When talking or thinking about crypto,
it's important to get the nomenclature right.
There are three terms of art that are extraordinarily
important to master and to understand the distinction between them.
First, there's the notion of cryptocurrency.
Second, there's the notion of a token or a coin,
and third there's the notion of an initial token offering or initial coin offering.
All are different. All have different legal implications,
and let's burrow down and let's understand the distinction among the three.
A cryptocurrency is a form of code that's supposed to represent some kind of value.
It's an electronic version of money,
or at least that's how some people explain it,
other people will dispute that explanation.
Best example is probably something like bitcoin,
where many people are using it as a store of value.
On relatively rare occasions,
it's actually used as a medium of exchange.
But basically, it's supposed to represent value in
a sense like a dollar bill or some kind of asset,
or gold, or what have you,
but in the form of a code that is scarce,
that doesn't exist in an infinite form.
We then have another form of crypto that many people call coins or tokens.
These are codes that when used in a particular system will perform a particular function.
For example, you could imagine an environment in which
you can store your data on the Internet,
on other people's computers.
It's a little bit like Airbnb,
but for your data instead of for your body,
and when you've got that kind of a system you're going to have to pay
the people who are providing the servers where
your data resides for the use of their servers.
You can use tokens or coins,
bits of code in order to transfer that value in that system.
In addition, you can imagine a situation where you could pay at a restaurant with tokens.
You could imagine tokens that are designed specifically for ride-sharing systems.
You could imagine and construct tokens and coins
that could be used for just about any economic function,
in addition to the store of value.
Third, we come to initial coin offerings or initial token offerings.
These are fascinating situations.
Imagine somebody who wants to build a system
that allows you to use tokens in order to make restaurant reservations,
you get paid for making reviews, um,
you can get premiums and discounts for ordering special bottles of wine or what have you.
So they build these tokens,
or they plan to build these tokens and they tell people, "Look,
we will sell you tokens for a system that doesn't yet exist,
and we will sell you these tokens and we will raise a certain amount of money.
When we raise that money,
we will then use it to launch the system,
and you will have the tokens that you can then use in the system."
And people have been raising lots and lots and
lots of money around these initial coin offerings.
In 2018 alone through July,
$10 billion has been raised for these initial coin offerings.
As you might imagine, these are a bit controversial.
If you stop and if you think about initial coin offerings,
in the real-world, it's as though somebody says, "I have an idea.
I'm going to come up with something,
I don't know, Beanie Babies."
And instead of selling you stock in the company that's gonna make Beanie Babies,
I'm gonna sell you Beanie Babies before I've actually made any Beanie Babies.
In other words, I'm pre-selling my inventory,
and I'm using the cash that I raised by pre-selling
the inventory in order to
build a company and build the inventory that I'm going to sell to you.
It's not selling stock.
The people who buy it don't have any voting rights.
All they are doing as a practical matter is buying the future inventory.
But in most situations or virtually all situations,
they're buying the inventory at a price that they hope will appreciate,
and it's in part because of that expectation of appreciation,
that expectation of a profit that we wind up with a fascinating legal issue as to whether
these initial coin offerings are actually sales of securities that need
to be regulated as security sales by the United States Securities and Exchange Commission,
and whether they also give rise to private rights of action for the failure to register
these sales and for fraud that in
my view commonly occurs in conjunction with these sales.