The Breakdown - Should the Government Have A Say In Where You Invest?

Episode Date: December 20, 2019

Accredited investor laws block most of the US out of technology and other types of early stage risk investing, but as the ICO boom showed, not being allowed to do something doesn’t mean that people don’t want to do it. The SEC announced prospective changes to those laws that could expand accredited status. In the world of DeFi, a number of different projects including Synthetix (with an assist from Chainlink) and Kyber are looking to more fully decentralized heading into 2020. And finally a quick review of the CoinDesk 2019 most influential list, including why Hodlonaut is the best selection. 

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Thursday, December 19th. And today we're going to be talking about some updates or potential updates in the accredited investor definitions in the U.S. Second, we're going to talk about a couple bits of news out of the decentralized finance world that all relate in some. way to putting the decentralization in decentralized finance. Third, finally, we're going to look at CoinDesk's most influential list. I'm going to tell you what I like, what I disagree with a little, what I disagree with a lot, and my favorite selection. But for now, let's dive into accredited

investor rules. So an accredited investor is someone who meets a certain wealth threshold. This is a designation in the U.S. that was created in order to protect investors. At least that's the theory behind it, right? The SEC's chief job is investor protections. And And so accredited investor rules, which basically say that unless you've been making a couple hundred thousand dollars a year or more for the past few years, or you meet a certain threshold of net worth, something like a million or maybe it's five million, I can't actually remember the exact number, not including your house, not including your main residence, you're not allowed to participate in certain types of private market offerings, private market fundraising or securities offerings,

such as venture capital, venture capital for new technology startups. And again, the goal is to protect investors from scams. The problem for a lot of people is that they use this very rough heuristic of wealth and just means. It's logical in some ways in the sense that the SEC assumes that if you meet a certain threshold, you potentially have more capacity to bear and withstand risk, right? If things go badly, you're not going to be destitute. The weird problem with that, obviously, or the issue that you could point out is that, that you could be making $200,000 a year, qualify as an accredited investor, invest way too much of that. You know, $50,000 on $200,000 salary into a startup is a pretty dangerous thing that you're not going to see liquid for a long time. But either way, whatever the logic is, that is the law of the land. Now, there are a lot of folks who think this is unjust.

Pomp in the crypto space has regularly tweets about this. He says, you know, we must stop discriminating against 80% of Americans based on wealth. Really, I think there are two issues that people have with accredited investor laws. The first is philosophical, and it's just should the government say what we can and can't spend our money on? And where is the consistency? You know, you're allowed to walk into a casino and bankrupt yourself, but you're not allowed to make a bet on a technology startup if you don't meet these certain wealth thresholds.

So that's one problem. A second philosophical problem, just how the definition actually works, right? the presumption that wealth equal sophistication is troublesome for a lot of people. There's a lot of folks who have made decisions in terms of what jobs they do or where their passions are that don't make that kind of money and that don't have that kind of assets, but who are more sophisticated from just their knowledge of markets and understanding than folks who happen to have, you know, well-paying jobs. So there's an inconsistency issue.

The third area is just practical what opportunities it cuts. out for people. This is particularly relevant in the context of the last 10 years in which capital has been flooding from public markets where it's harder and harder to make returns just based on how much cheap money is sloshing around in the wake of 2008 and QE. So much of that is moving into private markets and just looking in ever more exotic ways to find yield. And that's part of why we've seen so much money flow into venture capital and private equity. Those opportunities are obviously pretty systematically and systematically denied anyone who's not an accredited investor. For a lot of folks, that's been extremely frustrating, right? They've spent the last 10 years

watching the news continuously highlight these huge unicorns that have made their investors rich, and that's an opportunity that they don't have. So this has to do with crypto in two ways. The first way, I think, has to do with why the ICO boom happened. And for me, in my estimation, I think that one of, not the only, not even necessarily the main, but one of the drivers for, particularly U.S. investors who participated in the ICO bubble, was this fact that it seemed like an opportunity to actually participate in an early stage risk area that had been denied to them in the past, right? So I think it relates to crypto and that it fueled the demand for ICOs. The second way that it relates to crypto is that because those non-accredited investors

