thoughts?

Kelley: I think ultimately it's been interesting. Companies have had to be really creative in the ways that they've told their stories. And I think in a way, that's a really good thing. They've really had to prove themselves. And that's ultimately a net positive for everyone. So I feel like the stories that you're hearing now are probably more... Hopefully more legitimate. And that we'll begin to see some real innovation announcements. I'd love to see some announcements soon about scale of the actual building of blockchain. I think that that has been somewhat tiring too for developers is how do we really scale this? It's been trickier than I think people thought. And it's taken longer than people have thought. It's still gonna take a long time, but it's going to happen. We're big believers in that. And so have to be patient but realize that... Stay at it. And don't get discouraged because this is really an exciting time for this technology and there are so many opportunities for so many people to get involved at various different levels. Whether it's to work with the technology, apply your marketing skills, or your legal skills, or whatever to blockchain. Or to get involved with the community.

Chitra: Great. And where can someone learn about you, and the work you're doing at Melrose, and your podcast?

Kelley: Sure. So Crypto Token Talk is the name of the podcast. It's on iTunes. And our website's CryptoTokenTalk.io. Melrose is MelrosePR.com. And you can reach me, I'm on Twitter @CryptoKelley. I also have my own website at KelleyWeaver.com, as well.

Chitra: Great. Thanks so much, Kelley, it's always great to have you on the show.

Kelley: Thank you so much.

Chitra: That's all for now. Join us again soon for another edition of Running With Unicorns. Until then, enjoy your crypto journey, unicorns.

Jill Richmond joins us today to talk about the U.S. government’s somewhat mixed success to date in regulating cryptocurrency and the growing push by predominantly conservative political forces to reduce federal intervention and give states a bigger say in how this new economy is regulated.

Jill brings us up to speed on how crypto trade and lobbying groups such as the Digital Asset Trade Association (DATA), which she Co-Founded, are faring in their efforts to ensure that states pass consistent laws across the board. And she explains how the growing tensions between states and Washington D.C. on crypto regulation involves the principle of  federalism.

We’ll give you a report card of states and show how some states are doing better than others at this political gamesmanship. Tune in to find out what’s fact, what’s substance, and what’s grandstanding in the growing political battle over cryptocurrency.

Topics Covered in this Conversation with Jill Richmond:

– Patchwork of federal regulations

– Confusion and lack of clarity

– Complex woolly regulatory environment

– States trying to create clarity for companies

– Many states also creating patchwork of laws

– Difficulties of crypto companies to get banked

– Interest from banks to move to foreign jurisdictions

– Confusion over definition of cryptocurrency and ICOs

– Role of federalism in crypto politics

– Conservative groups working to give more power to states

– Digital Asset Trade Association (DATA)  working to create consistent state legislation

– States Report Card

– How DATA was created and got involved in legislative activity

– States doing the most on regulation

– Gubernatorial races and impact on industry

– Wyoming becoming Delaware of crypto

– Rise of crypto banks

– Getting Congress to become more engaged

– Closing thoughts and key takeaways

Questions and Comments?

[email protected]

Guest Contact Information

Jill Richmond

LinkedIn | Twitter | Telegram

Website: Digital Asset Trade Association

Resource Links

• Blockchain and Cryptocurrency: State Law Roundup
• US Election Sees Crypto-Friendly Politicians Win Governor Races
• DATA Continues To Move the Needle in Wyoming
• Wyoming Eyes Creation of Blockchain-Friendly Bank to Lure Bitcoin Startups
• State Regulations on Virtual Currency and Blockchain Technologies
• Crypto industry leaders warn Congress: Figure out regulation, or watch innovation leave the US
• Colorado Digital Token Act
• Wyoming wants to be Delaware of the West With Business Court
• U.S. State of Wyoming Defines Cryptocurrency ‘Utility Tokens’ as New Asset Class
  
  

Transcript: Interview with Jill Richmond

Interview Recorded On: January 8th, 2019

Topic: Politics and Crypto

Chitra: Welcome to the show, Jill. It's great to have you.

Jill: No, it's great to be here. Thanks, Chitra.

Chitra: Thanks so much. So this past year there was a tremendous amount of interpretation and confusion it seemed on how different federal agencies were defining how cryptocurrency should be regulated.

Jill: Sure. So - and I think to lean into that a little bit more - I think you have everyone from the SEC to the CFTC to FinCEN determining whether we're looking at property, we're looking at commodity, or we're looking at a security, but none really turning around and saying this may be a new asset class. So, what you have is agencies that leaned in really hard without creating a lot of clarity and companies wrote reactively and proactively trying to respond to what was either coming down the pike as they anticipated it. And so, interestingly enough, what you've started to see as a result of this kind of complex woolly regulatory environment is states and hopefully on the federal side, trying to lean as heavy as they can and trying to create some clarity for companies, individuals, and otherwise, and obviously consumers in terms of how they need to behave, operate within a framework in the United States.

Chitra: Let's pause for a minute and talk about the current state of affairs for businesses and investors when it comes to pain points and friction in how they're operating.

Jill: Okay, sure. So, I guess you sort of need to define what you're talking about here, are you talking about cryptocurrency? Are you talking about blockchain technology?

Chitra: Cryptocurrency.

Jill: Cryptocurrency, fine. Okay. So for cryptocurrency, you have a lot of companies that have very difficult time trying to get banked. So there are banks that are more or less unhelpful to companies that are operating in the US and companies are finding themselves having to find a jurisdiction and bank outside of the US. So there's this, I would say, this interest in moving to other jurisdictions. So that's a huge pain point for companies. Certainly companies who were trying to bank class last year had a very difficult time. I can get to that later. In terms of what legislation is on the ground, possibly in Wyoming to have a bank that basically is supporting blockchain and crypto-based companies.

There are pain points around, even companies, and I'm often uncomfortable in discussing it, but there were companies who essentially said, look, we want to do an ICO. Can we do an ICO in this country? Does that mean that we have to turn around and now only work with accredited investors?

Chitra: An ICO is an initial coin offering, which is a method of crowdfunding in cryptocurrency.

Jill: Yes. So, essentially, companies last year were producing utility tokens and treating those utility tokens effectively as an investment vehicle and running afoul of major securities law. Essentially treating a token, utility token, extensively, which needs to be treated as utility token. In other words, the token has utility consumptive value within the ecosystem.

Chitra: Unlike a security for instance, which the SEC says ICOs and tokens essentially are.

Jill: That's right. So there is still real value in having a utility. That utility token, however, should not, could not, cannot be treated as an investment contract per se. So it's the intent around what that token’s primary purpose is.

Chitra: And this is a source of great disagreement at the federal level.

Jill: It is still a source of great disagreement, although I don't know because the disagreement is such that, the SEC still looks at the how we test as-

Chitra: Which is a supreme court test that deals with securities regulation.

Jill: That's right. And so, in applying that test to, I guess a utility token, it can be very complicated. And as I said, it often is about the intent of the utility tokens. So, there was legislation that was created out in Wyoming. We can cover that, HB 70, which was a bill that was passed in a Wyoming last March that we helped. And I can tell you that we helped shepherd along, which really stipulated effectively what a utility or an open token is and that it is exempt from property taxes.

Chitra: So this is important because the SEC says that cryptocurrency is a security and is illegal unless regulated by the SEC, then you've got the commodities future trading commission. The CFTC says, oh no, cryptocurrency is a commodity. And then you have the IRS saying cryptocurrency is property. And then you have FinCEN which is the treasury’s financial crimes enforcement network saying that it is money. So you have all of these different interpretations. But now you have a state named the Wyoming saying, we believe that utility tokens can be essentially exempt from-

Jill: Property taxes.

Chitra: ...from property taxes. So it seems like this is a perfect example of federalism at play. So can you talk a little bit about how federalism is kind of playing a role here and eventually they'll, it seems that in situations like that often courtside with the federal laws and so how will this all play out?

Jill: Yeah, it's a good question and we haven't seen it yet. So yes, it is a perfect example of federalism, but you still have major issues that fall within, I guess financial markets to some extent, taxes and otherwise that are still at the purview of the state level. So, as long as you are working closely with the state securities, if you're working around securities law as it relates on the state level, you're extensively okay. Do I think that there's going to be a showdown about what's happening in Wyoming? I don't know. We haven't seen it yet and it's hard for me to predict whether we're going to start seeing the courts take on what's happening on a state level. It's still extremely nascent right now. I mean with Wyoming being probably the front runner and the most maybe controversial legislation on the ground in one particular state.

