The opportunity calculus for security tokens is different than what I just described. Blockchain-based securities are distinct from the fixed-supply, bearer, store-of-value cryptoassets like BTC, ZEC, DCR, and others.¹

Instead — security tokens, and the trust-minimized contracting environment they operate within, may be best understood as a formatting revolution.

Let’s begin.

The Legal Layer

In the United States, the foundation of contract law and securities law originates out of two principles.

The first? Protection.

Contract law protects the promises we make with others — if we enter into a set of promises with a counterparty, we should be remedied if our counterparty’s promises go unfulfilled.² Similarly, securities law protects investors by providing them with information deemed significant, while prohibiting deceit, misrepresentation, and fraud.³

The second? Incentivizing value exchange.

When rule of law is understood across transacting parties, confidence in the system allows new value to enter, wrapped in legal contracts.

Over the last few hundred years, both contract law and securities law have evolved out of these two principles.

Judges play a critical role in advancing these principles. Under a common law system, when contractual disputes enter our legal forums, judges apply the reasoning used in prior cases to the new set of facts presented in front of them.

We call this system stare decisis⁴ — “to stand by things decided”.

Life is complicated, and so are the promises and obligations that we exchange with others. Leaving complex fact patterns up to human arbiters leaves breathing room for more equitable decisions — especially where the black letters of law may dictate otherwise.

Securities may best be understood as a special kind of contract. Simply, they are a kind of tradable contract for financial instruments — things like stocks, bonds, and investment pursuits.

Like contract law, so too has securities law been carved and shaped over time at the hands of human lawmakers and judges. For example, the Securities Act of 1933⁵ defined the types of assets covered by federal securities law — while simultaneously prohibiting things like deceit and fraud during the sale of them.

A year later, the Securities Exchange Act of 1934⁶ empowered the SEC with broad authority over all aspects of the securities industry, including the power to register, regulate, and oversee entities like brokerage firms, transfer agents, clearing agencies, and our nation’s securities exchanges.

Over time, a rich history of stare decisis has formed around these laws. One of the most famous examples — in 1946, the Supreme Court reasoned that an “investment contract”, a term previously left undefined in the Securities Act of 1933, should be evaluated using a flexible four-part test. We call this The Howey Test.⁷

To recap, we have the underlying rights and agreements that parties make with one another. We have an array of laws written and codified by our legislators — and the principles behind that lawmaking. We have human interpreters of those laws known as state and federal judges. And finally, we have a never-ending book of unique fact patterns that create a lineage of stare decisis in our country.

This is the legal layer.

The Formatting Layer

Throughout history, the legal layer has enjoyed a unique relationship with its corporal counterpart — the formatting layer. Where the legal layer focuses on laws, principles, rights, and remedies, the formatting layer focuses only on one thing:

Optimal formats for the legal layer.

As long as legal layers have existed, humans have sought out the best formats to amplify the law’s underlying rights, rules, and principles. We’ve seen this play out over history.

Let’s take contracts, for example. Under this framework, contracts have naturally gravitated towards formats that (1) better protect contracting parties, and (2) better incentivize the exchange of value — the two driving principles of contract law.

To anchor this in practice, let’s start at contract law’s first formatting layer — the oral contract.

Within the Roman Republic, stipulatio was a legal format created to facilitate binding oral agreements between two parties.⁸ The format required specific words to be stated in order to create “offer and acceptance” of the agreement, in the form of “question and answer”. By not requiring an intermediating scribe to a contract, stipulatio incentivized greater levels of participation in Rome’s economy, while creating sufficient legal protection around the agreement.

Flash forward to today, oral contracts are still deemed a legally enforceable contracting format across the world — a remnant of human’s pre-literate contracting history.

But that doesn’t mean the oral format is optimal for the legal layer.

Today, most oral contracts are ignored by modern contracting parties. Samuel Goldwyn, the 20th century Hollywood executive, once argued, “A verbal contract isn’t worth the paper it’s written on.”

The problem with the oral format? While it’s frictionless to enter into verbal agreements, the format doesn’t lend itself well to evidencing that the agreement was formed — not to mention, the specific terms of the agreement.

As technology improved over time, contracting parties gravitated away from the oral format — and toward formats that better harnessed the principles of its legal layer.

The Written Format

The written format had several “killer features” that rendered it superior to the oral format.

The first feature was durability.

The Code of Ur Nammu (2050 BC), the oldest legal writing on record, was carved on clay tablets.⁹ Importantly, clay’s durable format allowed the code to be read and understood thousands of years after its creation — including rules about tax, perjury, and courtroom procedures. In fact, the code’s unique “if this, then that” structure is credited for influencing much of lawmaking thereafter.

The second feature enjoyed by the written format was the signature and other authentication methods — which helped demonstrate the seriousness of an undertaking by evidencing an individual’s willingness to be held to its terms.

Magna Carta, the peace charter signed in 1215 between King John of England and the rebel barons, was hand written on parchment and signed with the King’s seal.¹⁰ Used in concert with parchment, King John’s wax seal was an important formatting feature used to evidence his intent to be bound — while simultaneously preventing downstream forgeries of the agreement.

The third feature enjoyed by the written format was its distributive power.

In 1439, Johannes Gutenberg optimized the paper making process by introducing the wooden printing press and movable type.¹¹ Gutenberg’s first major project advanced a different kind of legal layer — religious laws. Gutenberg’s Bible sold for 30 florins — a significant price reduction compared with the manuscript Bible, which typically required one year to compose by hand.

A few hundred years later, the first industrial revolution brought new advances in machine tooling, including the creation of the Fourdrinier paper machine (1799).¹² This modern paper machine dramatically reduced the cost of books and paper over the next century, and coincided with the expansion of basic education and the rise of world literacy. In 1820, nearly 90% of the world was illiterate. By 1950, that number had been cut in half.¹³

Armed with a proliferating paper-based format, and with literacy rates on the upswing — the legal layer made significant strides in its dual pursuit of (1) protection and (2) efficient value exchange. These principles were on full display in the famous Ferguson Farm case, Lucy v. Zhemer (1954), heard by the Supreme Court of Virginia.¹⁴

On December 20, 1952, Lucy and Zehmer met inside Zehmer’s restaurant and proceeded to drink significant quantities of distilled spirits. In time, they began to discuss the sale of Zehmer’s Ferguson Farm to Lucy.

Finally, Zehmer wrote on the back of the restaurant’s receipt:

“We hereby agree to sell to [Lucy] the Ferguson Farm complete for $50,000, title satisfactory to buyer.”

Zehmer signed the receipt.

The next day, Lucy hired an attorney to examine the Ferguson Farm title. Once assured title was clear, Lucy wrote a letter to Zehmer asking to close on the deal. Zehmer backed out, insisting that due to Zehmer’s intoxicated state, Lucy should have known the “receipt contract” was written in jest.

The Supreme Court of Virginia unanimously found in favor of Lucy, holding that the circumstances were such that a reasonable person would believe that Zehmer intended to enter into a serious legal contract.

A simple paper receipt, facilitating the exchange of value, and the protection of two individuals’ legal promises — the legal layer had found its best format yet.

Paper’s Weight

Over the next few years, the underlying rights to assets — and the contracts humans made with others to own, trade, and manage those assets — thrived under the written, paper-based format. While oral contracts had allowed for frictionless contracting, written contracts were clearly the superior record keepers (durability), included evidence of a party’s intent to enter (signature/authentication), and by the mid-20th century, could disseminate with far greater ease and less expense (distribution) due to rapid advances in paper manufacturing.

But as trading exploded in the late 1960’s, U.S. markets began to wobble under paper’s weight. By the end of the 1960s, what was once the legal layer’s prized formatting tool — paper — was turning into a nightmare.¹⁵

In the public markets, stock certificates were spilling out across Wall Street — filing cabinets, tables, briefcases. Certificates were being delivered to wrong locations, or failed to be mailed at all — leading to costly mistakes. At scale, other new problems emerged as a result of paper’s format — damage, loss, theft. Between 1967 and 1970, $400 million in lost or stolen securities were reported.¹⁶

Back office expenses increased. Longer hours were required. On the streets, hundreds of bicycle messengers were employed to shuffle paper certificates back and forth between brokers. Eventually, exchanges were forced to close on Wednesdays, just to catch up on the administrative overload.

The paper format was failing in its pursuit of (1) protecting contracting parties, and (2) incentivizing the exchange of value. To match growing demand in the public markets, the legal layer for contracts and securities would need a new formatting upgrade.

The Trust-Dependent Electronic Ledger

In the second half of the 20th century, a new format began to emerge with the development of the microprocessor, and eventually trends in corporate and personal computing. Powered by small electrical circuits that could be turned on or off — the computer hit the mainstream.

Binary code, a computer language consisting of ones and zeroes, allowed humans to communicate with computers by defining how these machines took in information, stored and processed that information, and produced useful computer-readable outputs. Coding allowed for new tools and automated commands to develop into commercial applications.

In 1973, to help remedy the growing number of paper shares transferring back and forth between buyers and sellers on Wall Street, the DTC/DTCC was created to kick off the book-entry method of stock ownership we still use in our public markets.¹⁷

Today, the DTCC manages public market stock ownership as an entry on its electronic/digital database. Securities transactions on each stockbroker’s internal database are later shared, tallied, and reconciled on DTCC’s electronic/digital database.

And for privately held assets? Today, underlying rights to securities are often found in the form of electronically-signed and searchable PDFs on cloud-based storage (Dropbox), or as ledger entries on centrally-operated software (Carta) or spreadsheets (.XLS).

Looking back, it’s clear now that the switch from paper to electronic/digital unleashed tremendous value for the legal layer. Importantly — moving our public and private markets to electronic/digital optimized on the three core formatting features of the written format — (1) durability, (2) signature/authentication, and (3) distribution.

In regards to durability, ones and zeroes stored on databases no longer shared paper’s physical limitations. Unlike written contracts, digital entries could be trivially copied, shared, and saved across multiple electronic/digital databases. For example — after Hurricane Sandy destroyed $39.5 trillion worth of stock and bond certificates held by the DTCC, the firm announced that computer records had detailed inventory files of the damaged stock certificates, mitigating against total loss.¹⁸

For signature (authentication), there was also an important upgrade with the jump from paper to electronic/digital. By linking personal information to digital signatures, the legal layer began to recognize new forms of identity that could bind a contracting party — including things like Acrobat’s digital authentication system, or contracts made by email address. Where the first signature created the ability to codify a party’s intent to enter into a contractual obligation — the electronic/digital signature iterated on this feature by improving its speed, efficiency, and interoperability.

