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patio11 Criticizes Cryptocurrency Initial Coin Offerings as Investment Scams

Patrick McKenzie (@patio11) wrote all of the following on Twitter:

There's an interesting thread here analyzing ICOs as if they were startups. I'll give the counterpoint: they're investment scams.

Investment scams are big business! $5 billion+ a year in the US. But they receive substantial adversarial attention from regulators.

Scammer problems: you have to recruit marks, successfully transfer their money to a scam vehicle, exfiltrate, and avoid arrest.

Recruitment in traditional scams happens over phone calls (boiler rooms), letters, and every other channel people talk to each other on.

The fundamental innovation of crytocurrency is that it has distributed, self-organizing recruitment through incentive structure for adoptees

Now how do you get money into the scam vehicle? Material amounts of money start in the traditional financial system. This is tricky for you.

As a scammer, you can't just tell Milli Smith to take out a reverse mortgage and wire $800k to an account in the Caymans. Her bank says No.

So your options are e.g. suborning a listed company and wearing it like a skin suit, then having marks purchase shares of that company.

This is dreadfully inconvenient, because marks might not have brokerage accounts, and scaling the scam gets it shut down quickly.

Enter the cryptocurrency ecosystem, which needs one node with plausible deniability and a bank uplink. Controls of other nodes irrelevant.

The cryptocurrency ecosystem has what strikes participants as a surprising difficulty in maintaining one node with a foot in real finance.

This is not surprising because that node's economic justification for existing looks a whole lot like money laundering at scale.

Now for whatever reason this shell game is really successful, and after value is in cryptocurrency ecosystem, it flows from scam to scam.

Exfiltration! How do you justify to the grownup financial system where your $20 million came from? You can't say "Defrauding Milly."

So instead you say "Speculation.", which is just enough for the see-no-evil gatekeepers.

Now how do you avoid going to jail for it? The plan appears to be "Exploit regulatory ambiguity and move as fast as possible."

With varying level of "Make some sort of plausible excuse that there does exist an actual enterprise and it is not just scams all way down."

Economic substance is not a novel innovation for scams. Sometimes e.g. the boiler rooms did pump stocks for companies which had products.

Small company which makes pool cleaners: a possibly high risk investment. Same company implying 1000X returns: scam scam scammity scam.

Here again we see the fundamental innovation of cryptocurrency, where the central actors can mostly truthfully claim to have never said it.


Elliot Temple on August 19, 2017

Comments (4)

I don't really trust Twitter to never break links or remove old content (including due to going out of business) or screw with public non-logged-in visibility, etc. So I wanted a safe and linkable copy of this content, which I liked.

curi at 8:10 PM on August 19, 2017 | #8950
>The fundamental innovation of crytocurrency is that it has distributed, self-organizing recruitment through incentive structure for adoptees

>Here again we see the fundamental innovation of cryptocurrency, where the central actors can mostly truthfully claim to have never said it.

I didn't understand these parts

Anonymous at 9:55 AM on August 20, 2017 | #8952
crypotocurrency has incentives for people who buy it to hype it up and sell other people on it. they have monetary incentive to popularize and spread it. they start helping run the scam.

then the people who made the cryptocurrency can say "we didn't organize a bunch of people to hype up this cryptocurrency". they had no direct involvement with most of the sales/marketing.

this differs from the boiler room model where a bunch of people do the scam marketing hype by making phone calls from one room. in that case, the organizers are blatantly guilty of organizing what's happening by hiring everyone, renting the room, etc. but with cryptocurrency, the organizers unleash it on the world, do NOT say "please now market this to suckers who will in turn market this to more suckers like multi level marketing scheme" and yet, due to incentives, that's what happens anyway. this reduces the provable-in-court criminal guilt for the organizers.

curi at 10:02 AM on August 20, 2017 | #8956
Great explanation curi, thanks!

Anonymous at 10:09 AM on August 20, 2017 | #8957

What do you think?

(This is a free speech zone!)