Chitra: Let's go back to the broader area. It seems that many states are now weighing in on how cryptocurrency should be regulated. And the Brookings Institute essentially categorized states in seven different ways. And they said there are states that are unaware, reactionary, appreciative, organized, actively engaged and recognizing innovation potential. And I know that your trade group, The Digital Assets Trade Association has also done a lot of work and done a report card on how states are fairing when dealing with cryptocurrency. Can you sum up what you’ve found?

Jill: Yeah, I think that's fair. So what you saw in 2014, is the first wave of kind of 20 states that came in and started to regulate or started to create legislation acknowledging cryptocurrency and more or less protecting the consumer. So you've got New York and California and the license. So, but fast forward to 2018 really is sort of the next wave of states that fall within those sort of seven categories. So for us at The Digital Asset Trade Association and I love the Brookings, I thought Brookings did a great job of breaking that down, at least for people who were slightly unaware of what's going on on a state level. What we did is take it a little, a step further, which is to say the elections are imminent and let's kind of highlight some of the governors that we know are either proactive. So in the case of Colorado, we had Jared Polis who we know as a state legislator, formed the blockchain coalition.

Chitra: And you're referring to the 2018 midterm elections.

Jill: [crosstalk] That's correct. Yeah. So anyway, the short version of a long story is that where seven of those states fit. So there are seven key states that are really looking into legislation that not only is acknowledging the technology, but are creating safe harbor legislation and also, trying to identify where blockchain technology fits around public and private services. So, can we have state records on a blockchain? Can we have... how are we treating smart contracts? So you have places like Delaware, Arizona was extremely progressive. Wyoming as we know which issued and passed six bills last year, extremely progressive and probably the most progressive.

So our scorecard was basically giving, we're giving governors and states, essentially an A rating or a passive rating or an A rating, so to speak. So at least voters started to understand where their state fit and where their legislators fit around adopting legislation that was probably creating job creation within their state. So it wasn't just about cryptocurrency, it was, look, we're taking a really strong position. We want companies to set up shop in the case of Wyoming and we want to be seen as an innovation hub.

Chitra: So what's at stake really here is the entire new ecosystem that's being built around cryptocurrency. So it's a jobs and attracting more companies to increase your tax base. There seems to be a lot at stake here.

Jill: Yeah, there is a lot at stake and I think there's still that pivotal moment where legislators are starting to see if they take action, they can retain talent, company innovation, staying either in-state and not fleeing to a new jurisdiction. That's the hope. That, that innovation, that sandbox legislation that gets put on the table in Colorado for instance, creates opportunities for new financial based or fintech-based companies to operate within their state and not flee and go somewhere else.

Chitra: What are the stakes for crypto businesses in terms of the friction we talked about, the pain points, what do they want?

Jill: Oh, well. I guess it was September of this year, there was a real, there was a round table on a federal level that was put together with a number of major players within the industry and above and beyond all else, it was clarity. It was just clarity. It was the, look, in order for us to have big money come into this industry, it needs to be regulated well, it needs to be regulated with clarity and their hopes in the friction at least as far as they're concern is as they're building new financial products and infrastructure, that clarity means everything in terms of, again, where that innovation is coming from. Is it in Korea or is it really coming out of the United States? Is it coming from Malta or is it coming from the United States?

Chitra: So you have at the federal level, a patchwork of guidance and confusion. And now you have states jumping in and every state is trying to issue its own idex on regulation of cryptocurrency. You have the underlying kind of a conservative political movement steeped in federalism that's tried to give more [crosstalk] power to the states from ALEC, the conservative organization, the American Legislative Exchange Council. So you have that underlying kind of political movement that's driving some of this stuff. And then we have groups like yours that's trying to wrestle all of this to the ground and finding some kind of consistency. So how is this all working out?

Jill: Well, it's complicated. So, and maybe it helps if I give a little bit of an information. Oh, I help you understand a little bit about DATA, so-

Chitra: Your organization?

Jill: My organization, which is The Digital Asset Trade Association. The Digital Asset Trade Association, let me just sort of give some context to bring you right back. Digital Asset Trade Association was really formed last year. End of January, we had a round table with the chief information officer at the CFTC and the SEC and we sat down in a private room with stakeholders from blockchain and crypto-based companies and said, what can we do to help you? In not so many words, what can we do to help you communicate directly to the companies and understand their pain points and help you understand how do you either both weed out bad actors or be compliant or operate in a way that is moving the needle on proactivity?

And so what came out of it, at least the timing, was Wyoming was really fast moving in introducing six pieces of legislation. And we as an organization that had just been formed, turned around and said, we're going to focus all of our energy and attention over to Wyoming. We're going to work closely with the Wyoming blockchain coalition. We're going to work closely with Caitlin Long and help them shepherd through kind of a stake in the ground and that's what we did and we did it very quickly. It was within two weeks. We sort of dropped in like a SWAT team, testified, introduced as much language, education, support as the state needed. Walked away and said, okay, we have our mission. Our mission is now to use Wyoming as kind of the ground zero, even though there were other states before, but use Wyoming as sort of the proverbial ground zero and say, now let's try and create federal language that takes HB 70, for instance, on a federal level and create consistency among states.

Chitra: [crosstalk] utility token definition.

Jill: This is utility token definition, exactly. And so, we started to get inbound requests from states and guidance and support and we went over to Colorado and started working in Colorado to help pass legislation that by the way, did not pass. But we have a very different makeup in the Senate and the House right now and we have a very progressive governor. And so the short version of a long story, is DATA was really formed to create consistency among states and we will be working with bodies like ALEC to help support that consistency among states.

Chitra: But at the moment, given this patchwork, the fact which of course is democracy at its best and worst as we know it, is this a blessing or a curse that states are jumping in willy nilly to try to change and shape this ecosystem.

Jill: Is it Pollyannaish for me to say it's a blessing and a curse? Because it is. It's a blessing because you almost need to do this pincer move. There's a little bit of a pincer move that needs to happen. States are going to jump in and they're going to try and clarify and they're certainly going to do that hopefully, or at least in their best interest, which is to attract companies and they're going to go head to, so Wyoming is going to go head to head with Delaware and you've got states that are going to start competing with each other to attract talent, to attract innovation. Now is that helpful for those companies? Probably not. The reasons why states are doing it versus why companies need to have some defining language. So, it's a blessing because now you have companies that are like, great, I feel like I can go move-

Chitra: They have a home.

Jill: They have a home, they can move to Colorado and there are a lot of major companies in Colorado. They can move to, you have kind of, you have companies that are now at least exchanges that have turned around and said, okay, we can move out to Wyoming and leave Washington for instance. So you're attracting talent, but you will have to create a serious pincer move around the introduction of a lot of that consistent legislation on the federal side now. And we hope as a trade organization to bridge, we've got many masters, but to bridge that chasm so to speak.

Chitra: And one of the things you're seeing is the education of politicians both at the federal and at the state level about blockchain technology and cryptocurrency and the midterm elections were significant for the cryptocurrency industry in that you had the election of three crypto savvy, crypto friendly governors, I guess it was Jared Polis of Colorado and-

Jill: Gavin Newsom.

Chitra: Gavin Newsom of California and you had the third one was Mark Gordon of Wyoming-

Jill: Wyoming.

Chitra: ... of course. And then you had-

Jill: He was inaugurated last night.

Chitra: Yeah. And then you had two who were re-elected. One was Gina Raimondo of Rhode Island and Greg Abbott of Texas. So you've got five state governors now who are getting educated and are knowledgeable and supportive of cryptocurrency. And that seems to, that that's going to have an impact too.

Jill: Yeah, it will. I mean, you absolutely will. I mean, you're literally starting to see the movement of that legislation right now. You've got bills that are hitting the House floor in Colorado. You have new package legislation that we hope we expect to get very little push back on, but we don't know. There's now five bills that are hitting the House floor on Friday.

Chitra: In Wyoming?

Jill: Wyoming.

Chitra: And what do they, just generally speaking broadly, what are they trying to do those bills?

Jill: So you've got, and I'm going to lose the number, but I think it's HB 76, so forgive me on that. We'll have to edit that. But HB 76, so you have clarifying legislation, which is just re-clarifying HB 70. It helps to clarify in terms of the utility and the exemption of property taxes. And the most important bill, I think that's hitting the floor is a banking bill. Which is setting up the establishment of a bank, which is-

Chitra: A crypto bank.

Jill: A crypto bank.

Chitra: The first of its kind?

Jill: It will be the first of its kind, which is not FDIC insured. So there will be no lending, but it is really for the purposes of depository and acts really for companies to be able to have a bank. I don't know, you've been in this industry long enough to see what it's like to try and set up a bank account. It's often your bank account is shut or frozen or you have a ton of issues and this is a huge pain point for companies. So, I think part of the package of legislation in Wyoming is again, to attract companies and talent.