Finally, electronic/digital’s distributive quality also thrived as compared to the paper-based format. By coding legally enforceable content into ones and zeroes, contracts and assets could interoperate with computer-readable systems, and allow exchanges of these financial instruments to clear and settle much faster than ever before.

The electronic/digital database was the perfect format to match the modern realities of securities and contract (1) protection and (2) exchange.

The Trustless Digital Ledger

That brings us to today.

In 2020, much of what we recognize as our global financial system — and the contractual agreements within — have been captured by the electronic/digital format, trading from database to database across the world.

However, one major problem was left untouched during the migration from paper to ones and zeroes.

Trust.

Today, the contracting environment for the world’s financial assets is built on a network of trusted third-party databases, resulting in severe fragmentation for assets and trading around the world.

Owners of securities trust away their assets to electronic databases held by banks (hundreds), broker-dealers (thousands), law firms (tens of thousands) — or leave them idle on segregated cap table software or cloud-based spreadsheets (hundreds of thousands).

And what does a trusted, siloed environment mean for the world’s assets and its markets? It means value extraction, mistake, and inefficiency across all stages of an asset’s lifecycle:

• Costly fees accrued as a result of trading ownership or issuing distributions across siloed databases.
• Costly record keeping, auditing, and reporting services for transactions across siloed databases.
• Costly legal compliance and opinion for transactions across siloed databases.
• Inaccurate shareholder accounting and reconciliation systems.¹⁹
• Inefficient clearing and settlement speeds.²⁰
• Loss of appraisal/voting rights.²¹

As history has dictated over the last three thousand years, the legal layer will continue its inevitable march to locate more optimal formats over time — specifically where formats better pursue the principles of the legal layer.

And so — the terminal format for how securities and contracts are created, traded, and owned? This is a pursuit that will continue in perpetuity. It’s not whether the legal layer will adopt a new format — but what the next one will be.

Today, all signs point to blockchains as the next formatting layer.

In 2008, Satoshi Nakamoto published the Bitcoin whitepaper.²² Nakamoto gamified the double entry accounting process by creating a “third entry” — a dominant record of an event between two transacting parties, accepted as the truth by all parties.²³ Distributed computers all over the world — unrelated to an underlying transaction — were incentivized to provide costly amounts of electricity to power third-party receipt services for any transaction on the Bitcoin blockchain.²⁴ As a result, parties could trust that the transaction was accurately debited and credited, without having to trust their counterparty.

Over time, we learned that this type of data structure could track and store any kind of information reduced to ones and zeroes — including ownership rights to assets covered by a legal layer.

Like securities and contracts.

So — “why blockchain” for securities? Simply, using blockchains will unlock securities from the trusted, siloed, databases of the world — into an environment that enables trustless settlement and contracting.

In the context of the formatting layer, a “trustless” recording format optimizes on the three core formatting upgrades of the “trusted” recording format — (1) durability, (2) signature, and (3) distribution.

Compared to the durability offered by our current siloed system for securities, trustless ledgers offer unprecedented accuracy and record-keeping. Further, a blockchain’s transparency allows problems at both the asset and contract level to be seen and understood quickly — providing issuers, regulators, and contractual parties improved oversight to fight mistake, fraud, and abuse in our asset markets.

For signature (authentication), blockchains improve on the siloed database model by opening the door to a trustless, interoperable network for personal identity — in turn, removing the risk of storing personally identifiable information (PII) in multiple centralized databases around the world.

For distribution, blockchains are also a significant upgrade on the siloed database model. Our current matching and settlement systems are built on weeks/months-long matching periods (private markets) and days-long settlement times (public markets). Trustless ledgers offer the potential for transparent, 24/7, fractionalized, global, near-instantaneous matching, trading, and settlement — for any digitally-wrapped financial right or interest.

In the aggregate, these benefits make the distributed ledger a non-trivial formatting upgrade.

Digital Sovereignty

The formatting upgrade could stop there, and I believe that would be enough to bring the legal layer to its next evolutionary point. But trustless ledgers also unlock a new killer feature for the legal layer.

Digital sovereignty.

In 2018, Collaborative Fund’s Stephen McKeon wrote the following in his piece, The Security Token Thesis²⁵:

“The current stage of security tokens is analogous to broadcasting a radio program on television. We’ve just begun to tap the expanded design space for securities that it facilitates and we just don’t know how it will evolve from where we stand today. It could be a huge canvas for creativity over the next decade…”

I’ve had the last couple years to think about this idea, and I believe digital sovereignty is the heartbeat behind a new design space for financial assets. With digital sovereignty, individuals enjoy stronger ownership over their financial assets — one without siloed intermediation — and an improved influence on the security’s contracting environment over the asset’s lifecycle.

Attorney Gabriel Shapiro may have put this best, in his long-form paper Tokenizing Corporate Capital Stock²⁶:

“The [unique selling point] of blockchain technology is that it furthers the values of individual asset sovereignty by creating the technological predicates necessary for ordinary persons to hold, manage and transact with assets in an environment that is trust-minimized while also being secure.”

Over the last six months, we’ve started to see the earliest signs of how digital sovereignty will power a wildly expansive design space for the future of asset ownership, management, and exchange:

• Blockchain-managed “startups” may stream vested equity to founders, advisors, employees, and investors as it is earned in real time — providing each stakeholder new optionality and sovereignty in how that equity is used upon receipt.
• Securities issuers can provide direct and immutable messages, memos, dividends, voting, information, and marketing across a security’s pool of stakeholders — bridging together consumer markets and capital markets in previously impossible ways.
• Global investors can swap blockchain-based dollars for security tokens representing interests in US-based real estate — and later trade those security tokens on a P2P decentralized platform without requiring an intermediary or human counterparty to contract with.
• Blockchain-based credit facilities may allow security token holders to trustlessly collateralize their tokenized asset in a debt position, and mint a synthetic asset pegged to the US Dollar without requiring an intermediary.
• Blockchain-based decentralized autonomous organizations (DAOs), coupled with legal layer entities like LLCs, can creatively interoperate together in a trustless environment to streamline and improve governance, contractual undertakings, and for-profit opportunities — as a result, improving a number of inefficiencies and inequities that exist within the existing VC model.

These are just some of the earliest experiments highlighting digital sovereignty.

Over time, as more of the world’s assets reduce down to ones and zeroes onto distributed blockchain ledgers, an efficient and trustless global contracting environment will emerge. Humans and computers will paint together across a blank canvas — creating new forms of value, and value exchange, difficult to imagine in 2020.

The legal layer will evolve to accommodate — as will the laws, rules, regulations, and stare decisis wrapped within, better pursuing its principles of (1) protection and (2) incentivizing value exchange in a new open and permissionless formatting layer.

This is the power of digital sovereignty.

This is the formatting revolution.

Derek Edward Schloss (@derekedws) is the Director of Strategy at Security Token Academy (@security_token).

Special thanks to Professor Stephen McKeon (Partner, Collaborative Fund), Gabriel Shapiro (Attorney), and Professor Mohsen Manesh (Professor, UO Law) for their feedback during the construction of this piece.

To stay current on the latest happening across the security token industry, subscribe to the Security Token Stories podcast, and the industry-leading newsletter The Security Token Edge, delivered to your email each weekend.

For more long-form content from Security Token Academy, visit www.securitytokenacademy.com, join the conversation on Twitter @security_token, and jump in to STA’s security token Telegram group at https://t.me/SecTokenAcademy.

Additional Reading

Security Tokens and The Digital Wrapper (Schloss, 2018)

Security Tokens and The Investment Stage (Schloss, 2019)

Tokenizing Corporate Capital Stock (Shapiro, 2018)

The Security Token Thesis (McKeon, 2018)

Traditional Asset Tokenization (McKeon, 2017)

Appendix

¹ Value Capture And Quantification: Cryptocapital Vs Cryptocommodities (Burniske) — https://www.placeholder.vc/blog/2019/4/26/value-capture-and-quantification-cryptocapital-vs-cryptocommodities

² Restatement Second of Contracts — https://www.betterblackletter.com/wp-content/uploads/2019/02/Restatement-2nd-of-Contracts.pdf.

³ The Laws That Govern the Securities Industry (SEC.gov) — https://www.sec.gov/answers/about-lawsshtml.html.

⁴ Stare decisis (Cornell Law School, Legal Information Institute) — https://www.law.cornell.edu/wex/stare_decisis.

⁵ Securities Act of 1933 (Cornell Law School, Legal Information Institute) — https://www.law.cornell.edu/wex/securities_act_of_1933.

⁶ Securities Exchange Act of 1934 (Cornell Law School, Legal Information Institute) — https://www.law.cornell.edu/wex/securities_exchange_act_of_1934.

⁷ Securities And Exchange Commission v. W.J. Howey Co. et al. (Cornell Law School, Legal Information Institute) — https://www.law.cornell.edu/supremecourt/text/328/293.

⁸ Stipulatio (Encyclopedia Britannica) — https://www.britannica.com/topic/stipulatio.

⁹ The Code of Ur Nammu — https://en.wikipedia.org/wiki/Code_of_Ur-Nammu.

¹⁰ Magna Carta (Encyclopedia Britannica) — https://www.britannica.com/topic/Magna-Carta.

¹¹ Johannes Gutenberg (Encyclopedia Britannica) — https://www.britannica.com/biography/Johannes-Gutenberg.

¹² Fourdrinier Machine (Encyclopedia Britannica) — https://www.britannica.com/technology/Fourdrinier-machine.

¹³ Literacy: Our World In Data — https://ourworldindata.org/literacy.

¹⁴ Lucy v. Zhemer (Justia) — https://law.justia.com/cases/virginia/supreme-court/1954/4272-1.html.

¹⁵ The Remaking of Wall Street, 1967–1971 (HBS: Business History Review) — https://hbswk.hbs.edu/archive/the-remaking-of-wall-street-1967-to-1971.

¹⁶ The solution to Wall Street’s 1960s paperwork crisis could also save bitcoin (Quartz) — https://qz.com/370553/what-the-cigar-chomping-schleppers-of-1960s-wall-street-mean-for-bitcoins-future/.

