The SEC Really Doesn’t Like ICOs

The way I like to explain initial coin offerings is that “they’re like if the Wright Brothers sold air miles to finance inventing the airplane.” There are two parts to that explanation. One part is the idea of the currency: There is some good or service that will be offered at some point on some platform, and some currency—some cryptocurrency token—that will allow people to pay for that good or service. The other part is the idea of the financing: The people planning to build the platform will raise the money for it by selling the currency before the platform actually works; then they will spend the money to build the platform, and the currency will become useful.

Obviously there are ways this can go wrong (the people building the platform can take the money and not actually build it, etc.), though there are ways for any financing mechanism to go wrong. But the strongest case for the ICO is that it represents a genuinely new and interesting way of financing economic activity, in which the development of a platform is funded not by owners but by users. In the fun early days of ICOs, you could believe that they pointed to a glorious future in which new open decentralized internet protocols would be funded not by private companies—which would then own the protocols and make socially destructive decisions in order to maximize their profits—but by their future users, who would then govern the protocols in a responsible way to maximize their social value.1