If You Aren't Trying to be Money, Why Do You Need a Coin? \ stacker news ~bitcoin

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If You Aren't Trying to be Money, Why Do You Need a Coin?

480 sats \ 51 comments \ @nerd2ninja 12 Jul 2022 bitcoin

The creation of a new coin is the decision to compete with Bitcoin as money. In contridiction, projects which create a new coin often do not wish to compete as money. Generally, the creation of a new coin is intended as a way to subsidize the project, which brings us to the reality of this money creation for such a project.

So called "crypto" projects have to subsidize their use case because the problem they are trying to solve has no economic value.

Arcade city learned this, struggled with the reality of focusing on the price of their coin to stay valuable which proved to be a distraction, capitulated, and made the switch: https://arcade.city/bitcoin-only

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321 sats \ 0 replies \ @Spartan 12 Jul 2022

The projects that create a new coin to fund their development are unregistered securities. Full stop.

Here is how the Howey Test is used to determine if something is a security. It is a simply pass / fail test. If you satisfy these 4 prongs, you pass. Passing means you are a security.

1. An investment of money

2. With the expectation of profits 

3. In a so-called “common enterprise” (roughly meaning: investors and the company rise and fall together)

4.From the efforts of a promoter or third party (Ex. a "Team")

55 sats \ 4 replies \ @oli 13 Jul 2022 freebie

So a bit of Bitcoin history... Back in the early days, there were some online platforms that enabled people to buy/sell shares in online businesses (primarily Bitcoin-related businesses). Those platforms even had dividend systems.

Those platforms shut down for various reasons but primarily because regulators weren't happy about their existence and they were easy to shut down (e.g. the shares were stored in centralized databases).

Then Ethereum came along and its ERC20 tokens. Entrepreneurs were now able to use those decentralized shares that couldn't be confiscated or shut down. They were able to easily crowdfund their projects and buy/sell shares. No one could stop them, or so they thought...

In late 2017, the U.S. Securities and Exchange Commission (SEC) announced that it considered tokens used for that purpose just like regular securities, and so they were bound by the same rules and regulations. The cost of compliance made crowdfunding prohibitively expensive, difficult, and time-consuming for small-time entrepreneurs and businesses. So they had to stop using tokens for that purpose.

Despite the SEC's inability to seize the shares or shut them down, they were able to coerce entrepreneurs into abandoning their use. The only remaining option was to stay anonymous and illegal (but that's not always easy when running a business). Or was it really?

The SEC had carved out an exception for tokens that they considered "utility tokens", as opposed to "equity tokens". In order to be categorized as a "utility token", a token had to have utility outside representing ownership in a business. For example, tokens that represent tickets for a concert or event. Or virtual tokens used in a game.

In order to fall under the "utility token" category, entrepreneurs went to great lengths to design complex, and sometimes confusing, systems that somehow required a token.

For example, instead of building an app that would normally have accepted ETH/BTC as payment, they were now building apps that only accepted their token as payment. This was thought to be sufficient for a token to have utility and not be considered equity.

Imagine if McDonald's issued a limited amount of McDonaldTokens and only accepted McDonaldTokens as payment from now on. The value of McDonaldTokens would be tied to the demand for Big Macs. If McDonald's sales went up, McDonaldToken holders would see a return on their investment. The tokens would essentially behave a bit like company shares.

In other words, every crypto project having its own "token" was largely an unintended consequence of that SEC decision. Really, it incentivized entrepreneurs to build tokens that behaved like equities, without being classified as such. The tokens were often given utility in very convoluted and questionable ways. As they were not able to pay dividends directly to token holders, they also had to find all sorts of ways to achieve the equivalent (e.g. burning tokens).

This made it really hard to evaluate the real actual economic value of projects. So yeah, a lot of tokens with questionable utility started popping up everywhere. Many investors incorrectly evaluated those tokens as money instead of as equity. Money doesn't need fundamentals (e.g. income generation) to succeed but equity does.

