A Martian walks into a cafe...Explaining the surrealities of Earthly securities laws to extraterrestrials
A Martian walks into a cafe looking to invest in Earthly blockchain endeavors and strikes up a conversation with Otonomos seated next to it at the bar.
This post is a surreal exchange between a visiting Martian (M) looking to invest in projects on planet Earth, and a hapless Otonomos (O) who had to explain why it could not.
O: Greetings! What brings you here?
M: Oh, we’ve been observing your planet for eons, but only recently saw some real interesting stuff happening.
O: Ah, like what?
M: It’s always nice to see things discovered in parallel! We’ve solved the Byzantine General’s problem ages ago using what you call Merkel trees and since, all our payments are peer-to-peer on a distributed ledger, which also runs unstoppable software powering and automating a lot of things on Mars. If you would have visited us we could have shown you!
O: You guys have crypto?
M: We call it “programmable assets” but here on Earth you’re perhaps a step behind still… which is why we see such opportunity to invest here!
O: You came to invest?
M: Yeah, we’ve kind of seen what works back on Mars and it will be fascinating to see how Earth too is now going fully decentralized.
O: Yeah we believe it’s irreversible, but a lot of people seem to want to reverse it!
M: They do not interest us. They stand in the way of progress. Progress always happens at the frontier of chaos. We like Earthlings who work right at that frontier.
O: Great. We see some very interesting stuff being built by our clients at Otonomos.
M: And your company sells legal skins for Web3 projects is that right?
O: Yeah that’s one way of putting it.
M: On Mars, business building is largely gamified. Projects Martians work on together then level up by bolting on legal skins as booster packs, to help coordination and to encode rights and obligations. Is that what Otonomos does?
O: That’s the end state! But the legacy world isn’t quite ready for this yet…
M: I know what you mean. We have observed that you have a class on Earth we call the “Inert”. They don’t seem to want to move.
O: It’s important I guess that we can find mainstream adoption and not just build for ourselves, making crypto even more incestuous.
O: Err… let’s say in the context of crypto that - how shall I put it - some participants are excessively close.
M: Yes we have observed that too, especially with some investors who all seem to pile in on the same deals, what do you call them, VeeCees or something?
O: Ha! Yes VCs it stands for Venture Capital and they run pools of money called funds that invest in early stage companies.
M: Why would people invest in such funds if they can just buy a token that gives them the same carry in the success of a project?
O: Well, you see (fumbles), they can’t.
M: They can’t? Oh I forget, sorry if I may have embarrassed you, the tokenization technology is not quite ready yet here on Earth… you guys are still working on that. Exciting!
O: Actually in our defense, I think at the tech layer we have token standards that allow pretty much for the tokenization of everything, maybe we’re still lagging a bit on programmability.
M: So then, if everything can be tokenized, what’s the benefit of letting other people invest on your behalf? Do they have special access or better terms?
O: Well…, yes, there’s that, but ultimately that’s because the projects themselves grant them access on preferential terms instead of going out to a wider group of investors. But it’s also because they can’t go out to a wider group of investors.
M: Why can’t they? With the internet etc. it’s not difficult to reach everybody with a wallet and let them acquire a token in exchange for payment in digital currency.
O: Yes, you’re right, but projects that do so risk penalties, and may even go to jail.
M: Come again? Are you saying that when you seek investment on Earth you can ultimately go to jail?
O: Well, err, it’s kind of complicated (grinning). There are regulators who think the public needs to be protected against investment scams that take other people’s money and run with it. They call it Investor or Consumer Protection.
M: But can’t Earthlings look after themselves? If you feel something is off about a project, surely you would not hand them over your money? So how do these Protectors decide who gets to invest and who doesn’t?
O: We call them Regulators. In simplified terms, they do it on the basis of… how much money you have.
M: Hang on. You mean there’s some threshold amount you need to have before you are allowed to invest? Isn’t that slightly self-perpetuating for the people who already have a lot of money, as it will likely deny people with less money the opportunity to make more money?
O: (Nods). I see it the same way but the Regulators justify these restrictions believing that it protects people with less money. The proverbial grandmothers who would be scammed out of their savings.
M: Not mine! She is smarter than me and thought me everything about money! This whole thing strikes me as backward. On Mars we do it very different: we let anybody stake any other Martian and if they do, they get an onchain claim on a project’s value gain by way of what are called Participation Tokens. If there is no gain in value they lose. All value shows onchain with all revenue and costs visible and fed back into the token. Token holders can ragequit anytime if they lose faith in a project.
O: I guess we would call these tokens “shares” or “stock”, or more broadly “securities.” They give people exposure to the appreciation in value by the efforts of a few.
