Personal Tokens – FUD and Loathing in Las Vegas
Ethereum is drowning in tokens. Literally. There are thousands upon thousands of tokens. I mean, it is crazy that anyone can just hop onto to the network and mint a token to represent anything or nothing. Utility tokens, security tokens, rights tokens representing music licenses, tokens to access a newsletter or a network. The innovation currently happening in Ethereum is staggering and the envelope is pushed to represent a wide array of social, legal, royalty, redemption, membership, access rights on the blockchain. Today puppy meme coins are totally a thing.
For the uninitiated, the ERC20 standard is one of the eureka moments for blockchain technology, especially as it relates to Ethereum. There has been much written about it, but to understand personal tokens one should start at the prolific ERC20 standard. The ERC20 token standard allows for a common set of rules for the storage, transfer, approval of tokens to allow spending and standardize the treatment in smart contract functionality. In other words, it is a standard to have the Ethereum network be able to interoperate and handle ERC20 tokens the same. So, if Karen makes her CARE token according to the ERC20 standard, then Ethereum wallets can recognize, transfer and smart contracts can interoperate with the function. This is just like MP3 Players can play MP3 files.
What the Heck are Personal Tokens?
Personal tokens are different things to different people. A simplified explanation is that personal tokens are ERC20 tokens that are personal to an individual. These tokens are different from the taxonomy of other larger project tokens. Governance tokens = COMP, BAL, MKR. Utility tokens = BAT, Orchid. Security tokens = RealT, Arca, Tokensoft. Personal tokens — BOI, RCLE. To break out to sub categories, personal tokens can be be categorized in the following species:
- Personal tokens as a social currency. Platforms such as Roll (closed beta) allows for artists, youtubers, creators, and rabble rousers to leverage and reward their followings, to amplify and curate their art. The social currency can be redeemed for enhanced access, deals on art, or as a collectible. The social currencies are very personal and provide a way to foster a closer relationship between the socialite and the currency holders. Think Pearl Jam’s Ten Club.
- Personal tokens are also being developed as time consulting tokens. This pattern follows, many consultants, professionals, coders and programmers who basically sell their services by the hour. Many people are in the market for selling their time. Good examples of time token models, check out original Dapp BOI and Reuben Bramathan. Time tokens can be streamed via streaming apps, or auctioned on developing platforms such as Microsponsers where time slots go to bidders.
- Offer Personal tokens allow for redemption for a fixed thing. For good examples of this check out sponsored Ameen Soleimani’s tweets PEW, or the bond curve tradable offer tokens for Unisocks. Unisocks are an interesting example where the “thing” is redeemable for a consumable and traded on a bonding curve. Another example is exclusive brand project to own a limited edition verifiable in its rareness. Seemingly following this model is Zora.
- Personal Tokens may also be used for something that is much closer to crowd funding, or Income Sharing Agreements (“ISA”). Famously is Spencer Dinwiddie’s trailblazing tokenized offering to his NBA contract payment stream which was registered with SEC for sale to accredited investors. Most examples in this category are not as ambitious (or large)as the Dinwiddie offering and can be differentiated as they are meant to raise a certain amount of money to accomplish a finite goal or meet a need. For this category Alex Masmej’s ALEX or Kerman Kohli’s Kerman, or as pioneered by Lamda School (not tokenized). This 4th area seems to be where much of the criticism is mostly directed.
Why All the Controversy and Vitriol?
Everyone seems to have an opinion on personal tokens, from thinking they are a useless distraction, to being security offerings, scams, or the next world changing technology. If successful, Ethereum will continue to develop into a full fledged economy. Economies, have markets, grey markets, scams, and disputes mirroring national and world economies at large. As David Hoffman puts it in his thought provoking Bankless Nation “all Nations require internal regulation to ensure that no one is breaking the rules of the protocol. Physical nations have police forces that enforce and uphold the laws of the nation….In digital nations, the enforcement of the laws of the protocol is trivial and objective.” In other words, the network will surely send the ERC20 token, whether it is a scam coin, something flippant and beautiful, useful or worthless so long as the rules of the transfer are followed, gas is paid, etc. Personal tokens rely on offchain trust and reputational cache to maintain their value (or lack thereof.) This particularity brings out concern and criticism similar to the following:
To characterize (or perhaps mischaracterize) David Hoffman’s criticism is directed to avoid a tarnishing of the Ethereum ecosystem as a place for ICO scams, etc. For the full article quoting David Hoffman regarding personal tokens here.
Similarly Twitter legal minds affectionately referred to as cryptotwitter have strong opinions as well. Stephen Palley reasons as follows:
Are Personal Tokens the Next ICO Scam Wave?