In my opinion, if it had not been for that SEC decision, there would have been a lot less token speculation and more focus on creating real products and services. Personally, I hope investors will become more sophisticated, and start going back to analyzing fundamentals.

Thanks for coming to my TED talk.

20 sats \ 3 replies \ @nerd2ninja OP 13 Jul 2022

Okay, but what that still sounds like is scammers gonna scam. Their trying to start equity funds. They're trying to make stocks in a business. Well, if you buy stocks in a business that's regulated, you get protections

https://www.investor.gov/introduction-investing/investing-basics/role-sec/laws-govern-securities-industry

These tokens can not guarantee these kinds of protections, nor are the communities around them demanding these protections before buying the shares. In other words, there is no protections from scams and rug pulls and there is a dismissive disposition to founders having full control over the protocols.

15 sats \ 2 replies \ @oli 13 Jul 2022 freebie

Indeed.

Personally, I'd like to see regulators allow unregulated equity tokens[0] to exist. I think it would do more good than harm in the long term. I believe it should be an investor's individual decision whether or not to invest in an unregulated token. Of course, such tokens should not be advertised as regulated securities.

Many of the problems you mentioned do not require regulations but the enforcement of existing laws, such as fraud law.

This would also probably help slow down the explosion of fake money tokens with no actual economic value.

But I'm not holding my breath...

[0] Either as colored coins on Bitcoin or ERC20 tokens on Ethereum.

0 sats \ 1 reply \ @nerd2ninja OP 13 Jul 2022

But according to the law, they can't allow unregulated equity to exist. In that link, it describes the

"Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010" which includes things like

"Regulations of Swap Markets" these are credit swaps,

it has the "Investor advisory comittee" which is a continuation of the "Investor Protection and Securities Reform Act of 2010" requires broker dealers of securities (what you and I know as exchanges) be registered with the SEC.

The real nail in the coffee for why regulators can not legally allow unregulated equity tokens is:

"The Securities Act of 1933" Which requires "that companies disclose important financial information through the registration of securities." and

"that investors receive financial and other significant information concerning securities being offered for public sale"

So in saying that current laws should be enforced...well they are being enforced.

0 sats \ 0 replies \ @oli 13 Jul 2022

Yes, I know. What I meant is I wish they would change the regulations to allow unregulated security tokens but have law enforcement more consistently go after scammers through "regular" laws (e.g. fraud law).

For example, the software market is largely unregulated. But if someone sets up a website and starts collecting payments for a non-existing software, they are committing fraud and should be prosecuted. I believe it should be similar with security tokens.

If you intentionally make false or deceitful claims about your business or run away with investment money, you are committing fraud and should be prosecuted.

60 sats \ 0 replies \ @shyfire 12 Jul 2022

39 sats \ 10 replies \ @moon 12 Jul 2022

I am not against the creation of shitcoins for these projects. It's just free market, it's healthy. The problem is with the users. I've been in the past "earning" some shitcoins in a similar way as here: you write a post, you get some coins. The difference -- that I only learned with time -- is that now I know that what I get here is real and will be worth something in the future -- and out of all the coins, this is more likely (by far) for BTC. While with the other coins, well, some of them went to zero even before I was able to withdraw them to my personal wallet.

125 sats \ 8 replies \ @nerd2ninja OP 12 Jul 2022

Its not actually healthy though. Sure it would be healthy to compete as money on merits, with no premine, but like I've shown, if a new coin is created to subsidize a use case, it only serves as a distraction to the projects development.

120 sats \ 2 replies \ @tomlaies 12 Jul 2022

I think the existence of bullshit is normal in a healthy free market.

What is problematic are the funders that shill their shitcoins. It is perfectly fine to hate people who are manipulative scammers.

118 sats \ 1 reply \ @Spartan 12 Jul 2022

The problem is that the scammers aren't held to account. I am fine with scammers, but I want them punished for their actions.

0 sats \ 0 replies \ @oli 13 Jul 2022

Same. The thing is there are plenty of laws already to deal with scammers (e.g. fraud laws), they just aren't enforced. What we need is enforcement of existing laws, not some magic "regulations".

