Big news on the blockchain front: The U.S. Securities and Exchange Commission has made a proposal that would allow blockchain projects to once again thrive.

Hester Peirce, the most forward-thinking SEC official on blockchain, put forth a proposal at this week’s International Blockchain Congress in Chicago outlining a three-year “safe harbor” for new blockchain projects that would give them “run room” before worrying about securities law. Her proposal would also create “best practices” that new projects would need to follow, ensuring more rigor for project creators and more protection for investors.

To explain her proposal in plain English, let’s take a brief walk through blockchain investing history.

2017 was the year of the Initial Coin Offering. Entrepreneurs saw they could fund new blockchain projects by issuing “tokens” (i.e., blockchain-based units of value) that investors could buy and sell, as a startup company would issue shares of stock. Importantly, these were not shares of stock: you didn’t own a piece of the company, just a token.

As new digital exchanges emerged to trade these tokens, and the price of many tokens begin to reach stratospheric heights, this formed a hype cycle. Entrepreneurs saw an easy way to raise money for a new project; investors saw an easy way to make money, because so many token holders were getting rich. Fueled by a lot of hot air, the bubble began to rise.

In 2018, at the height of blockchain mania, regulators and lawyers began to indicate that maybe these tokens really were like stocks, and should fall under the same laws. And with that, the bubble popped.

Blockchain innovation became a confusing morass of obscure securities laws overseen by poorly-informed lawyers. To make things worse, securities laws vary between countries. As an analogy, imagine creating a website where only residents from certain countries, or only people with a certain level of household income, could access the site. The model doesn’t work.

Blockchain is both global and digital. This is not like brokers standing on the floor of the New York Stock Exchange and trading stocks on slips of paper. What’s more, blockchain evolves quickly. So a token may start out with one purpose (funding the project), then evolve into something else (becoming a payment for using the network).

In fact, this is what happened with Ethereum. Originally, ether was used to raise funds to create the Ethereum network (which is pretty clearly a security, like a stock). But then ether became the “payment” for using the Ethereum network, like the in-game currency that powers the network.

Because of this “regulatory uncertainty” (two words I hope to never hear again), the torrent of blockchain innovation slowed to a trickle, and that trickle slowed to a freeze. Thus followed the great Crypto Winter of 2018. Blockchain projects went into hibernation. Startups huddled together for warmth, foraging for food and enduring the bitter weather.

Then came Hester Peirce’s proposal.

Like all good ideas, it seems obvious when you hear it. Allow U.S. blockchain projects to have a three-year safe harbor, at the end of which they will be classified as securities (or not).

In plain language, this means that entrepreneurs can launch new blockchain projects—with best practices in place, explained below—without worrying about whether their new token is a security. They can focus on building the network, building the community, building the blockchain.

Investors can buy into these new tokens, without worrying about whether they are breaking an outdated securities law. They can buy, sell, and trade these tokens for three years, after which their holdings will be classified as securities (or not).

In this three year “grace period,” a few things might happen.

The token might become a security. It might look like a stock, in which case the investors in the token would be investors in the project, and receive similar benefits as, say, a corporate shareholder.

The token might not be a security. Like Ethereum, it might become something more like an “in-game currency,” a means of payment for using the blockchain network, in which case it would still be tradeable via digital exchanges, but not legally classified as a security.

The project might not go anywhere. The majority of blockchain projects, like the majority of startups, are not going to get traction. So early investors—like early investors of any company—might have tokens that are essentially worthless. This is the risk of being an early investor.

Peirce’s proposal elegantly solves a number of problems:

Happy days are here again.

We don’t want to celebrate too early. This is still just a proposal, but it’s a meaningful step forward. By allowing a three-year “grace period,” the SEC will be giving the green light to blockchain innovation in the United States, coupled with rigorous accounting and transparency to protect investors.

Once again, the most important element will be investor education. We’ll have to explain to investors how to think critically about blockchain projects, how tokenomics work, and how to consider blockchain as part of an overall investment portfolio.

In other words, everything we’ve been faithfully doing for the past three years. But now—we hope—in harmony with the U.S. government.

In this Tweet thread, Justin Sun, who arranged the meeting by virtue of a $4.5 million donation to charity, publicly thanked Warren for his support and advice on how to take Tron to the next level. Whatever he said, it must be working because Tron is up about 12% since the meeting.

Another person who dined with them is my former boss Yoni Assia. In fact, while I was working in eToro I actually suggested to Justin to take Yoni and it seems he liked the idea. Yoni also put out his own volley of tweets in which he states that he tried to teach Warren about bitcoin but instead Warren taught him about value investing.

Funny enough, another email hit my inbox this morning about value investing. It was a fascinating dissertation from one of my favorite authors, Bloomberg's John Authors, who was comparing value stocks to growth stocks. Here's a key graph from that analysis.

It's been many years since I actually tried to publicly predict what the markets were gonna do and when they were gonna do it and I'm not really sure what inspired me to do it this time. But, I was wrong. I learned my lesson and paid the price. Feel free to watch me embarrass myself at this link.

Mati Greenspan

Analysis, Advisory Money Management