¹⁷ The Depository Trust Company (DTCC.com) — https://www.dtcc.com/about/businesses-and-subsidiaries/dtc.

¹⁸ DTCC finds 1.3 million soaked securities in Sandy-flooded NY vault (Reuters) — https://www.reuters.com/article/us-storm-sandy-securities-idUSBRE8AE02G20121115.

¹⁹ Dole Food Had Too Many Shares (Bloomberg) — https://www.bloomberg.com/opinion/articles/2017-02-17/dole-food-had-too-many-shares.

²⁰ SEC shortens settlement cycle for securities trades (Reuters) — https://www.reuters.com/article/us-usa-sec-settlement-idUSKBN16T1SW.

²¹ Bullish on Blockchain: Examining Delaware’s Approach to Distributed Ledger Technology in Corporate Governance Law and Beyond (Harvard Business Law Review) — https://www.hblr.org/2018/01/bullish-on-blockchain-examining-delawares-approach-to-distributed-ledger-technology-in-corporate-governance-law-and-beyond/.

²² Bitcoin: A Peer-to-Peer Electronic Cash System (Satoshi Nakamoto) — https://bitcoin.org/bitcoin.pdf.

²³ Bitcoin: an Accounting Revolution (Permabull Nino) — https://medium.com/@permabullnino/bitcoin-an-accounting-revolution-40efcb903d7b.

²⁴ Id.

²⁵ The Security Token Thesis (McKeon) — https://hackernoon.com/the-security-token-thesis-4c5904761063

²⁶ Tokenizing Corporate Capital Stock (Shapiro) — https://gabrielshapiro.wordpress.com/2018/10/28/2/

Security Tokens and The Formatting Revolution was originally published in Security Token Academy on Medium, where people are continuing the conversation by highlighting and responding to this story.

By: Derek Edward Schloss | STA Director of Strategy

In the past, colleagues and friends outside the blockchain space have asked about my work researching the intersection of securities laws, digital assets, and distributed networks. It’s a question I struggle to answer—mostly, because I’d like my response to be anchored to something relatable (to them and their work), and I find this difficult to do at our industry’s current stage.

Instead I find myself reciting a summary of the topics I’m writing about at that moment — bleeding edge stuff like sufficient decentralization or advancements across the regulated token economy. Areas that are timely and important today.

Like clockwork — their eyes start to glaze.

Take my parents for example. Sure, they’ll nod and smile. But I know my father would prefer not to hear about security token base layer tradeoffs for the seventh time. My mother has a tendency of circling the conversation back to healthy eating (or if I’m still taking a daily multivitamin).

Security tokens and digital assets are topics my parents should care about — my father’s been a real estate attorney for over 35 years, a paper-based industry itching for a digital disruption. My mother, having emigrated from the Philippines to the U.S. when she was nineteen, understands too well the difficulties of asset ownership and management for many non-U.S. individuals.

So, I find myself asking more and more these days:

What challenges still need to be solved for these conversations to become relatable?

In the coming years, I believe security tokens will radically transform how humans own and coordinate the movement of our value. At a minimum, I think the combination of digitized assets and trustless ledgers will reorganize our private and public markets — removing many of the inefficiencies that plague value transfer today. And once that infrastructure is properly built, I see that same combination leading to more trustworthy (and accessible) systems for individual asset ownership, wherever unrestrained access to the internet exists.

We’re not quite there today. Today, projects across the security token industry are focused on building the foundation for that kind of future — not necessarily the future we like to talk about when we talk about digital securities. At least not yet.

No hype, no fanfare, no leaderboards — just building.

Even if the mainstream hasn’t arrived, the conviction I see from projects across the space is at an all-time high. I hear it each week when I interview guests on the Security Token Stories podcast, and see it when I write The Security Token Edge newsletter each weekend.

A few weeks ago, our team at Security Token Academy reached out to our Corporate Members, a group that includes many of the teams and projects helping build out the digital securities industry. In the paragraphs that follow below, you’ll find their latest thoughts, ideas, and predictions around the future of security tokens— in 2020 and beyond.

The infrastructure build-out continues. Onward.

Question #1— Now that we have a greater information set about how the industry is evolving, what do you imagine the security token industry will look like in 2020?

Dave Hendricks (Vertalo): In 2020, the security token industry will appear — and be — more connected, more compliant, and thus more accessible. The elusive quest for ‘clarity’, with respect to securities law, should mostly come to an end by the close of 2020. The first half of 2020 is going to be dominated by discussions between leading platforms and the regulatory bodies that have maintained their focus on investor protection. As increasingly less skeptical regulators start to provide clear guidance in 2H20 to technology providers and issuers, data management platforms with compliant APIs and attendant data handling mechanisms will come to the forefront. These data management platforms, cleanly integrated with broker-dealers, custodians, and trading platforms, will drive the market forward while providing their joint issuer and investor clients with the confidence to choose a digital path.

Mason Borda (TokenSoft): With SEC registered offerings maturing into the market, we expect that regulatory certainty will provide for greater comfort in entering the market. We have our fingers crossed for FINRA approving a custodian which would provide greater comfort to companies small and large leveraging the blockchain to power their assets.

Jor Law (Verify Investor): I expect that 2020 will see greater momentum of security tokens as early players in the space refine their security token technology. Financial institutions will also have a greater impact in the space as they conduct further test offerings using the technology. The smaller, earlier players risk being left behind if they are unable to work with financial institutions in 2020 and 2021. 2020 will also be a battleground for various blockchains, including blockchains designed primarily for the securities industry. It'll be interesting to see the trends that develop in that regard.

Oscar Jofre (KoreConX): 2020 has to be the year of building TRUST. To gain TRUST, the key will be to bring everyone together and not leave anyone out. The current incumbents in the ecosystem will be in a reactive mode as more providers realize they need to be regulated. They are becoming broker-dealers or transfer agents. The current global incumbents in the private capital markets will begin to emerge with their own solutions, and look to work with providers who are not threatening to take them out of the process — this will be the key to mass adoption globally.

Luc Falempin (Tokeny): We believe financial institutions are now all convinced tokenization will happen. There is mounting pressure on margins for these players, and regulation is becoming stricter and more difficult to follow for these firms. Change is needed and central banks announcing digital currencies will encourage the adoption. We believe it will happen faster than previously expected, and financial institutions will go past the testing phase and roll out some of the initiatives.

Jamie Finn (Securitize): In 2020, the security token industry will continue its march to become a fundamental enabler of more liquid financial markets that are truly global.

Dan Doney (Securrency): We believe that 2020 will see an acceleration of the trend that links incumbent financial service providers with emerging security token firms to tokenize institutional grade assets. We should see tokenization platforms emerge provided by some of the largest technology firms (like Microsoft and Facebook) and issuances from highly trusted investment firms and asset managers.

Saum Noursalehi (tZERO): We believe that you will see an increase in the number of assets that are tokenized as issuers seek to reduce their cost of capital. Tokenization simplifies distribution to investors (globally) and with greater investor participation, more favorable primary issuance terms can be achieved. Additionally, as the liquidity on trading platforms continue to grow, traditionally illiquid assets will benefit from having a trading venue. Moreover, I anticipate investors will increase their holdings of digital assets in 2020. In fact, State Street recently conducted a survey of U.S. asset managers and asset owners, and 38% said that they planned to increase their holdings of digital assets next year. I also believe you will see more partnerships between traditional Wall Street institutions and those that are leading the adoption of digital assets. For example, our partnership with Box Digital Markets (BOX). And lastly, I believe we will have more regulatory clarity on the security token industry as a whole.

Question #2 — What challenges still need to be overcome for security tokens to thrive?

Jamie Finn (Securitize): The key items are having players that everyone is comfortable with from the institutional point of view — specifically you need a way to get digital securities into the dashboards of major banks’ private banking clients. I don’t believe these products are really ready for retail yet for the most part, as they are part of the alternative investment schemes and are less liquid and so they probably don’t suit a retail investor right now.

Dan Doney (Securrency): The biggest challenge is the gap between traditional financial services and the yet-to-develop tokenization markets. The gap remains in terms of market liquidity, user experience, cost structures, availability of high quality assets, and the convenience and trustworthiness of retail investment options. As issuance costs fall to a few basis points and back office reconciliation costs are eliminated, tokenization will compete on price with mature and trusted institutional models — bringing new, trustworthy assets into tokenized markets. In turn, institutional assets that can be easily priced will bring market liquidity. Market liquidity begets convenient transactions. Without these fundamentals, the tokenization industry has yet to achieve exit velocity — but the conditions are right for the breakthrough to begin this year.

Luc Falempin (Tokeny): The distribution side is still a work in progress — there is no exchange or marketplace that has a good number of quality assets listed. Once the distribution side is in place, we will see adoption accelerate across retail and institutional investors.

Jor Law (Verify Investor): We are already seeing adoption in both retail and institutional. It’s important to note the difference between the sell side and buy side. Retail “sell” side is seeing a fair amount of adoption, but retail “buy” side is lacking. Institutional quality deals will see a more balanced adoption of both the sell side and buy side. 2020 will see increased interest across the board, but will not likely be the breakout year.

Oscar Jofre (KoreConX): Our focus should be on infrastructure. We need to include everyone (lawyers, auditors, transfer agents, broker-dealers, media, marketing firms, newswire, incorporation providers, secondary markets, researcher) who are already providing these capital activities to companies.

Saum Noursalehi (tZERO): We are a proponent for progress and change in capital markets, and we are pushing to advance regulatory laws. However, this change will be incremental until it tips and will require complying with existing laws and regulations, while in parallel working on regulatory reform. It is assuring to see that the regulatory landscape is progressing with the recent announcement that the SEC is proposing to update the definition of what qualifies as an accredited investor, which will increase investor access to new investments.

Mason Borda (TokenSoft): We believe there needs to be an FINRA registered custodian that is compatible with blockchain-enabled securities. We see that as the final piece of infrastructure that needs to come into place to allow the market to flourish.

