June 09, 2015

Equity Crowd Funding - why it will change everything

Editor here again, picking up part 2 of the crowd funding thread. In the previous post, Vinay Gupta laid out why Coase's theorem didn't predict the tech revolution quite yet - in a nutshell, we lacked some critical components, of which one was the blockchain, being that invention that allows a dynamic membership multi-party signature (DMMS) to create a single entry that rules all others, the part I called triple entry.

But is it the only missing component? No. Actually, there's another component we are missing, and it is this: the ability to acquire the capital to build what we need and want. That hinted at, let's continue...

Vinay Gupta says:

Does everyone have a clear idea what Equity Crowd Funding looks like?

You get a bucket, everyone puts in 20 quid, everyone gets a tiny share in the company, if the company turns out to be the next eBay, you get 2000 quid back.

"Eh? Huh? What? I thought you never got anything back from most of the crowd funding sites?"

Aha! *Equity* crowd funding! Equity!

In Regular crowd funding, you put the money in and nothing comes back. In *equity* crowd funding, you put the money in and a tiny share comes back. And you can actually make some real money!

"I just missed the equity word."

Now, *equity* crowd funding is obviously a good idea. It is very very very hard to find any rational argument as to why equity crowd funding is a bad idea. The only objections you will typically see is, what if the public get conned. And that, coming from governments that actually operate national lotteries.

Right? Pardon? What are you talking about?!


You allow people to sell cigarettes, what are you talking about, "The public will get conned!" You're mad!

So, there are some quality control problems with equity crowd funding as a model. You need some way to communicate to people the level of risk in an appropriate way. You might want to talk about reputational rating systems. A Moodys or a Standard&Poors for equity crowd funding might be a good idea. There's all kinds of stuff you might want to do.

The basic idea is obviously sound. You sit there with a credit card, you swipe it, you own a tiny little share in a company that's manufacturing some weird looking device that you clip to a golf club, and if tens of millions of people like it, you make a lot of money back.

It's just not done.

Right now, the regulatory frameworks around equity crowd funding cripple it, and this is I think the key fight for the development of technology in the 21st century.

If we win equity crowd funding, I think we get pretty much a flying car each. And if we lose on equity crowd funding, I think we are potentially on a long cycle of decline, into a kind of neo-feudal patent-barren landscape.

Bold stuff!

Back to me. This pretty much nails *what* equity crowd funding is, and suggests the transition as to why it is going to be a killer app on the blockchain. (For the *why* of it you'd have to listen to the whole talk, and for the inter-relations you'd have to see a whole lot more stuff.)

The interesting thing, once we've got that understanding, that position, is to question how it will develop. We're in a race, or if we're not in it, we're watching it. At a simplistic level, it is a race between existing players trying to deregulate conventional securities issues fast enough, versus new players (we've maybe not seen yet) creating it fully openly on the blockchain.

It's not clear who is going to win. OK, what is clear is that the people win because we win more stuff for less money; but it is not clear whether we the people win all the way, or only a partial victory.

Do we get a flying car, each, or do we enter neo-feudal patent-barren secular decline?

Where are you on this race? Are you ready to bet?

Posted by iang at June 9, 2015 09:24 AM

Hi Ian

Equity in terms of shares in joint stock company are so Last Century and so terminally broken.

What is needed IMHO is equity in terms of 'Open Capital' ie prepay credit instruments.


This actually pre-dates all other forms of instrument, and with the right protocols an entire system may be built around it. Sort of a financial Nand gate.

Posted by: Best Regards, Chris at June 9, 2015 12:07 PM

In my opinion, Vinay's talk nicely shows how important both identities and their intertwining reputations are to the world of crypto-currencies. It could be seen as the missing layer of trust which will be needed for us to finally fully embrace peer-to-peer monies. Once we combine P2P money with P2P trust (especially via decentralized P2P communication channels), what trusted/relying parties will we then still need?

So, my guess is we'd need another free and open-source infrastructure layer, only this time one for trust (identity & reputation) instead of money. The infrastructure itself would enable disintermediation of trust (as Bitcoin has done to informational value (read: money)), and when a relying party is required, products/services could be built on-top of this layer, causing micro-intermediation instead of cartelization.

Ideally, such an infrastructure layer should look something like:

- Electronic trust networks for humans and machines (referring to Ian's earlier work on "First Class Persons", and the "Ricardian Contract" of course)
- Privacy-by-design & security-by-design / no trade-off between security & UX
- No trusted third party (TTP) necessary / Only use TTP when situation demands it
- Connect information silos & secure communication channels
- No need to process nor send sensitive information in order to automate exchange of trust
- Cheaper, faster and more broadly applicable than any other identity / reputation system
- Easy to implement in existing legal and production environments
- Enables a range of new business models

Once we combine decentralized trust with crypto-currencies and truly decentralized communications, a society whose right of existence is based on intermediaries (hierarchical societies) will then transform to one that becomes less and less dependent on it by the minute, through micro-intermediation.

"You never change things by fighting the existing reality.
To change something, build a new model that makes the existing model obsolete."
-- R. Buckminster Fuller




Posted by: Tim at June 9, 2015 06:17 PM

Last but not least, these thoughts are mainly inspired by Robert Hettinga's work on Geodesic Societies/Markets:

1.) Nicely summarized -- http://www.nikkei.co.jp/summit/98summit/english/online/emlasia3.html (scroll down a bit)

"But, what, you ask, do I do when someone defrauds me? The neat thing about using financial cryptography on public networks is that you can use the much cheaper early-industrial trust models that went away because you couldn't shove a paper bearer bond down a telegraph wire. In short, reputation becomes everything. Like J. Pierpont Morgan said 90 years ago, '...Character. I wouldn't buy anything from a man with no character if he offered me all the bonds in Christendom.' In a geodesic market, if someone commits fraud, everyone knows it. Instantly. And, something much worse than incarceration happens to that person. That person's reputation 'capital' disappears. They cease to exist financially. Financial cryptographers jokingly call it reputation capital punishment. :-). The miscreant has to start all over with a new digital signature, and have to pay through the nose until that signature's reputation's established. A very long and expensive process, as anyone who's gone bankrupt will testify to." -- Robert Hettinga (1998)

2.) Further in-depth explanation -- http://www.ibuc.com/pdfs/Geoecon.pdf (see page 14)

Posted by: Tim at June 9, 2015 06:27 PM

Moving money is only part of the problem. The real issue is how money is generated - and dispatched.

And a crucial issue is forged money. As long as people rely on mere arithmetic, then computers will be able to cheat the system.

Posted by: Pete at June 19, 2015 01:02 AM
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