Chitra: So, in essence is Wyoming trying to become for Crypto what Delaware is for traditional banking for instance?

Jill: It is. Yeah. It is. I think you saw 1977, Wyoming really was the first issue, the LLC. And so, I think there's always been a little bit of a rivalry between Wyoming and Delaware of sorts. But Wyoming has attractive reasons for companies to go. And, I will say that only because I'm watching companies that are relocating to Wyoming that are setting up developer communities across Wyoming that are setting up a secondary office or a third office or a fourth office so that they can take advantage of what Wyoming offers them. Not that I'm plugging Wyoming, I don't live there, but it's-

Chitra: It's one of the states that's proving to be friendly to crypto businesses.

Jill: Yeah, that's right.

Chitra: So let's look ahead to this year, 2019. What do you see happening in terms of federal legislation regulation, state legislation regulation, studies, business development across the spectrum? Where do you see us ending up at the end of 2019 compared to where we were a year ago?

Jill: I think you're going to get a lot more clarity. I mean, I do believe that there is so, I think on a macro level you've seen all of the pieces of the puzzle be put back together again to the extent that you have now strong movement on the state level. So you have a number of bills and key states that are moving. You've got New Jersey that's moving on legislation and Arizona as we know, has moved on legislation. We're getting inquiries from New Mexico and otherwise, legislation that is a little bit more closely aligned with either our agenda of our members or closely aligned with creating innovation etc and just clarity. And I think that the makeup on the federal side, at least in Congress, is such that we will start to move much more quickly in creating consistency as well. So I think-

Chitra: [crosstalk] If nothing else, maybe this is an invitation for Congress to jump in and start to provide some of this legislative language to clarify some of these issues and then reduce the confusion.

Jill: Agreed. I mean, I think this is a good year to see some, either groundbreaking movement or some clarity. So, I think you saw it was maybe December 11th and there was a lot of, it wasn't the most welcome move, but I think you saw the CFTC did a public request for input really around aspects of how Ether and the Ethereum network operates. You're starting to see the engagement at least open inquiries into, let's figure this out.

Chitra: Great. Any closing thoughts, Jill?

Jill: Yeah, I think, look, I'm a big proponent of my organization. We are constantly looking for support in companies that want to join our working groups, especially as we develop working groups post-Wyoming around really around banking and identity and otherwise. And so I would say please sort of visit us at digitalasset.org and keep an eye on what we're doing in Wyoming and keep an eye on what we're doing in Colorado.

Chitra: Great. And where can people learn more about you and the work you're doing?

Jill: So you can find, so digitalasset.org that's probably the best way. And you can certainly reach out to me directly at [email protected].

Chitra: Awesome. Well, Jill it has been so great to have you on the show, and there's so much going on that a lot of us are not even aware of at the state and federal level.

Jill: Yeah. Thanks for asking. Yeah, thank you.

Jeff Neumeister, Founder and CEO of Neumeister & Associates, joins us today to talk about cryptocurrency taxes, a confounding area of tax law (what isn’t?) and one that you should master if you are an investor in digital currency. Because what you don’t know could have an adverse impact on your pocketbook. That’s what happened to one U.S. college student in 2017 who invested $5,000 in Ethereum and somehow would up owing the IRS $400,000 in taxes. Yes, you stand to benefit greatly from understanding how the IRS views crypto (Hint: It’s in the same category as your house). And you’ll learn the cardinal rule of crypto taxation: The buck stops with you.

This is specially important this year after the 2018 market crash since many investors are selling their cryptocurrency and fleeing the market, without full knowledge of the tsunami of capital gains liabilities that these transactions may be triggering.

A forensic accountant by trade, Jeff brings great credibility to the task of walking us through the minefields of crypto taxes. He offers practical tips on everything from what constitutes a taxable event to what makes crypto taxes so challenging and how mined coins are taxed. That’s just a few of the questions Jeff answers in this episode. You’ll come away feeling a lot more confident about understanding your tax burden as you stagger into your tax prep marathon.  

Topics Covered in this Conversation with Jeff Neumeister

• What makes crypto taxes so challenging.
• What constitutes a taxable event?
• What is the difference between short-term and long-term gains?
• How are mined coins taxed?
• What happens if I give some coins as a gift, or someone gives me crypto?
• Do I have to pay tax on coins that were hacked?
• What happens if I lose some coins?
• What are the acceptable ways to report coin gains?
• What are the biggest obstacles to easily filing crypto taxes?
• Increasingly, there are charities that accept crypto. Is that something that would be helpful at tax time?
•  How are exchanges doing in terms of making it easy for investors to file taxes?
• Can crypto losses be balanced against traditional fiat capital losses.
• What’s the craziest thing you’ve ever seen or heard with it comes to filing or not filing crypto taxes.
• Let’s step back a bit and look at the process involved - let’s look at two scenarios:
• • Scenario A: Let’s say you are Sally Fey, a beginner investor in 2017 and you got all caught up in the buying and selling during the Bull Market and you didn’t track all the coins you traded across multiple exchanges nor did you jot down the buy/sell price  for each transaction. Now your taxes are looming and you have your head in your hands. How do you regroup?
  • Scenario B: Unlike Sally Fey, you are Matt Jones -- a beginner investor in 2019 and it’s a Bear Market and you’ve been told now is the time to buy. You’re starting with a clean slate. You’ve set up your exchange accounts, you are ready to trade. What’s good tax hygiene you should follow from Day One and on to Day 365 to simplify your tax headache for the year?
• Can you get away with NOT paying crypto taxes?
• What are the penalties for non-compliance?
• Any closing thoughts on how to make our crypto tax lives easier?

Questions and Comments?

[email protected]

Guest Contact Information

Jeff Neumeister

Website | LinkedIn | Twitter

Resource Links:

• 3 Ways the IRS Is Taxing Cryptocurrencies
• Taxes and crypto
• Turning your 2018 Bitcoin and Crypto Losses into Tax Savings
• What You Don’t Know About Crypto Taxes Can Hurt You
• Tax Nightmare: Student Invested $5k in Ethereum & Now Owes $400k in Taxes
• 4 things to know about your cryptocurrency at tax time
• Year-End Tax Tips And Strategies For Cryptocurrency Investors
• IRS Guidelines

Transcript: Interview with Jeff Neumeister

Interview Recorded On: November 12

Topic: Crypto Taxes

Chitra: Hello, and welcome to Running with Unicorns, your portal to the world of cryptocurrency. I'm Chitra Ragavan, Chief Strategy Officer at Gem. It's that time of year again, and your crypto taxes are looming. Here's what you can do about it. Our guest today is going to walk us through the ins and outs of crypto tax filing. Jeff Neumeister is CEO and Founder of Neumeister & Associates, an LA-based tax advisory firm with a growing practice in crypto taxes.

Jeff, welcome to the program.

Jeff: Thank you.

Chitra: What makes filing crypto taxes so challenging?

Jeff: It'd be probably because there are so many different things that are happening in the crypto world. It's not just mining coins or just trading coins, but there are forks, airdrops. There's just a lot happening. Because it's a new space, it's a lot that the taxing authorities are still trying to wrap their heads around.

Chitra: Let's start with the basics. What constitutes a taxable event in cryptocurrency?

Jeff: A taxable event is anything that results in a tax obligation or a potential tax obligation. That could be selling something, it could be generating income, it could be incurring a expense.

Chitra: Is it different than in regular taxes? What are the differences and similarities?

Jeff: It's similar in concept, except with cryptos there's just, again, so much more going on. Normally, if someone is just, say, a W2 earner, they have a paycheck, and that's the sole source of income that is subject to tax. With cryptos, however, if you're mining and trading in the ICO world, there's so many things that are happening that you're constantly subjected to different types of taxes.

Chitra: One of the basic things one needs to know is short-term and long-term gains. How does that work?

Jeff: Short-term gains just refer to anything, anytime you hold an asset or a piece of property for less than 12 months. Long-term is anything above that. Now, they also come along with different taxable rates. With long-term capital gains, it could be anywhere from 0 to 20%, so much better than what most of us pay with taxes for our income earnings. For short-term gains, it's anywhere from 10 to 37%. Short-term capital gains are essentially the same as ordinary income tax rates.

Chitra: Let's look at different types of crypto and how they will be impacted by taxes. Let's start with if you're mining cryptocurrency. How do you account for those?