did participate, the SEC is that's part of what the SEC is going back and prosecuting projects for, is allowing non-accredited investors to participate in their unregistered securities offerings. So I do think actually accredited investor laws have a lot to do with crypto, not just philosophically, but practically right now. So yesterday, the SEC proposed to update accredited investor definitions, which hit like a bomb in the crypto space. Pomp immediately tweeted it. He called it a step in the right direction. This is a quote from Chairman Jay Clayton. He says, the current test for individual accredited investor status takes a binary approach to who does and does not qualify based only on a person's income or net worth. Modernization of this

approach is long overdue. The proposal would add additional means for individuals to qualify to participate in our private capital markets based on established clear measures of financial sophistication. I am also pleased that the proposal specifically recognizes that certain organizations such as tribal governments should not be restricted from participating in our private capital markets. Basically, the gist of it is it's nudging into an area where there's different ways outside of just wealth or assets to qualify as an accredited investor. It's not clear yet because there's a 60-day comment process now. So we don't know exactly what those mechanisms are or where it'll land, but I think what matters in this case is the signal that the SEC is sending that they need to

update these definitions. I think this is a really important positive area, right? Part of what crypto is doing and part of crypto's job is to highlight problems in the existing system. And I do believe that while there are important reasons to have investor protections, the assumption of people's incapacity to make smart decisions for themselves is troubling. There's problems with that. one way to resolve that is to go the complete other end of the spectrum and just let people do whatever they want, but we live in the world of reality. So probably a more likely way, and in this case maybe a better way, is to create paths where people can demonstrate that they have the right qualifications, quote-unquote, to actually participate in different ways. Like, I think that what matters when it comes to a quality of opportunity is pathways in.

And it's okay if at the beginning some of those pathways, like, it's never going to be fully equal. If you're born with a net worth that qualifies you as an accredited investor, you're already on a different playing field. We're not going to solve that as it relates to investor accreditation. However, the way that you allow society to stabilize and give people a chance to continue to build new wealth is by giving them pathways into these opportunities. So I think this is super important. I think it's important for more than just crypto.

I think that it could have an impact on the way that crypto evolves. If you see real quality pathways for non-accredited investors to become accredited investors, it potentially increases the demand for actual units of equity that come with rights rather than things like tokens, which are really just a gamble in many contexts. So I actually think that this story has a pretty big long-term implications for the crypto markets. But with that, let's move on to number two, putting the decentralization in defy. I've been doing a bunch of interviewer interviews, which you'll start to hear next week around two questions. What's the narrative or what was the narrative the most important story of 2019?

And number two, what's a prediction for 2020? And as you might imagine, decentralized finance is coming up a lot. This was a year that defy really came into its own. This is a year that defy both went to the center of the Ethereum narrative, but also in some way started to transcend any single chain. Over the last couple weeks, we've talked about Bitcoin-based defy and things like that. So, defy is a big topic. However, there's this pesky little thing around that D in the decentralized finance that we're still at a stage of the infrastructure development where these projects are somewhat centralized,

right? There are foundations at the center of them. There are centralized points of failures in terms of things like where prices come from in decentralized exchanges. All of this is to say that defy has a lot of. a lot of challenges to become and live up to its potential. I think where we are is we recognize that that potential is huge. We're seeing really interesting indications of where there might be some cool product market fit, but to live up to the potential, it's going to have to really push

itself. So I noticed just kind of all wrapped up in a 36-hour period, a bunch of different news showing that it's clear that DFI projects actually seem to agree that they need to be pushing themselves to decentralize. So if you look at The Defiant, which is Camila Russo's great newsletter about defy. Two bits of news that I thought were interesting that relate to this idea of putting the decentralization and decentralized finance. The first has to do with governance. So two of the bigger projects in the space, synthetics, which creates effectively wrapped versions of assets on Ethereum, and Khyber, which is a decentralized exchange, are both looking to move their operations, treasury management

to DAOs or decentralized autonomous organizations over the next year. They're starting to talk about what that means, how it's going to happen, how the transition. So effectively you have this organizational development that's completely separate from what these projects do is they're trying to move from a centralized traditional kind of corporate model to a decentralized network approach, which all in its own, completely outside of what these projects are actually doing is fascinating and something that, you know, have been talking about for a while, right? This idea that organizations or projects decentralized themselves over time. Well, we're going to get to actually see how it happens