M: Maybe, but there is more: on Mars we also have a token called the “Martian Surplus Token” (MST) that at regular intervals distributes the overall gain in our Martian economy, in recognition that lots of what is being built by what you call the Few is built on top of public good infrastructure built and maintained by the Many. These MSTs (we refer to them lovingly as “mystees” coz we all love the token) are being minted commensurate with the growth in our economy and credited to every Martian’s wallet. It’s nice supplementary income and sustains lots of Martians who dedicate themselves to less immediately monetizable activities!
O: Oh, we have seen some similar experiments, some call it Universal Basic Income but it hasn’t really taken off yet here. It’s rather controversial. And the token if it were to exist the way you describe would probably be considered a securities coz it pays some sort of dividend.
M: You Earthlings are strange! I don’t see how the idea of sharing in common prosperity could be in any way controversial…?! The same way that I don’t see why people should be denied to do with their money what they want.
O: Yeah lots of these laws date back to more patronizing times but are still on the rulebook. For instance, in one of the most active and largest investment markets, a country we call the United States, they date back to 1940.
M: Oh I heard of these United States! They eat a lot of minced animal meat in a bun and watch this game with players strapped in helmets chasing an oblong ball.
O: Yeah Hamburgers and American Football. It’s a very American thing.
M: So if I wanted to be part of some of the activity in this big market called the United States, how would I go about it?
O: Umm, let me think how best to explain. First, we need to make a distinction between companies that list their stock on what we call public exchanges, and companies that are what we call “private” and don’t have listed stock.
M: Ho! Go slow on me here coz on Mars company Participation Tokens are offered publicly from day one and can be bought and sold peer-to-peer on decentralized exchange platforms. That’s not the case on Earth?
O: Lots of people would want to see it done that way but for now, if you’re a private company you can’t offer your shares to just anybody, only to what are referred to as “Accredited Investors”.
M: Only to people who are rich, I get that… Well, I don’t, but you explained earlier that your
Protectors Regulators have decided so. What I find strange is that, in any usual distribution of wealth, there would be more people who are less rich than rich. If this “less-rich” group forms a majority under your typical voting protocol on Earth, does this mean that basically they have agreed to cut themselves off from investing in private companies? Why would they do that, knowing it is likely to deny them upside from innovation?
O: Well, again… it’s complicated and kind of a long story. Let’s say that majorities do not directly control their own destiny. Every once in a while they decide who represents them in some sort of assembly that then passes laws, which once passed apply universally. However the delegates don’t always act on behalf of the broad electorate and are often influenced by a smaller group of people who have an interest in shaping the laws to their advantage, which leads to laws favored by a minority to apply to a majority.
M: So people on Earth can only vote directly once in a while to basically give up the power to control their own lives? You don’t have Governance Tokens yet which give people a guaranteed voice in all major decisions? To me it seems that if you tell people they can’t put their money where they want, that this is the type of decision they should be able to vote on directly. On Mars we could not get away with that!
O: Yeah, they don’t have a direct vote on Earth, they delegate to people who are directly elected who are then supposed to have their voters’ interests at heart.
M: Hmm. Odd. It seems like some Earthlings don’t trust other Earthlings to look after themselves. So I assume that these rules related to investments are then put in place by the people who have been directly elected and are supposed to take the electorate’s interests at heart, such interest being that they basically can’t invest?
O: You put it quite pointedly but yeah, that’s basically the situation. And if I wanted to give you the full picture, it gets more complicated. These rulemakers in turn delegate lots of the minutiae and enforcement of the rules they passed to what we call regulatory bodies. You may have heard for instance of the Securities and Exchange Commission, better known by its acronym SEC?
M: I haven’t but MarsGPT can tell me all about it I am sure with its hive brain.
O: I am sure! Well, the SEC is where you need to register if you want to offer a security such as a share in a private company, or a token that represents such share. It is also the regulator that oversees the exchanges on which publicly traded stock is listed by putting listing requirements in place. They also control who can offer investment-related services such as advisory, lending, etc.
M: Sounds like they are quite the busybodies!
O: You have no idea…
M: But hang one, this is new to me: Not only am I restricted as an investor where I can put my money, you’re saying that if I issue a token I also need to register this with this SEC, and if I want to list it on an exchange - though why the schizophrenia between unlisted and listed when it comes to liquid tokens? - I am subject to all sorts of listing rules. Is this part part of protecting investors as well?
O: So the SEC thinks. Now, their rules only apply to what they deem “securities” which if I am trying to simplify is basically when we enter into some form of investment contract where I hand you over money and you’ll do something with it.
M: Doesn't that apply to most situations where I hand you over money? If I thought I could get a better return from my own effort I would probably not hand you over my money!
O: You kind of put your finger on it. A “security” is meant to be some instrument that you buy in the expectation that you’ll get a return from the efforts of others.
