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June 22, 2018

When fines for pollution are too low, some companies will choose to foul the water. This may be bad from a moral and environmental standpoint, but it’s also a rational business strategy.

A similar situation is at play in the crypto world. The absence of clear rules has led some companies to play fast and loose with securities laws, calculating that the profits will outweigh any potential punishment. Other firms are operating more cautiously, betting that staying in the good grace of regulators is worth more in the long run than a quick buck right now.

Consider the case of cryptocurrency exchanges, which face a dilemma over which digital tokens to sell to the public. While it’s been clear for a while that Bitcoin and Ethereum are not securities—a conclusion the SEC confirmed last week—it’s harder to know the legal status of other tokens like Zcash or Monero or XRP.

The biggest U.S. exchange, Coinbase, has decided to play it safe and only offer a handful of tokens, including the newly-added Ethereum Classic. This will keep it on the right side of the SEC but also mean lost opportunities: Coinbase won’t collect trading commissions on other tokens, and will also forgo pay-to-play fees (rumored to be $1 million or more) that some companies pony up to get their tokens listed. More seriously, Coinbase faces a strategic risk if customers leave for other exchanges that offer a wider section of cryptocurrency investments.

Coinbase’s executives and investors aren’t stupid, of course. If they’re like most crypto enthusiasts, they have a sound understanding of game theory, and can recognize when it’s better to cede some of the market to competitors rather than run afoul of the regulators.

If Coinbase’s caution is justified, it means the SEC’s enforcement actions might be just beginning, and other exchanges could be in for a regulatory mauling. As the law firm Davis Wright Tremaine noted after the SEC’s latest comments, those who sell unlicensed securities can face “substantial fines and civil money penalties, as well as exceedingly high defense costs” plus other punishments.

For now, though, it’s too soon to know if Coinbase’s goody-two-shoes approach will pay off. In two years, the company may well look back and wish it had adopted the run-and-gun mentality of so many other crypto companies.

On a final note, the FT and others have reported that ethical companies perform better overall than those who brush aside legal and moral rules. Will this hold true for crypto—a realm where many embrace amorality? We’ll find out. Thanks for reading and enjoy the first weekend of summer.

SAY HELLO

As you probably noticed, we’ve decided to try sending the newsletter on Saturday morning this week rather than on Friday. If you have thoughts about that—or anything else—we’d love to hear them. You can send feedback and tips to ledger@fortune.com, find us on Twitter @FortuneLedger or email/DM me directly at the contact info below.

Jeff John Roberts
@jeffjohnroberts
jeff.roberts@fortune.com
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THE LEDGER'S LATEST

Microsoft Launches Blockchain Tool to Track Copyright by Jeff John Roberts

Why Ripple Thinks Coinbase Should Add XRP by Jen Wieczner

Ex-GoDaddy Execs Raise $6.5M for Cheap, Phone-Friendly Blockchain by Robert Hackett 

Stellar in Talks to Acquire Blockchain Startup Chain by Polina Marinova

$1 Billion Bitcoins Lost in Mt. Gox Hack to Be Returned to Victims by Jen Wieczner

Here's Why Bank of America Has Filed Nearly 50 Blockchain-Related Patents by Lucinda Shen

As Blockchain Grows, Companies Look to Avert a Patent War by Jeff John Roberts

New York Just Issued Another BitLicense. The Recipient Is Jack Dorsey's Square by Robert Hackett

Bitcoin Could 'Bring the Internet to a Halt,' Says Banking Oversight Firm by Lucinda Shen

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DECENTRALIZED NEWS

To the moon... Coinbase's custody service may boost Bitcoin—and its CEO says crypto prices will be just fine. Government employees must disclose crypto holdings. VC Fred Wilson invests in his sixth crypto fund. A cryptocurrency to help Africa. Robinhood wants to be a bank. SCOTUS namechecks Bitcoin. Laid off journalists reborn through blockchain. Randi Zuckerberg thinks the crypto industry is more women-friendly thank you think. Lawyers vouch for Tether.

....Rekt: So much for helping the homeless with blockchain. CIA won't confirm or deny files on Satoshi. Crypto-fueled stock pops don't last. New blockchain hash triggers bitcoin conspiracy theories. Another week, another big hack in Korea. 164 pages of Coinbase complaints. Japan orders six major crypto exchanges to shape up. Cryptokitties get crushed.

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BALANCING THE LEDGER

☝Click to view the show.

Vlad Tenev is the co-CEO of Robinhood, the popular stock buying app that recently made crypto assets available to millions of its users. He dropped by Balancing the Ledger to explain Robinhood's "no trading fee" strategy and to take a swipe at the "rip-off" prices at other exchanges.

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BUBBLE-O-METER

This week's hack-o'-the-week goes to Bithumb, where robbers allegedly made off with $32 million worth of coins. That's bad but nowhere near the worst.

Largest cryptocurrency heists (in dollar value at the time):

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MEMES AND MUMBLES

Visual explainers can be a fantastic tool for understanding complex ideas. Reuters this week tried if for the blockchain—with mixed success. Here's the introductory graphic:

Fortune's Robert Hackett came away confused, offering up this tweet in reply:

Everybody clear?

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FOMO NO MO'

Don't miss out: Wired magazine devotes its cover story to l'affaire Tezos—a tale of intrigue and infighting, which pits the husband-wife team of Kathleen and Arthur Breitman against Johan Gevers, a gadfly who seized control of the blockchain project's $232 million war chest. The piece offers up lovely vignettes from the weirder corners of the crypto landscape ("When Lambo?!"), and possible redemption for the beleaguered Breitmans. Plus lots of colorful quotes from Kathleen:

As Kathleen put it, "It's not a corporate-governance matter anymore, it's a hostage negotiation." When I asked how it had possibly come to this—Gevers, it seemed, could have just cut the checks, celebrated the network launch, and emerged a wealthy man—Kathleen could only throw up her hands. "He's the world's stupidest scorpion, and Arthur is the world's most gullible frog."

We hope you enjoyed this edition of The Ledger. Find past editions here, and sign up for other Fortune newsletters here. Question, suggestion, or feedback? Drop us a line.

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