Jeff: Mining's interesting, because it's kind of two things at once. When you mine a coin, or a fraction of a fraction of a coin, you're generating ordinary income, so whatever the value of the mined coin was, or fraction of a coin was, you have to pay ordinary income taxes on that. Then, that also establishes your cost basis in the coin that you now hold. If you do something else with it later on, trade it or sell it, you'll have capital gains on top of that.

Chitra: Then, let's look at crypto gifts. If you get a gift of Bitcoin, or Ether, or EOS, how do you handle that when it comes to tax time?

Jeff: If you're the receiver of a gift, then you just need to be aware of what the holder's or the donor's cost basis was. If they acquired something for, say, $100 and gave it to you, you need to make sure that you have that down in your records that your cost basis is $100.

There's no tax owed on a gift received. However, if you're the gift giver, you might have to do a informational filing, a form 709. What that is is anytime you gift more, at least in 2018, more than $15,000, you have to file a form 709. You don't have to pay gift tax on that, but if you exceed your gift-giving of $5.6 million during the course of your lifetime, then you have to start paying gift taxes.

Chitra: If only we could all be so lucky.

Jeff: Right. Most of us will never have to worry about that, but make sure that you file a form 709, because there are penalties with not filing.

Chitra: Then, can you give crypto to charity? I see that increasingly, there are a lot of, even the Red Cross and other organizations accepting crypto. When that happens, is that a good thing to do, when it comes to tax time? Obviously, it's a good thing to do in any case, but it probably helps with taxes, doesn't it?

Jeff: Absolutely. It's just like any charitable contribution, except instead of giving clothes, or fiat, or artwork, or jewelry, you're giving cryptos, yeah.

Chitra: It's taxed similarly?

Jeff: Yes, mm-hmm (affirmative).

Chitra: Then, if you're hacked, what happens? You're losing a bunch of coins because you got hacked. Do you have to pay taxes on that?

Jeff: No, but you have to make sure that it's documented. It's the same thing as if someone came into your house and burglarized it, right? It's a casualty loss. That would be an itemized deduction. You have to make sure that you record those things.

Chitra: What if you just lose your crypto? Like, they're on some exchange, you don't know where it is, or you've lost the password. Can they figure it out that you have this crypto? How do you account for the missing crypto?

Jeff: That's a little bit more challenging. If you no longer have access, say, to your key, and you'll never obtain access, then that could be construed as a casualty loss, as well. If you just say, "I don't know which exchange it's on," hopefully that won't come up if you're audited, yeah.

Chitra: And if you are?

Jeff: Then, as long as you show a good faith effort in being consistent and transparent with taxing authorities, and they could see that you're not trying to hide anything, then you should be okay.

Chitra: Do you hear of people that are trying to hide crypto by claiming losses, that they've lost it?

Jeff: Some folks, yeah, yeah. More egregious than that, though, we've had, there was one gentleman that was seeking out a CPA, who made a little over 2.5 million in cryptos, and said, "No, I'm just not going to file. If they want the money, they have to come after me."

Chitra: Did they?

Jeff: Well, that's what's going to happen over the next couple years, yeah. The IRS has started mounting a task force specialist specifically to investigate cryptocurrency filings.

Chitra: Is that going to be an easy task? Will they find people that are scofflaws?

Jeff: They will absolutely find people, right? It's going to be interesting in the tax world for the next couple of years, and tax courts, people fighting them.

Chitra: You're seeing a lot of new developments in tax filings, in tax law as a result of this?

Jeff: Not yet. Really, they're just kind of testing the waters, now. The last, about a year ago, they started issuing subpoenas to exchanges, and they were winning, to get transaction records from them, so they could see what people are trading and how much people are earning, so they could compare that with individual tax returns, to find evidence of those that are evading their taxes. They're just starting to institute those audits now and will be taking these folks to tax court as needed. There's a lot of things that will come out of it, but it hasn't happened yet.

Chitra: Because I think, particularly in the early days, there were probably a lot of people who weren't filing taxes. Is there like a statute of limitations, or does it matter if like 10 years ago you weren't filing taxes, and now the IRS is starting to think about this and starting to do these audits?

Jeff: There is a statute. It's, generally speaking, three years from the date of which a filing was due, but that's only if it was an innocent mistake. If you're intentionally evading, there's no statute on that.

Chitra: How do you report, typically, gains and losses? What's the process?

Jeff: The process is usually, you want to have everything calculated, all the transactions. Coin for coin, coin for fiat, and those will be itemized on a form 8949, and summarized on a schedule D, which are attached to the tax returns.

Chitra: Having done my crypto taxes this year, it's fairly complicated. It's just, you have to look at every single transaction. Talk a little bit about what that process is like. It's fascinating for me to see the level of detail and how you actually go about finding those records, if somebody hasn't kept those records, and being able to trace the flow of that currency from the exchange to your wallet, or if you're trading, you've got all of these multiple transactions that have taken place, hundreds, maybe thousands of them.

Jeff: Yeah, it could get very complicated. That's why a lot of our clients have come to us, to help them untangle these complex array of transactions, ranging from, if they have a few hundred coins that they're trading across multiple years, you can end up having thousands and thousands of cost pulls, because you have to trace every single transaction to its cost basis. Its cost basis depend on whether you used FIFO, LIFO, or HIFO.

Chitra: Explain that a little bit.

Jeff: Sure, yeah. Those are the manners in which you inventory the cells of different coins. LIFO, last in, first out, that's saying, when you sell a coin, you go to the last time that you had acquired that coin, and you sell it out of that pool. If you're buying and selling coins all day long, go across multiple months, you have many cost pulls, even thousands or tens of thousands of cost pulls.

FIFO, first in, first out, is where you sell your oldest coin. What that does is it will result in fewer long-term capital gains, but you're kind of eating up your tax obligation now, versus deferring it to later on.

Chitra: Let's say I'm trading, okay? I'm on exchanges, and I'm trading. I'm not really thinking about ... It's not something you think during your trading process, right? It's something you do after the fact. I'm not thinking LIFO and FIFO when I'm like, "Let me find what's my oldest Bitcoin, and let me trade that for Ether." I'm just like, trading. Am I doing the right thing? Is this something you go after the fact, and start to look through it and make those calculations?

Jeff: The easiest thing is to maintain good records, so that whoever, whether you're doing it yourself or outsourcing it to a professional like us, then they could go through those records a lot easier, because it does get complicated. As long as you have the information, it could be all untangled.

Chitra: What's the largest number of transactions you've done, filing taxes, that you've seen? Thousands, hundreds of thousands?

Jeff: Probably in the hundreds of thousands. I think our largest client had a little shy of 200,000 transactions across about 2.5 years. It was a lot. It took a massive amount of manpower, because there isn't a way to fully automate it, yet. We've established a proprietary method to semi-automate portions of it, but not the whole thing. There's still a lot of manual touches that have to be done to it.

Chitra: Were you able to do it?

Jeff: Yeah, yeah. We were able to untangle all of it. He had a massive tax obligation, but most importantly, it'll keep him compliant with the IRS. He had the cash, right? If you make a million dollars in cryptos, and if you have to pay a few hundred thousand in tax, you know, you're still coming out ahead.

Chitra: This is true. What are some of the biggest obstacles today for average investors, when it comes to filing taxes?

Jeff: I think having an understanding about how complex the tax aspect is with cryptos, if you're trading, mining, doing anything else. I think just being aware and mindful of that.

Chitra: There's also the issue of documentation, right? For example, different exchanges can give you different levels of information about your trades, so at the end of the year, some exchanges will give you a lot of information. Other exchanges give you virtually no information. How do you start to do the detective work to find all of your records?

Jeff: That's one of the tricky parts, yeah, because there isn't really any sort of regulation about what all the exchanges have to provide users. There's going to be, and it's moving that direction. For now, it's kind of up to the individual to maintain their own records. If the exchange only provides piecemeal stuff, or in the case of Bittrex that just up and deleted people's information, it's still your obligation to make sure that you're tracking things.

Chitra: What happened in that instance where the information was deleted?

Jeff: Well, they up and decided just to remove information.

Chitra: This was an exchange?

Jeff: Yeah, yeah, Bittrex. It's still the user's responsibility to maintain the records. The individuals that were subjected to that, had they downloaded their transactional information, let's say, every week or every month, they would have been okay, right, just in case something does happen to an exchange. That's something we advise our clients to do is don't wait till the end of the year to start pulling your information, even if you're using a CPA like us, right? Pull the information maybe once a month, just in case something happens.

Chitra: That's interesting. That's something I've never thought to do. It's kind of surprising that they're allowed to even delete information. Is that going to change, in the future?

