Reel v. Real, 5 Silicon Vall. 7, 8 (2018)

By Joshua Ruthizer

Spoilers to follow! If you haven’t seen episodes 7 and 8 of HBO’s Silicon Valley, go watch and come back to us!  

Episodes 7 and 8 of Silicon Valley find Pied Piper on the verge of launching the new internet.  Richard is ready to get his Series B investment from his VC backers at Bream/Hall.  However, when Guilfoyle realizes that the price of some Pied Piper computing credits being traded among other start-ups has gone through the roof, he approaches Richard with the opportunity for Pied Piper to launch an Initial Coin Offering (ICO) rather than taking the Bream/Hall’s money.  Richard raises this issue with Monica, who flips out, espouses all the other benefits besides investment capital that Bream/Hall provides (regulatory and legal advice), and asks Richard why he would ask her opinion about an ICO that is essentially a competitor to VC’s everywhere.  Monica sends Richard and Guilfoyle to meet with Russ Hanneman, the arrogant (to put it nicely) and foul-mouthed (understatement) billionaire investor from earlier seasons.  Richard and Guilfoyle meet Russ at a garbage dump, where Russ is paying workers to look for a thumb-drive that contains $300 million worth of cryptocurrency that was accidentally thrown out.  It turns out that Russ lost $1 billion running 36 ICOs, 35 of which failed.  This is enough to convince Richard to take the Series B from Bream/Hall.While Richard is executing the documents, Monica interrupts him and tells him to do the ICO.  It turns out that Laurie wants 70% of Pied Piper’s revenue to come from ads, something that Richard is totally against.  Richard convinces Monica to leave Bream/Hall, come to Pied Piper, and run the ICO. 

All is right with the world, right?  Well, no.  The ICO is a flop, trading at less than $1 per coin.  Also, Jian-Yang, back in China, has figured out a way to run his stolen version of Pied Piper’s new internet and not infringe on Richard’s patent.  After unsuccessful attempts to buy the tech by Gavin Belson, Jian-Yang sells his tech to Yao, a former partner of Gavin and new partner of Laurie.  Laurie and Yao plan totake over the new internet through a 51% attack.  They are manufacturing phones and installing the Pied Piper app on them.  Once they have 51% of the users, they will seize control, re-write the code, and delete the octo-pipers (really a bad name) from the system.  Luckily, Pied Piper discovers the scheme, and after enlisting Gavin’s help, a double-cross by Gavin, a triple-cross of Gavin by Richard, and some unfortunate dancing and use of languageby Richard, Pied Piper is able to add users, retake control of the system, and eliminate the threat from Laurie and Yao.  Finally Silicon Valley fans, Pied Piper is a success, will have to significantly staff up, and is moving into huge new offices.  Oh yeah, and the price of Pied Piper Coin goes up to over $2.

We thought that these two episodes would be a great way to give an introduction to ICOs and cryptocurrencies.  Cryptocurrencies, or crypto, are digital currencies that are not backed by central governments.  Instead, they obtain their value from supply and demand.Cryptocurrencies are also de-centralized.  Rather than centralized recording of transactions (i.e. your bank), every transaction is monitored and recorded by all persons who purchase the currency.  Every new transaction for a cryptocurrency unit (usually referred to as a coin or a token) is recorded on the network as a new “block” on the “chain” of transactions for that coin – hence the term “blockchain.” 

There are over 1,500 known cryptocurrencies out there, many of which were distributed through ICOs.  But investors should be aware, because of the decentralized nature of crypto, and the until-recently lack of regulatory oversight, there is the potential for fraud in the ICO process.  The Wall Street Journal recently examined documents for 1,450 ICOs, and found that 271 of those offerings (which raised more than $1 billion) had red flags and indicia of fraud, including plagiarized investor documents, promises of guaranteed returns, and missing or fake executive teams.The Securities and Exchange Commission (“SEC”) also unveiled a fake ICO to educate investors on just how easy it is to be defrauded.

There is also confusion over whether crypto is a security, subject to oversight by the SEC, or a commodity subject to oversight by the Commodity Futures Trading Commission (“CFTC”).  In March 2018, a federal judge in Brooklyn ruled that they are commodities subject to regulation by the CFTC.  However, currently (May 2018), another judge in the same courthouse is hearing a criminal case where the defendant is challenging the DOJ’s position that the tokens at issue are securities.  The eventual resolution of this question is important as it will determine how, and under what laws, ICO investors can bring claims to recover damages caused by fraud or wrongdoing. 

We hope you have enjoyed our first series of Reel v. Real.  Check back soon for our next series, which will be launched in Summer 2018.