Dave Hendricks (Vertalo): Only four things are holding back the security token industry — regulatory clarity, interfaces, issuance cost, and offering quality. Just those things. Most participants will agree that regulatory clarity has been the greatest challenge to overcome, and that won’t change in January. Even once the regulators agree on standards and acceptable approaches, the security token technology providers will still need to refactor themselves and their APIs to comply with the current POV of regulators. User interfaces and experiences are a major deterrent to adoption. In order for this industry to take off, it needs to stop asking new participants to master arcane wallet technologies and private keys. Security tokens need to be as simple as email, Facebook, or Coinbase. The cost/benefit ratio related to issuance needs to improve — asking an early stage company to spend $100k to produce a token prior to a fundraise makes absolutely no sense when that same startup can spend $25k or less on a Reg D 506(c) offering. Asking that same issuer to spend $30k a year to manage their stakeholder registry when Carta can handle most of the same data for $10k is also a major deterrent. Total cost of ownership cannot exceed the benefits from any technology if it expects to scale and gain mass adoption. So issuers and offerings need to improve dramatically if security token technology platforms are to survive on revenues — and not investors’ funding. Once we can solve for regulatory, interface, and economics, the issuers and the revenue will follow.

Question #3 — Let’s talk assets. What category of tokenized assets will have the most traction this year?

Jamie Finn (Securitize): Real estate.

Luc Falempin (Tokeny): Real estate will continue to be the most popular asset tokenized in 2020 — debt instruments and investment funds do not lag far behind.

Mason Borda (TokenSoft): We expect every traditionally serviced asset to move onto the blockchain, and the category that will gain the most traction might be the simplest — such as tokenized equity or LP interest in a fund.

Dan Doney (Securrency): We’re excited about the tokenization of publicly traded assets. The disclosure requirements, strong pricing signal, and existing liquidity of these assets will bring much needed liquidity to the security token markets. These assets, backed by some of the most known and trusted financial service providers, will create the liquidity and trust needed for the foundation of the security token industry.

Saum Noursalehi (tZERO): In the near term we expect real estate to be a leading asset class — followed by funds and other private companies.

Dave Hendricks (Vertalo): The asset class that makes the most sense for regulated tokenization is real estate — not only is real estate the largest asset class by category, it is also suffers the biggest problems related to data management and liquidity. The team at Vertalo is very excited to focus on the real estate vertical in 2020 and will be announcing some big initiatives in this arena including a close partnership with Prime Trust where we will be digitizing billions of dollars of private REITs using a new platform that we are jointly developing called TREATs.

Oscar Jofre (KoreConX): Tokenized equity and debt — more complicated derivatives may soon follow. There is a well-established (though complex) securities regulation and corporate law in almost all jurisdictions. Tokenization of other assets — such as fine art — may take longer because the questions of trust, custody, and protection need to be answered first.

Jor Law (Verify Investor): Real estate has already established itself as a category with significant traction and should continue to see increased traction in 2020. Institutional debt and bond offerings will also see greater 2020 traction.

Question #4— Zooming out, what are you most excited for this year?

Oscar Jofre (KoreConX): Building trust, educating, and providing clarity to the market — the global landscape is highly fragmented, and looking to be glued together where no company or provider is left out.

Luc Falempin (Tokeny): We’re looking forward to discovering what happens with digital currencies — as these will help drive the industry forward.

Jor Law (Verify Investor): A greater amount of use cases in tokenization across the board — with closer integration between different market participants.

Dave Hendricks (Vertalo): I’m looking forward to working with all of our partners across this industry, and the regulators, to bring user friendly, cost-efficient, compliant, and reliable technology to the issuers and investors who have been waiting on the sidelines while we got our collective act together.

Mason Borda (TokenSoft): We’re very excited to raise awareness and participation to help move the world’s assets on to the blockchain — we will continue to educate the market and regulators domestically and internationally.

Jamie Finn (Securitize): Starting to see high quality deals move to become tokenized without the tokenization being a feature. In 2020, we will see growth in great assets being on-chain all over the world, and we will see increased liquidity as the current asset pools age and have more of a vintage.

Saum Noursalehi (tZERO): We are excited about the launch of the first regulated national security token exchange through our joint venture, the BSTX, in partnership with BOX. With BOX’s experience in building and operating a sophisticated securities exchange and tZERO’s industry leading blockchain technology, we have brought together our organizations’ combined expertise to fundamentally improve the marketplace for digital securities.

Dan Doney (Securrency): We’re excited to work with regulators who are embracing participants in the industry who seek to augment regulatory compliance rather than avoid it. We’re also excited for intuitive user interfaces that demystify blockchain for investors, issuers, and everyday retail participants. Coupled with high quality yield bearing token issuances and efficient global transactions, 2020 will finally be the year we unlock the accessibility which fuels mass global adoption — the dream of blockchain enthusiasts for over a decade.

Derek Edward Schloss (@derekedws) is the Director of Strategy at Security Token Academy (@security_token), the leading educational platform for the security token industry.

To stay current on latest news and research, make sure to sign up for STA’s industry-leading weekend newsletter, The Security Token Edge, delivered right to your email inbox each Saturday, and subscribe to STA’s Security Token Stories podcast on your favorite podcast aggregator — including Apple, Spotify, and YouTube.

For more content from the security token industry’s leading educational platform, visit us online at Security Token Academy, join the conversation on Twitter @security_token, and jump in to our industry-leading security token Telegram group at https://t.me/SecTokenAcademy.

Legal Disclaimer

Security Token Academy is the leading platform for educational information about security tokens and digital securities. Security Token Academy is not a registered broker-dealer or investment advisor. You cannot purchase or invest in tokens through our website SecurityTokenAcademy.com. We do not offer investment or purchase advice, nor do we endorse or recommend purchases or investments in tokens of any kind (security tokens, utility tokens, network tokens, etc.). In addition, Security Token Academy does not tell you if any purchase or investment is suitable for you. All investments entail risk, and investments in start-ups as well as security tokens involve a potentially greater risk. This interview is not investment advice — it is strictly informational. Do not trade or invest in any tokens, companies, or entities based upon the information in this interview.

Security Token Predictions (in 2020) was originally published in Security Token Academy on Medium, where people are continuing the conversation by highlighting and responding to this story.

The Digital Wrapper | Mitesh Shah

Derek Edward Schloss (TDW): Mitesh, great to sit down with you on STA’s The Digital Wrapper. Let’s start off by hearing a bit about your pre-blockchain background, and how you found your way into the space.

Mitesh Shah (Omnia Markets): Before jumping into the blockchain space, I was a student and received my MBA after a five-year accelerated program at St. John’s University, Tobin College of Business. I started working as a financial and equity analyst at SKN Capital Management LLC where I managed several portfolios. In my role, I would come up with different portfolio strategies, and eventually started using — and became certified for use with — Bloomberg Terminal¹. I ended up becoming very passionate about the blockchain and crypto space, and over time, I wanted to bring my expertise as a financial analyst into blockchain and cryptocurrency and carry these same tools with me. What made this even more exciting were the advances in artificial intelligence² and machine learning³ abilities. I started exploring new ways to apply these new abilities to the data analytics that I am familiar with.

Derek Edward Schloss: Did you find that some of the tools weren’t as strong in the cryptoasset space compared with those in our legacy asset markets?

Mitesh Shah: Exactly. There really was no similar tool to do the research I wanted to conduct. A lot of analytics platforms, while having come a long way, still have a ways to go. For example, I found that the information regarding price fluctuations were often displayed on historical price charts, with no information pertaining to potential causes or precursors, or explaining why the prices themselves fluctuated. I wanted to find sources where we might pull that information from — build teams around this. That led me to create Omnia Markets.

Derek Edward Schloss: Understood. Omnia Markets is described as a crypto analytics platform. Can you walk me through the vision of Omnia Markets, and the specific problems your team is trying to solve?

Mitesh Shah: Omnia Markets plans to become a one-stop platform that provides cryptocurrency-based data, proprietary and non-proprietary analytics, and industry information and trends to both individual and institutional investors. Besides providing the typical financial ratios that you can get at sites like Yahoo Finance, for example, we’ll also provide actionable proprietary analytics based on user-defined parameters — backed by our artificial intelligence and machine and predictive learning⁴ algorithms. Our goal is to provide reliable and pertinent information specific to the crypto industry. Additionally, we plan on having hub locations in several areas of the world, including alliances and partnerships, and intend to provide unmatched data and information for use with our proprietary machine learning program. What is also unique to our approach is how we plan to develop our own journalism and news reporting division that will provide our own generated content.

Derek Edward Schloss: The idea of building a global physical presence in this industry is always interesting to me, given some of the global benefits enabled by blockchain-based assets. How are you thinking about regulation as the platform starts operating across a variety of jurisdictions? Do you hope that some of the cross-border regulatory expertise you obtain will eventually translate into your products?

Mitesh Shah: Definitely. One of our goals is to become a leading voice within the industry — today, we’re actively participating in legal landscape conversations, specifically here within in the U.S., and we want to expand that participation around the world. We want to help contribute to the creation of legislation that encourages growth for the industry, while also promoting reasonable and appropriate safeguards for participants within the industry. To that point, being able to break this down in an easy to understand language for our consumers is important to us, and something that we’re really focusing on. We aim to provide all kinds of industry information so that any user can come in, get a handle on the industry quickly, and start to understand what makes the industry move.

Derek Edward Schloss: It would be great to unpack how the Omnia platform works — let’s say a new client starts using the platform. What might the customer journey look like? What’s a potential idea or data point they may be researching, and then how would Omnia play a role extracting and filtering that data into a package that a customer might be looking for?

Mitesh Shah: When it comes to any of our users, whether it is institutions or just everyday users, we offer different tiers. For starters, we offer a basic tier — a free tier where they can receive basic information on the industry. In the simplest example, an individual or institution may want to figure out a certain kind of cryptoasset to build into their portfolio — immediately, they can use Omnia Market’s reporting platform to begin analyzing and comparing different assets, filtered by their own parameters to match their investment strategy. They can also go to each asset’s basic data page to really understand the asset itself. In addition to the more basic historical price charts, we’ll combine these with other algorithms and tools to allow users to understand why a crypto price might be moving the way it has. As they go throughout the platform, they can start getting more hands-on, with reports and cryptoasset comparisons based on unique parameters and strategies.

Derek Edward Schloss: What might some of Omnia’s higher tiered products look like?