Jeff: Yeah, there's definitely more pressure in regulation around what the exchanges are doing. Also, keep in mind that a lot of these are foreign exchanges, too, right? The IRS and the federal government only has so much control over what they do.

Chitra: Because this is such a global flow of money.

Jeff: Exactly. It's a global thing. Right.

Chitra: How does the US government, or how is the US government attempting to get a handle on this? Do you feel like the government is kind of playing catch up, now?

Jeff: A bit, yeah. I think there was too much downtime from 2014 to now. You know, the last time the IRS issued any formal guidance was in 2014.

Chitra: What was that initial guidance?

Jeff: It was maybe like a five-page notice, 2014-21, which pretty much just said that it's not legal tender, and to pay your tax on it. There really wasn't much guidance beyond that.

Chitra: What happened before then, like 2009 through '14? Was there any guidance?

Jeff: Nothing formal.

Chitra: What were people doing then?

Jeff: I think, at the time, IRS and other government agencies probably just assumed that this is just a fringe thing, it's a temporary thing, it's not going to last, but look at us now. There are industries being built around blockchain and crypto, and they realize that, now, and the amount of money that people have earned in the sector. They see it as, like, it's a huge nest egg waiting to be tapped.

Chitra: Build your highways and all of that stuff.

Jeff: Right, yeah.

Chitra: Now, when you're filing taxes, can your crypto losses or gains, be balanced against your traditional portfolio?

Jeff: Yes, yeah. The way it works is short-term gains and losses get netted against other short-term gains and losses, regardless of if they're crypto or not. Then, the same thing with long-term.

Chitra: Great. Now, what are the penalties for noncompliance?

Jeff: For failing to file a return, it's a flat 5% of whatever your tax obligation is. For not paying the total amount of taxes owed, it's one half of 1% per month. If it's just one month late, half of 1%, it's not a lot, but if a couple of years go by, a few years go by, it can add up really quick, plus interest.

Chitra: Can you go to jail?

Jeff: Absolutely, unfortunately. If it's deemed that it was tax evasion, like in the example that I gave you of the gentleman that was looking into using our service and decided, no, they can just come after me, a couple million dollars, if they find evidence of tax evasion, then it could be subjected to a felony, which leads up to up to five years in prison and up to a quarter million dollars in penalties.

Chitra: Now, there's a lot of money laundering also going on, right? Does that play a role at all in this?

Jeff: Not so much with the taxes, but it is something that they're mindful about, out there. I see that more in the banking sector, that being an issue. In fact, one of our clients in the crypto space, their bank account was just abruptly closed with no notice. They said, "You can't bank with us," because they are concerned about potential money laundering.

Chitra: What is their fear?

Jeff: I think because they don't know where the money is coming from, right? If you have crypto-related money, it's so easy for it to be maneuvered from overseas. I think that's the concern, because there isn't enough regulation out there yet, right? Some people are just distancing themselves.

Chitra: It seems like there's a whole bunch of areas in which the federal government and governments around the world are now grappling with, how do you make people accountable for all of this wealth that they're generating, and how do we get a piece of that action?

Jeff: Right, that's what it is. They want their cut. As long as you give them their cut, they're not going to bother you.

Chitra: Now, let's look at two scenarios. Let's say you're a Sally Fay, you're a woman investor. You're just starting out. You're super excited. It's 2017. The bull market is in full swing, and you've learned how to trade, and you're just buying and selling without any regard for keeping tabs on your cost basis or the proceeds that you're making. Then, come December, you're stuck with having done thousands of transactions, and you have no idea how to go about finding those records, because every trade that you've done is potentially taxable, correct?

Jeff: Correct.

Chitra: What do you do?

Jeff: In those kinds of situations, because it's a lot of cleanup, the best thing to do is consult with an expert like us, so we can get you cleaned up and caught up. Then, going forward, you're on the right path, right? And to be mindful just about all the tax consequences of all that trading activity.

Chitra: Do you just sort of systematically start to go back and look at every trade you've made?

Jeff: In order to calculate all the gains and losses, historically, yeah. We have to kind of start from inception. If someone started trading in 2014, right, we have to go back to square one.

Chitra: That's pretty daunting.

Jeff: It is, yeah, yeah. At least once we get you caught up, then you should be okay, right?

Chitra: Let's look at scenario B. Let's say that I am a young man, Matt Jones. I'm not in the crypto market yet. It's the bear market, and people are telling me, "Hey, now's the time to come in. Buy low, and you can sell high." I have a clean slate. I've set up my exchanges, but I haven't done any transactions. What are the kinds of things I need to put in place to have tax hygiene, so to speak?

Jeff: Some best practices.

Chitra: Yes.

Jeff: I'd say, first, be mindful that you do any sort of trade coin for coin, that's all going to be a taxable event. Have at it, but just be mindful that there could be a lot of tax compliance to deal with at the end of the year. That affects some people's volume activity.

Another thing, to make sure to pull their records on a consistent basis. We usually, we're advising our clients now to download their transactional history from each exchange they use about once a month. Just make it a month-end practice, just in case either they got locked out, the data is deleted, or something is hacked, just in case anything happens, at least you have the records.

Then, outside of transactions like that, if you're trading on an exchange, if you're gifting coins, jot down somewhere on a Excel sheet or a Word document who you gave it to, when you gave it to them, and how much you gave, right? Just in case if there's any gift tax compliance to do, we could do that as well.

Chitra: Is it advisable to have a notebook and a pen, and when you're making these trades, to actually just jot it down, or put it on an Excel sheet that on this date, I bought X amount of Bitcoin, or I sold X amount of Ether for X amount, and to have that? Is that going to be helpful at the end of the year?

Jeff: It could, but like all the transactional data within the exchanges usually is going to have all that information. If someone wants to just separately track it, and if they're not doing a lot of trades during the year, that could be just as efficient and make their process easier at the end.

Chitra: Now, tell us some war stories. What are some of the anecdotes that you tell people about folks having challenges in filing taxes, or cases that you've seen, or what the government is doing to come to terms with this new source of income?

Jeff: Sure. Probably a couple examples. We have clients that were trading back from, the oldest one is 2013, maybe about a little over $4 million, and of course, they never reported any of it. Thankfully, in contrast to the other individual I was referencing, he said, "You know what, I just want to be compliant, right?" He came to the table. We went through everything, all the records, and got him up to speed.

Going forward, if he's audited, or maybe I should say when, because it's a lot, a big amount, we have work papers in place that we could provide in response to an audit. 90% of the time, that'll just make it go away, almost immediately. As long as the IRS can see that you've made a good faith effort, that there's been due diligence in being compliant, and you have work papers and a CPA to back it up, the audit will go away, right?

Another example, well, with the IRS, it's not so much a war story, but it's come to my attention that they've selected around 1200 to 1300 cases already from the 2017 filings that they're going to move forward with audits. Now, I don't know which ones those are. That comes from a source I have within the audit community, but we suspect that those are probably the larger ones, mostly, people that have generated hundreds of thousands, if not millions.

Chitra: Is the IRS not only trying to get revenue back from these taxable events but also trying to set precedence in some way?

Jeff: Yeah. It serves both purposes, yeah. One, it's a huge amount of revenue just sitting there for the government that hasn't been tapped yet. The second is going through this process, and going through these audits, and taking some people to tax court will set precedence, so that it's clear to everyone else that, one, you need to be compliant. Don't play games with them. I wouldn't be surprised if they send at least a few people to jail over this that have evaded their taxes.

Also, it allows them to kind of establish authoritative guidance, because they're going to take everything they find. They will undoubtedly issue some pronouncements about, "Here's how you calculate this. Here's why you file things this way," which right now, we don't have.

Chitra: What about moving out of the US, like just moving abroad so you don't have to pay your taxes, or even moving to Puerto Rico. You hear a lot about that. Is that going to help you or hurt you, in the long run?

Jeff: I think for taxes, temporarily, it would help, right? But, do you really want to expatriate yourself, denounce the US, in order to just save some money temporarily on taxes? I don't know.

Chitra: Depends, I would say.

Jeff: It depends, yeah, yeah.

Chitra: On what the amount is. Are you hearing about people who are actually doing that?

Jeff: No one I know has actually done it. Some folks that we know have been debating it, and they asked to do some research on expatriation process.

Chitra: It's a fascinating area. When you're doing the forensic work, you've been asked to help, I think, with investigations and things like that. How do you go about collecting the forensic evidence on these cases?

Jeff: Really kind of the same way we do crypto calculations for our clients, right? We pull all the underlying third-party documents. In this case, transactional records. We get their narrative about what happened, hear the story, because any forensic case, anything that we do, it's not just the numbers. It's also the context. It's also what happened, the story, if you will.

