7 Up: An Interview with…Andrew Hinkes
This is the first in a series spotlighting prominent people in the blockchain and digital currency communities.
Andrew “Drew” Hinkes is a Partner at Berger Singerman LLP’s Miami office, where he practices commercial litigation, with a focus on representation of court-appointed fiduciaries, and litigating technology-related disputes. Drew is a prolific writer, blogger, and speaker on topics related to bitcoin, blockchain, and smart contract innovation. Prior to practicing law, Drew worked as a computer consultant and in continuity of business and technology audit capacities for Citibank.
BlockTribune.com: What do you think of the 20 exchange consortium’s decision to list Bitcoin Unlimited separately?
Andrew Hinkes: I think that Bitcoin Unlimited is not going to ultimately prevail, but to the extent that some think that it will, I can’t see the fork happening right now. So I don’t think that the decision to list it separately is going to amount to very much. My understanding is that Bitcoin Unlimited is backed by Roger Ver, who has considerable financial resources available to him, and that he’s going to make an effort to push it. So needless to say, everyone’s going to ask around and try to figure out if this happens, how will it be handled? The response was what the response was, but ultimately I don’t see a tremendously successful effort.
BlockTribune.com: Is the hard fork inevitable?
Andrew Hinkes: I see bitcoin going one of two ways. If the community zeitgeist suggests the people do want to use bitcoin as a transactional currency, then eventually one suspects the volume of transactions would require some sort of change, and a hard fork will be needed unless there is a way to do that without a hard fork. If the community decides that people want bitcoin to be a transactional platform, then a fork may be inevitable. But users of bitcoin can also decide that bitcoin is not best used to buy your daily coffee, and in that case, we really don’t have an issue with size. Because if it’s used more as a reserve currency or as a trading asset, you may not have a need.
BlockTribune.com: What effect is the China crackdown having on digital currency?
Andrew Hinkes: It’s unclear right now, because there are so many other interesting factors that are working to affect the price. Generally speaking, as China goes, bitcoin goes with it. But between the Bitcoin Unlimited, the recent market activity anticipating the ETF, the impact of the ETF not being granted or permitted, and then what looked like an influx of capital into bitcoin and into a lot of the other crypto assets besides for bitcoin, it’s unclear how much China is driving. But make no mistake, if China has a significant adverse event, I think bitcoin will move with it.
BlockTribune.com: Will the Securities and Exchange Commission change its mind on bitcoin?
Andrew Hinkes: Why does anyone need to change the SEC mind on bitcoin and crypto currencies? The SEC job is to regulate securities, and any person who has taken a basic securities class in law school or done a bit of Googling can find the Howey test and try to apply it to these assets. Generally, they don’t fit. But the Howey test itself is not definitive. The SEC has repeatedly had opportunities to regulate bitcoin like a security, and with the exception of when bitcoin is used as part of a Ponzi scheme or another sort of financial arrangement that would otherwise fall into the SEC jurisdiction, which could be bitcoins or pencil sharpeners or bottles of whisky or anything else, otherwise the SEC has backed off.
In my view, based on my understanding of these crypto assets, that’s probably the right approach for the SEC. With respect to the ETF, the issue became the ability to open trading of the ETF to people who are used to having a certain level of certainty as to what the assets they’re investing in are and are not. One of the things that the SEC requires of the ETF is that the underlying market for the commodity that underlies the ETF has to be able to be monitored in a way so that the SEC can determine whether there is price fixing, tampering, or other anti-competitive acts occurring and investigate it. And what the SEC said is, “There is no single place where the majority of bitcoin changes hands, so we cannot effectively enter into an agreement. But we can make sure that nobody is price fixing.” In my view, it sounds like the SEC kind of understands bitcoin very well.
A lot of bitcoin moves off exchange, a lot of bitcoin moves in non-public forums, and a lot of bitcoin moves between business people and not on publicly available websites. So it helps me that the SEC totally understood what was going on, and from my viewpoint, the ETF would have been cool. But if you are afraid of bitcoin security, and you don’t want to get into the minutiae, and you still want to get some financial exposure to bitcoin, go buy some GBTC that’s traded, I believe, on the NASDAQ.
So, to me, the ETF was a hype event. It drove a lot of attention to the space. Big picture, I don’t think the SEC got anything wrong there. I think they accurately applied their tests. They looked at the issue of the ability to surveil the market and share information. They said, “There isn’t yet a sufficient market, so therefor we’re not able to, under our rules, to permit this sort of investment to be made available.”
BlockTribune.com: Has the public view of bitcoin changed in the last six months?
