Why the term "web3" rankles, plus Bitcoin is a DAO
Jan 10 2022
Happy new year, everyone. Today there’s no real main course, more of an assortment of tapas.
Let’s start with follow up from my last missive on the Canadian model of cryptocurrency exchange regulation. I got several great replies that I’d like to address.
One very smart commenter took issue with my assertion that regulating custodial exchange balances as securities leaves no room for bailments. He points out that the Canadian regulation only applies to trading venues (i.e. where one can buy and sell crypto). If there was a safekeeping service where a customer could deposit bitcoins and then withdraw them at a later date, but the service did not offer buying or selling, that service would be providing bailment that would not be regulated as a security.
That is fair enough, but the question I’d ask is, what is it about facilitating trading between bailees (without any other associated promises) that turns a bailment into a security? The famous whisky receipts case, SEC v. Glen-Arden Commodities, Inc., is instructive here. This case is often invoked for the proposition that selling receipts (i.e. tokens) for a bailed commodity amounts to an investment contract. But the facts of the case are more nuanced than that.
Bottom line, what was sold to investors in that case was more than mere receipts that could be redeemed for gallons of whisky, but also a set of promises and projections of profit. From a good explainer on the case:
Before launching into a recitation of the facts of the case, the court, after citing Howey, noted that “[I]t is clear then that the manner in which the Scotch whisky warehouse receipts were sold, the information given, profits predicted, services promised and the obligations to be assumed by the purchasers were at all times relevant to the proceedings before the court.” The recitation of facts would demonstrate that there was a lot more to the offer and sale of the receipts in question than a simple offer and sale of evidences of ownership of casks of whisky.
The evidence established that the defendants’ mode of operation was to recruit salesmen familiar with neither the Scotch whisky business nor investment practices, provide these salesmen with a “canned” sales pitch along with sales literature and direct them to potential customers solicited through mass merchandising techniques such as newspaper advertisements and the indiscriminate use of mailing lists. The training of the salesmen consisted of meetings at which defendants or their employees provided data on the price of Scotch whisky, the cost of insurance and cooperage and the profits which could be anticipated from an investment in Scotch whisky warehouse receipts.
The evidence also established that representatives of the issuer of the receipts (“WWR Issuer”) informed prospective purchasers at promotional meetings that: (i) the WWR Issuer would utilize its expertise in selecting the type and quality of Scotch whisky and casks to be purchased; (ii) receipt-holders could call the WWR Issuer to obtain current information about the Scotch whisky market; (iii) the WWR Issuer would provide the cooperage of the whisky; (iv) the WWR Issuer would provide two insurance policies to protect the investments; (v) when the receipt-holders wished to sell their whisky, the WWR Issuer would assist them in making a sale at the current pricing schedule, charging no fee or commission; (vi) the WWR Issuer would handle all administrative details relating to the program; and (vii) customers could expect a doubling of the value of their investment within three to four years and further increments after that.
I don’t know much about Canadian law, but in the in the U.S., while Congress can certainly pass a law that says that deposits that would otherwise be bailments at exchanges will be securities (and like I said last time, I’m very open to that approach), I’m pretty sure that the SEC can't just say that they are. Assuming exchanges are not making any of the promises and assurances that the promoters of the whisky receipts made, what would be the SEC’s argument that bailments of crypto, even on trading platforms, are investment contracts?
Speaking of Canadian law, another reader with lots of experience dealing with Canadian securities regulators on crypto share this:
Anglo-Canadian law has a narrower conception of bailment than U.S. law. There are Canadian and English authorities that suggest only tangible property can be the subject of a bailment. I’m not sure why that should be and perhaps one day an English or Canadian court will have to address the issue more directly and clarify.
Could explain some of the difference.
Finally, I’ll note the Canadians are not playing around. Two weeks ago they sent Binance a nastygram letting them know in no uncertain terms they could not do business there unless they registered:
The Ontario Securities Commission (OSC) is notifying investors that Binance is not registered under securities law in Ontario. This means they are not authorized to offer trading in derivatives or securities to persons or companies located in the province.
Binance represented to OSC Staff that no new transactions involving Ontario residents would occur after December 31, 2021. Binance has issued a notice to users, without any notification to the OSC, rescinding this commitment. This is unacceptable.
No entity in the Binance group of companies holds any form of securities registration in Ontario.
