While this week’s sell-off in stocks was steep, the S&P 500 is still up 34% from its March 23 nadir on Friday morning. In other words, the United States’ fiscal and monetary COVID-19 stimulus efforts continue to be heavily favoring hedge fund managers, bankers and corporate CEOs. Meanwhile, as stocks have posted a record-breaking rally, 115,000 Americans have died from a pandemic that forced 38 million others to file for unemployment benefits.
This is not only fundamentally unfair, it also highlights how our current capital market system grossly misallocates resources. Failed companies with dire long-term prospects – see Hertz, below – get rescued while small businesses and startups working on solutions to our economic and public health malaise miss out.
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It’s time to talk about an alternative mechanism for allocating capital, one that’s not skewed by the stock market. It’s time to revisit ICOs.
A different approach
First, some level-setting: The 2016-2017 ICO boom was an abomination. Rife with scams, ill-defined business plans and hype, the initial coin offering bubble provided a reminder of why securities regulations exist: to make fundraisers with asymmetric information accountable and to protect investors from their abuse.
But the token boom did unleash some valuable outside-the-box thinking. We should tap into it now.
ICOs were touted as a means for innovators to gain access to a wider funding pool and for retail investors to earn the kind of returns otherwise reserved for privileged insiders. Startups, it was said, could now bypass the venture capital gatekeepers who decide who gets funded and who gets the golden handout of a stock market initial public offering, while token investors could make those 100x payouts VCs boasted about.
Disintermediating both Silicon Valley and Wall Street paved the way to an open market for ideas, ICO fans proclaimed. Yes, there’d be losses, blowups and scams. But in its roundabout way it would ultimately allocate resources to where the economy most needed it: to the innovators.
Those voices were quieted by the bubble’s bursting in 2018. But the current state of U.S. financial markets demands we revisit some of their arguments – if not to resurrect the failed ICO model than to think through related regulatory reforms that address the problems with the Wall Street model.
After all, the transfer of wealth from ordinary Americans outside the system to a privileged few insiders has been many magnitudes greater these past two months than anything that happened in the token issuance markets.
For most of the 20th century, that system served reasonably as an engine for monetizing American ingenuity and funding economic development. But, over time, mostly because of the excessive political clout that Wall Street accumulated, it has incorporated some perverse incentives that discourage innovation.
Part of the problem stems from our political culture. The mainstream narrative fed by media outlets like CNBC and by Dow industrials-obsessed political leaders like Donald Trump positions the stock market as the bellwether of the American Dream. With elites so invested in the market, both economically and politically, it’s little wonder the COVID-19 monetary and fiscal bailouts were geared toward propping it up.
But it’s also structural.
Think of how the quarterly “earnings season” sets standards. The rewards for all involved – Wall Street’s earnings forecasters, ROI-obsessed fund managers and corporate executives and, by extension, the bonuses of their middle management staff – hinge on “beating the number” every three months.
This isn’t conducive to taking bold bets on innovative strategies that take much longer to gestate. Consider the problem of “stranded assets.” Most pension funds continue to hold big stakes in carbon-heavy companies such as oil and gas producers even though reams of analysis suggest they will be worthless within the longer-term retirement horizon of most of their members. It’s hard to get off the drug of quarterly returns.
(A tangential thought experiment: Quarterly company reports are a byproduct of centralized, siloed accounting systems in which bookkeepers and auditors must reconcile records and draft periodic financial snapshots. What would happen to the quarterly rhythms of Wall Street if these reports became obsolete? What if all counterparties within a particular supply chain or economic ecosystem instead contributed to a single distributed ledger with an openly available yet privacy-protected snapshot of all transactions in real time? Such models are not possible now, but blockchains and zero-knowledge proof developers are putting them within the realm of imagination.)
What works and what doesn’t?
To imagine an alternative, cast your mind back to 2018 when token prices were tanking, the ICO market was drying up and “Crypto Winter” was setting in. There was actually a sensible debate back then on what token-based fundraising ideas should be retained and which ones should be dispelled.
For example, are security token offerings, which require regulatory filings but can integrate smart contracts that traditional stocks and bonds cannot, a better way for startups to fund themselves?
STOs were hot for a brief post-ICO period, and then lost momentum as it was clear the regulatory, compliance and technical framework had a long way to go. But there seems to be some resurgent interest, with issuer platforms Polymath and Securitize both making technical progress. One can imagine the recent tie-up between Galaxy and Bakkt also veering into security token services for institutional investors.
Can we also agree on what legal utility tokens are, and on what the best practices for marketing them are? If, as the “Hinman doctrine” suggests, a token can cease to be security if its network evolves to a more decentralized state, what is the right framework for token issuers to stay compliant through that evolution toward utility status? How can they stay compliant at the outset but have a means to attain the desired network effects of a token-governed decentralized system?
And how do we make it easier for small investors to legally and safely buy and sell tokens?
Accredited investor rules are outdated, favor the same set of privileged wealthy players and unreasonably restrict the general public’s access. Meanwhile, U.S. restrictions on a host of crypto exchanges deny ordinary Americans access to a market that’s intrinsically designed for little guys to participate in.