in real point of fact. The second story that relates to this decentralization piece has also to do with synthetics. As synthetics thinks about moving to a decentralized model, one of the kind of mechanisms of that has to do with price feeds. Kane Warwick, the founder of synthetic says, Given our reliance on regular price feeds for our derivatives trading mechanism, finding a robust decentralized Oracle solution has always been at the top of our priorities list. Basically, the idea of oracles is that oftentimes for blockchain systems to work, there's some information from outside of the blockchain ecosystem that needs to be pulled in to work. A very obvious part of this is what is an asset cost, right?

That's a factor of how it's being traded on other exchanges. And so actually understanding what the price of an asset is for some of these automated mechanisms can be really difficult. The news from yesterday is that synthetics would be partnering with ChainLink, which is a decentralized Oracle provider, to actually offer that. So it's pretty interesting stuff. I think we could go way deeper on this. ChainLink itself is a project which is sort of at the center of a huge number of conversations

because there are many who are still skeptical of their ability to actually offer decentralized Oracle information just on a fundamental level. But at the same time, they've obviously created a huge splash in the space. They have the Chainlink Marines, which are one of the most aggressive communities in crypto. We recognize how important they are just based on, you know, if you look at the most influential list, their founder, Sergey, is on that top 10. chain link and synthetics working together is obviously a pretty big story in the context of this space. But again, the larger overarching idea here is about decentralized finance decentralizing itself and what that means.

Now, one more piece on that or one more story that even as I was prepping, I just noticed this, Maker Dow has raised more money. So it has received $27.5 million from Dragonfly in Paradigm to expand into Asia. Basically, the way they did this, they purchased 27.5 million of maker tokens representing about 5.5% of the supply with the explicit goal of expanding to Asia. Basically, Dye wants to go after Tether, right? And Tether accounts for something like 95% of total stable coin volumes. And part of the reason that they account for so much is Asian markets. Effectively, the goal is that they, with these new resources, Dye can go compete a little bit. That's all well and good. There's tons of interesting things

to talk about there, but the point relative to this larger topic of decentralizing, decentralized finance is the fact that you have three investors, Andresen Horowitz, Dragonfly, and Paradigm, that account for more than 10%. They count for 11.5% of supply, which creates obviously a huge amount of influence in governance. We can debate whether it's right or wrong, whether it's fine, we can look at the practicals, and ultimately we won't know until actual governance capture does or doesn't happen. We won't know how powerful that sort of ability to influence the network is until there's a contentious issue where they're on one side and the communities on the other. But the reality is that you now have one of the most important

projects in the defy space that has, you know, something like 11.5% of its tokens supply owned by a very small number of actors. It's worth noting and it's worth thinking about and debating whether that compromises things in any way or whether it's at least worth keeping an eye on. I don't know where I stand in some ways with that, but I think it's important. So clearly there is a lot going on as we move into 2020 that relates to just how decentralized decentralized finance is going to be and who it's available to. But for now, let's move to our third and final topic for the day, the CoinDesk most influential list. So again, throughout the week and moving into next week, you know, we've been looking at

at end of year content. It's a great way to just kind of try to catch up with ourselves about what the significance of this past year has been and what we think might happen next. And so I wanted to share just briefly, it'll be fast, a few quick thoughts on CoinDesk's list. So this list, the way that it was made for some helpful context, it was a multi-part process. So first, CoinDest team put together a long list of potentials. From there, they asked readers to vote in a survey, and then taking into account those opinions, but not strictly following them, coin desk editorial team might have final choice. So this represents one take and now it represents two takes because I'm going to put my stamp on it. There's a bunch on here that I think are just good

that I like. So like I said, I'm going to talk through what I like, what I disagree with a little, what I disagree with a lot, and my favorite selection. The ones that I like is kind of the core of them, right? Jack Dorsey, I do think deserves a spot here for flying in the face of Libra in some ways by being so resoundingly focused on Bitcoin as an internet-native protocol being an internet-native money and committing Twitter to helping Bitcoin or in Square to helping Bitcoin. I think as a powerful force related and kind of opposite, I think you have to include David Marcus or someone from Libra, at least in this conversation. To me, and I just published a piece on CoinDust today, Libra and the emergence of a global