Mitesh Shah: We ramp our tiers all the way up to specialized and customized tiers for institutions. For certain categories of institutional investors, they’ll be able to create AI and ML-backed reports based on their own specific parameters and criteria. In addition, other customers might want a more customized product, which could include a dedicated in-house team at Omnia Markets. The great thing about blockchains is that they’re something you can easily access. When it comes to sourcing data, the blockchain is one of the major sources we rely on, among other key sources, that makes our platform unique. With that said, the industry has to be very careful with this information — recently, CoinMarketCap⁵ came up with a new type of filtering to take out the inaccurate information we might get from blockchains. Similarly, we want to make sure that all the information we’re getting is properly vetted and not manipulated in any way.

Derek Edward Schloss: Interesting. As it relates to pulling manipulated data —what is the role of things like artificial intelligence, machine learning, and predictive learning? How might some of these concepts help filter out some of the bad data one might get when pulling raw information from these transparent blockchain ledgers?

Mitesh Shah: Yes. Historically, we’ve seen AI and ML used in different platforms in the cryptocurrency industry, like using these types of tools to scan social media to come up with sentiment around a specific cryptoasset. Similarly, AI is starting to help companies and analytical platforms like Omnia Markets comb through the vast amount of data on blockchains and from our other sources. These concepts help eliminate unnecessary or inaccurate data — a data fog — allowing us to show more relevant and reliable information. So while some firms use things like AI to measure overall market sentiment, it doesn’t actually explain what causes prices to fluctuate. In other words, it’s a great first step, but it’s unable to answer the underlying cause behind the measurable sentiment.

Derek Edward Schloss: I think I understand what you’re saying— today, AI and ML for something like sentiment analysis⁶ might help explain the effects, but not necessarily the causes of asset movements.

Mitesh Shah: Yes. With Omnia Markets, the platform will be able to generate reports based on user defined criteria that provides insight into the likely causes and trends for price movement. With that said, this isn’t something that can be done overnight — it’s going to take time to develop. Our in-house analysts will need to make sure that the data being output has a high degree of accuracy. Eventually, we’ll take that data and combine it with AI and ML to generate insights from news and events around the world. It’s going to be an ongoing process starting from day one, when we first release the platform. Around year three or year four, we predict the full feature set will be built out.

Derek Edward Schloss: Blockchains are a ledger innovation, and that innovation comes with some unique transparency benefits that are still fairly untapped. I think the industry is really just scratching the surface with how the extraction and curation of transparent data might look in the future. Right now your team is focused on cryptoassets, but eventually, do you imagine your clients will expect to have the same information pulled for blockchain-based securities and security tokens?

Mitesh Shah: This is something that we’ve definitely thought about, even well before we decided to launch our own security token offering, or STO, with the team at Securitize. Right now, our initial strategy is to tackle existing cryptocurrencies in a top down manner based on market cap and volume traded — this is where the majority of participants are located. So, whether it’s Bitcoin, Ethereum, Ripple, Litecoin — we’re going to tackle it from the top down and provide information to as many people as possible. As we move forward and we start to go down the list of cryptocurrencies, we’ll also start tackling security tokens. And we’ll do it in a unique way on our platform, leveraging AI and ML algorithms — in addition to traditional information.

Derek Edward Schloss: As it relates specifically to blockchain-based securities, what are some of the on-chain analytics you think might be important to pull in the future?

Mitesh Shah: Today, a majority of security tokens are either equity-backed or revenue-backed. Looking at historic company performance will give us an insight into how that token might perform in the future, as well as if that security has any other additions built in — like dividends. All of this information is going to be key to investors. We’ll be able to pull any financial information, provide traditional ratios, and eventually, investors will compare that information against other security tokens, or other traditional crypto tokens like Bitcoin.

Derek Edward Schloss: I’m always interested to hear — why did your team decide to fundraise using a security token vehicle?

Mitesh Shah: I’m passionate about the industry, and the benefits of this industry — I considered a traditional offering, but I think it’s important to stand behind this technology. I also like the idea of building in different features into the token. In other words, while our investors have the ability to start trading the security tokens once the one-year lockup period ends, the tokens can also be used to purchase different subscription tiers on our platform. The ability for the token holders to trade after the lock-up period provides flexibility that an equity raise wouldn’t provide without taking the company public. That imposes a significant burden on the company to become public before it is quite appropriate. And yet, the token holders will also have the ability to use the tokens as currency to buy our products and services, something an equity holder would not be able to do. Moreover, our planned distributions based on profits to the token holders also provide an annual rate of return that would be difficult to structure in equity raises after several rounds of fundraising. I believe the STO, in full compliance with the SEC regulations, provides significant benefits to us and the investors.

Derek Edward Schloss: Your security token technology is powered by the tokenization team at Securitize — can you share what it’s been like working with them, and why you decided to move forward with that team?

Mitesh Shah: There are several companies working on this type of technology — I reached out to Securitize, and Jamie Finn, the Securitize Co-Founder, reached out to me on social media to start discussing our strategy at a high level. They have been absolutely amazing to work with, and have really assisted in the development of everything we’re looking for as far as technology goes. They’re also implementing their digital security protocol, the DS protocol, into our smart contract which gives our security token an additional layer of security when it comes to following securities laws.

Derek Edward Schloss: Mitesh — wrapping up, how do you think about the cryptoasset space evolving over the next year? What are some areas you’re excited to follow?

Mitesh Shah: You are very right when you said we are just scratching the surface here. There are a number of industries really starting to get involved with blockchain technology — to name three, healthcare, traditional finance, and real estate. We’re starting to see these industries use blockchain-based technology to address existing issues. As this starts to increase, we’ll continue to see new evolutions in how this technology can be applied to existing problems. I believe in a few years blockchain technology will be mainstream. And as the tech evolves, so too will the information and analysis. That’s where I’m most excited for Omnia Markets — to provide information for the industry, and to be part of that evolution.

Derek Edward Schloss: Mitesh, on behalf of Security Token Academy, thanks for joining me on The Digital Wrapper.

You can learn more about Omnia Markets and Mitesh Shah at the following links:

Website: https://www.omniamarketsinc.com/

LinkedIn: https://www.linkedin.com/company/11555407/

Twitter: https://twitter.com/OmniaMarketsInc

Facebook: https://www.facebook.com/OmniaMarketsInc/

Instagram: https://www.instagram.com/omniamarkets/

YouTube: https://www.youtube.com/channel/UC9SbQZ9vXoyfsug-5J-NbLg

Mitesh Shah (LinkedIn): https://www.linkedin.com/in/miteshshah93/

Mitesh Shah (Twitter): https://twitter.com/MiteshShah93

Did you enjoy The Digital Wrapper? Have suggestions for future guests? Clap 50x, leave comments below, or email / tweet Derek Edward Schloss, Security Token Academy’s Director of Strategy.

For more content from the security token industry’s leading educational platform, visit us online at Security Token Academy, join the conversation on Twitter @security_token, and jump in to our industry-leading security token Telegram group at https://t.me/SecTokenAcademy.

Footnotes

¹ Bloomberg Terminal enables professionals in the financial service sector to monitor and analyze real-time financial market data and place trades on its electronic trading platform.

² Artificial Intelligence (AI) is an area of computer science that emphasizes the creation of intelligent machines in areas like speech recognition, learning, planning, and problem solving.

³ Machine Learning (ML) is the scientific study of algorithms and statistical models that computer systems use to perform a specific task without using explicit instructions — instead relying on patterns and inference. It is often referred to as a subset of artificial intelligence (AI).

⁴ Predictive Learning (PL) is a technique of machine learning (ML) in which an agent tries to build a “predictive model” of an environment by trying out different actions in various circumstances.

⁵ CoinMarketCap is a website that provides cryptoasset market capitalization information and charts.

⁶ Sentiment Analysis is a way to evaluate written or spoken language to determine if the expression is favorable, unfavorable, or neutral, and to what degree.

Legal Disclaimer

Security Token Academy is the leading platform for educational information about security tokens and digital securities. Security Token Academy is not a registered broker-dealer or investment advisor. You cannot purchase or invest in tokens through our website SecurityTokenAcademy.com. We do not offer investment or purchase advice, nor do we endorse or recommend purchases or investments in tokens of any kind (security tokens, utility tokens, network tokens, etc.). In addition, Security Token Academy does not tell you if any purchase or investment is suitable for you. All investments entail risk, and investments in start-ups as well as security tokens involve a potentially greater risk. This interview is not investment advice — it is strictly informational. Do not trade or invest in any tokens, companies, or entities based upon the information in this interview.

The Digital Wrapper | Mitesh Shah — Omnia Markets was originally published in Security Token Academy on Medium, where people are continuing the conversation by highlighting and responding to this story.

The Digital Wrapper | Wave Financial

Derek Edward Schloss (TDW): Ben, it’s great to sit down with you on Security Token Academy’s The Digital Wrapper. I’m looking forward to learning more about your products and work over at Wave Financial. I always enjoy hearing about pre-blockchain backgrounds — I noticed you’ve spent quite a bit of your career working in Asia.

Benjamin Tsai (Wave Financial): Thanks Derek — yes, I was originally trained as an engineer, and I spent some time in Asia as an engineer. I ended up going back to business school, and after the program, I spent about fifteen years in Asia working in finance, in Tokyo, Hong Kong, Singapore, and Taipei. My first twelve years were with Merrill Lynch working on structured products¹, both equity and fixed income, packaging derivatives for high net worth clients — it’s quite a popular business in Asia.

Derek Edward Schloss: Great — and the last few years you were over there?

Benjamin Tsai: Eventually I was tasked to rebuild the commodities business for Bank of America across Asia. I worked on that for two years. In my last three years, I moved to AllianceBernstein where I switched to somewhat of a buy-side role focused on alternative investments. I was in charge of the strategy. We handled products around hedge funds, and fund of hedge funds, infrastructure, real estate and all sorts of exotic asset classes. That’s my background in finance, and about three years ago, I came back to the U.S.

Derek Edward Schloss: Thanks for the helpful intro. What’s been your general area of focus since you came back to the United States?

Benjamin Tsai: Real estate and fintech — in fact, my work in fintech led me into the blockchain and crypto space, which I became actively involved in a few years back. Two years ago, I co-founded a nonprofit called the LA Blockchain Lab and we work with UCLA, USC, UC Irvine, and Cal Tech — along with the city government of Los Angeles — to promote blockchain development and usage, and its proliferation across Southern California. About one and a half years ago, I met with David Siemer and we started Wave Financial.