Andrew Hinkes: Sure. I think that the public view of bitcoin is increasing in its visibility, and increasing in the perception of its permanence. The more reporting there is about bitcoin that is not an exchange getting hacked, the more positively or robustly bitcoin is going to be viewed. I think that if you study the space at all, you’ll see the rush of money both from venture capitalists and from established market players, and from banks, and from consortia of these people continues unabated. So, from the investment community standpoint, there certainly is a continuing high visibility and a continuing desire to innovate in the space. With respect to alt-coins, which I kind of prefer to call crypto assets, I think that there is an even higher visibility than there has ever been for a couple of reasons. One is that what used to be a term called alt-coins, which was basically a crude rip-off of bitcoin with one or two minor aspects altered. They are no longer the dominant non-bitcoin crypto asset. There’s a lot of novelty, and new ideas, and new concepts that are being offered.
You see ethereum with the idea of creating a blockchain that permits applications to be run on top of it. You see Dash, you see Monero and Z-Cash, which have fundamentally different privacy enhancements and privacy-related features than these other coins. So you’re starting to see things that are crypto assets that are meaningfully distinct from bitcoin versus what were sort of called alt-coins before, which were kind of crude copies with some minor deviation from what bitcoin is or does. With respect to visibility, a lot of businesses have decided that they wanted to experiment with building on top of blockchains, and Hyperledger has been trying to create platforms where you can sort of cobble together your own blockchain and choose from different functional aspects from what a blockchain is to make your own.
A lot of businesses are choosing to build their platforms on ethereum. That has been a really good event as far as raising visibility, and if anybody follows the trade markets, there has been tremendous appreciation against bitcoin in the value of the other crypto assets. So I think that the visibility is rising, and I’ll just note that despite the fact that companies are very aggressively developing on ethereum, some of the ethereum developers have publicly said that this is charitably beta software that is not robustly tested, in that people should not expect the same polish that you expect out of well-crafted commercial software, which I thought was a very responsible thing to say. The crypto asset and bitcoin community tends to be an echo chamber, and we hear our voices back at us and we hear other people parroting what we seem to say and think and it’s nice to hear somebody within the community step out and say, “Let’s get back to the level and realize that we are still building things here and that there should be some expectation that there is going to be trial and error involved.”
BlockTribune.com: If you were put in charge of the digital currency world, what changes would you put in place through your first hours on the job?
Andrew Hinkes: So I’m a trial attorney. I am a partner in my firm. I’ve been a courtroom lawyer for the past 11-12 years, and a lot of time I see people hang with their own words or hoistedon their own petard. I look at the things that people in the crypto asset world say versus what they do, and I look at the actual impact of their actions, and I’m thinking specifically with respect to ICOs or initial coin offerings, I see people who have representations made in writing about what their ICO is and then they go on Reddit and say something totally different, and there is a lot of ambiguity in that space. So I would perhaps first teach the issuers of ICOs to stop saying things that contradict their written representations and stop creating ambiguities about what they’re doing. Because ultimately, if the SEC decides that it wants to start investigating ICOs as issuances of securities, as a lot of smart folks think that they are – there is another group that thinks that they aren’t – there are consequences to their statements.
The second thing I would do is I would change ICOs so they would function less like securities. Again, people love ICOs because it’s a rapid way to raise money for a project. But there is also a lot of lingering uncertainty and risk out there.
The third thing that I would do is I would find somebody who is willing to insure a crypto asset exchange. We all take for granted that when we put our money in the bank that it is going to be there, and even if the bank goes upside down, as long as you have less than $250,000 dollars in your federally insured depository institution, you’ll get your money back even when that bank fails.There is no such thing in the crypto asset world as an insured exchange, and so when exchanges get hacked like Mt. Gox, people are out of luck, and they maybe look at lawyers.
Bitfinex did something novel that would be issuance of something, essentially a debt token, that functioned as a release of claims to the extent that it was traded, which allowed them somewhat amazingly, in my view, to create “debt” out of thin air, issue it to people, procure waivers by them selling those assets to other people, and if I’m them, I eventually buy up all of my own debt at a fraction of what I owe people, and hopefully they were betting that the assets they had left would continue appreciating, people continue to pump money into it, and ultimately, I think that they probably made out okay, and those who are harmed in that hack are somewhat close to whole. But nobody would have to jump through these contorted hoops if the exchanges were insured.
The last thing that I would do is either ban the troll boxes or just teach people not to engage in hyperbolic pump and dump kind of discussion. Because ultimately, you get people who don’t really know what they’re doing, and pump people to raise the price of some sort of less-known crypto asset, and then the price will surge, and there will be a bunch of momentum investing, and then as soon as the pump hits a certain level, a large shareholder will dump it. A lot of people will get turned off from the fact that a lot of these crypto assets look like just momentum investments, and pumps and dumps and scams.
I think that you can do an alt coin or a crypto asset that isn’t bitcoin without it being a scam. So I would try to train people to maybe not engage in pump and dump behavior, and not unnecessarily hike stuff to each other.
BlockTribune.com: So, last question; if the bitcoin blockchain was a baseball game, what inning are we in?
Andrew Hinkes: If the bitcoin blockchain was a baseball game, we are in the top of the third. If the crypto asset community was a baseball game, we’re in the middle of the second.
