Bitcoin Bucket Shop Kicks Bucket

http://www.bloombergview.com/articles/2015-06-19/bitcoin-bucket-shop-kicks-bucket

by dsri • 11 years ago

39 71 11 years ago

This article was not only educational, but entertaining. Some of my faves:

As I put it at the time, "Haha what? Just because you mumble the word 'blockchain' doesn't make otherwise illegal things legal."
But the basic illegality of Sand Hill was covered in thick doughy layers of other, stranger illegality. For instance: The blockchain stuff was fake!
overdetermined illegality

It's an interesting spin to see their situation described by multiple layers of compound illegal activity.

phdp2• 11 years ago

It's an interesting spin to see their situation described by multiple layers of compound illegal activity.

Can you describe how this was NOT illegal? They were illegally selling derivative contracts and illegally creating fake trade history.

stephengillie2• 11 years ago

Oh, I wholeheartedly agree. It delights me to see this situation described not only as very illegal, but in layers of illegality, like an ogre.

harryh• 11 years ago

If you enjoyed this you should read more of Matt Levine's writing. He is consistently both educational and entertaining!

markbnj• 11 years ago

My favorite:

> Tech is an industry of moving fast and breaking things. Finance is an industry of moving fast, breaking things, being mired in years of litigation, paying 10-digit fines, and ruefully promising to move slower and break fewer things in the future.

davidgerard4• 11 years ago

Here is Elaine Ou's blog: http://elaineou.com/

After being told not to talk about this stuff, she thought she'd get someone else to guest-blog it for her (which she then published on her blog): https://archive.is/LBBC2

The arrogance and lack of self-awareness of these "creative entrepreneurs" defies belief.

Hermel• 11 years ago

Given that they had virtually 0 real users, I'm not convinced the strict fintech laws are a necessity. It seems like the free market on its own is alreardy pretty good at avoiding dodgy companies.

One might think of Mt.Gox as a counterexample. However, I see that debacle more as an unintended consequence of too much regulation: making it too hard to setup legit exchanges reduces consumer choice and forces users onto alternatives like Mt.Gox even though they don't really trust them.

ForHackernews• 11 years ago

It seems like the free market is pretty good at avoiding dodgy fintech startups.

Hahaha, are you kidding me? https://www.reddit.com/r/sorryforyourloss

Johnie• 11 years ago

FinTech specific laws aren't necessary. There are more than enough financial regulations beyond what you can wrap your head around.

The thing that many tech entrepreneurs underestimate is the power of these financial regulators. It's not like Uber/Taxi industry that will bend to their wills. Financial regulators don't like any risk that they can't manage/mitigate.

Retric• 11 years ago

I think your underestimating how often banks fail.

"The Panic of 1819. The Panic of 1837. The Panic of 1873. The Panic of 1907. The Great Depression. The savings and loan crisis of the '80s and '90s. The financial crisis of 2007-2009. The list goes on and on." http://www.davemanuel.com/history-of-bank-failures-in-the-un...

PS: The average is more than 6 banks per month over the last 50 years in the US. With only 2 years from 1934 to now having zero bank failures in the US.

nickodell• 11 years ago

One might think of Mt.Gox as a counterexample. However, I see that debacle more as an unintended consequence of too much regulation

I don't agree. A fairly simple asset control system would have detected that someone was embezzling money from the exchange. That's been standard at companies I've worked at, even though they weren't in the financial sector.

yc1010• 11 years ago

No one would have been using Mt Gox if there were better options back then (the coinbases, krakens and bitstamps didnt exist then or were just starting off)

I used bitcoin since 2011, MtGox was fairly much unavoidable at the time, tho I do remember #bitcoin-otc :)

Everyone knew mtgox was dodgy, and in the end the people who did get burned are those who forgot about their bitcoins there and those who were willing to gamble despite months of warning signs of impending doom.

Hell I think i have like 100$ worth of bitcoin there at todays rate but for the life of me can not remember the password I used.

tptacek7• 11 years ago

By the time they have hundreds of thousands of users, it's too late to prevent MtGox scenarios. Better that they get shut down quickly --- for their own sakes.

dragonwriter2• 11 years ago

Given that they had virtually 0 real users, I'm not convinced the strict fintech laws are a necessity.

They had virtually 0 real users because "strict fintech laws" were applied to them while they were still actively limiting their number of users and scope of use while planning to scale out.

I'm not sure how that is a demonstration that the "free market on its own is already pretty good at avoiding dodgy companies".

One might think of Mt.Gox as a counterexample.

Well, yeah. Among others.