15 sats \ 4 replies \ @moon 12 Jul 2022

again, free market...

if you waste resources to create a useless token, your project will be punished eventually

115 sats \ 1 reply \ @Spartan 12 Jul 2022

No, it's not healthy to pump and dump scams on people. That is why they need to be regulated. Almost all shitcoins are coordinated pump and dumps of unregistered securities backed by marketing and vaporware. They are scams and have rekt countless people in these cycles chasing big returns on nothing more than a scam run by fucking assholes.

0 sats \ 0 replies \ @moon 12 Jul 2022

well if you are talking about outright scams that's another thing, so far we have been talking about "useless" tokens, not necessarily anything imoral

some level of regulation might be good, idk, so far I haven't been impressed with what governments have come up in this area

0 sats \ 1 reply \ @nerd2ninja OP 12 Jul 2022

Do you acknowledge "Toxi Maxis" as a healthy free market anti-body mechanism as the free market's version of consumer protection? Because that's the reality we live in.

15 sats \ 0 replies \ @moon 12 Jul 2022

I agree 100% with your post.

I am a maxi myself, I just don't think bitcoiners should care too much about what those shitcoins are doing. If people want to gamble or set their money on fire that's on them. If bitcoin is indeed the only serious "crypto", which I think it is, we don't really need to convince anyone of that, reality will show itself. That's what I believe.

But I see the value in educating people and warning them about scams and such.

46 sats \ 0 replies \ @fgiveme 12 Jul 2022 freebie

The problem is much deeper than shitcoin users.

Shitcoin creators, specifically Ethereum, maintain a huge marketing department. Their shills did crazy amout of reputation damage to Bitcoin. BTC development was set back years by the bcash incident (which was endorsed by no other than Buterin).

And I expect even more attack after they switch to PoS.

People thought XRP was the #1 banker coin, but in reality the JP Morgan coin is way more successful. The establishment got in earlier than anyone expected and you would be delusional to think they pose no significant threat.

27 sats \ 0 replies \ @k00b 12 Jul 2022

@dk organized a discussion with Muneeb of Stacks, and Muneeb seemed very confident in the fact that it increased their security budget. Without the incentives of receiving a freshly printed coin, Muneeb's reasoning went, the miner participation would be far lower (using RSK, etc as examples).

tldr you can make more money and spend it to get people to do more things when you're printing your own money.

Obviously, I'm not saying it's good but people have incentive to do it, especially when the market has trouble comprehending that this stuff will be worthless eventually.

15 sats \ 1 reply \ @gmd 12 Jul 2022

Just because it hasn't worked very well historically doesn't mean it's always necessarily a terrible idea. It would be nice for end users to be able to participate and get rewarded on the upside of a winning project.

IE uber drivers / AirBNB hosts grew the network but did not get any of the upside from growth.

Unfortunately the pump and dump marketing economics add tremendous noise as to whether you actually have product market fit.

21 sats \ 0 replies \ @nerd2ninja OP 12 Jul 2022

My brother in Christ you're talking about a workers cooperative which is a business type like an LLC or a Corporation which gives shares of the company to its workers, shares which are a type of security which under US law has to be registered with the Securities Exchange Commission.

Once again, there are benefits for investors who buy regulated stocks: https://www.investor.gov/introduction-investing/investing-basics/role-sec/laws-govern-securities-industry

I have a huge issue with what is known in the traditional world as "an increase in the total capital stock" Info: https://www.investopedia.com/terms/c/capitalstock.asp

https://www.investopedia.com/ask/answers/050415/why-increase-capital-stock-companys-balance-sheet-bad-sign-stockholders.asp#:~:text=Disadvantages%20of%20Increasing%20Capital%20Stock,making%20the%20shares%20less%20valuable.

15 sats \ 2 replies \ @Brunswick 12 Jul 2022

The issuance of securities by a company is very similar to how the US Treasury issues bonds. The government may sell their T-bills out on the open market for federal reserve notes (dollars), however they have the option for the federal reserve to purchase them directly in exchange for interest (paid with taxes).

