Suckers, Bitcoins, and Investments


Right after finishing lunch with the USPTO director, Jon Dudas, at the Alexandria PTO head office, I bumped into a Physics patent examiner on the metro. He related to me his quandary on why various investments were being made for patent filers who claim to be able to draw nuclear energy from water. I replied by quoting from the venerable P.T. Barnum phrase that a “sucker is born every minute.”  This short prelude begins to explain my thoughts about I.C.O.s and the many millions being raised by tech companies through ICO sales.

Before discussing ICOs, let me distinguish them from Bitcoins, the “other” crypto-currency. Bitcoins are finite in number.  A brainchild of a programmer, they are digital crypto-currencies that can be transferred from one party to the next with a form of systemic confirmation entitled the blockchain process. The key here is that a programmer created this currency – not an economist or governmental entity.

During my business school tenure, I took a course in international currencies and discovered that hands free economics was not the sole influence on a currency valuation, but also international policies. Once the gold standard for the U.S. dollar had been removed, more than market forces influenced its trading values. Why?  If we take China as an example, export leaning countries make sure that their currencies are priced competitively to encourage exports.  That influence can materialize in many forms – prime rates, the quantity of currency in circulation (through global purchases or printing controls), inflation, and other macroeconomic factors. Not so with bitcoins.  This currency’s value is influenced by supply and demand, ironically priced most often against dollars. The bitcoin is in no way influenced by governmental policies.

Since bitcoins can obviate standard currency controls and financial institutions, they can be traded and controlled anonymously. That is an attractive feature to groups that prefer that non-transparent feature. Recent worm attackers demanded bitcoins as a means of payments while still remaining anonymous. That way they avoided prosecution.  That feature alone would not be acceptable to the U.S. Treasury, whose mandate is, in part, to monitor and control illegal financial or other international activities.

To reiterate my earlier comment, the key difference I note between bitcoins and ICOs is the finite quantity of bitcoins. ICOs are not restricted and seem to sprout from many startup technology companies.  ICOs remind me of Bernie Madoff Ponzi scheme: in both, you create a digital record of fictitious trade and then show incremental value, however arbitrary. Anyone with a semblance of computer programming background can create an ICO.  First, each line item or currency needs a unique identifier.  A random number generator can create each currency with a unique number. Then build the database and insert the counter-party buying with dollars that ICO currency.  Any decent programmer can create that ICO system within a week.

But an ICO is neither a currency nor a stock.  Let us look at stock (or shares.) The quantity and type of stocks are declared as authorized in the certificate of the incorporation filed with the Secretary of State within the incorporation state. They are declared finite.  In order to sell more shares than originally authorized, the company must amend its certificate.  And this is public information.  More to the point, stocks or shares have vested ownership rights detailed in the incorporation laws of the State and in bylaws of the company. As part of those rights include the privilege to inspect corporate books and financials, whether that shareholder owns millions of shares or even one. What ownership rights are bestowed to ICO holders?

Again, I need to revert to earlier blogs about rules and regulations.  Many laws were created to protect the rights of the consumer.  For example, a Silicon Valley company recently refused to provide any financial information to an employee who owned vested shares in the company.  The employee needed that information to value the company. As the company was incorporated in Delaware, the employee filed a lawsuit against the company and won undeniably.  I doubt that ICOs afford such remedies.

So this raises another question, how are ICOs valued without accessing financial information from the company? What recourse does an ICO purchaser have against the company under corporate law? We all know the answer to this: none.

Bitcoins, by the way, have exploded in value, but bitcoins were issued once with finite quantity. And they can be converted in the marketplace for cash. ICOs, in contrast, are not restricted to predefined quantities and are not fungible into cash. Any company can issue ICOs and explain to investors the purpose of the ICO raise.  With thousands of companies out there, there is no maximum ceiling to their issuance.  They are not required to file with the state their crypto-currency issuances. They are not fungible currencies.  And they don’t represent equity in the company.  As such, there are no ownership rights in a company.  The Madoff scheme has similar characteristics. The scheme had unique but fictitious financial instruments.  The Madoff securities were not currency or convertible into cash, something akin to ICOs.  The reality was, under the trial, all investors owned nothing.

In fact, I cannot fathom what is the economic value behind an ICO. The ICO is in no way a state registered security when one creates a corporate entity, although it is being used like a bitcoin as a means to attract investors. (Securities laws were promulgated to protect investors from fraud and misrepresentation and instituted as the means to control and sanction companies through punitive and criminal sanctions for misrepresentations.) If it is neither a bitcoin, a stock, nor a bond, then it is an artificially created crypto-currency that can be developed by any programmer within a few days. It is simply a digital record.  All a programmer needs to create a crypto-currency is a database with a jpeg file representing the currency, and the counterpart owner of that crypto-currency.  This so-called “unique” code and crypto-currency have raised millions. But as P.T. Barnum clearly pointed out, there are many “suckers” out there.  In a few years, we will witness how crypto-currency buyers will fare.


About Juan Ramón Zarco, SVVGP 胡安•雷蒙•扎尔科

Juan Ramon Zarco, 胡安•雷蒙•扎尔科, Silicon Valley Ventures Growth Partners llp, Hygieia Healthcare Technologies Company, AllRest Technologies LLC, Crimson Growth Partners LLP,, is an experienced as CxO, General Counsel and Secretary to public and private companies with global operations. Established track record of producing practical, revenue-focused solutions. As Counselor and Secretary, demonstrating vision, integrity, and sound business judgment, to CxOs. Managed complex, strategic transactions, M&A, contracts support, PE Financing, IPO, SEC compliance, Corporate/HR governance, IP licensing, Budgeting, Staff, outside counsel management, International market access strategies, Domestic & foreign government relations and advocacy. Creative in designing and implementing market access strategies. Practices law beyond conventional model with low-overhead and project-based fees. Effective at managing departments, formulating marketing strategies, balancing budgets, and implementing cost-saving measures. Extensive in-house and private practice experience, advising clients on commercial, corporate, international business, and technology law and policy.; For Sprint, he managed iDen international development in Southeast Asia, Middle East, and Africa, and contractual issues with Verizon. In Private Equity, he worked with Pegasus in vetting international investment deals and interim President for portfolio companies, such as Data Foundation, a data storage company, handling marketing, strategy, fund raising, and accounting. Before Pegasus, Mr. Zarco, as CLO and V.P. of Corporate Development, played a principal role in the structuring, international expansions for 2 telecom companies, U.S. Cable Group and Viatel, Inc. in financing and M&A deals exceeding $200 million. Mr. Zarco earned a J.D. from NYU Law School, M.B.A. from Cornell, and B.A. from Williams College; is fluent in Spanish, Portuguese, French, and German, with working knowledge of Russian, Arabic and Japanese.
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