On April 10, CoinGenius held its first virtual conference, Collective Intelligence, during which Ravencoin founder Tron Black, securities lawyer Josh Lawler, and others sat down to discuss Wall Street’s foray into blockchain and distributed ledger.
Tron Black sees different blockchain products evolving on Wall Street. tZero, a distributed ledger company building an alternative trading system (ATS) for which we worked, wants larger issuance models for securities, while there are interests promoting lower amounts.
“I prefer entering from the lower side,” he said, mentioning the Reg CF and the Reg A+ exemptions. Under Reg CF, companies may crowdfund up to $1 million from both accredited and non-accredited investors. Under Reg A+ also has stipulations so the public can invest in private companies.
“Because the digital technology brings the bar down so low, and tracks things so well, you can drop it down so that you can invest $5, $10, and $100 and not start out with issuance at $20,000, $100,000 or a million dollars.”
Technological efficiencies will bring the starting dollar amounts down, and then the laws will have to adapt. When it comes to who can invest in such securities, it will cease to be dependent upon one’s wealth, but one’s knowledge of the subject, says Black.
Josh Lawler wonders what happens when people holding widely distributed assets, but the folks who issue those assets are not necessarily as reliable to keep up their end of the deal. “Particularly, in terms of reporting public information that facilitates trading and things like that nature to a point where, if they’re treated as securities, there’s a problem in terms of Securities Exchange Act of 1934 problem and anybody making a market with them.”
Lawler points out that digital currency is a commodity or property depending on the agency with whom you are dealing. “But there’s no separate use case, the way there would be for different types of platforms.” Ethereum, for instance, being one of them.
“There’s a use case in Ethereum to be money, but it can be used that way, of course, and then that leads to some more confusion,” said Lawler.
Amid the confusion, Lawler sees a trend he likes. “Wall Street, as it were, has figured out that they will want to use digital assets as traditional securities,” he said. “And, if you look at what the consortia are doing, if you look at HSBC or JP Morgan, they’re putting high yield bonds in a couple hundred million dollar runs onto distributed ledger tech. That, in my mind, is a great use of distributed ledger technology.” He wouldn’t call it a cryptocurrency, even though it may be tokenized. It is likely akin to an asset, he says.
One of the reasons Black learned about securities regulations was to make the argument more clear that a token can be a utility. “It can be token that’s representative of a piece of art, or of a building, which may be a security, because it has rents and things like that and they pay out,” he said. “But, it can also be a gift certificate or an hour of my time or anything.”
Black suggests that perhaps things do not need to change so much despite the introduction of tokens as a financial instrument. “What you really need to do is kind of separate the transfer layer––it might be the same as on the spreadsheet and in the lawyer’s office, or it might be the same as the database at the DTCC––from legal aspects, whereas if you say it’s something that represents a share of a company with a dividend.”
Lawler was disturbed to hear from some of the Chamber of Digital Commerce folks that the Token Taxonomy Act didn’t “have a chance in hell” of actually getting passed. The Token Taxonomy Act excludes tokens from being considered securities domestically.
“It’s similar to the Australian approach, which I like a lot,” he said. “You’re a financial product, great, you’re a security; your’e a commodity, great, you’re a commodity; you’re anything else, you’re consumer product.”
He notes that the Federal Trade Commission (FTC) regulates consumer products. “It’s a stretch for them, because they don’t have to deal with things like exchanges and rules of exchanges. If you can’t figure out what these things are in the first place, you can’t regulate them.”
The question is, Can people in the space come up with solutions to adapt the policy and the reasons?
“Look at the Howey test,” says Lawler, “and you see it’s the only thing subjective in all of securities law. Go and try to apply it to the Exchange Act. It works if you actually have an issuer selling your seller. If I am a secondary seller, who exactly is making the contract. What if I say in my subscription agreement, this isn’t assignable? I said it legally can’t have a contract. But, it’s still got those characteristics of being something investable. So, the law doesn’t fit. And I don’t think it’s going to.”
Lawler is a proponent of the ERC-1400 standard, a library of security token standards, each representing a different facet of modeling the lifecycle, trading, and management of securities on Ethereum.
These standards can be combined in ways that reflect the specifics of the jurisdiction and asset class, while still offering interoperability across the ecosystem. These standards are currently divided into the Core Security Token Standard, Partially Fungible Token Standard, Document Management Standard and Controller Token Operation Standard.
“We can force the restriction on it,” Lawler explains.
Watch the discussion: