The copy of the U.S. Constitution that crypto investors wanted to buy is one of only 13 remaining … [+]
What started a couple weeks ago as a novel, if slapdash, crypto experiment has devolved into what’s altogether more common in that world: legal questions—and speculative trading.
In a five-day stretch earlier in mid-November, an internet collective called Constitution DAO crowfunded close to $47 million in Ether, a popular cryptocurrency, through a campaign carried out over social media. The group quickly became the most prominient example of a so-called decentralized autonomous organization, which is essentially a co-op that governs itself using votes tallied through blockchain technology. Someone wishing to join a DAO pays for a token; the more tokens you own, the more votes you get. In the case of Constitution DAO, $4,000 in Ether purchased 1 million tokens.
The group’s leaders intended to use the money to buy a rare copy of the U.S. Constutition at a Sotheby’s auction on Nov. 18, then turn it over to a formal non-profit run by the DAO’s donors. Fueling their push was an enjoyable enough historical parallel, a group of ordinary people coming together to upend a traditionalist institution.
But the collective didn’t prevail at auction—the document instead went to billionaire Ken Griffin—leaving Constitution DAO wondering what to do next. That’s when things went topsy-turvy. At first, the DAO’s leaders considered keeping the group together and going after some other item. Within a few days, they changed their minds, returning to the original plan if they walked away empty handed from the sale: refund everyone’s money. But giving it back was complicated. Due to the fees involved with converting cryptocurrency to dollars and vice versa, the DAO’s sponsors who contributed a small amount likely walked away with zilch, their capital eaten up in those fees. This was undoubtedly the situation for many: The average contribution was $206.26, the group said.
DAOs represent the newest thing to emerge out of cryptoland, a place already famously beset by murky legal obligations. In 2017, the SEC investigated an earlier DAO and decided it did have jurisdication over it, concluding the group had offered what amounted to securities. But it’s unclear whether Constitution DAO’s leaders sold securities, and they certainly would argue they did not, since the DAO as a non-profit entity rather than one designed to increase in value. (More complicatedly, they have also insisted the purchased tokens represented merely an ability to govern the group, not fractional ownership. By contrast, the DAO investigated by the SEC made no such claims. It did offer fractional ownership of what amounted to an crowdsourced investment fund.)
Any unhappy donors who wanted to sue Constitutional DAO would likely need “creative lawyering,” says Stephen Palley, a Washington, D.C. technology attorney. What about government action? It is not even clear which regulatory agency this would fall to. Maybe the SEC, maybe the IRS, which looks over non-profits. “I don’t know where this would be on any regulator’s radar screen or list of proritites,” says Palley, who partly specializes in advising fintech and crypto companies. “Then again, it did get a lot of media attention.”
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Regardless of the DAO organizers’ intentions, a portion of the token holders are certainly treating them like securities. An enormous secondary market has bubbled up with roughly $100 million in daily trading volume over the last week. Their price has risen as much as 3,700% in the past week, though it has sank in recent days. On Tuesday, they fetched a price correspending to only a 1,400% rise. The tokens’ price on the exchanges is entirely disconnected from their fundamental value, which hasn’t changed from the 1 Ether to 1 million tokens offered by the DAO.
Cryptocurrency at its core seeks to stick it to conventional authority. Constitution DAO certainly sought the same and, nobly, tried to avoid another defining characertistic of the space, the purely speculative frenzy that have turned things like Dogecoin into assets with hundreds of millions of dollars in market value. (As it stands, the Constitution DAO tokens are collectively worth about a half billion.) But Constitution DAO’s inability to escape the same conjectural fate is an uncomfortable comment about the difficulty in navigating cryptocurrency, which remains a financial frontier land.
“The Constitution DAO token is being turned into the latest meme, this living, breathing thing onto itself,” says Yossi Hosson, cofounder and CEO of Metaversal. Hosson’s firm collects and invests in blockchain companies and cryptoassets, primarily the digtial collectibles known as NFTs, and put $1 million into Constitution DAO. He has taken a refund, receiving almost all of the money back, a few hundred of dollars in fees insequential to a seven-figure sum. “That’s the beauty of this technology. It’s messy, it can appear chaotic. But those are features, not bugs.”
“Maybe a new leadership team can emerge, who are holders of the token and say, ‘Let’s reinvigorate this community and fund this next mission,’” Hosson says. “Though I don’t know what that mission should be or who those people would be.”
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Author: Abram Brown, Forbes Staff