With forensic cases, there's usually a lot of other moveable parts, as well, particularly like divorce cases, where people are sometimes hiding funds. Partnership disputes, where one partner is embezzling money. We see that kind of stuff a lot more often than what people realize.

Chitra: What happens in the case of a divorce? Who gets the crypto? How do you actually even split the proceeds, if that's what happens?

Jeff: Same thing with kind of like a house, right? If it was community property, assuming it's a community property state like California, then any assets would be split 50/50, unless it was bought with separate property. If you don't want to cash out the portfolio, then usually one partner would buy out the other half from the other partner, just like a house. If you don't want to literally split the house in half, one person wants to keep it, one partner would buy out the house from the other.

Chitra: Well, that actually raises an interesting question, because let's say one partner is very crypto-savvy and the other partner is not crypto-savvy. It probably is pretty easy to hide your assets in the form of crypto, because the other person has no way of finding out how much you have and where you have this.

Jeff: True. Yeah, there's an opportunity there for someone to try to take advantage. Part of the divorce proceedings process is to come to the table and be transparent with both partners. Usually, like, you're essentially signing off to the court that let the partner know 100% of the assets out there. To try to hide it is essentially perjuring with the court.

Chitra: Where do you see all of this going in the next few years, as more and more people get into the space? There is a prediction that you're going to have a billion new crypto investors, over the next five years, entering the market. Where do you see the field of taxation going?

Jeff: Yeah, definitely, I see a second adoption, as well, coming in the coming years. I think, by the time that happens, there'll be a little bit more infrastructure in place with the taxation piece. One, with the exchanges. They'll start being a little bit better about what they record for their clients and what they issue out at the end of the year. I think we'll get to a point where exchanges are very, very similar to brokerage accounts, where you just get a 1089 of, "Here's your cost basis, here's your proceeds, here's what you report on your tax," and make it much easier for folks.

Chitra: Just as the industry is growing up, the tax piece will grow up, as well.

Jeff: Yup.

Chitra: Yeah. Great. Is there anything I haven't asked or anything really important, closing thoughts?

Jeff: One closing thought, just, I think it's good for everyone to remember that almost everything is a taxable event. If the question is, "Do I have to pay tax on this?" 9 times out 10, it's yes.

Chitra: Sadly.

Jeff: Yes.

Chitra: Thank you so much for joining us. Where can people learn more about you and find out more about the work that you're doing?

Jeff: Sure. Our website is neumeistercpa.com, that's N-E-U-M-E-I-S-T-E-R-C-P-A.com. We're a full-service accounting consulting firm, but we specialize in things like cryptos.

Chitra: Great. Thanks so much for joining us.

Jeff: All right, thank you.

Chitra: That's all for now. Join us again next time for another edition of Running with Unicorns. Until then, enjoy your crypto journey, unicorns.

BitGive Interim President, Alyse Killeen joins us today to talk about how non-profit charities are increasingly accepting cryptocurrency as donations, and how these digital assets are revolutionizing global philanthropy. She describes how the process works and why blockchain technology and cryptocurrency are an important way to increase transparency in tracking how foundations are using your donation. Alyse talks about the birth and growth of BitGive, the first Bitcoin and blockchain non-profit charity, which just celebrated its fifth anniversary. She describes some of the complexities of donating crypto assets, both for givers and receivers and the “magic bean” challenges foundations confront in converting these contributions into something that’s truly useful to those in need.

Blockchain Beach Co-Founder, John Marchesini joins us today to talk about this long hard year of uncertainty for crypto investors and the industry as a whole. John describes the biggest events of 2018 that roiled the markets, sent investors fleeing, and sent shockwaves through the industry. We discuss the key enforcement actions by the SEC relating to ICOs and other SEC announcements or lack thereof that had market impact and how it’s just the tip of the iceberg. We talk about the growing sensitivity of the cryptomarkets to global news events and forces. And we analyze the impact of the market downturn on the industry as a whole, with layoffs and buyouts already at play and more on the horizon. John looks back at the 2018 predictions that came true and the ones that didn’t. And he has some informed projections for 2019.

Questions and Comments?

[email protected]

Guest Contact Information

John Marchesini

Blockchain Beach

@John_Marchesini

LinkedIn: John Marchesini

Resource Links:

1. SEC settles charges with two ICOs that opens the door to non-fraudulent cases
2. https://www.cnbc.com/2018/11/29/sec-charges-floyd-mayweather-dj-khaled-for-promoting-icos-without-disclosing-payments.html
3. https://cryptovest.com/news/consensys-layoffs-mark-freezing-point-in-crypto-winter/
4. https://www.forbes.com/sites/jeffkauflin/2018/12/05/cryptopia-in-crisis-billionaire-joe-lubins-ethereum-experiment-is-a-mess-how-long-will-he-prop-it-up/?utm_source=TWITTER&utm_medium=social&utm_content=1958373349&utm_campaign=sprinklrForbesMainTwitter#76351ddb2f0a
5. https://www.newsbtc.com/2018/12/01/what-is-bitcoin-crypto-featured-as-category-on-jeopardy/
6. Jay Clayton's remarks at Consensus Invest 2018 (it includes the full video interview).
7. Former SEC Chairman Chris Cox’s remarks at StartEngine Summit (Recap)
8. Former SEC Chairman Chris Cox's remarks at StartEngine Summit
9. The (Future) Most Valuable Company In The World

Micah Winkelspecht joins us today to analyze the forces that are shaping the volatile cryptocurrency markets and the evolution of the decentralized ecosystem. Micah offers insights into the many pain points that are confronting the industry and what it’s going to take for digital assets to cross the chasm into mainstream adoption. Chitra spoke to Micah in early October, just two weeks shy of the 10th anniversary of the Satoshi Nakamoto whitepaper, “Bitcoin: A Peer-to-Peer Electronic Cash System.”

In this in-depth interview, Micah describes how his casual interest in cryptocurrency as a software engineer in 2010 turned into crypto evangelism after reading the Satoshi whitepaper in 2013. He fell down the cryptocurrency rabbit hole from which he hasn’t yet emerged (and likely never will). Having been through four crypto down-cycles, Micah offers tales from the front to help us put the current market volatility in perspective and looks ahead to how the decentralized ecosystem will evolve over the next decade.  

Morvareed Salehpour joins us today to discuss the complex legal issues around blockchain technology and cryptocurrency. An attorney and public speaker, Morvareed became interested in the space back in 2012 when she began reading about how cryptocurrency was being used in role-playing games (RPG). As these digital assets gained traction in real-world financial transactions, she started studying the complex jurisdiction, liability, and enforcement challenges of this decentralized technology. Morvareed shares some of her perspectives on how blockchain and cryptocurrency are transforming the legal landscape thanks to the rise in cryptocurrency securities lawsuits.

Topics Covered:

– How she got started in this space

– Biggest legal issues of blockchain technology

– Cases now working their way through courts

– Case law being developed

– How various countries are handling legal challenges

– The questions around intellectual property

– How can businesses protect themselves

– The rise of cryptocurrency lawsuits

– How average investors are affected

– Top three takeaways

– Closing thoughts

Questions and Comments?

[email protected]

Guest Contact Information

Morvareed Salehpour

Attorney & Public Speaker

https://www.salehpourlaw.com

Transcript: Interview with Morvareed Salehpour

Interview Recorded On: September 17, 2018

Chitra Ragavan:  Welcome to Chasing Unicorns, your portal to the world of cryptocurrency. I’m Chitra Ragavan, Chief Strategy Officer here at Gem.  Today’s topic is how blockchain technology and cryptocurrency are disrupting the legal landscape. Joining me is Morvareed Salehpour. She’s a noted attorney and speaker on blockchain technology and cryptocurrency. She’s based here in Los Angeles.

Chitra: Welcome, Morvareed.

Morvareed Salehpour: Thanks for having me, Chitra.

Chitra: Tell us a little about yourself, and how you first became interested in crypto and blockchain legal cases.

Morvareed: Sure. So I am a lawyer, and I first learned about the blockchain cryptocurrency space in 2012, 2013. It was a point where it was being used for RPG games as a way to buy virtual beers in virtual bars, and there was a double spend problem at that point, so digital currencies weren’t an actual thing that could be used in business. But I started learning about that in the legal context as people started exploring that as an option for conducting financial transactions and the potential there. So I stayed on top of it and continued to learn more and more about it and started to get more and more involved and working on matters in the legal space that continued to evolve as the double spend problem was resolved, and it became more of a real space that people were transacting business in.