M: So if I benefit from buying a token of a protocol that is maintained by others, would this would be considered a “security”? Stuff like say Ether which I heard of just because one of its founders does look a bit like a Martian!?
O: Hahaha yeah Vitalik is his name, he does have some extraterrestrial features hahaha.
M: Yeah I looked at Ethereum and it’s quite clever, especially now that they have this “Proof of Stake” mechanism. But by staking I am no longer strictly relying on the “efforts of others” to get to finalization of transactions, since my stake helps the chain reach consensus. So I guess on this basis Ether would not be seen a security?
O: The view is that Ether and some of the native tokens of other largely decentralized protocols are indeed not securities, but the SEC and other “Inerts” as you call them haven’t really explicitly pronounced on that. But yeah Ether and most definitively Bitcoins are not considered securities, but regulators haven’t been consistent for instance for tax purposes they may be considered property, for the commodities regulators some tokens are seen as commodities, etc. Also, the SEC for now allows you to stake on your own behalf, but if you rely on a centralized player to stake your money on your behalf, they seem to consider that an activity that needs a license.
M: Bitcoin we know quite well, in fact one of its inventors managed to establish contact with us and we gave him some ideas about segregated witnesses etc. Their paper turned out quite alright… a bit long though.
O: The Bitcoin white paper is seminal! As far as its length goes, as Mozart allegedly said to the Kaiser who thought his opera had too many notes, “which ones do you propose to remove”? Its succinctness is one of the key reasons the paper is so powerful: Satoshi is like a benign god who creates and then lets his children play. You had a hand in the Bitcoin paper??
M: Not me personally but some Martians yes. But it’s old technology now, it was based on ideas we developed like ages ago in human terms.
O: [Shakes head in disbelief] I’d love to learn about your latest technology! What are my chances of a hitchhike on your spaceship to Mars?
M: You would probably not survive the atomic compression or if you did, there’s a high risk your carbon composition would get reconstituted in a very different way. Also, I assume you don’t have a brain port implanted yet where we could download and backup your mind just in case? The safer bet would be to find your own way. I understand you have people working on spaceships to Mars, though I understand the journey would be very slow, like around 9 months?
O: Yeah there’s a guy called Musk, Elon Musk who aims to get to Mars within a decade.
M: Musk, that’s his name. We saw his car passing by the other day, flying right past Mars. Well, if he manages to get people to Mars you should be one of the first to join, we’ll welcome you with open arms! You’ll see that perhaps we are a couple of cycles ahead in how we organize things on Mars: we iterated a lot on the decentralized ledger idea we shared with Satoshi at the time and now have a choice of chains for all sorts of purposes, some with features that allow users to keep the contents of their transactions shielded, some with zero latency, some with ultrahigh security, but they all interoperate.
O: Fascinating. It’s a vision we work towards here on Earth too. And you have some Martian authority that controls the issuance of digital currencies for use in your economy?
M: Like some central mint? Nah. That’s a very Earth-like thing I noticed, it seems subsets of people here like the idea of controlling things like currencies. For instance, I observed that only 12 people set the price of money in the United States, which then ripples into interest rates of most other countries. We don’t do that on Mars: we let Martians freely issue their own money, resulting in lots of competing but interchangeable currencies bidding for people’s use. Some are more like a store of value, other a medium of exchange, so you can pick and choose.
O: Oh wow. I like Mars already!
M: We even let people spin up their own countries, we call them Sovereign Realms, with native currencies and internal economies that people can decide to participate in but also freely opt out of. It’s a wonderful dynamic seeing how they all strive to attract citizens!
O: These are powerful ideas that some people here too talk about, but they seem so difficult to realize on Earth. I know you’ve got to leave but any suggestions how we can move closer to what Mars is doing?
M: I don’t want to patronize, every planet needs to figure it out for itself.
What worked for us is that we systematically dismantled pockets of central authority by pushing decision making to the broadest possible base, using the decentralized technology you now also discovered.
Once that happens, you will solve what seems to me the major contradiction in Earth’s governance protocol: that a majority has to live by rules they don’t agree with, issued by a minority to whom it delegated the power to enact rules that supposedly derive their legitimacy from the very consent of the majority!
O: I very much hope to see you on Mars one day. Don’t feel like I am pitching you but a de-risked bet on decentralized innovation on Earth would be for you to invest in Otonomos, we’d be delighted to have a Martian on our captable!
M: I like the idea of a picks-and-shovel play, is there a deck I can look at?
O: Sure just email firstname.lastname@example.org and they’ll send you a DocSend link. We’re raising 4 million dollars in straight equity, but I can’t tell you much more or we’ll get a slap on the wrist or worst from the SEC!
> Email us to learn more about the Otonomos financing round