When a company issues stock in their company, they fractionalize the value of their company into these securities and sell them on the open market in exchange for federal reserve notes. Generally this is a fundraising activity with the promise to pay dividends based on the profitability of the company. You might analogize the dividend being paid to the holder of the security as having been paid by the 'tax' or profit that is collected from the company's clientele.

The dividend is like having a variable interest rate on the issued securities based on the 'ability to pay' from profits. The value of a security theoretically is 'backed' by title and interest in the underlying corporation. In effect, the stock is a harder asset than is the present fiat dollar, but is very similar to (if not exactly the same) as the fiduciary instrument that is the dollar. The only difference is regulation around the tracking of trade of the stock. If tracking of trade of a stock in a company were fully public, verifiable and inbuilt to the transference process, like a blockchain, there would be little need to regulate the trade of stocks as every transaction is fully traceable and auditable.

A company may chose to further fractionlize the company by issuing more stock and therefore inflate the supply, or they may perform a split. A split theoretically does not dilute any previously issued stock, but only fractionalizes it to play (and therefore profit) on the psychology of the plasticity-of-value around unit price.

If a company, rather than issuing stock through generation of paper instead issued its stock by means of a cryptocurrency, either through a unique blockchain, or as an NFT, this would obsolete several middlemen around the public stock trade. If the unique blockchain route were chosen, the company could theoretically 'pay' miners to secure its blockchain by issuing stock as a reward for proof of work. Alternately, it could use a proof of stake model where a chain of trust is established around securing the blockchain, but the long-term viability of this method is unclear to me. A proof-of-work security blockchain could have its algorithm periodically modified, though made public and open-source, to adjust the fractionability or total quantity of stock available. The company could code the software such that a particular wallet would always be the origin (other than miner awarded stock) and it is able to sell out of this wallet to a potential shareholder.

How does this relate to the federal reserve? This exercise points out the treasury and federal reserve have many 'aces up their sleeve' to keep the system going. They already periodically adjust the interest rate to suit their ability to pay 'dividends' based on tax revenues, they can issue stock with no need to ever pay it back so long as someone out there willing to 'buy' it by accepting it for goods, and they could even perform a 'split' such that anyone holding a dollar in a US bank now holds two dollars but everyone outside the US does not benefit from this. This has also been done during covid with the government issuing 'covid checks'. These analogies likely extend with other tricks companies use to manipulate the value of their stock such as stock by-backs.

I hope this helps you understand that the government operates much more like a business than you might imagine, and that businesses through issuing stock are engaged in a form of currency creation.

12 sats \ 1 reply \ @nerd2ninja OP 12 Jul 2022

Yes, I acknowledge that the 1% have been using stocks as a store of value and as a sort of money for a while now. However, if these coins are in fact stocks are you claim and therefore securities, they should register with the SEC

There are benefits for investors who buy regulated stocks: https://www.investor.gov/introduction-investing/investing-basics/role-sec/laws-govern-securities-industry

I have a huge issue with what is known in the traditional world as "an increase in the total capital stock" Info: https://www.investopedia.com/terms/c/capitalstock.asp

(I posted this before but I wanted to make sure you knew I read your post.)

75 sats \ 0 replies \ @Brunswick 12 Jul 2022

You are right to have an issue with increase in capital stock as it is an inflation tax on the shareholders to the benefit of the company. This sentiment I share but I bring up stocks and expansion of stock only as a parallel to illustrate the similarities of securities with government fiat, and vice-versa. My point isn't necessarily that the upper echelon use stocks as a currency, its that companies have been engaging in and benefiting from money creation for a very long time. I noticed this a long time ago when I first learned how the federal reserve works, and that stocks are not much different than the debt notes issued by the government.

A stock, a bond and a fiat money have many similarities where the specific terms and conditions vary between the instruments, they serve very similar functions. Bitcoin is unique such that it also serves as an asset class but more akin to a physical possession than a fiduciary instrument.