Derek Edward Schloss: Wave Financial is a blockchain-based asset management firm in Los Angeles. I’d love to unpack Wave’s thesis a bit — who are the customers that Wave serves, and what problems are you solving for them?

Benjamin Tsai: Sure — I’ll take it from a macro perspective. I’ve done equities, I’ve done fixed income, I’ve done commodities — and I really see cryptoassets as the next asset class. That’s the first area we find very interesting. The second area we’re focused on is the application of blockchain technology as it relates to the tokenization of different assets and different products. Wave Financial is an asset manager that serves high net worth and institutional investors around these two themes.

Derek Edward Schloss: I can imagine your background in regulated markets is probably helpful in navigating some of the unexplored territory around both of these two areas.

Benjamin Tsai: Definitely. You know, one of the things we realized early is the increasing regulation of the space — which ties back to my past work. I was licensed in Japan, Hong Kong, Singapore, Taiwan, and in the U.S. as well with various securities and marketing licenses. I’m quite familiar and comfortable with being in a regulated space, and when we set up the firm, we bought an RIA² and rolled that into Wave Financial so that we could become a regulated entity for managing client assets. As an RIA, we have a fiduciary duty to our clients to do the best that we can as an asset manager.

Derek Edward Schloss: Let’s jump into Wave’s latest security token product — the “crypto derivative” fund you’ve called Wave BTC Fund. This is a type of tokenized product I haven’t spent time thinking about in the past, so I’m interested to learn more about this.

Benjamin Tsai: The original idea behind the product came from the fact that people in the wealth management business — typically high net worth clients — they are first interested in getting as much yield³ as they can. Once the yield is understood, they’ll ask what risks they have to take in order to get that yield. So we decided to approach this from a yield perspective — we asked ourselves, “what can we do in the space that would generate good yield for clients, while having reasonable risk exposure.”

Derek Edward Schloss: Understood — that makes sense.

Benjamin Tsai: And in looking at risk, one of the things we noticed is the high volatility that comes with many cryptocurrencies, which can be a problem for many people. So we decided to take that volatility and essentially convert it to yield using BTC derivatives, and package that yield together into a monthly dividend-paying fund product. We’re selling off the volatility of BTC to generate a stream of yield that we’re paying out on a monthly basis — our target rate is about 1.5% a month or roughly 18% a year which we think is quite an attractive number today.

Derek Edward Schloss: I might need a bit more help unpacking this structure. So the idea is that the Wave BTC Fund, which is tokenized, holds the rights to the underlying BTC assets. Now, anyone can purchase call options⁴ from the Wave BTC Fund — these call options are contracts that provide those buyers the right, but not the obligation, to purchase BTC from the Wave BTC Fund at a later time and price. And in exchange, these call option payments are aggregated and paid to the Wave BTC Fund token holders through a monthly dividend.

Benjamin Tsai: Yes, that’s right. We’re typically selling roughly “one month, 20% out of the money” options — so options 20% higher than the current spot price. And this resets monthly. So with the Wave BTC Fund, we’re letting clients get exposure to Bitcoin’s upside up to 20% per month, and anything greater than that they’re giving up for the yield. I want to highlight the fact that we’re leaving the client quite a bit of headroom — it’s 20% of rise every single month. If you were a Bitcoin holder and the market’s up over 20%, it would make sense to take some money off the table.

Derek Edward Schloss: So for your clients — these high net worth individuals — there’s first and foremost the target yield associated with the product. But in addition, there could be other benefits for having this alternative exposure to BTC. From a portfolio management perspective, the tokenized Wave BTC Fund is simply a tool in the toolkit to help them achieve greater diversification in their portfolios. Do I have this right?

Benjamin Tsai: That’s correct — actually, that’s one of the ways that we talk to people about this. Some people hold Bitcoin on their hardware wallets, in their sock drawer or something. That’s certainly one way to do it.

Derek Edward Schloss: [Laughs] Right.

Benjamin Tsai: But when you think about it, that might not be the best way to hold your Bitcoin. It’s certainly not the easiest way of handling assets, and most investment assets in the world, that’s definitely not how you take care of it. You don’t print out your stock certificate and stick it in your safe — we don’t do that anymore. So we think the Wave BTC Fund is a good way to have alternative exposure to Bitcoin, with a slightly more actively managed component as opposed to just buy and hold. And fundamentally, buying and holding doesn’t pay a return of any sort — here, we’re able to provide a high level of return.

Derek Edward Schloss: Understood — that makes sense. That brings up the question, who custodies⁵ the actual BTC owned by the fund? And where is the fund incorporated?

Benjamin Tsai: Fidelity Digital Assets handles custody of the BTC, and the fund is a British Virgin Island entity — BVI — set up as a closed-end fund. When someone new invests in the fund — we create units, we buy Bitcoin, and we custody the BTC with Fidelity. We’re one of the early clients of Fidelity’s Custodial Services. We went through their full review process, and we also work with other counter-parties on the options side.

Derek Edward Schloss: I think I understand the product a bit better. I’d love to dive more into the tokenization part of the fund’s construction — why was the act of tokenizing the Wave BTC Fund so attractive from your perspective?

Benjamin Tsai: I think the tokenized fund structure here makes a lot of sense because it opens new channels for liquidity⁶. Not only are we providing buybacks on a regular basis, but clients can put fund tokens onto the market to buy or sell as they wish. The value of the fund is relatively easy to determine — the fund holds Bitcoin and the sale of options — which lends itself well to determining value for trading. And in this case, it’s probably easier to price and trade compared to a tokenized VC fund, which may not have as clear of a NAV⁷, and which typically does NAV on an annual basis.

Derek Edward Schloss: Vertalo is your tokenization and technology partner for constructing the product. I had a chance to sit down with Vertalo’s Dave Hendricks earlier this year. Why did you decide to work with Vertalo on the tokenization piece, and what does that relationship unlock for your team?

Benjamin Tsai: We first started this firm roughly a year and a half ago. At that point, the infrastructure wasn’t quite there for building everything out and being able to support the whole ecosystem. To me, it was relatively clear that we needed to get to a place where the client experience was similar to an E*TRADE or a Schwab — an online brokerage. Crypto was nowhere near there. And the security token space? That was even further behind. We decided to search out the best partners we could work with to create the type of products that we wanted to create. We’ve been speaking with a number of platforms and Vertalo’s platform was very flexible with what we wanted to accomplish. We decided to work closely with them in terms of development and integration work. In addition, Vertalo works closely with Prime Trust — a qualified custodian⁸. We decided to go down this path of working with both of these counterparties — Vertalo for tokenization development and integrations, and Prime Trust as a custodian for the security token that represents the Wave BTC Fund.

Derek Edward Schloss: And the downstream trading piece? Once the lockups end, are there security token trading platforms you think are well suited for the tokenized fund product?

Benjamin Tsai: Right — probably the most important component, which is also the most behind at this stage, is the trading component. In the U.S. we’re starting to see a number of players come out and support security token trading. OpenFinance Network is probably the most advanced — they have a listing board with buy and sell orders. tZERO and SharesPost have both signaled their interest in working on this as well. And internationally, we’re really starting to see this environment move forward. Hong Kong recently announced regulations with regards to tokenized securities and the exchanges that manage that process. So we’re still early days in the security token exchange space, but we are starting to see some progress — and the progress that I typically focus on are the major markets like Hong Kong and the U.S., as opposed to some of the smaller, offshore, esoteric locations.

Derek Edward Schloss: Listening to you speak — it sounds like Wave is thinking about building products that can be easily priced, with the investment potential to trade across global markets. I think creating products in this way is authentic to some of the core values that make digitization and blockchains interesting for securities in the first place — in other words, engineering for transparency and global trade.

Benjamin Tsai: Thank you. I feel that what we’re doing is being extremely client focused in terms of what clients want, what clients need, and how we can provide the best experience for them. I think that’s the right way to look at it — because in the end, if the clients aren’t interested, then it’s a non-starter.

Derek Edward Schloss: Another reason I find the tokenized fund model so interesting is that the fund model can be extrapolated to all kinds of assets — with a tokenized fund, you can start bringing all sorts of interesting products into blockchain-based environments. Do you see Wave engineering new products with this same structure in the future?

Benjamin Tsai: Definitely — the fund structure is great for tokenizing various things. On the collectibles side, we’re exploring the tokenization of Picasso art pieces. We’re looking at tokenizing whiskey barrels. We’re looking at tokenizing Japanese race horses — packaging their cashflows. We’re really looking at all sorts of different ways to provide investment exposure using tokenization technology, which can help us create different investment profiles for our clients. In general, I think the whole idea of tokenization opens up the possibility of liquidity. And I’m very careful in what I say, because true liquidity comes from having buyers and sellers that actually want to trade something back and forth — not the fact that there is a place for someone to go trade. All three of the products I mentioned — Picasso art pieces, whiskey barrels, race horses — typically, these don’t have a liquid market today.

Derek Edward Schloss: How do you see tokenization creating more liquid markets for those three assets in particular — horses, art, whiskey?

Benjamin Tsai: So, Japanese race horses are regulated — only Japanese corporates or individuals can buy them. We think non-Japanese investors would like some kind of exposure here. Tokenization will make it easier to access products not currently accessible due to regulatory barriers. And for Picasso pieces, the barrier is the high cost of entry.

Derek Edward Schloss: Right — the high unit costs associated with purchasing a single Picasso.

Benjamin Tsai: Yes. Right now we’re looking at ten Picassos — a combination of roughly $600 million dollars, so each Picasso is somewhere between $50 — $100 million dollars. That’s definitely a price tag barrier. And we see similar discussions in the real estate space, right? The price tag for each unit is too high for average investors, and tokenization and fractionalization aims to help with this.

Derek Edward Schloss: And whiskey?

Benjamin Tsai: With regards to whiskey barrels, it’s an investment product that isn’t popularly available — it’s something people don’t really have great access to. Tokenization is a tool that helps open up that access. The investment thesis behind this asset class is very good — not a big drinker myself, but I’ve done research in this space and my understanding is that a barrel of whiskey increases significantly in price throughout its aging life. This increase in value is very interesting — something that has great return profile that we can package and offer as an investment product. Here, we’ll create a tokenized whiskey fund where people can invest at day zero, and as the barrel ages, interested buyers and sellers can create a market for these tokens. Now that you have a liquid market trading these tokens throughout the whiskey’s life — other producers, or bottlers, or wholesalers are able to buy tokens to hedge their exposure. It can help create a commodities market for actual producers who, maybe three, four years ago, should’ve put away a barrel of rye whiskey as opposed to bourbon — and they didn’t do it, and now they need it. With commodities, there’s always a speculator side and a producer’s side. One side wants to hedge, and the other side wants to punt. Tokenization allows us to recreate this for various assets that historically have not been able to easily do that.