Chitra: And what are you finding now are the biggest challenges now in the legal space? Let’s start with blockchain technology before we start exploring cryptocurrency, since blockchain is sort of the rails of cryptocurrency.

Morvareed: Yes, so blockchain technology is basically a system that, if it’s true blockchain, it’s decentralized. So in a decentralized system, there are issues with jurisdiction, liability, and enforcement, which are different than when it’s centralized, as a source of business. So, for example, with any type of jurisdictional issues, it could be the case that any location where there is a node physically located for a blockchain - that is a source of jurisdiction. Which means that conflicting laws can apply, and there are issues regarding where you can even bring suit or where you will be brought into court.

Chitra: Because this is a global phenomenon.

Morvareed: Exactly. It’s an issue that it’s a technology that spans the globe, and there are new issues with that because this is not something that we have dealt with before. Similarly with liability, one feature of blockchain is there is a lot of anonymity with it, so in that kind of situation, if there is a something that goes wrong like an error, or there is a fraud committed on a blockchain transaction, you then have to find issues of who’s held liable. And you may not be able to find the guilty party if there’s a fraud, for example, on a supply chain blockchain where someone has removed a tracker and put it on another product of what was supposed to arrive. How do you find that person? Two, if there’s an error in the transaction because of an error in their code, who do you hold liable in that situation? Is it the developer? Is it the central entity maybe still in control of the blockchain? So these are some of the issues that are being developed on the liability front. Similarly on the enforcement front, those issues arise again when there is a court order that is going to be issued. How do you enforce that on a blockchain where the court may not have jurisdiction over everyone - or may not even be able to logistically enforce that order in any real manner we can think of?

Chitra: And this is not just theoretical. You’re actually already starting to see cases working their way up through courts, right?

Morvareed: Yes, that’s correct. There are already these cases that are coming down and the case laws starting to develop. So these are all issues that some forethought should be put in by blockchain entrepreneurs and businesses to address some of these issues on the front end in their transactions and their contracts so that when things do go wrong they are put into a position where they have strong arguments for what they want the outcome to be.  

For example, one case is the case against NANO (RaiBlocks) in the eastern district of New York where there’s a securities violations and fraud class action by a plaintiff who lost money in the BitGrail hack. BitGrail was an Italian cryptocurrency exchange, but the plaintiff has now sued the actual NANO token founders and their company - instead of the cryptocurrency exchange - and one of the reliefs that has been asked for in that case is a court ordered rescue fork. It brings up the issues of all three jurisdiction, liability, and enforcement. Because one, jurisdictionally, how does the court effectuate jurisdiction over people in Italy or people who are part of that blockchain but are not in the U.S.? Two, how does it hold the developers liable. Is that who is going to be held liable in this case - even though they weren’t the ones who committed the theft? Three, how are they going to enforce this rescue fork? Even if they decide to rule in its favor, how are they going to stop everyone from proceeding on the unforked protocol? So that’s something that’s now pending in the courts, and it will be decided probably in another year or so.

Chitra: And this also goes to this larger issue. We hear a lot about of these court-ordered rescue forks that may be coming down the pike in years or months, but that kind of almost goes against the very grain of what blockchain technology is supposed to be - kind of this decentralized democratic system of decision-making.

Morvareed: Yes - so yes, that’s one of the issues with a true public blockchain. It’s not functional with a lot of our systems that are in place, and it actually creates problems and makes it more complicated for people. So it becomes a situation where one - the governments are not going to promote truly decentralized blockchain. It’ll be more private blockchains or ones with some sort of centralized actor that are going to succeed and supported by the government. In fact, we are already seeing that a lot of the blockchains we are familiar with have centralized actors. Think of bitcoin - they are centralized actors. EOS, they’re centralized actors. Those are the ones that even take off. We don’t see many truly decentralized entities. There was one - you could say maybe DAO was one, but we saw how badly that ended when there was an error in the code, and it went out of control when someone hacked it.

Chitra: Talk about that - how that ended and the precedent it helped set.

Morvareed: Sure. So one of the issues there was that they had created this entity that was supposed to be decentralized and people were investing Ethereum. Then basically someone hacked it because there was an error in the smart contract code and they were able to take advantage of that vulnerability and take out the funds. That created a situation where Ether had to fork to resolve that problem. So these are some of the issues that are present with a decentralized entity. There’s no central entity to try and stop a hack or to help recover.  It has to be something that’s more difficult to address in those kinds of situations. And there are other kinds of cases that are coming down that bear on that realm as well.

For example, there’s a big consolidated class action against Tezos for securities violations. A couple of the defendants in that case are Swiss-based entities, and they have tried to file a motion to dismiss to get out of the case based on the fact that they may not be a U.S. entity. There might not be jurisdiction over them. There is not a most convenient forum. You’re applying the SEC rules outside of the country. And the judge actually came up with a very interesting ruling. He denied a lot of the motions to dismiss, and some of the takeaways in that case are that you cannot avoid U.S. law by just structuring entities abroad. Two, the way you format your transaction, you don’t get to, for example, just pick. You don’t automatically get Switzerland even if that is included in your transaction as the subject of jurisdiction when it is a browser wrap agreement rather than a click wrap agreement so that the consumers who are entering in these transactions are not on notice. Three, the judge actually focused on the circumstances of the transaction, which was the contractual terms of the transaction. So where the effects are being felt, how it’s being effectuated, where it’s being effectuated, are more important than necessarily what the contract says.

Chitra: And the number-two point, which was the browser versus the click—what was that?

Morvareed: So, they basically said that Tezos, the contracts for the token sales in that situation had browser-wrapped agreements basically saying the jurisdiction is Switzerland so basically agreement was assumed. There was nothing putting the person buying the token on notice that this was what the jurisdiction would be, and there was no affirmative action by them to agree to that so it was just a boilerplate assumption of jurisdiction. The court said that doesn’t work in this case.

Chitra: So you’re seeing cases in the U.S. and abroad in other countries too. Is everyone grappling with this in different ways?

Morvareed: Yes. There are other countries that are stepping up in this space too. There are other countries that even tried to outlaw cryptocurrency. Other states are trying to embrace it, but one of the things to point out is that a lot of people say, “Oh, the U.S. is being very strict. They’re getting involved in the space.” But actually the U.S. is taking a very measured approach, and they have not come out saying you can’t do this. They’re basically saying that these are investment contracts, and you need to comply with securities law. There is flexibility in securities law in covering all this so they haven’t passed new regulations saying the existing rules apply. It makes sense that it applies when you’re raising funds.

Second to that, when people say we should go into a foreign country because it’s more beneficial etc, they fail to realize that a lot of the different countries rely on the U.S. for their rules and regulations. We are the world leader. They follow us in terms of what the standards are, and we’re already starting to see that the U.K. is taking similar positions. I believe Switzerland has recently been taking similar positions to us as well, so the days of trying to find loopholes are very, very limited.

Chitra: But even if these cases are being brought, isn’t it going to take an unprecedented amount of international cooperation to actually bring these cases to bear? Because this is a global phenomenon, and there are no boundaries, no nation borders like in other cases. So how does this work?

Morvareed: It’ll be a lot of choice of law issues, which is something that we already handle in different contexts, where parties may be in different jurisdictions. You basically do this choice of law analysis as was done in Tezos case. The court decides where is jurisdiction, is jurisdiction appropriate, can I exercise jurisdiction over this entity. One of the interesting things to think about in a way is - are you taking advantage of commerce in a specific jurisdiction? If you are, it doesn’t seem unrealistic for you to be called into court and held liable for your actions. So that’s one way to think of it there, and I think there needs to be some thought put in to structuring your transactions as well as some thought put into your contracts. It can’t just be boilerplate, it has to be well thought out. You should be thinking about these issues already, because you may not realize they're coming, but they’re already in courts and these will all be addressed and new issues are rising.  

For example, in that Tezos case, one of the factors the judge used to determine that the actual geographical jurisdictional location would be the U.S. was that most of the nodes were located in the U.S. So these are some of the issues—where are nodes located, where is marketing happening, where are the founders located. That was another factor—where is the website located for the securities offering, or for any kind of blockchain. So it’s a holistic factor contest that is being developed, and you need to have people that understand it on your side and helping you formulate your structures on the front end. So when it goes to litigation you’re not left scrambling, trying to come up with an argument to save yourself.

Chitra: When laws are written, there’s often this idea that you want to not have them be too prescriptive, too narrow because as tech changes, as the world changes, that the law should be able to keep abreast with changes in society.  Do you think that current laws - both in the U.S. and internationally - are built in such a way as to be able to adapt to this revolutionary technology, or are lawyers and courts just struggling to and scrambling to kind of understand what’s happening and to keep pace with it?