	Security	Bond	Fiat	Bitcoin
Creation	Issuance by company bylaws	Two-party debt contract	Debt contract contract	Proof of work
Profit for holder	Dividend	Interest	Taxes	None/Deflation
Redeemability	Upon company buyback	Upon maturity	Payable for all debts	Exchangeable for value
Exchange forum	Stock Market	Bond Market	Open Market	Open Market
Holder rights	One vote per share	Contract law, court enforced repayment or rights to collateral	Government decree	Universal veritability of possession
Value Measurement	Viability of company and potential profitability	Credit risk, face value, relative interest rate and maturity level	Merchantability for goods	The sum of all present value liquidity divided by 21M
Sources of Risk	Lack of company performance, loss of stock price, changes in profitability	Debtor fails to service debt, changes in interest rates, loss of collateral value	Run on banks, changes in tax revenue, loss of confidence of value	Loss

The problem with shitcoins, particularly ones with a centralized govenance and issuance model, is they are more like corporate paper than they are like a security. Separate from this topic, I propose that companies should move to a blockchain or NFT model of stock issuance (either with a shitcoin or somehow with bitcoin like liquid) to improve exchangability of the instruments and to reduce regulatory burden on both the company and the shareholder.

15 sats \ 26 replies \ @KingZing 12 Jul 2022

I see them as a more usable, highly liquid stocks that can act as a medium of exchange and store of value. It could become a norm in the future if some defi stuff really catches on.

15 sats \ 7 replies \ @Spartan 12 Jul 2022

In this instance it would not be a coin per say, it would be a Tokenized Security. Regulated fully by the SEC and treated no differently from a stock. That would not be considered money by anyone, thereby validating OP's stance on this.

15 sats \ 6 replies \ @KingZing 12 Jul 2022

labelling those tokens as tokenized security would make transaction on Defi a nightmare for everyone. I don't see that happening. Best thing SEC can do is to come up with a new criteria imo.

30 sats \ 5 replies \ @Spartan 12 Jul 2022

That is what you want them to do, but there is no incentive for them to create a new standard outside of the howey test. The DeFi tokens pass the test on almost all of them, and will eventually be regulated as securities.

Play with fire at your own risk.

15 sats \ 4 replies \ @KingZing 12 Jul 2022

there's no incentives now, but more and more money and talents are flowing into the industry. they will have to deal with it eventually in ways that it won't wipe out the entire sector.

15 sats \ 3 replies \ @Spartan 12 Jul 2022

I appreciate your stance on this, but I just completely disagree with you. I don't think DeFi will ever get so big that they wont regulate under the standard securities laws. That completely defies logic and assumes that DeFi will grow to be larger than TradFi all ahead of them actually regulating it.

I'm sorry to get heated about it, but I just think your take on this is dangerous for anyone reading these posts. 100% based on hopium about something that has very little traction in the real world.

15 sats \ 2 replies \ @KingZing 12 Jul 2022

I don't think there's any hopium here? majority of the financial hubs like SG/UK/HK are working on regulations for digital assets. Why would the US would be any different?

15 sats \ 1 reply \ @Spartan 12 Jul 2022

Because Gary Gensler (Chair of the SEC) has stated over and over that almost all coins besides BTC (and ETH, which is bullshit) are unregistered securities. There is no indication of any type that suggests special laws being created around crypto DeFi. None. Zero.

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10 sats \ 17 replies \ @nerd2ninja OP 12 Jul 2022

If its a stock it has to be registered with SEC though.

Do you really want to get me started on DeFi? Because I hope DeFi never "catches on".

15 sats \ 16 replies \ @KingZing 12 Jul 2022

SEC will have to accept it one way or another if it gets big enough. imo Defi is definitely here to stay, it just takes a lot of failed project to find a few gems. It has gone through a lot of boom and bust already, and bitcoin has its own DEX and futures trading on LN in works.

15 sats \ 0 replies \ @Spartan 12 Jul 2022

The SEC will not HAVE to do anything. In its current state, DeFi is akin to a fly on the elephants ass in their eyes. Nowhere even close to being big enough to influence their stance on securities regulation.

