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The Walrus - - TOSS OF THE BITCOIN - the­wal­

Mak­ing cur­rency transactions harder to hack may not sound revo­lu­tion­ary. But when you re­al­ize that blockchain can be ap­plied to any sit­u­a­tion that re­quires keep­ing au­thor­i­ta­tive records — med­i­cal files, busi­ness deals, le­gal agree­ments — it be­comes eas­ier to un­der­stand the hype. (One com­pany re­cently saw its shares surge 394 per­cent sim­ply by adding the word “blockchain” to its name.) Ac­cord­ing to a 2017 re­port by Uk-based Juniper Re­search, more than half of the cor­po­ra­tions sur­veyed were con­sid­er­ing a blockchain strat­egy. IBM is work­ing with the ship­ping gi­ant Maersk Line to track con­tain­ers us­ing blockchain and part­ner­ing with com­pa­nies, in­clud­ing Wal­mart and Nestlé, to use the tech­nol­ogy to track food from farm to shelf.

Many of the po­ten­tial ben­e­fits, how­ever, are still un­re­al­ized. And ig­no­rance about the com­plex com­puter sci­ence un­der­pin­ning the tech­nol­ogy has caused con­fu­sion over what blockchain is presently ca­pa­ble of. This has prompted loud warn­ings about the “blockchain bub­ble.” It’s hard to miss the irony that a tech­nol­ogy de­signed for build­ing trust has led to such dodgy in­vest­ments. Like the dot-com bub­ble in the late 1990s, the blockchain bub­ble may soon be­come one of tech’s cau­tion­ary tales. For now, though, the ques­tions in­vestors are fo­cused on are: Which prom­ises about this new tech­nol­ogy are solid, and who is sell­ing fool’s gold?

We do n’t know who in­vented blockchain. It was in­tro­duced in 2008 in a pseudony­mously pub­lished pa­per and al­most im­me­di­ately adopted in some of the more ec­cen­tric cor­ners of the in­ter­net. Over the last two years, how­ever, the once-fringe tech­nol­ogy has cre­ated afever in the cor­po­rate world.

Blockchain in­vest­ment has been par­tic­u­larly frenzied be­cause the tech­nol­ogy has al­lowed for a new way of rais­ing money for star­tups, called an Ini­tial Coin Of­fer­ing. The DAO was the first project to raise more than $100 mil­lion through an ICO. In this process, the new ven­ture of­fers up “coins,” which are chunks of code, that it en­dows with value. It’s the equiv­a­lent of rais­ing money for your ven­ture by sell­ing cock­tail nap­kins with “IOU” scrib­bled on the back. But blockchain al­lows you to limit the num­ber of au­then­tic cock­tail nap­kins in cir­cu­la­tion. If in­vestors want to buy them, their value jumps and the com­pany makes money. Mu­tual be­lief in the coin’s value makes that value real.

Be­cause of ICOS, star­tups don’t need ac­cess to elite ven­ture cap­i­tal­ists to get their idea off the ground. They can just set up a web­site, mar­ket their idea, and wait for the money to roll in. And in­vestors are ea­ger to give it to them be­cause of ex­am­ples like Bit­coin. Those coins went from be­ing worth pen­nies in 2010 to more than $9,000 at press time. (Bit­coin’s value con­tin­ues to fluc­tu­ate wildly.) Jump­ing into the ICO gold rush has also been made eas­ier be­cause many tra­di­tional bar­ri­ers to in­vest­ing have been swept away. Any­one with an in­ter­net con­nec­tion can put their money into an ICO with about the same ef­fort it takes to or­der a pack­age on Ama­zon.