Regulation is both unavoidable and necessary. But it absolutely should not function as protective armor for a capital market system that harms our economy’s capacity to optimize capital allocation.
At a time when the U.S. economy needs innovative approaches to everything, we urgently need an innovative approach to how we fund innovation.
A phoenix rises… and falls
For proof of our broken capital allocation system, look no further than the performance of Hertz’s stock. On May 24, the car rental company filed for bankruptcy after incurring massive losses on account of the COVID-19 travel restrictions, which had left the industry’s fleets at a standstill. In response, Hertz’s share price, which had already shed more than 85% from a two-year high in late February, plunged further, dropping into penny stock territory to $0.56. But then a strange thing happened: On Thursday last week, Hertz started a three-day tear to hit $5.54 on Monday, a 574% gain. A surge in trading activity by accounts listed on small investor trading app Robinhood seemed to be behind the gain. As the rest of the market absorbed the euphoria of a stimulus-fueled recovery, the bankrupt car rental firm was suddenly attracting an influx of speculative retail investors.
For many of those newcomers, the story hasn’t ended well. On Wednesday, the New York Stock Exchange put the company on notice for delisting. Hertz is appealing that decision, but the announcement sent the shares crashing back to earth. At Thursday’s close, the price was at $2.06.
A common caveat emptor response would simply say that some greedy speculators learned a lesson and we can forget about it. But the reality is more nuanced. That kind of speculative mania is inseparable from the broader sentiment of the market, which is now consumed by a “don’t fight the Fed” logic on monetary stimulus. Hertz’s mini-bubble was (indirectly) engineered by central bankers.
The global town hall
What’s your story, bitcoin? June has been a frustrating month so far for bitcoin bulls. That’s not only because a series of rallies offered false hope, each faltering near the psychologically important $10,000 level. It’s also because market performance has again confounded efforts to define a narrative for bitcoin as an asset. After its COVID-19 sell-off in early March, which challenged the idea of bitcoin as a safe haven, bitcoin’s relatively strong rebound was explained in terms of fiat money supply issues. Bitcoin would then be described as an antidote to the fiat world’s “quantitative easing” as the Federal Reserve’s stimulus efforts spawned the “Money Printer go Brrrrr” meme and bitcoin’s own monetary policy “quantitatively tightened” via the halving. But on Thursday, one day after the Fed said it was “committed to using its full range of tools to support the U.S. economy,” bitcoin again sold off sharply. After staging another frustrating rally to just above $9,900, it plunged to an intraday low of $9108.47. Crucially, this was in sync with a big unwinding in U.S. stocks as concerns grew around new COVID-19 cases.
So, is bitcoin just a “risk asset,” moving up and down with overall investor risk appetites? It’s unclear. Having a more consistent story would make it easier to make an investment case for bitcoin. But maybe the lesson is we shouldn’t be searching for a narrative. Don’t try to pigeon-hole it. Bitcoin just is.
We laid the table for you… The failure of a meaningful price breakout is proof enough that the long-awaited arrival of institutional investors into crypto markets remains unfulfilled – regardless of Paul Tudor Jones’ or Bloomberg’s upbeat comments about bitcoin. But this hasn’t stopped big players in the crypto industry from continuing to build services catering to institutions for when they finally do show up. Three separate firms – Genesis (a CoinDesk sister company), BitGo and Coinbase – have established crypto prime brokerages, which leverage deep balance sheets and market connections to provide assured liquidity and price-efficient order routing for institutional investors. Meanwhile, Galaxy and Bakkt are teaming up to offer specialized crypto custody and trading services to the same kinds of players. In a press release, the firms described it as a “white-glove service,” the kind of business that lays it all on with a tailored service for its clients. So, there you go, institutions, the price is right, the butlers are waiting for you. What more do you need? Jump in. The water’s fine.
Go for a bike ride, get doxxed. Those of us who obsess about privacy – as Money Reimagined does from time to time – can get frustrated by an apparent lack of concern about it among the general public. That’s why it’s important to humanize it, to show the real-world impact of privacy breaches on people’s lives.
Enter Peter Weinberg. Thanks to a date error in a police public service announcement and some overzealous users of geolocating cycling app Strava, a Twitter mob wrongly flagged Weinberg as the instigator of a rather ugly incident. A viral video had earlier shown a different man on a bicycle accosting two young girls who were posting flyers in support of George Floyd on a trail in Bethesda, Md.. When the Maryland-National Capital Park Police tweeted a request for information about the unhinged cyclist, it wrongly used June 1 as the date of the incident. That tweet was shared 55,000 times. It later corrected the tweet to say June 2. But that one was only shared 2,000 times. You can piece together what happened. A Strava user must have surveyed the site’s data, found what was thought to be a likeness, tied it to Weinberg’s associated social media profiles, put two and two together to come up with five and then outed him. Weinberg’s Twitter and LinkedIn message feeds were barraged with comments accusing him of being a racist and of engaging in child abuse. This is surely not what he signed up for when he agreed to communicate information about his rides and exercise regime with a friendly community of fellow cyclists.
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