Most all of the FUD and controversy regarding personal tokens appear to relate to the “Crowdfund” category #4. This species of personal token is used to represent something similar to a personal loan, a crowdfund campaign or an ISA. It has been argued that this category of personal tokens are masquerading as unregistered securities, highly susceptible to fraud, may tarnish the name of Ethereum, etc. The carnival barker, snake oil salesman, ponzi scheme propagator, charlatan, and fraud have been around since the beginning of time. Without it, there wouldn’t have been the securities acts passed almost 90 years ago in the first place. In other words, scams and scammers will follow the money and the market and this has been the case since gold rushes, stock bubbles, and beanie babies.
It has been counter argued that due to the small size, and the fact that the personal token offering was premised internationally that the securities regulations don’t apply. Time will tell, and jurisprudence will be built brick by brick through enforcement actions and challenges to come and depend heavily on the facts of each circumstance. To some degree what will determine whether or not these “crowdsource” personal tokens become subject to enforcement and regulation by the SEC will turn on the enforcement discretion of the SEC itself. In other words, will the SEC prioritize enforcement in this area, or will it look at it as a personal “crowdfund” better left to anti-fraud protections. This is particularly a case where the purpose of the personal token is to raise risk capital as thoughtfully raised here and eloquently argued with best practices to traverse minefields by Reuben Bramanathan in one of the first posts here on GCR.
It appears that the much maligned agencies are trying to allow some breathing room for innovation in the space. To allow regulation, safeguards, and the regulatory regime to grow into the space. To allow growth of regulatorily compliant platforms and best practices. I have little doubt that the SEC could bring an enforcement action against the ALEX and KERMANs of the world. But will they? Does it depend on the actions of Alex and Kerman behind the personal tokens. Does it increase chance of enforcement if they “exit scam” with the money and move to a beach or does it not matter as the registration and offering missteps were made and the SEC will make an example of them to signal to the market. Personally, I think that both the above parties have good intentions to innovate, and push the space forward without malintent. It is when the experiments fail that allegations crawl from the woodwork.
Does the Law and Regulations Apply to Personal Tokens?
Of course! How can parties interested in personal tokens continue to innovate, build new business models and develop a set of best practices to follow. First, it would seem that sticking to the three consumable categories of personal tokens would clearly insulate from most claims of securitization. This is a much safer spot, governed by the same real world regulations that would govern any contractual or product offering.
If Unisocks melt off people’s feet. Then rest assured they will hear from a myriad of governmental agencies and brush up on product liability jurisprudence. If unisocks manages to foment world domination and become a “commodity” of socks, with sock futures, and derivatives, then maybe the CFTC will come knocking.
If a Karen offers her CARE personal token offered to give one Karen haircut when redeemed and she defaults by giving a CHAZ cut, then clearly, the meatspace contractual breach regime will come into play. The breached party will have to resort to reporting Karen to the local authorities, file a cause of action to attempt judicial contract enforcement, or perhaps sue for specific performance. This requirement of outside enforcement is what rubs many the wrong way. There isn’t clear protocol enforcement. But can there be? Surely, parties to the personal token agreement can just agree to have an alternative dispute resolution. JAMS, Aragon Court, or Kleros, or to have a token stake burned, or have Karen kicked from her haircutters guild. This is why all the personal tokens will be a very interesting space to build out and see what is possible and fix and mitigate where things go wrong.
For the fourth category, it would probably make sense to request a SEC no action letter. Since the inception of the securities laws, it has been clear that there are many innovations that the SEC has had to wrestle with. Here are a couple of no action requests for personal seat licenses, where sports teams can raise money for the portion that they don’t get from taxpayers. They make for an interesting read and provide some instructional (nonbinding) guidance, and highlight the process of requesting a no action letter from the SEC. Here is one for the LA Rams and another for the San Francisco Giants. And a more recent one with a great synopsis and chart of SEC points from O’Melveny & Myers LLP here comparing points from three of the latest SEC no action letters.
Some of the personal token FUD seems designed to play the system dynamic of hiring the lawyer, to provide the assurance (insurance), to avoid the issue of not being the nail the SEC hammers. Prudence isn’t free call and engage competent legal counsel.
What are Personal Tokens Good for?
At a base level, personal tokens are unsecured promises. The world runs on unsecured promises. Some are enforceable by law, and some aren’t. The Code of the West where “Honesty is absolute — your word is your bond, a handshake is more binding than a contract.” For many people a handshake can seal a deal, can purchase a farm, a house, agree to sell a company or widgets for a certain price. How can this be so? Lawyers hate this, it must be wrong! Reputation is a currency, it always has been and always will be. Individuals have been building and banking reputational currency since the beginning of time, and some recklessly spend it, making them reputationally bankrupt.