Derek Edward Schloss: I’ve really enjoyed this conversation — can you close us out Ben? What are some of the things folks can expect from Wave Financial over the next year?

Benjamin Tsai: We’re continuing our work on the asset tokenization side — we’re aiming to launch a whiskey product early next year. We’re also expanding our firm to be able to service more clients in more countries — we really like the fact that this technology is global in nature, and we’re actively building for this.

Derek Edward Schloss: Ben, on behalf of Security Token Academy, thanks for joining me on The Digital Wrapper.

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Footnotes

¹ Structured products are those pre-packaged structured finance investment strategies based on a single security, a basket of securities, options, indices, commodities, debt issuance, or foreign currencies. From the issuer’s point of view, structuring means that a number of existing financial products have to be combined to achieve the client’s desired return function.

² RIA, or a Registered Investment Advisor, is a person or firm who advises high-net-worth individuals on investments and manages their portfolios. RIAs have a fiduciary duty to their clients, which means they have a fundamental obligation to provide investment advice that always acts in their clients’ best interests.

³ Yield refers to the earnings generated and realized on an investment over a particular period of time, and is expressed in terms of percentage based on the invested amount or on the current market value or on the face value of the security. It includes the interest earned or dividends received from holding a particular security.

⁴ Call options are financial contracts that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity or other asset or instrument at a specified price within a specific time period. The stock, bond, or commodity is called the underlying asset. A call buyer profits when the underlying asset increases in price.

⁵ Custody refers to third party ownership of one’s assets. In blockchain, holding custody of a wallet and its assets also means holding the private keys and the responsibility of keeping funds and digital assets safe.

⁶ Liquidity is the ability to find someone on the other side of the market, at a reasonable price, for the size that you’re looking for. It’s both the size of the “bid-ask” spread, which is the difference between what people are willing to sell and buy for, and also how deep those markets are.

⁷ NAV is net asset value, which represents the net value of an entity and is calculated as the total value of the entity’s assets minus the total value of its liabilities. When used in the context of a fund or ETC, the NAV represents the per share/unit price of the fund on a specific date or time.

⁸ Qualified custodians are those financial institutions that clients and advisers customarily turn to for custodial services. These include banks, savings associations, and registered broker-dealers. Custody of client assets occur when the custodian holds, directly or indirectly, client funds or securities or has any authority to obtain possession of them.

Legal Disclaimer

Security Token Academy is the leading platform for educational information about security tokens and digital securities. Security Token Academy is not a registered broker-dealer or investment advisor. You cannot purchase or invest in tokens through our website SecurityTokenAcademy.com. We do not offer investment or purchase advice, nor do we endorse or recommend purchases or investments in tokens of any kind (security tokens, utility tokens, network tokens, etc.). In addition, Security Token Academy does not tell you if any purchase or investment is suitable for you. All investments entail risk, and investments in start-ups as well as security tokens involve a potentially greater risk. This interview is not investment advice — it is strictly informational. Do not trade or invest in any tokens, companies, or entities based upon the information in this interview.

The Digital Wrapper | Wave Financial — Benjamin Tsai was originally published in Security Token Academy on Medium, where people are continuing the conversation by highlighting and responding to this story.

The Digital Wrapper | Marc Boiron

Derek Edward Schloss (TDW): Marc, great to have you on The Digital Wrapper. This is a conversation I’ve been looking forward to — today, you’re a Partner at law firm Fisher Broyles, but let’s start at the beginning. How did your legal practice take you into blockchain?

Marc Boiron (Fisher Broyles): In 2015, somebody started talking to me about Bitcoin and I got really interested in the technology. At the time I was a securities attorney working with early-stage companies. I didn’t really focus on it too much until late 2016. At that point I remember thinking, “You know what? I absolutely love this tech. All I do is think about it, so I might as well get into it from a legal perspective.” By the second quarter of 2017, I had dropped everything else. Since then, my entire time has been spent working with companies in this space.

Derek Edward Schloss: What areas of blockchain tech is your practice most focused on today?

Marc Boiron: I was one of the earliest attorneys to really focus on security tokens, so a lot of my practice is focused there today. In early 2018, I worked on a project called Slice RE, which was one of the first tokenized offerings for LP interests in a real estate fund. That started things off for me in the security token space.

Derek Edward Schloss: Do you find yourself working on quite a bit of projects adjacent to security tokens?

Marc Boiron: Beyond security tokens, it’s one of those things where there’s so few attorneys focused on this space that it’s really hard to specialize right now — you get phone calls from everybody. They’re looking for someone who actually understands the technology, who understands the ecosystem, who can guide them. And not just legal — but also on the business and technology side. Today, I do a lot of work with crypto funds, protocols¹, mining² operations — things of that nature.

Derek Edward Schloss: It’s interesting that you say that. I’ve noticed there’s a resistance for attorneys operating in these legacy legal spaces to start the initial process of getting acclimated with the technology.

Marc Boiron: Yes, people are either really interested in the technology or they’re not. Given that it’s complicated tech, finding people who want to learn isn’t that easy. Today, there’s a small group of attorneys you run into constantly in this space.

Derek Edward Schloss: Transitioning to security tokens — earlier this year I came across an excellent piece you put together for The Block called Security Tokens: Misconceptions and Benefits. You argued that some of the framing within the security token industry might be off, and re-categorized a number of proposed benefits as misconceptions.

Marc Boiron: I wrote that piece because it’s incredible how much misinformation there is out there about security tokens. I think people get really excited by the technology and suddenly there’s a belief that it’s changing everything, including things that already exist. To the extent that I could put something out there that lays out the true story, that was my goal.

Derek Edward Schloss: It was well done. There were two actual benefits you named I think would be great to talk through — the first is “better cap table³ management”, and the second is “improved corporate governance”. You have some direct experience with both of these, more than most, so I’m curious to hear your takes here.

Marc Boiron: With cap table management, when you have early-stage companies, their cap table management is done in a few ways. First, it might not be done at all — which means the company signed agreements to issue securities but it’s not documented anywhere. Second, the company might manage their cap table themselves, but might not understand how one part of the cap table relates to another. Third, the company has their lawyers manage the cap table, but this can be expensive, and most founders won’t send every document to their lawyer. And as a result, the cap table can end up being a partial cap table. Or fourth, the company pays $10 or so per month for something like Carta⁴ to manage their cap table, but the cap table will only be as good as the inputs — companies might end up having the same issues as they do with their attorneys, although it might cost less.

Derek Edward Schloss: It sounds like none of these methods are quite perfect today — how might security tokens improve the accuracy and efficiency of our cap tables?

Marc Boiron: The better option is to have stock ledgers or cap tables represented on a blockchain. By way of background, cap tables are usually done on a fully-diluted basis — they’re calculated for financing purposes, to give companies an entire economic picture. A stock ledger is different. It’s a very accurate representation of who actually owns the stock in your company, which is really what you need when you’re trying to determine who has voting and dividend rights. When you put an entire cap table on a blockchain, you have a more accurate representation of a cap table, stock ledger, or both. And when a transaction occurs, assuming the only way to transact in your securities is on chain, you have an automatic updating of your cap table and stock ledger where no mistakes can really be made.

Derek Edward Schloss: How have you seen some of these ownership issues come up in your legal practice?

Marc Boiron: I practiced in Delaware for a while before moving out to California. When you’re in Delaware, one of the issues that tends to come up is around issuing stock that companies think exists but doesn’t actually exist, voting stock that a person doesn’t actually own or transferring stock that can’t actually be transferred. For example, I worked on both the Dell and Dole cases. In Dell, a brokerage input the wrong vote on behalf of beneficial holders of stock, which resulted in certain rights of those holders not being exercised. That brokerage paid a significant sum of money to those holders. If they were holding their stock directly, as is easy and efficient to do with security tokens, then this problem would have never existed. In Dole, there were approximately 30% more votes cast than shares that existed. This all happened because of the way shares of public companies are held and voted. With security tokens, the time of every vote — assuming it on chain — and ownership of all securities would be captured perfectly. The question after Dole and Dell is how often is there a similar miscounting or incorrect votes that we never know or find out about because there was no litigation? I’m not sure anyone knows the answer to that. The bottom line is, putting your cap table and stock ledger on a blockchain really deals with this issue and several others.

Derek Edward Schloss: The other security token benefit I’d love to chat about is the improvement of corporate governance. This seems to be closely related to the tracking and management of cap tables.

Marc Boiron: Yes, corporate governance is definitely related. In private companies, corporate governance isn’t really as significant — people don’t really hold the annual stockholder meetings that they should, and if they do, it’s very informal in nature. With that said, you could envision some kind of system that triggers an automatic vote that needs to be taken by shareholders for the directors each year, which would begin giving shareholders rights that they did not even know they previously had. I think it’s unlikely that will be done often by private companies — but as you get companies that are VC backed with more investors involved, or even crowdfunded companies — then it starts making more sense.

Derek Edward Schloss: What are the implications for public companies?

Marc Boiron: With public companies, it comes back to getting an accurate count of the voting that you do. In Delaware, you have a record date for that vote — either your bylaws or Delaware code will tell you how the record date is set. If your stock is on a blockchain, then you can go ahead and look at the blockchain at any given time and say, “This is exactly who needs to vote”.

On top of this — with blockchain, you have the ability for every individual to be a record holder of your stock instead of beneficial holders. Now, it’s worth pointing out that it solves some Delaware law issues, that can technically create issues under 12(g)⁵. 12(g) is the section of the Exchange Act that says if you have more than 2,000 common equity holders, and more than $10.0 M of assets, then you need to register under the Exchange Act.

Derek Edward Schloss: Right — staying under that 2,000 holder amount can be fairly critical.

Marc Boiron: One of the benefits of our beneficial ownership rules is that if you’ve got one custodian that holds tokens for ten thousand people, it will count as one equity holder — not ten thousand. With that said, we would be much better off having every actual owner of a company have a true say in the company, rather than having one custodian decide how things are voted. As a side note, it is currently problematic to have one custodian holding a large number of security tokens of a private company because beneficial owners of the security tokens could request to hold them directly at any time, which could cause the company to have more than 2,000 holders.

