On Democratizing Ownership
Ownership of assets has historically been exclusive, but blockchains are changing that
Throughout history, where you live and what you already own has largely dictated what you can own.
“But what about the public stock markets?” you may say. “The NYSE and NASDAQ in the U.S. already do a great job democratizing the ownership of assets! Anyone could have invested a small amount in Amazon when it went public in 1997 and done phenomenally well.”
Democratization is the act of making something accessible for everyone.
If you are an average person living in mainland China, you are well aware of the fact that the U.S. stock market is not accessible for everyone. If you are an average person living anywhere outside of the U.S. and Western Europe, you may be able to own public equities and real estate in your region, but you have few options beyond that. You generally can’t own international public market equities, real estate, or private companies. As an average Chinese citizen, you certainly were not able to participate in the wealth creation associated with Amazon when it went public in the U.S. stock market 19 years ago — that right was exclusive to people who lived in the U.S.
Even in the U.S., the Securities and Exchange Commission (SEC) generally enforces regulation that assures that only accredited investors (i.e. people who own over $1M in total assets or have made more than $200K annually and will continue to do so) invest in private companies. So while the average person in the U.S. can invest in public companies, they generally can’t own the private companies that are creating new technologies and tremendous wealth — that is reserved for those who are already wealthy.
In 2009, Satoshi created a new asset type that is accessible to anyone regardless of where one lives or what one already owns: bitcoin (BTC), a cryptographic token that exists on a distributed ledger that is not controlled by anyone.
Satoshi released the software to the world on January 3rd, 2009 and immediately after the Genesis Block, anyone who had an internet connection and a few dollars (or yen, euros, rupees, etc.) could take an ownership stake in the Bitcoin blockchain by contributing electricity to the network or buying BTC on exchanges or P2P. There were no gatekeepers controlling access to ownership and the rules of token distribution were transparent, fair and inclusive at the onset. While a small percentage of the world population owns BTC to date and it has not yet been adopted by the masses, it was accessible to the masses from day one. The creation of Bitcoin represented an important change in how technology and value are created, and inspired the token boom that we’ve seen over the past few years.
A good measure of accessibility is % of the population that owns something. In a little over 9 years, there are already countries like South Korea and Argentina where bitcoin ownership is approaching or exceeding stock ownership (this data is hard to come by, but see here for a study on crypto ownership in South Korea and here for a study on stock ownership)
What about all of the tokens that have followed BTC?
Some tokens that were inspired by BTC, like Ether (ETH), were similarly accessible, fair and transparent from the start. Ownership of the Ethereum network was accessible to all when the Ethereum Foundation launched its token distribution event in July 2014. Participation required BTC, but anyone could contribute any amount of BTC and it didn’t require exclusive access of any kind. Those who participated in the ETH token distribution event have since seen their ownership stake increase by over 2000X in USD terms (which has greatly exceeded any venture capital investment in that time frame).
Many other token-based projects have taken a different approach and raised private funding from exclusive investors— giving a better deal to a few without taking more risk prior to a broader token distribution. Filecoin is a well known example of this approach. This approach gets far away from the democratic, fair and transparent ideals that Satoshi put forth, but if you are an entrepreneur who wants to launch a token and network that comply with U.S. regulations it might be necessary.
The regulatory landscape
Most regulators globally, including the SEC in the U.S., have not yet provided clarity on how they view tokens in the context of securities law. There is a strong legal argument for why some of the tokens that have come after BTC are not securities, but many other tokens that have popped up over the past 18 months look more like a security as defined by the Howey Test. Highly centralized teams and tokens that offer owners passive income streams associated are two particular characteristics that make tokens look more like securities than usage or work tokens.
If regulators recognize (and put out clear guidance) on the distinction between tokens that have passive income streams associated which rely solely on the work of highly centralized parties as security tokens and tokens that give holders the right to use an existing digital service or contribute work to an existing decentralized organization as non-security tokens, the democratization of ownership of non-security assets will continue.
If regulators determine that all blockchain-based tokens are securities moving forward, it will not. This could have a negative effect of giving wealthy individuals and institutions ownership of the the blockchain ecosystem, leaving the masses out of wealth creation in the industry.
There are future possibilities to consider other than regulators either ruling that all tokens are securities and stifling accessibility or regulators taking a nuanced view on different securities and enabling accessibility in some cases.
One possibility is that the regulations could be adjusted in the spirit of more accessibility. This may be wishful thinking given that technology generally outpaces regulation, but it is possible nonetheless. A useful characteristic of Ethereum is that it enables token creators to transparently code controls into smart contracts to comply with whatever the regulations are. Regulations that take a more balanced approach to protecting consumers, while also allowing the to have broader ownership access, could be a great thing. New standards for regulatory compliant tokens are beginning to emerge, such as Harbor’s R-Token standard and Zeppelin’s TPL proposal. These could offer a powerful sandbox for new approaches to be tested and implemented.
Another possibility is that many more founders could go the Satoshi route of being completely anonymous upon launch to allow their tokens to maintain broad accessibility and also avoid any regulatory risk. If regulators come down aggressively and say that all tokens are securities, there is a strong chance that this happens.
As a result of Satoshi’s breakthrough and the subsequent token movement that Bitcoin catalyzed, asset ownership in our world is inevitably changed forever. People who never owned assets before can now own them and will continue to own them thanks to blockchains.
I made a comment on Twitter to that effect the other day, and a lot of people took exception to the comment. If you are one of those people, I’d like to challenge you to a friendly wager for charity. Within five years, I think that more people in the world will own cryptographic tokens than stocks. If you disagree, express that here: http://longbets.org/758/. We’ll check back in five years!