Binance seems to now be complying.
Why web3 rankles
Next I want to address the question of why so many folks in crypto dislike the term “web3” so much.
Of course, there are many individual reasons, but I think in large part the visceral reaction stems from the fact that this “marketing language” for what until now has been called “crypto” feels imposed on the community in a top-down fashion, rather than the traditional bottom-up, open source fashion through which language and concepts emerge in crypto. In the crypto space, things that come up through that process have legitimacy while there tends to be an immune response to things that individuals or small groups try to promote, even if it’s for everyone’s own good.
In the case of “web3” the word itself has been around for years, but with little real use. That changed around last fall when there seems to have been a concerted effort by some VC firms to change how crypto is talked about, especially with policymakers. It doesn’t help that these marketing materials tended to draw a distinction between web3 and Bitcoin. For example, here is every use of the word “Bitcoin” in a16z’s policy agenda for “the Third Generation of the Internet”:
Policymakers should continue working with the bitcoin community to bring greater levels of sustainability and renewable power use to the bitcoin blockchain. Efforts are already underway: the Cambridge Center for Alternative Finance found that 76% of bitcoin miners use renewables as part of their energy mix, and 39% of bitcoin mining’s total power consumption comes from renewables—twice as much as the U.S. grid.
Rather than fixating on bitcoin’s energy consumption as an excuse to dismiss the potential of the whole industry, policymakers should embrace the value of web3 platforms to support sustainability objectives, such as enhancing the liquidity, integrity, and utility of carbon markets.
The document also includes this chart, which is funny especially because of where Ethereum is positioned above the line.
This is kinda the way Bitcoin maximalists like to draw a distinction between Bitcoin and “crypto” and I don’t find either approach helpful. It leads to resentments and what René Girard would call “memetic rivalry.”
Given the source of the term, I think another reason “web3” rankles so many is its perceived hypocrisy. Here’s an example from someone I respect and admire, former CFTC Commissioner Brian Quintenz who is now at a16z:
That’s all great stuff, and I very much recommend Rep. Gonzalez’s op-ed (which, by the way, explains the term web3 this way: “web3, which is more commonly referred to as the crypto or blockchain revolution.” Emphasis mine.)
The thing is, Facebook is the pinnacle of "the broken/tyrannical nature" of web2, at least according to Rep. Gonzalez who especially singles out Instagram for opprobrium. So, someone already captured by the kind of mimetic rivalry I’m warning about (perhaps because they’re sensing an illegitimate top-down imposition of a marketing term, and a term that seems to exist to be a contrast to some of the the oldest, biggest, and most important blockchain networks) might ask, “But isn’t Marc Andreessen one of Facebook’s earliest investors and currently serving on its board of directors?”
If marketing and policy folks want the crypto community to embrace the web3 term, they’ve got to convince them, not just expect them to get in line. I hope it doesn’t come as a surprise to them, but crypto is not a business, but a movement. Folks who think they know how best to market to the public or engage with policymakers will find that the community doesn’t follow anyone’s lead simply because of who they are. It’s a lot like open source development. You’ve got to have rough consensus and running code before your patch is accepted, and if you’ve done it right, no one will think of it as your patch.
For my part, I use the term web3 when it’s useful, but whenever I do it’s deliberate. The reflexive and natural thing for me to say is “crypto” or “Bitcoin” and I don’t sense that reflex changing soon.
Bitcoin is a cryptocurrency. It is also the first DAO.
Speaking of evolving terms in crypto, it seems to me that the meaning of the word DAO has of late been (organically, emergently) expanding quite a bit and in a way I don’t think is helpful and I’m going to tell you why. Consider this my contribution to the open source discourse on the matter. (See, this is me modeling.)
To my mind, Bitcoin was the first DAO. It is truly a decentralized autonomous organization. It’s an organization because it is an assembly of people and their machines to accomplish a purpose and that purpose is very akin to the kind of thing that would have previously been done by a corporation (i.e. PayPal, and yes I know Bitcoin does more than PayPal). Bitcoin has customers and it has employees, but it is decentralized so it’s not a corporation. It even has very effective governance, but it’s not based on membership or shareholding or the like. It really is autonomous and unstoppable.
I think we should have many more DAOs like Bitcoin to compete with the services that centralized internet firms now provide. Some would call that web3, and it’s a good vision.