How can Personal tokens = unsecured personal credit? First reputational personal credit obviously works much better in a world of identity. For example, one could say that they know Chaz, and that he comes from a “good” family and has always performed on what he said he would do. How can Chaz transfer this local “reputational” currency to something more decentralized?
Guilds as The Iron Bank:
Guild Reputations will be one of the first non person to person “staking” reputational systems. I eagerly anticipate the formation of large guild banks. For GOT fans, imagine an Iron Bank of Braavos, but hopefully without the same Faceless repo guild. Imagine a Civil Engineering DAO where all the members stake 100 hours of their time in the form of a personal token. Where there are 100 members. With the staked time, the members could easily loan to each other. If a member defaults, then they get kicked from the guild (Reputational/Credit Score Hit). Also Engineering DAO, could stake all the personal tokens into an ENG token. The licenses and credentials of the ENG DAO could be issued as NFT’s or ERC20’s that would signal to parties the starched shirt credentials that are earned in the real world. This framework and reputational stacking enable and make possible that other parties would lend against this pooled diversified stack.
Ultimately, guild managed personal tokens will assist a motivated person to bootstrap their dreams. We the Guild think we can borrow X and invest at a higher return. We have no collateral, so we will offer the only thing we have which is our reputation and maybe in contract via Openlaw or something similar. Guilds with mega reputational scores will be able to borrow more at a lower rate. If this is starting to sound alot like alot of DAOs that you know, then it starts to make sense when they can collectively manage a Treasury of the Guild assets.
Kickstart Your Dreams:
Obviously, this may or may not work, but seems better than P2P lending clubs, and Kickstarter is littered with more unfulfilled promises and broken dreams than a trailer park. An advantage or superior aspect is fungibility makes it where you can join the kickstarter program of a guild or future product. But let’s say you change your mind and don’t want the tokenized unicorn t-shirt. Then it is easy to just sell that right or interest. You can’t do that on crowdsource platforms that I know of. The ability to sell into a market makes it a BETTER consumer protection than not having it. Perhaps secondary markets will form, but it seems so long as these are ancillary to the consumptive purpose then the ability to sell on a secondary market is beneficial.
The animosity of personal tokens from some circles seems misplaced. It is OK as society to leverage our best and brightest to the gills, issue 1.6 Trillion in debt for student loans to encourage future basket weavers and lawyers. Hawk their parents’ retirement future to cosign on the line. The educational system has even managed to socialize the default risk, through government guarantees and make it where the debt is akin to indentured servitude by making it almost impossible to seek bankruptcy relief. Society benefits if Lambda is able to turn a waiter into a programmer or Alex is able to get an education in the San Francisco school of hard knocks without having to pay the $200,000 tax and 4 year penalty to obtain the societal reputation signalling currency “the diploma”. Who will be the first to “mint their Harvard acceptance letter” as a NFT and, issue personal tokens as a form of signing bonus to rage quit from the expensive social signalling that we have currently. LOL someone doing something similar here.
Iterative innovation is how we move forward and find a better way. To assist and foster the discussion LexDAO club collaborated and made a personal token factory at lexdao.org to make it easy to launch a personal time token.
- Limit the overall issuance to 4,000 hours of time, where each token = one minute.
- Provide a stamp string, where the issuer can stamp in the location of the terms of service that govern the token. For example, see http://tos.stamford.lexdao.eth.link/ which links to a term of service.
- Provide details of the offer and redemption, expiration date, what happens after. This makes the token consumable and perishable, which should militate security treatment. Also provide protections, such as a moral repugnance clause, arbitration, or other reasonable limitations on redemption and service.
- Read more about the design choices made at the personal token factory in the article.
Here I am shilling my own personal token the $SDT or the “Social Distance Token” half off sale. Still a good deal, same price half the distance.
All links provided are for informational purposes only and not meant as recommendations of the people or products. Nothing herein is legal advice and should not be relied upon without reaching out to your own personal attorney. The linked ABA disclaimer is appended to the blog.
LexDAO is a non-profit association of legal engineering professionals that brings the traditional legal settlement layer to code, and coded agreements to the masses. We believe that everyone deserves access to justice provided in a quick and efficient manner. If legal services were easier to use, verify, and enforce, we could live in a fairer world. Blockchain technology offers solutions to many problems in the legal space. Our mission is to research, develop and evangelize first-class legal methods and blockchain protocols that secure rules and promises with code rather than trust. We do this by training LexDAO certified legal engineers and building LexDAO certified blockchain applications. We strive to balance new deterministic tools with the equitable considerations of law to better serve our clients, allies, and ultimately citizens.
Originally Published in LexDAOism 7/13/2020