Speaking in New York City on Feb. 27, Tyler Winklevoss – co-founder, along with his twin Cameron, of the Gemini cryptocurrency exchange – lent his support to an argument that has long been popular among Bitcoin bulls: the cryptocurrency is a form of digital gold. Both gold and Bitcoin are scarce, he continued, fungible and divisible. Bitcoin, however, is “better at being gold than gold is,” since it is much more portable: any amount of Bitcoin can be held in a single string of numbers. (See also, What Is Money?)
Winklevoss continued the metaphor, describing ether as a digital oil that fuels a protocol layer – the ethereum blockchain – on top of which decentralized applications using their own tokens can be built.
Asked if he agreed that litecoin is the “silver” to Bitcoin‘s gold, a common trope, he said the fork more closely resembled a “testnet.” These are simulated versions of blockchains that developers use to vet their designs without risking the loss of actual money. The reason he gave for this comparison was that litecoin is nearly identical to Bitcoin, but with a much smaller market cap. (The only differences between Bitcoin and litecoin protocols are in the hash algorithm, the time between blocks, and the rate at which block rewards halve.)
Another question courted controversy: an audience member asked if Gemini would consider adding Bitcoin cash, a hard fork of Bitcoin, to the exchange. Gemini currently supports only Bitcoin and ether. The Winklevii – a nickname they said, in response to another question, that they do not mind – avoided giving an answer, but seemed to indicate that Bitcoin cash support is unlikely, contrasting the contentious fork to litecoin’s “friendly fork.” (See also, Should Coinbase Stop Selling Bitcoin Cash?)
(left to right: Josh Brown, Paul Vigna, Cameron and Tyler Winklevoss. Photo: Alex Kerr/Investopedia)
What to Do About ICOs?
Tyler and Cameron Winklevoss were speaking at an event hosted by the Museum of American Finance, with support from ING and Investopedia, which marked the release of The Truth Machine: The Blockchain and the Future of Everything by Michael Casey and Paul Vigna. The event also featured Josh Brown, CEO of Riholtz Wealth Management and blogger (as “the Reformed Broker”), and Joe Lubin, a co-founder of Ethereum and the founder of ConsenSys.
One of the evening’s main disagreements – though the respective camps never sparred directly – was over the regulatory treatment of initial coin offerings (ICOs). Lubin, unsurprisingly, appeared to be the party most in favor of ICOs as an innovative approach to raising capital. He objected at one point to the suggestion that ICOs are unregulated, insisting that they are, and advocated a self-regulatory model in which participants in the cryptocurrency community assemble a central (but presumably decentralized) repository for information about the various projects offering tokens. He compared the concept to the Security and Exchange Commission’s (SEC) EDGAR database. (See also, ICOs: The Beginning of the End?)
Lubin also claimed that utility tokens – tokens on the ethereum blockchain that are intended only to provide incentives on a particular project’s network – should not be considered securities. SEC chair Jay Clayton recently told a Senate committee, “I believe that every ICO I have seen is a security.”
While that judgment was probably not intended to include ether itself, the platform that has hosted so many ICOs was itself a sort of ICO, with investors depositing Bitcoin in exchange for ether. Lubin, in an interview after the event, countered that interpretation, arguing that ether fails a key portion of the Howey test: if the ethereum development team were to go away, the network could still generate value.
Tyler Winklevoss, by contrast, seemed to dismiss the idea that ICOs were compliant with securities law as currently written. “ICOs are tokens on top of tokens,” he said, calling them an effort to “crowdfund equity.” Discussing the value of the ethereum network and its tokens with Brown, Winklevoss said the value lay in ether itself (not to mention Bitcoin, which he said might appreciate by a factor of 20 or 30). (See also, Bank of America, JPMorgan Call Cryptocurrencies a Threat.)
Brown countered that Tim Berners-Lee, who developed much of the internet’s protocol layer, “has no money.” The wealth derived from the internet came from the application layer – Facebook, Amazon and Google – which are more analogous to the tokens offered through ICOs. But Winklevoss argued that HTTP produced no monetary value because it lacks a token. Ethereum doesn’t have that problem. (See also, Bitcoin vs. Ethereum: Driven by Different Purposes.)
Lubin didn’t give the impression that he was particularly concerned about whether ethereum itself or tokens at the application layer would produce better returns. He spoke about uPort, a project funded by ConsenSys to enable the ownership of…