20 sats \ 14 replies \ @nerd2ninja OP 12 Jul 2022

I acknowledge Taro exists if that's what you're refferring to, but the fact that a shitcoin exists using Bitcoin doesn't make it a good project.

There are benefits for investors who buy regulated stocks: https://www.investor.gov/introduction-investing/investing-basics/role-sec/laws-govern-securities-industry

I have a huge issue with what is known in the traditional world as "an increase in the total capital stock" Info: https://www.investopedia.com/terms/c/capitalstock.asp

Now on DeFi, I just have beef with debt in general. Historically, it has been considered "sinful" and it was known as "usury". Usury is the reason we have Keynesianism as it is a method to bail out the banks. DeFi will incur the same problems:

https://slidetodoc.com/presentation_image/c4928f736671a273044b74dc2d88bd49/image-7.jpg

15 sats \ 13 replies \ @KingZing 12 Jul 2022

Debt is a VERY old financial instrument, at least several thousands of years. I think very few economist, even Austrian side would argue how important debt is, except on a theology level.

It all comes down to whether you see money as THE value (more emphasis on it being a store of value) or whether money is a tool to enable economy activities and growth which generate value (that can be stored in various means)

We have moved on so much on the latter that it's very hard to imagine a world without debt

0 sats \ 12 replies \ @nerd2ninja OP 12 Jul 2022

If you want to imagine a world without debt, look at Saudi Arabia. In the musilim religion (as well as the Christian and Jewish religions before culture changed) usury is still sinful.

An argument for debt, is effectively an argument for the current system in which case you should be very against sound money.

15 sats \ 4 replies \ @Brunswick 12 Jul 2022

DeFi is the natural next-step in cryptocurrencies, be it good or bad. There are two kinds of currency: hard-assets and debt-assets. One is money, the other is a form of currency, both are assets. The reason fractional reserve is even possible is that people accept 'debt notes' as a more convenient medium of exchange than the supposedly underlying hard asset. Its through the acceptance of this fungible debt as a currency that the fractional-reserve funny-business is enabled. We have hope that people will not accept 'bitcoin-backed' currency over bitcoin itself since there is little benefit to using the proxy-currency rather than the hard-money itself. This does not prevent banks from attempting to issue a 'bank note' rather than the bitcoin sats themselves when a person takes out a loan, but the frictionless of the hard-asset bitcoin makes this business model very unstable. If a bank or defi can find a way to 'lock up' bitcoin in 'checking' accounts, this will enable them to lend out more sats than they have on deposit. This is possible if their clientele are willing to buy and sell within the captive bank accounts. Seekers of debt (lendees) may be willing to participate in this system due to this ability to get your hands on 'cheap bitcoin'. This places the long-term viability of bitcoin itself as a hard asset in question. All that's required in the end is (through the use of force) to disconnect the debt-asset from redeemability for bitcoin and make it only redeemable for more debt and this brings us right back to where we are today with dollars.

12 sats \ 3 replies \ @nerd2ninja OP 12 Jul 2022

That would be a nightmare scenerio and as such, I think its important to establish a culture that would reject such attempts to prevent it from happening in the first place. Things like "not your keys not your coins" have been good for this.

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15 sats \ 6 replies \ @KingZing 12 Jul 2022

An argument for debt, is effectively an argument for the current system in which case you should be very against sound money.

that's an interesting point. I am more for sound economy than sound money. I don't see money as the only store of value, generating more value (which is not materialistic by nature) is more important than locking it into one particular thing.

0 sats \ 5 replies \ @nerd2ninja OP 12 Jul 2022

Damn. Like I get that productivity is the most important part of economics, but not at the cost of theft. Our debt based money is so bad, the rich are using houses as money. Thankfully, with Bitcoin, the average person can use Bitcoin as money instead. Based on current projections, I'm looking forward to taking the path where any debt based money is rejected due to being undesirable to alternatives being better stores of value.

I hope you understand my "Toxic Maximalism" from this point forward. I have to be vehemently against you simply to protect myself from savings theft, as such I will be rejecting DeFi and therefore will encourage others to do the same.

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