However, I see that debacle more as an unintended consequence of too much regulation: making it too hard to setup legit exchanges reduces consumer choice and forces users onto alternatives like Mt.Gox even though they don't really trust them.

So, if a "dodgy company" fails before it gets many users (even if that failure is a direct result of regulatory action!), this proves that financial regulation isn't needed and the free market works to constrain dodgy companies.

And if a "dodgy company" gets lots of users and lots of real money before it fails and inflicts widespread harm on a large number of users when it fails, that also proves that financial regulation isn't necessary.

Is there any conceivable set of facts which you would not characterize as demonstrating that financial regulation isn't necessary?

s73v3r7• 11 years ago

I'm sorry, but your last statement is idiotic. If they didn't trust them, then why did they use them?

waterlesscloud4• 11 years ago

For what it's worth, I tend to agree with you in this specific case. Even the craziest bitcoin gamblers avoided this one...

Now, 1broker.com on the other hand...

pnathan• 11 years ago

One interesting question the author obliquely brings up is this: Should all the financial regulation exist? My general sense is ... "not for things more complicated than savings accounts, checking accounts, and basic mortgages".

I really don't see the harm in prediction markets, even if they are putting together strange derivatives.

nosuchthing2• 11 years ago

2007 called, they want their "mortgaged backed[1] security-derivatives[2]" back.

[1] (mortgaged backed) = lenders were rubber stamping home loans to people who given their current income would not be able to pay back the loan.

[2] "security derivatives" were created on those mortgages as financial instruments that could be traded like stocks, effectively like allowing a 3rd party to take out insurance on your car and get paid when you get in a crash... a full on BET against the bad mortgages - paying out if the mortgages went into default

[3] https://en.wikipedia.org/wiki/Credit_rating_agencies_and_the... — credit rating agencies, trusted to research, validate and rate the mortgages were for some reason giving the obviously bad and likely to default mortgages ratings on AAA, thus allowing for a greater insurance pay out on the security-derivative bets, creating an incentive for investors to make shit tons of money from defaults on these loans not to mention the repossession of the properties by banks.

TLDR; Unregulated 'prediction markets' seemingly colluded to create loans that could not be payed back, than created insurance on those bad loans - falsely evaluated as safe, inflating the pay out, and effectively fabricated a profitable bet against the entire global economy.

maxerickson7• 11 years ago

The credit ratings agencies exist because of highly regulated markets. They are most relevant for things like pension funds that are legally required to buy investments above given ratings.

It's quite likely that a completely unregulated market would not have that particular set of incentives.

tptacek7• 11 years ago

A lot of the law around derivatives regulation seems to have the explicit purpose of building a wall between "gambling" and "risk management" (trading, hedging, &c). A regulatory problem with OTC derivatives in the '90s was that they were determined to be gambling devices, not real financial products.

The law is obviously imperfect. But the goal --- don't let us pretend we're financing we're just running games --- seems pretty straightforward.

So to my mind, debating the regs that brought down this exchange takes you in one (or more) of three directions:

1. You can believe we shouldn't regulate gambling at all, because people will find ways to gamble, and many people can gamble responsibly. As Levine points out, we might even benefit from the information generated by the gaming activity.

2. You can believe "main street" investors should have access to private company equity and not just large institutional investors.

3. You can believe we should not have "safety and soundness" as a goal for regulating retail financial transactions, and that the SEC/CFTC/&c should not serve a role for the financial system that is similar to the FDA's role for drugs (lots of people also think that the FDA does more harm than good). That is to say: companies should not have to spend large amounts of money to ensure "truth in labeling" for financial products.

I tend to think you probably have to believe all of these things to think what Sand Hill Exchange was doing should have been lawful. For instance: if you think there's value in generating retail exposure to startup equity, there are obviously saner ways to provide it than relaxing regs on derivatives betting exchanges.

lorddoig4• 11 years ago

Should all the financial regulation exist?

Almost certainly not. The regulatory burden of operating in the finance industry is overwhelming - innovation is not so much stifled as killed. The big boys thrive because the little guy doesn't stand a chance from the get-go. The whole industry is estimated to be worth ~17% of global GDP and that money, which is almost equivalent to the output of Europe (or every country in the world except the top ~17 richest nations), goes to a list of companies so small you could probably write their names on a single page. It's a joke.

tptacek7• 11 years ago

It's far from obvious that the industry would be more diverse and less consolidated if regulations were relaxed. The overwhelming majority of that gigantic flow of money is not main-street retail activity; it's financial engineering serving the operational needs of giant corporations, none of whom are interested in e.g. working with a YC startup for their commercial paper needs.

s73v3r7• 11 years ago

"The regulatory burden of operating in the finance industry is overwhelming"

That's not a reason in itself to not have it. I don't care if the rules are hard to follow. If you don't want to deal with them, go do something else.

