In 1913, H.G. Wells wrote “The World Set Free,” a chillingly prescient set of predictions about the development of technology.
Published in early 1914, this slim volume called it exactly right on the coming dominance of aircraft in warfare, the ways armies would adapt (or not) and even some of the geopolitical implications. Most astonishingly, Wells also predicted that atomic bombs would soon be dropped from the air on civilian populations – and that this would change everything.
As we grapple with the potential future of crypto-tokens and related developments, Wells’ volume – and particularly the way he thought about the future – bears closer consideration.
The remarkable point about Wells’ reasoning is that he jumped directly from the fairly rudimentary pre-World War I knowledge of radioactivity and atomic structure to the idea that within this science lurked an explosive device of devastating power. In retrospect, this might seem obvious, but it was not until almost exactly 20 years later that a physicist even conceived of exactly how a chain reaction might take place.
Wells was wrong, of course, about all the details. Anyone who imagines the future of technology will necessarily mess up on all the small stuff. The more interesting question is: if we understand the bigger shifts, can we predict at least the direction of future change?
And – much more difficult – if we can see where this new breed of digital, blockchain-based tokens might lead or what they could become, could we glean any insight into when big things might happen?
What we do know is that one feature of this technology is already triggering a societal and economic shift before our eyes: initial coin offerings (ICOs). While it will it take some time, if ever, before this technology’s advocates realize their vision for tokens to forge a new system of economic exchange and governance, ICOs are making waves right now.
There is obviously a lot of debate about the precise nature of ICOs, including whether or not they constitute securities offerings in the eyes of the law – which, in the U.S., the SEC interprets and applies in the first instance (subject to legal appeals and political discourse, of course). I’m not a securities lawyer, and I am not here taking a position on this question.
Instead, let’s focus on what promoters of ICOs say they are trying to do by selling digital tokens to the public – and what appears to have caught the attention of investors. While many will describe their tokens not as investments but as pre-sold, negotiable “products” with a utility function that gives the holder access to the system’s services, so far the most disruptive aspect of this idea lies in how it changes the fundraising dynamic.
And on that score, the idea is relatively straightforward: someone will build a technology that could be useful to you and others, and that person would like to prefund that in a way that the value generated by that technology is shared with early users (and others who are willing to provide risk capital at this development stage).
Access to capital for risky ventures is a key constraint both for the development of individual firms and for our economy-wide process through which new technology reaches the market. ICOs offer a more direct route for both tapping and deploying funds, for matching founders with investors. That turns out to be quite revolutionary.
In the 19th century, before there was a boom in industrial development projects, we built a lot of railroads in Europe and the U.S. The legal form varied somewhat across jurisdictions, but every country that made progress in raising capital did so through some form of Joint Stock Company – liability for investors was limited, and ownership shares could be traded in a relatively efficient forms.
Of course, there was madness and also bad behavior during various railway manias. And we learned the very hard way that unfettered competition can lead to some problematic behavior, either in terms of safety (a lot of people were injured or killed by trains in the early days), the concentration of power (e.g., build railway monopolies and jack up prices), a boom-bust cycle (which can even bring down the financial system and have broader deleterious macroeconomic effects).
We responded over the following century or so with various “soft” or institutional innovations that started in the private sector but ultimately acquired the backing of government.
Dangerous behavior was constrained through the award of legal damages and through the protections demand by trade unions. The predatory pricing behavior of trusts was limited by law and by the executive – Teddy Roosevelt’s first antitrust action was against a regional railroad monopoly.
A central bank was created because, following the panic of 1907, no one was confident that purely private mechanisms could prevent collapses in a severe panic, and securities regulation emerged because the consequences of the Crash of 1929 proved so devastating. David Moss’s compelling book on the rise of the U.S. federal government is aptly titled, When All Else Fails.
Seen in this context, how should we see ICOs – joint stock companies, or railroad ventures, or some combination of both? We don’t know yet for sure, but we can see more clearly the problem that is being addressed – it is relatively hard to raise early stage capital, and under the existing venture capital model it helps to be located in one of a few places (e.g., Silicon Valley broadly defined, Boston and New York).