Bitcoin Maximalists Get Dragged for INX Hypocrisy
This column does not necessarily reflect the opinion of the editorial board or the BTC Times and its owners.
"Ethereum is garbage." - Samson Mow
I'd call it a dumpster fire, but a dumpster implies containment. Ethereum is more like the Deepwater Horizon oil spill, an ever-expanding pile of toxic sludge that’s fine if you bail out early, but stick around and you’ll inevitably find yourself BTFO.
That's why it's odd that sane and sensible Bitcoin proponents are shilling a security token issued on Ethereum.
On Tuesday, a crypto startup called INX Limited became the first company to have a token-based initial public offering registered with the SEC. Instead of launching on a national exchange on Wall Street, INX is hosting the IPO on its website. Eventually, INX plans to have tokens available for trade on registered trading facilities, including its own trading platform.
An INX token is different from a dividend-paying stock in that it’s not equity and has no voting rights. Instead, HODLers are entitled to 40% of the firm's net operating cash flow and may use the token for discounted trading fees on the trading platform. The idea is to create an incentive loop for traders to pump the coin without encouraging a subsequent “dump”.
There are few reliable ways to make money in crypto. The number one use case for cryptocurrencies is speculation, and the house always wins. But it's not easy to build a regulated trading platform, which is why a securitized cash-flow token makes more sense than an equity offering. Deep-pocketed investors have already taken the upfront risk and secured initial regulatory approval for the INX Digital trading platform (footnote 1). Those who complained about the "premined" advisor distribution are completely overlooking the INX corporate shareholders, who retain 100% of the equity as well as the other 60% of cash flow.
The token sale provides new investors with less upside, but also less risk than if you'd invested at the company’s founding in 2017. Different types of investments have different risk profiles. In the event of liquidation or acquisition, token holders get their money back first - ahead of the shareholders.
Which brings us back to the issue that Ethereum is garbage. It is, but it's a form of garbage that regulators are intimately familiar with, after years of enforcement actions against illegal ICOs.
The SEC is a lumbering bureaucracy staffed by underpaid government workers. Getting them to approve a new trading system is like asking a DMV desk clerk to title the flying submarine you built in your garage, only this time you're paying a securities lawyer $900 per hour to act as a go-between. It took the SEC a full year to declare DAO tokens a security, at which point the DAO had already raised $150 million, got hacked for $60 million, and hard-forked out of existence.
Ideally, the INX team would have liked to use Liquid, a settlement network built as a sidechain on Bitcoin. In fact, INX recently joined the Liquid Federation along with 52 other exchanges and service providers. But it takes time to explain new technology to the SEC, and Liquid only began to support securities this year with a limited test group. Give it a few more years and some high-profile scams, and then the regulators might be ready to consider it.
An IPO does not require a blockchain token. Back in the olden days, companies would issue bearer certificates, where legal rights associated with the security were conferred to whomever held the certificate. It turned out that this was a convenient channel for money laundering, so now all US-based securities must be registered and transferred through a broker-dealer.
In a way, the INX token disintermediates this process. Token buyers still need to undergo AML/KYC, but once whitelisted, they are effectively cleared for peer-to-peer transactions. This exercise might seem like a lot of effort to nominally cut out a middleman, but now that there's a framework for a security token IPO, subsequent offerings will be much easier.
In the future, tokenized cash flows may present a less volatile way for retail investors to bet on the crypto industry. Diehard maximalists will insist that anything but Bitcoin is a scam, but not every investor is ready for a trip to the Moon or bust.
Footnote 1: From page 8 of the prospectus: “We have registered INX Digital with U.S. Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”) as a federal money service business. In addition, we have submitted notifications to California, Massachusetts, Missouri, Montana, Pennsylvania, Utah and Wisconsin and INX Digital is now eligible to operate as proposed in those jurisdictions.”