I have recently been getting more involved in the wild and wonderful world of cryptocurrencies (such as Bitcoin), and now that I am more of an expert on the topic, I can share some of my experiences. The vast majority of the general public is still just trying to wrap their heads around the idea of Bitcoin, and have no idea how it really works. While Bitcoin slowly spreads around the Internet, some forward thinkers have already left Bitcoin in the dust and are building “Bitcoin 2.0” in the form of alternate cryptocurrencies such as Mastercoin, Ripple, Counterparty, NXT, Open Transactions, and Ethereum.
If you had trouble following my cryptocurrency blog posting back in June where I gave a summary of some of the advances that are happening with electronic currencies, then much of what I am about to write may be over your head. But, if you bear with me, the info may help you make money at some point in the future.
Let me start by saying you don’t really need to know how Bitcoin works to use it, just like when you visit a website you don’t need to know about their server, database, programming, web host, and webmaster. Ultimately, Bitcoin is just an electronic form of online payment, similar in a way to how you can send and receive money using Paypal, Western Union, or a wire at a bank. It just is a much cheaper and more anonymous way of doing it, like in the late 1990s when Napster was a novel and free way to download music. Napster used peer-to-peer file sharing, and Bitcoin uses what is called a blockchain. Napster relied on the users’ PCs to host the files, Bitcoin relies on Bitcoin miners (regular people like you and I) to host the blockchain on their computers and gives them a small fee for doing it.
Over the last few years cryptocurrency programmers have perfected and tested the Bitcoin model, but it leaves some people wanting more. Other competing cryptocurrencies have been able to piggyback on the Bitcoin architecture, or create a new but similar architecture of their own, and offer all sorts of additional features. These features are like an extra dimension for the coin, giving it the power of a regular Bitcoin type currency but also allowing extra information to be attached to it. So for example, I could create my own currency called ImpulseCoin. I could try to get people to use it and if it got listed on some of the cryptocurrency exchanges, a market would develop for it. I could also make it a virtual currency on some of my sites, like on my virtual pet site at Adoptme.com I could give it out as rewards for special achievements and allow people to buy it to get a premium level Adoptme.com account that would unlock certain features on the site (or maybe people could use it to buy food or clothes for their virtual pets). Much like when a company goes public on the stock market, I would keep a certain amount of ImpulseCoins for myself, and then I could later sell them for my own profit once there is a stable market for the coin.
Another good example of creating a cryptocoin would be that a site like Domaining.com could create a DomainingCoin and give one out to to bloggers for each blog posting that gets published on Domaining.com. Domaining.com would then accept DomainingCoins as one of the payment options for Domaining.com ads, Domaining.com memberships, eCop.com escrow fees, and Lend.me domain loan listing fees. Because this would instantly give DomainingCoins some real value, a market might develop for them and other domain related sites might also start accepting them. For example, maybe I would sell one of my domains for DomainingCoins, knowing I could use them to advertise on Domaining.com or sell them on a cryptocurrency exchange.
The biggest excitement right now is that small companies can crowdfund by selling “shares” using these advanced cryptocurrencies. You are not usually selling ownership like with a stock, instead you are selling a percentage of the profits from your business. For example, Rhino Recordings is a record label and recording studio in Canada that launched Rhino Coin and is looking to raise around $1 million through a Counterparty cryptocurrency IPO. Earnings from the company are paid to Rhino Coin holders monthly in the form of Rhino Coins, which the owner can then hopefully exchange for real money (via a cryptocurrency exchange). Tatiana Coin (via the CoinPowers.com Crypto-Property CrowdSale platform) is another recent Counterparty IPO, where New Jersey-based singer-songwriter Tatiana Moroz released the first ever “Artist Coin” which can be redeemed for exclusive prizes which include autographed memorabilia, passes to backer oriented invite-only events, sponsorship opportunities, house concerts, and personalized songs. She will use the proceeds from the sale to help record and release her next album, and to fund her tour. Her goal is to raise anywhere from $50,000-$250,000.
So, after seeing all this, I started trying to come up with my own ideas. Maybe I could create the world’s first domain name cryptocurrency asset (a domain cryptocoin), where I sell a profit share in one of my domains. Since I am trying to sell the domain Physical.com right now, I could create PhysicalCoin (note the irony of it being 100% virtual and not “physical”) and offer a profit share of all proceeds over $25,000 (my goal would be $75,000) that I receive for it when I sell it. If I don’t sell it by X date or sell it for higher than $25,000, I would need to pay some sort of penalty which would be distributed to coin holders. Or, maybe I could create DomainCoin and have it be consist of a portfolio of my domains. Or, I could have a DumbCoin which would be based on the profit share from my Dumb.com website. I could even offer WebsiteCoin to raise money to buy websites, and give a percentage of the monthly profits to the coin holders.
But alas, it was not meant to be. Although the laws are somewhat unclear about all of this, in June 2014 the SEC charged the owner of SatoshiDICE.com and FeedZeBirds.com with violating securities laws because his “IPOs” were unregistered. See http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541972520 for details. To be clear, he was not charged because he created/sold a cryptocoin, instead it was because he was selling unregistered shares in his business via Bitcoin, but all of this makes it too risky for me. This only applies if you live in the USA though, so domain/website owners in other countries might want to look into doing this.
Also, you may have heard about the recently passed JOBS Act, and how it will soon change crowdfunding (cryptostocks and cryptocoin IPOs could be considered a type of crowdfunding, like Kickstarter and IndieGoGo). Up until 2013 it was illegal to publicly raise money (solicit investors) for your company without filing a complex and expensive registration with the SEC, but now due to the JOBS Act if you do a very simplified registration and follow certain rules, you can sell shares to “accredited investors” (people who are worth $1 million+ or earn over $200,000+ a year). Later in 2014 you should also be able to sell to non-accredited investors also, but there are lots of restrictions for this and you still need to register. Mainly though, neither of these options will work for cryptocoin related IPOs due to the various restrictions. Even worse, with Cryptocoin IPOs, it is not just obtaining investors that is a potential problem for the SEC. You are also creating what amounts to a security (the cryptocoin) that will be traded on public markets (currency exchanges), so you are now possibly violating both general solicitation and security issuance laws. If you create a cryptocoin for other reasons, like to use a virtual currency on your site, compete with Bitcoin, or raise money without profit sharing or giving up a percentage of your company, then it may not be a problem. Also, the guy who was charged in June by the SEC for securities violations did not use these new “version” 2.0 type cryptocurrencies to raise the funds, and because each cryptocurrency platform is structured very different in both a technological and legal sense, the SEC may not have a problem with some types of cryptocurrency IPOs. But, the entire industry is certainly on their radar.
If you are looking to get involved in any of this, you might want to take a look at the forum postings at Bitcointalk.org and read the cryptocurrency news at CoinDesk.com. This will give you a great overview of what is currently happening in the cryptocurrency community. Also, there’s an interesting article in Forbes about how the largest cryptocoin crowdsale so far was wildly successful but also a total disaster. And this article in Wired about the rise and fall of E-Gold should serve as a warning to what can happen when you try to sidestep US government financial regulations.