Jason Calacanis predicts that years of litigation and possible criminal charges lie ahead for venture capital firms and companies that knowingly flipped worthless crypto tokens to unsuspecting retail investors.
An internet entrepreneur, angel investor and author, Calacanis co-hosts the All-In Podcast. He started his career in the 1990s as a reporter covering the internet in New York. Calacanis co-founded the blog network Weblogs with the help of an angel investment from Mark Cuban and sold it two years later to AOL (America Online). He made millions from early investments in companies such as Uber and Robinhood.
“I believe the overwhelming majority of tokens are securities, but they’re being dumped onto retail investors,” Calacanis said during the Odd Lots podcast. “And this is being done explicitly by venture firms. This is going to blow up in the faces of the venture community.”
The Odd Lots podcast is co-hosted by Bloomberg executive editor of digital news, Joe Weisenthal.
Proponents of blockchain-based tokens say the technology democratizes access to startups that would normally exclude all but professional investors, supposedly allowing novices to imitate VCs and own a piece of the next Amazon or Apple, Bloomberg reported. Critics say such tokens bypass U.S. securities regulation and expose unsuspecting retail investors to risks.
At issue is the classification argument over whether crypto coins are securities or not. The Securities and Exchange Commission (SEC) enforces federal securities laws meant to protect investors by ensuring that the securities markets are honest and fair.
The SEC and Commodity Futures Trading Commission (CFTC) generally consider Bitcoin and Ether as commodities, not securities, because they can be freely traded on traditional asset markets, as well as cryptocurrency exchanges.
SEC Chair Jay Clayton reiterated in 2018 that Bitcoin was not a security. “Cryptocurrencies are replacements for sovereign currencies…[they] replace the yen, the dollar, the euro with Bitcoin. That type of currency is not a security,” Clayton said in a CNBC interview.
SEC Chairman Gary Gensler reaffirmed in June 2022 that the SEC views Bitcoin as a commodity that should be regulated by the CFTC. However, Gensler has not commented on other coins or tokens.
“The majority of these tokens that are being sold are either pre-launch companies, which would value them at $3 to $10 million, or they’re frauds, or they’re run by incompetents, or they’re frauds run by incompetents. It’s some combination of those three buckets,” Calacanis said.
One of the most common crimes in decentralized finance is a rug pull, a kind of exit scam that is difficult to detect. Rug pulls are most often seen when fraudulent developers create new crypto tokens, push up the price, pull as much value out as possible, and then close up shop when the price falls to zero.
“The value of a coin may climb in hours, signaling a possible rug pull. A rug pull coin may move from 0 to 50X in 24 hours. This ruse is intended to induce FOMO and so token investment,” Coinscreed reported.
The SEC has gone after “a handful” of token-based offerings in recent years. Calacanis predicted that criminal charges will rise now that valuations have fallen in Silicon Valley and trillions of dollars have been wiped off the crypto market in the crypto winter.
People should be able to gamble if they want to, Calacanis added. “The people who are creating these things, those are the people who are 99% responsible, and those early investors. I’d say the platforms and other folks, they’re 1% responsible for this.
“Now do people go to jail? We just had somebody on the FBI’s most wanted list, who was the Bitcoin queen. I don’t remember a dotcom person being on the FBI’s most wanted list. So that might be the canary in the coal mine. When the FBI’s most wanted list winds up being three or four crypto people, I think you’ve got peak grift,” Calacanis said.