But many of the DAOs I’m seeing today, at least the ones that are getting a lot of coverage, look just like gussied up Kickstarter campaigns. (BTW, Kickstarter announced they’re pivoting to crypto.) Don’t get me wrong, I really enjoy the creative ways the mob can leverage technology to challenge convention, and I think people should be free to organize to experiment however they want. But if Bitcoin is the model for what an unstoppable DAO can be like, I’m not sure a lot of the Discord-groups-with-a-crypto-balance I see meet the standard. Additionally, from my myopic perspective, the Bitcoin model of DAO has another very attractive feature: it’s not a security.
Most stories you’ll read about DAOs in either the crypto or mainstream business press usually don’t mention anything about law or regulation, but the way the featured DAOs are described usually has me asking myself a lot of questions. Here are a couple new DAOs that recently caught my eye.
LinksDAO, which raised $10 million in 48 hours, caught my eye because of the way the CNBC reporter described purchasers of its NFTs as relying on the efforts of the promoters to follow through on their promises, which is hilariously close to the Howey test. Of course, as one smart commenter replied, what matters here is whether there’s an expectation of profits. No expectation of profits is why I said a while ago that ConstitutionDAO was not a security.
(Quick aside: FTX announced last week that they will be launching futures markets for ConstitutionDAO’s $PEOPLE token. In their announcement they describe the tokens this way: “the tokens currently possess no rights, governance, or utility other than redeeming them for ethereum from the smart contract held in Juicebox at a ratio of 1,000,000:1”. What will the futures market say $PEOPLE is worth?)
Anyway, according to LinksDAO’s website, buying a LinksDAO token doesn’t get you the promise of a golf club membership once they have bought a golf club, only the promise of the right to purchase a golf club membership once they have bought a golf club. (Per the site’s front page: “Enjoy the perks of LinksDAO including… The right to purchase a membership at the 1st physical club LinksDAO acquires.”) The “Terms of Sale” on the site, though, don’t make any mention of this and actually disclaim any such rights (“You understand and agree that the sale of Membership NFTs grants you no rights and carries with it no guarantee of future performance of any kind by LinksDAO, Inc.”). 🤷
Another DAO that caught my attention recently is BlockbusterDAO. Given the obvious nostalgia meme play, it has gotten some attention. And apparently the daughter of a former Blockbuster CEO has joined BlockbusterDAO’s “core team.” What they want to do is raise $5 million to buy the rights to the Blockbuster trademark and other IP and then use it to launch a (seemingly for-profit) decentralized video streaming service that will show content that they commission and produce. De-Film they call it.
Dish Network owns the Blockbuster brand and doesn’t seem interested in selling it. The DAO’s plan, however, is to raise $5 million, tender an offer to the company, and then engage in a PR campaign creating on the company “pressure to sell”. It would be very humorous if instead of selling, Dish sued the DAO which, after all, is using a trademark the company owns.
From what I can tell they haven’t yet sold any tokens or even solicited any funds, so I’ll be keeping my eye on this one.
Various and Sundry
Self-promotion: Last week I spoke on a panel at the American Enterprise Institute hosted by Jim Harper and alongside other great panelists Chris Giancarlo (former CFTC chairman), Kara Calvert (Coinbase), and Miller Whitehouse-Levine (DeFi Education Fund). Clips of yours truly playing all sided and a link to video of the whole event are in this thread.
Also, there’s [a new episode](https://wap.simplecast.com/episodes/the-sum-of-small-things-by-elizabeth-currid-halkett) of Worker & Parasite, my book review podcast with Stably. We discuss [The Sum of Small Things](https://www.amazon.com/Sum-Small-Things-Theory-Aspirational-ebook/dp/B01MYNT9GW) by Elizabeth Currid-Halkett, which is an updating of Thorstein Veblen’s Theory of the Leisure Class. It seems aspirational class people today care more about inconspicuous consumption, and many signal their status through conspicuous production, like writing newsletters.
Friend-promotion: If you’d like a less jaundiced view of DAOs, web3 and the rest, I recommend you check out my friend Matt Mulder’s newsletter, Muldering, in which he “identif[ies] massive opportunities for building the companies of tomorrow, based on the less than obvious, but really important, trends happening in the world of politics today.” It’s a must read.
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