digital currency war is the narrative of 2019. So I think that that has to be here. I was really glad to see Caitlin Long on here. I think that she's done so much work, creating actual space for cryptocurrency businesses and models for how jurisdictions can interact positively with cryptocurrency businesses, obviously in the context of Wyoming. Rune Christensen, the founder, Maker Dow. I do believe that Defi was one of the key narratives of this year. And I think that MakerDAO is the undisputed most important project within that. So I think that makes sense. Meltem has just been a champion throughout the year and a voice and a presence, particularly as the stakes have been raised. You know, she was the one from our community that

was tapped to go actually testify before the house. Big double thumbs up for me. And then I guess lastly, another one I'll mention is Munib Ali. I think this one is cool because it's so specific. The big thing that Blockstack was able to do this year was actually offer a regulated token offering under a Reg J plus exemption, which is the first time that it happened. So again, a lot of this is trailblazing, right? So those are all the what I like. They'll all make sense to me. Now, disagree with a little. I'm going to go with Andrew Yang. I like Yang a lot. I think he brings something powerful to this contest. He has opinions about crypto, but he has opinions about everything. And he has not used this bully pulpit at all to talk about this. He's not talked about really what

the context will be. Now, I don't blame him for this. There's not a big voting block that he needs to get by talking about crypto. However, I don't really love highlighting him just because he's a prominent person, right? It would be like if Jack Dorsey hadn't created the skunk works of square crypto and he hadn't gone out of his way to make public statements about Bitcoin and why Bitcoin not Libra and things like that. So disagree a little with Andrew Yang, but I understand why he's there. The one I disagree with a lot is Ted Livingston from Kick. I can see how he's here in the sense of one of the biggest newsmakers, right? Deciding to pick a fight with the SEC and do this whole, whatever it was called, defend crypto campaign. Like, it certainly made a bunch of news, and it

was a story. But forgive me for thinking that it was a little crass. And it was just a way to try to kind of have a Hail Mary and try to use public sentiment to aid your startup community. So, I don't know. I'm not a huge fan of that selection. I think that most influential is different than made the most news. And I don't really think that he influenced much other than putting his project at the center of something that it didn't really have the clout to speak for in the first place. I talked a lot about this back in the day when this was going on. So that's my disagree with a lot. Let's end on my favorite selection, which is Holdenot. I don't know how you could have missed this, but Holdenot is a cat in a spacesuit on Twitter. He's also a normal person, a man from Norway.

He was basically bullied in a legal way by Craig Wright. He tried to basically take him down for saying Craig Wright wasn't Satoshi. The whole Bitcoin community rose up. Everyone changed their avatars to Holdenot. Some of them are still there. It's very confusing for me as I'm trying to see who said something curating Long Read Sunday. The reason that I like this selection is that one of the most important throughlines throughout the history of crypto is redistributing power away from traditional modes of influence and authority. In particular, money and the ability to use money to compel people to do things. I think the through line in crypto is about power and redistributing power to both the many who speak up together, but also to individuals on their own

and away from traditional institutions. We saw this when S2FX was defeated, and we saw this again with Hodel Not this year. So I loved that selection. I was super glad to see it, and I think it was a great choice. Read the whole thing. The team, I think, did an amazing job. Trevor Jones did incredible art, and just each of the pieces is really worth reading. So go check it out. Enjoy that. I'll be doing a roundup of all the end of year news in Twitter written curation form in my Long Read Sunday, on Sunday, obviously. And then next week we'll be starting to actually do some of our own year-end interviews. I have some great folks coming on. So make sure to subscribe so you catch all that. There's going to be Peter McCormick, Meltem DeMir's. Many, many folks will be

here telling us what they thought the narrative of last year was and what they think their predictions are going forward. So thanks as always for listening. I hope you are getting excited for the holiday slowdown. I know I am. So one more day and then we're into the weekend and then we're into the holidays. Hopefully I'll catch you tomorrow, guys. Cheers.