Morvareed: No, so that’s what I always like to say—the law has always embraced innovation, and this has happened multiple times in the past.  Case law in the U.S. specifically always sets precedent. So it’s always interpretation of laws and regulations that is how our case law develops. So it is always whenever some type of technological innovation happens - for example the internet and utilities even when those came out - our laws adapted to it, our judges interpreted it, we had arguments that the lawyers made on behalf of their clients, and they basically had the law developed.  And it may take some time to get clarity, because there’s a lot of gray areas, so you need someone who’s going to be able to make persuasive arguments on your behalf. And once they’re able to do that, it will depend on the judge and jurisdiction you are before too, because there are certain situations where we can have conflicting laws even in our country because there are several circuits and our circuits can have splits where a certain number of them believe it should be one outcome and a certain number believe it should be another outcome. Again, similarly for example, in an area that’s more established - employment law. There are specific jurisdictions that are more beneficial to the employee versus not. So that jurisdictional issue is very important, and that’s something you should be talking with your lawyer to see. How do I pick a jurisdiction that’s beneficial to me, and how do I structure my transaction and my contract in a way to make it most likely that if something goes wrong, that is the jurisdictional result I will end up with?

Chitra: And doesn’t it also matter who your judge is?  Because if your judge is technologically savvy, is doing a lot of self education on cutting-edge tech, then it would make a difference in the outcome. But if you have a judge who is not so cutting-edge, it could have the opposite outcome.  

Morvareed: I think a lot of judges are pretty good about that. There was a judge in the northern district of California who has actually taught himself coding because he was getting a lot of software copyright infringement cases. So a lot of them actually make the effort to understand what is going on. They’re likely as interested by these issues because they’re new issues and they’re innovative. And it’s just interesting for us as lawyers to come up with resolutions for our clients, so I think a lot of them are excited about this.  They understand it. Obviously, the opinions I’ve seen so far in these cases I’ve mentioned and several other ones have been really well thought out and really making a good look at the factors to consider and how to come up with a logistical and fair outcome in this case.

Chitra: And it seems at least from our perspective, we found that with trademark law, this could have pretty groundbreaking consequences because of the idea of irreparable damage. For instance, we had to sue another company that was using our name and our likeness of our logo and had even registered its token with our name and what we discovered was - obviously it was settled in our favor and the other company has to change the name and notify exchanges that it has to change the name of its token.  However, once it’s registered on the blockchain then you can’t change it, so this idea of irreparable harm is something that’s going to be revisited a lot when it comes to blockchain technology and cryptocurrency.

Morvareed: It’s a big issue, and I don’t think people quite realize it. Intellectual property is one of the areas where this is really a big issue, because not only is it a legitimate infringement like you’re talking about, trademark copyright infringement. A lot of it is even by actors you may not be able to pinpoint. For example, with copyright infringement, there’s embedded material on blockchain ledger entries. Someone can put encrypted versions of movies or other copyright material on this blockchain, and then you have given the liability issue of finding these people. You don’t know who to send a digital millennium takedown request to. You don’t know who to call into court if there is an infringement that you want to stop.  Similarly going along those lines you have issues with people embedding other inappropriate material. For example, state secrets, malware, blackmail material, all these things are things that can be embedded. And it then raises the question - you may not be able to locate the people who actually embedded that material, but there’s a copy of it on the blockchain, and the node operators are now storing that. Are they liable for that?

Potentially yes, because there are certain locations where there is strict liability associated with that. For example, in China there’s strict liability for state secrets, and that is broadly defined from my understanding, so the node operators could all be liable for spreading state secrets. If they’re in China, that is a scary situation to be held liable for, so these are some of the considerations to take into effect. At that point, these node operators are faced basically with a choice: do we delete this? Then it’s not a blockchain, if we are changing it, and can we even delete it? How can we, can we all agree, is that even going to be effective? So it’s one of those issues that’s developing in terms of liability. And another kind of example to think about.  I’m sure you’ve heard of Augur’s assassination markets. I’m sure something’s going to go wrong based on that, sooner or later, and I would not be surprised if Augur is called into court for that and has to address the issue of node operator and developer liability there.

Chitra: And then you also have the request for information, warrants being issued, how do these companies… all of a sudden they’re on the hook for information and they find themselves in a very interesting position. How can companies protect themselves if they’re interested in getting into the space or are in the space?

Morvareed: I think they need to work with lawyers who understand the space and start structuring businesses in a way that put some forethought and put some safeguards as how to address each of these issues. You need to have that forethought, because otherwise you’re going to be in a situation where you have no protocol or policy to address these issues when they do arise. Because they are arising already. And so you need a way to address it. And if someone approaches you and says there’s a copyrighted material on your blockchain, figure out a way to come to some agreement with them to resolve that. You don’t want to be the one called into court and incurring the cost of setting that precedent in the cases.

Chitra: So, what are your top three takeaways or advice for companies that are in the space? What should they know, what should they be aware of, and what should they do?

Morvareed: Sure. I think number one is—you’re not going to be able to get out of liability simply by structuring these entities abroad as has been established with these cases now. So stop trying to look for loopholes, and start actually thinking about how can I set up a legally complying business and make it grow. Two, you need to put forethought into how you’re structuring your business and your transactions. So you should be engaging lawyers who understand the space and business operations people who understand the space to set up your business appropriately and to have that forethought in your business structure. Three, if you realize something is going wrong, please go get council from an attorney right away. It’s so much more cost-effective to address this upfront instead of waiting for things to go really wrong before doing so.

Chitra: And what about investors? Are there things they need to think about? Is this going to affect them as well, in terms of getting redress? For instance, you hear more and more about class action lawsuits being filed. Average investors—what are things they need to consider, and what redress do they have if something goes wrong?  

Morvareed: So, one kind of redress is this class action there’s a lot of pending. There’s Tezos, there’s NANO, one against Centra, there’s a Coinbase one. So the class actions are something that is a growing space for people who have lost money in these spaces. But I think before even getting there, the smarter thing to do would be to actually analyze any type of opportunity that you are looking to put your money in and never invest more than you can afford to lose, because the facts are that 90% of startups fail, all these people doing ICOs or token raises are all startups. So do your due diligence and really consider, is this something I think is going to succeed? And if I lose the money, am I okay with that?

Chitra: Great. And looking back, is there any one moment or any one case or any one incident or anecdote that made you realize, wow, you know this is really going to be transformative—blockchain and cryptocurrency are going to be transformative to the law and the realization of the impact it’s going to have?  

Morvareed: I think it’s the technology itself and one of the strongest use cases in my opinion is supply chain blockchains; they create such advantages for business transactions there. For example, Walmart is doing this supply chain blockchain with IBM’s blockchain technology. And they did a beta test. They basically tracked a box of sliced mangos to its origination point doing their normal method, which took—I believe it was 6 days 18 hours and 2 minutes. They did it on their beta testing blockchain—it took 2 seconds. So that’s amazing in terms of how fast it was and, more importantly, when you think about it, it has advantages in terms of doing targeted recalls. So now you don’t have to recall all your lettuce if it’s bad. You know which farm it went to, which store it went to—targeted recall.

Even if that’s still private blockchain, it still creates a competitive advantage because you’re spending less on recalls and you’re providing transparency to your consumers at the same time, and that’s something your competitors may not be able to provide. So I think those are the kind of use cases that will take off first and have really strong implications in an enterprise application.

Chitra: Great. Do you have any closing thoughts?

Morvareed: I think it’s - people like to apply blockchain technology to all sorts of different applications, and I think they need to consider if they are a business entrepreneur or business, whether their project actually needs a blockchain. Not everything needs a blockchain to succeed.  

Chitra: And this could actually protect them from all kinds of legal headaches.

Morvareed: Not only legal headaches, but you know a cost of doing an ICO is actually a significant amount, both on the compliance and legal side as well as the engineering side in setting it up. So consider whether you really need that or a typical fundraising method may be better for you.

Chitra: Great. Thanks, Morvareed. Where can people learn more about you, read more about you and your work?

Morvareed: Sure. You can visit my website. It’s salehpourlaw.com. My email is also [email protected]. I’m on LinkedIn and I also have a Quora, so you can follow me on either of those.  

Chitra: Great - thanks so much.

Morvareed: Thanks for having me, Chitra. It was a lot of fun.

Chitra: Thanks for watching! Join me again next week for another edition of Chasing Unicorns. Until then, enjoy your crypto journey, unicorns!