"innovation is not so much stifled as killed."

If the "innovation" is stuff like mortgage backed securities, then good riddance. Finance is not a place where innovation should be happening.

"The whole industry is estimated to be worth ~17% of global GDP"

Which is about 17% too much for an industry that doesn't actually produce anything of value.

s73v3r7• 11 years ago

If the only ones who were ever affected by things in those markets were the ones directly investing in them, you'd be right. As is, however, no man is an island, and problems in those markets tend to bleed out and people who have no connections to them end up facing the consequences.

maxerickson7• 11 years ago

There is a fair chance that people would be less inclined to create the interdependencies if there were no regulation.

I don't mean that as an argument against regulation, but as an example, there are lots of stock market rules that make it simpler for individuals to make investments (required reporting of information, standards about how it is reported, etc). Without those rules, the risk would be higher and the investment would likely be lower, and the lower investment is exactly less connection to that market.

emodendroket5• 11 years ago

Yeah, of course not. Incidentally, I just woke up from a coma that I went into around 2006.

davidgerard4• 11 years ago

The problem is when "prediction market" becomes "assassination market". With bitcoins.

Animats2• 11 years ago

The Bitcoin world has replicated most of the known financial scams. This has worked because it preys on a population that doesn't know the known financial scams.

There is a long, long history of financial scams. That's why the handling of other people's money is regulated. FINRA fines about one broker a day, year in and year out. Even with regulation, there are problems, but today in the US you can often get your money back. Bank failures occur, stock brokerages fail, and the SIPC and the FDIC pay off the losses up to $250K per person. Madoff's victims already have about half their money back, after years of litigation and clawbacks. Madoff himself, of course, is in the federal pen at Butner, North Carolina.

The Bitcoin world thinks it doesn't need regulation. About half of Bitcoin brokers, and most of the Bitcoin online wallet companies, have gone bust, most of them taking customer assets with them. Any questions?

ikeboy2• 11 years ago

About half of Bitcoin brokers, and most of the Bitcoin online wallet companies, have gone bust, most of them taking customer assets with them. Any questions?

Do you have a source for that?

Animats2• 11 years ago

"Beware the Middleman: Empirical Analysis of Bitcoin-Exchange Risk"[1] That was written in 2013. At that point, 45% of the exchanges listed had gone bust. Check their list on page 3. That was before the collapses of Mt. Gox, Vicurex, Intersango, Bitfloor...

[1] http://lyle.smu.edu/~tylerm/fc13.pdf

s73v3r7• 11 years ago

It's not that these people don't know the known financial scams. These people think they're too smart to fall for them, and think that regulations are "for the weak."

emodendroket5• 11 years ago

My favorite are the people on Bitcoin forums advertising "reputable Ponzi schemes." "Reputable" meaning that there's an actual Ponzi scheme and not just one guy pretending there is but then running off with everyone's money.

dragonwriter2• 11 years ago

It's not that these people don't know the known financial scams. These people think they're too smart to fall for them

Or think that, in a market not regulated to control them, they will be able to make money perpetrating them.

kurotetsuka3• 11 years ago

Neither of these are true. 'These people' don't want to let any particular party regulate their use of money, for better or worse. By using bitcoin, you implicitly accept the risks of a decentralized currency. Until there exists some good way of decentralized regulation, if its even possible[1], these sort of risks become a simple fact of life, a cost of doing business.

Bitcoin users and proponents dont "think they don't need regulation", they reject it. They don't "think they won't fall for scams", they accept the risk and possibility. They don't think "regulations are for the weak", they think regulations are for people who accept their government knowing everything about their finances and need transactional legal accountability. Your comment, and the parent one, are nothing more than really weak strawmen.

[1] :: I'm kinda sorta working on something that might help solve this problem, hyphaelia (https://github.com/kurotetsuka/hyphaelia), which could theoretically be used to create a trustable darknet marketplace. I'm nowhere near that point yet though.

waterlesscloud4• 11 years ago

Having followed the bitcoin world fairly closely, I think it's a little more complicated than that.

Part of the problem is that it gets very hard to distinguish between woefully unprepared entrepreneurs and outright scams. It's difficult beforehand, when you think "Well, they're unprepared, but there's a 1% chance it might work anyway." or "They know they can't do it and they'll run with the money."

Even after the case, when they've failed and you know how they've failed, you can't always tell which is was.

Not that it matters much when the money is gone.