To many, this easy ac­cess is ap­peal­ing, but ICOS are also ripe for abuse. In­vestors may know very lit­tle about what they are buy­ing. And un­like in the stock mar­ket, com­pa­nies are not forced to dis­close fi­nan­cial in­for­ma­tion be­fore of­fer­ing them­selves for sale. Plus, be­cause all the fund­ing is raised up front (as op­posed to ven­ture cap­i­tal fund­ing, which is un­der­taken in mul­ti­ple stages), new com­pa­nies have an in­cen­tive to over­sell them­selves with few con­se­quences for fail­ing to de­liver. A ven­ture called Te­zos re­cently raised $232mil­lion in an ICO with­out set­tling who was go­ing to lead the project. A le­gal dis­pute is now stalling the launch of Te­zos’s cur­rency, the Tez. Un­til it’s sorted out, in­vestors won’t see re­turns. But Te­zos al­ready has their money.

See­ing in­vestors torn be­tween risk­ing their money and be­ing left be­hind prompted Toronto fi­nancier Alex Tap­scott to start his own firm. His com­pany, Nex­tBlock Global, mar­keted it­self as a way for in­vestors to safely fi­nance lu­cra­tive blockchain star­tups. In his early thir­ties, Tap­scott has al­ready co-au­thored a book on blockchain and ad­vises the In­ter­na­tional Mon­e­tary Fund on fi­nan­cial tech­nol­ogy. He told me that these cre­den­tials con­vinced clients that his firm will pick win­ning com­pa­nies.

When we met in Au­gust, in his cor­ner of­fice in down­town Toronto, Tap­scott had just raised $20 mil­lion in early stage in­vest­ments. On his desk was an empty sil­ver brief­case, the kind that, in a spy film, would be filled with bricks of cash. “Lack of knowl­edge and there­fore pos­si­bil­ity for wrong­do­ing is pre­cisely the thing that we’re go­ing to avoid,” he said.

Things didn’t work out as he planned. In No­vem­ber, Forbes re­ported that while try­ing to raise an­other $100 mil­lion and take his com­pany pub­lic, Tap­scott claimed that four blockchain lu­mi­nar­ies were ad­vis­ers to his firm — when they ac­tu­ally had noth­ing to do with it. Tap­scott ini­tially de­nied the claims. Days later, his com­pany is­sued a state­ment say­ing it had “stum­bled,” can­celled its plans to go pub­lic, and sug­gested it might give in­vestors their money back.

Over the past sev­eral months, a stun­ning col­li­sion of big money, tech, con­fu­sion, and haste has pro­duced count­less ex­am­ples of these swift rises and falls. And the same forces that tripped up Tap­scott’s com­pany may soon bring the high-fly­ing ICO sec­tor back to earth with a bump. Mean­while, reg­u­la­tors are be­gin­ning to catch up with the craze. In Septem­ber, the US Se­cu­ri­ties and Ex­change Com­mis­sion launched what is thought to be its first pros­e­cu­tion over an ICO, charg­ing a New York busi­ness­man for sell­ing shares in two com­pa­nies that the SEC says didn’t have “any real op­er­a­tions.” As the SEC warned ICO in­vestors in July: “If the in­vest­ment sounds too good to be true, it prob­a­bly is.”

Both the SEC and Canada’s se­cu­ri­ties reg­u­la­tors have also in­di­cated if a “coin” looks like a stock and func­tions like a stock, then it will be reg­u­lated like a stock — re­quir­ing all the nor­mal due dili­gence be­fore a pub­lic sale. Some ICO devo­tees have com­plained that reg­u­la­tors are sti­fling in­no­va­tion, since a crack­down would al­most cer­tainly cool the blockchain mar­ket. Oth­ers, such as James Grim­mel­mann, who teaches in­ter­net law at Cornell Uni­ver­sity, ar­gue that more en­force­ment could serve as a san­ity check. “I’ve seen very few ICOS that ac­tu­ally make sense,” Grim­mel­mann says. “A lot of peo­ple are go­ing to lose a lot of money.”

Like the dotcom bub­ble of the late 1990s, the blockchain bub­ble may soon be­come one of tech’s cau­tion­ary tales.

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