This has made me re-think my support for crowdfunding for equity for the masses. Even the best VCs aren't very good at sorting out winners from losers on a percentage basis (sorry, YC). They just have enough money to eat the variance and get to the winners. The general population doesn't.

On the other hand, I don't think most bitcoiners putting money into these schemes are stupid, I think they're just degenerate gamblers. I think they know the risks. Certainly once they've been around bitcoin for a couple months they do. You can't miss it.

Personally, I don't think they should be stopped from their gambling, but I can understand how people disagree.

brighton36• 11 years ago

Sounds like well-insured and managed Bitcoin businesses are a big opportunity.

akg_672• 11 years ago

IMO, the main problem is the success of Uber and AirBNB in flaunting the laws has led some entrepreneurs to believe that they can ignore the laws. They just don't realize that ignoring and fighting laws at municipal and state level is much easier to manage than ignoring and fighting the federal laws.

tptacek7• 11 years ago

I don't think it has anything to do with local vs. federal. The real factors are:

* Civil vs. criminal: Airbnb and Uber are violating regulations with civil penalties attached to them. SHX violated statutes with criminal penalties, though it appears they were charged civilly as a "slap on the wrist". The "1099 vs. FTE" issue Uber is running up against not only doesn't have criminal penalties attached (so long as they don't deliberately try to keep payroll taxes for themselves), but is also extremely common: 1099s are routinely reclassified.

* Ordinance/regulation vs. statute: The laws Airbnb and Uber are running afoul of are regulations set by regulatory bodies. The SEC is a regulatory body but it's also a prime mover in criminal enforcement actions, unlike, say, a taxicab commission.

* Principal vs. facilitator: The regulations Airbnb challenges are challenged by Airbnb's users, who are letting out houses and apartments in violation of local hotel/short-term-renter regulations. The law as it stands does not directly recognize culpability for sites that facilitate unlawful rentals. The law directly contemplates third parties marketing and creating venues for unauthorized securities transactions.

akg_672• 11 years ago

Both Uber and Airbnb violated the laws set forth by the cities and states. The advantage for both startups was that the laws only extended to a city or state. So both still had 100s of other cities and dozens of other states, that were slow to react, to target and gain traction and turn this into "Principal vs facilitator" and "consumer-benefit" issues. When you are running afoul with a federal law, you are losing the whole country with very little recourse unless you have a war chest.

BTW, SHX would have been fine if they stayed under the radar for a while until they had a war chest to hire lawyers to argue and work with SEC to come up with a suitable compromise. See the example of Lending Club and Prosper that were shutdown by SEC in 2008/2009. Both emerged from it because they already had traction and enough of war chest to hire securities lawyers to work with SEC. Now Lending Club is a $5+ billion public company.

waterlesscloud4• 11 years ago

Off-topic, but I've lost count of how many times I've heard of owners of small businesses keeping payroll taxes, getting caught, and cutting a deal with the IRS to stay out of prison that means they have to sell the business RIGHT NOW for whatever cash they can get. I've known a number of people who bought very profitable businesses from people in that exact situation.

zyxley• 11 years ago

The same folks were on HN a while back attempting to justify their poor decisions: https://news.ycombinator.com/item?id=9642186

paulpauper• 11 years ago

Matt actually thinks that allowing the short selling of hot web 2.0/app companies could actually make prices go lower, but in actually it tends to be the opposite as short sellers have to scramble to buy back the shares in panic as prices keep going up. Oh, you think snapchat is a bubble at $4 billion..now it's worth $40 billion. Enjoy your 900% loss. Remember the Porsche/Volkswagen short squeeze fiasco?

emodendroket5• 11 years ago

That doesn't mean it's not a bubble though; it just means it hasn't burst yet.

ghall2• 11 years ago

Here's our video response to the allegations. Many thanks to all of our users for your continued support and trust!

http://blog.sandhill.exchange/post/121768113883/sand-hill-ex...

tptacek7• 11 years ago

When you say you employed "aggressive marketing techniques", you're really saying "you employed bots to create fake wash trades to create the illusion of liquidity on the market", right? You launched a prediction market and then traded manipulatively on that market.

Also: they stopped being "allegations" recently, right?

ghall2• 11 years ago

My friend, I unfortunately cannot comment publicly outside our video due to legal sensitivities.

Of course, I always have an open door policy, provided any discussion is private and off the record.

pdeuchler• 11 years ago

Here is the archived Sand Hill blog post he talks about: https://archive.is/L97V5#selection-607.1-607.101

Hilarious in the lack of self-awareness

Bitcoin Bucket Shop Kicks Bucket

Related Stories