Derek Edward Schloss: Can you walk through some of the benefits that might exist if we bring company management closer to equity holders?

Marc Boiron: A custodian will always pass records on to the beneficial owners. But because the beneficial owners are so far removed, they’re never truly in tune with what’s going on in the company. As it relates to corporate governance, I think you’d have a much greater number of people who would be close to what’s going on in the company if they were actually true record holders. In addition, you’d never have the issue that happened in Dell where you have a custodian who votes the wrong way for a transaction. There’s layers of benefits there, and most of them have to do with getting to directly hold your stock rather than holding it through a custodian.

Derek Edward Schloss: That’s great Marc. Let’s transition over to some of the regulatory action we’ve seen since the start of the year. Earlier this year, SEC Commissioner Hester Peirce called out recent SEC cryptoasset guidance as a “regulatory version of an escape room”. I’d love to go through some of the recent guidance and see if we can put some of these puzzle pieces together.

Marc Boiron: Let’s do it.

Derek Edward Schloss: Back in April, the SEC released a new framework for analyzing whether a digital asset is offered and sold as an investment contract. What were some of your top takeaways here?

Marc Boiron: This framework had to do with the nature of what the Howey test really is — a lot of people want to blame the SEC, but really it comes down to Howey. Howey is a test that depends on facts and circumstances, and the framework acknowledges that there’s a huge number of circumstances at play when we’re dealing with digital assets. For our practice, what we’ve done with clients is taken that framework and boiled it down to ten or so points from the forty points that the SEC put forth. We try to separate the ten key points from the “once in a blue moon” points that issuers don’t necessarily need to focus on and end up being encompassed in the ten points we put together, but that the SEC did include in the framework to make it clear. The framework wasn’t very helpful, but I don’t blame the SEC — this is really the only thing they can do when dealing with Howey.

Derek Edward Schloss: There’s been a few major blockchain projects in the news that touch on the state of digital assets and securities regulation — Blockstack, YouNow, and Pocketful of Quarters. Let’s start with Blockstack, the decentralized computing network. Blockstack’s Reg A+ offering for its STX tokens, which aim to power its decentralized network in the future, was recently qualified by the SEC.

Marc Boiron: You know, the very first thing to note here is that the SEC is willing to qualify a project’s security token. Blockstack is super interesting because you would have thought it would be one of the last projects to be qualified due to the complexity that you’re dealing with — a utility token that is also a security. With a Reg A+ offering, you’ve got free transferability which makes it a lot easier than if you were dealing with the same thing in a Reg D context. Nonetheless, it’s really complicated, so what it tells me is that their lawyers did a good job. They put together concise, thoughtful responses to the SEC’s comments. I think that gave the SEC confidence to go ahead and qualify them. YouNow was very similar, though it seems like Blockstack did the bulk of the work getting the SEC comfortable on the concept of a utility token as a security being used in a network.

Derek Edward Schloss: Recently, Pocketful of Quarters received a no-action letter regarding their “Quarter” token, a stable gaming token that will be used as a medium of exchange across multiple games. I want to clarify here that the no-action letter is completely separate from the company’s previous equity raise for $145k. What does a no-action letter like this tell you, Marc?

Marc Boiron: To me, this was no different than the SEC’s no-action letter for Jet Token. Yes, this was the first time that we got a no-action regarding a public network — here, it was Ethereum⁶ and an ERC-20⁷ token. However, it’s really not all that different than a private network like Jet Token. With Ethereum, you can essentially create a private network through restrictions at the smart contract level — which is what happened here. I still think the no-action letter is important for market confidence. This gives anyone who is going to deal with these tokens confidence that there’s not going to be any regulatory action taken with respect to the way the token is structured and sold. I think it’s very valuable in that sense, but I don’t think it had much value in terms of telling us how you can do things or not do things.

Derek Edward Schloss: The SEC and FINRA also released a joint statement on broker-dealer custody of digital asset securities. The statement focused specifically on the Customer Protection Rule for Broker-Dealers under Rule 15c3–3. What are you seeing here?

Marc Boiron: I think everybody agrees that this statement was meant to state the things that still need to get figured out rather than helping solve any of those things. We saw something similar by the SEC’s Division of Investment Management last year when they said, “Before we see any kind of investment companies registered in this space, here’s the things we need to deal with.” This most recent statement was a bit more disappointing. Essentially, if you’re not a custodian in this context, then there won’t be an issue. But if you are acting as a custodian, then you’re going to have some issues — because you can’t possibly comply with some of the rules and laws that exist today.

Derek Edward Schloss: How would you have liked to see the SEC and FINRA be more helpful here?

Marc Boiron: In this case, we have rules that the SEC could change — unlike with Howey, where it really doesn’t have as much flexibility. Sure, the SEC can interpret Howey a little less strictly than it does. But here, some of these rules are things that the SEC has direct control over, and they’re choosing not to do anything.

Derek Edward Schloss: This reminds me — there’s been some recent news lately that FINRA has been sitting on months of blockchain-based broker-dealer applications. Some of the firms have been waiting to hear back from FINRA for over a year.

Marc Boiron: A long time. FINRA is waiting for more guidance from the SEC — no doubt about that. They’re not really going to do anything until they get the green light from the SEC.

Derek Edward Schloss: I think there’s a concern that the cryptoasset ecosystem might be developing more quickly in other regions of the world, which could end up putting US-based companies at a disadvantage. Are you concerned?

Marc Boiron: Does it concern me? I mean — look I don’t like it, but it doesn’t concern me for the time being. The US has such a lead on the rest of the world in the securities markets. We do have time before anyone else has a chance to catch up. To really compete, I think we’d need a market that investors are flocking to, with investor protections in place, and that still receive the benefits of blockchain and security tokens. You need all of that to come together before the SEC and the US get their act together out of a concern of another jurisdiction threatening the US’s lead in the securities markets — and I don’t think that’s going to happen in the next year or two. I would be really surprised if we don’t have our act together a little more by then.

Derek Edward Schloss: As it relates to security tokens, are there laws you think should be updated that could help the industry really thrive today?

Marc Boiron: To start, I would say that my focus right now is taking current securities and moving them onto the blockchain, and less about STOs as a financing mechanism. As a result, I think the thing we need to remove — to get this technology going — is transfer agents⁸. Transfer agents make sure that one side of the ledger and the other side of the ledger are correct. Blockchains are ten times better than a transfer agent for this. To me there’s absolutely no reason to have transfer agents play this role in the future. Transfer agents do play a role beyond balancing the stock ledger, around communications with investors and other investor relation-type tools. However, those are things anyone can do. Eventually, investors will also be able to place votes using platform dashboards, which makes some of these new solutions that build platforms for managing security tokens so much more capable than transfer agents are today.

Derek Edward Schloss: Playing off this idea — once the infrastructure for security tokens is more solidified, are there any other existing roles or processes you see being eliminated fairly quickly?

Marc Boiron: It depends on how the market develops. Right now, institutions can’t hold their own securities — they need to use a qualified custodian. Historically, why did we actually need to have custodians? Well, to protect stock certificates so that they’re not lost and so institutions don’t misuse them. With blockchains, many of these issues are naturally dealt with because issues around lost tokens can be easily be addressed and beneficial holders of tokens can hold them directly. It starts becoming clear that individuals might not need a Schwab account — they can just hold securities themselves and give access to Schwab to transfer them. This now outs the individual, rather than the institution, in control. To add to this, the risks of individuals or institutions directly holding their own securities might not carry the same risk as holding their own non-tokenized stock — they can never really lose it. If it is lost, the token is burned and reissued. I think those are the reasons why custodians should play a much more limited role with security tokens than they do today with traditional securities.

Derek Edward Schloss: Marc, you’re one of the more well-known attorneys working in the tokenization space. What advice do you have for existing securities attorneys or service providers who might be looking to get involved?

Marc Boiron: My advice is threefold. First, spend time understanding the technology. If you don’t want to do that, then it’s not worth getting into the space. It’s crucial to understanding how issues will develop — especially on the non-security digital assets part of it. The second piece is understanding the security token ecosystem and who’s involved. I have had a number of clients tell me, “Hey, I’m going to build this solution”, and I’ll say, “Why? There’s this company that’s doing this, and there’s that company that does that, and there’s this other company that does this other thing.” Understanding who’s involved so that you can guide clients in the right direction is very important. You don’t want to see clients spending money on services that they really don’t need because there’s solutions that already exist. Go to a few conferences, be a part of the ecosystem, start getting to know people. Finally, understand how the infrastructure works — you don’t have to understand every aspect of it, but the key parts that we’re trying to solve for, and the laws around it, I think is really important. I don’t think just having a securities background is really enough in this space — you need to understand more than that.

Derek Edward Schloss: This is a great transition into a product you’ve been helping build out with Security Token Academy. Can you share a few of your insights working with our team to develop the new STA Professional Membership program? Why do you think the new Professional Membership program might be so important for the security token industry at our current stage?

Marc Boiron: When Aubrey⁹ was first talking about the Professional Membership program, the thing that interested me the most was really this idea of building out an ecosystem. The more good people we have doing this, the better. The more people we have learning about this technology and helping grow the ecosystem, the better. It’s going to speed everything up. Security Token Academy, and everything you guys do by way of education, is super important for this industry. And given the vital role that lawyers play, having a membership in place for them to learn from one another, to gain more exposure — these are the important things that will help grow the industry over the coming years.

Derek Edward Schloss: That’s great, Marc. Final question — why are you so excited to wake up each morning and work on this stuff? What are you most looking forward to in 2019?

Marc Boiron: Purely from a technical perspective, I love that we’re continuing to see more progress with the technology. We keep seeing new tech and new protocols come up — so that’s fun. And continuing to see the evolution of Bitcoin and the world’s view of Bitcoin, that is very interesting as well.

Derek Edward Schloss: I agree, having front row seats to the evolution of this technology has been a blast. How about on the regulatory side of things?

Marc Boiron: You know, one of the things that weirdly excites me the most is this new political focus on crypto, which has been thrown into the light because of Facebook’s Libra. We’re now getting so much attention in Congress, and I think that’s a really good thing. Where the regulations are going to go — I don’t know, but there’s a lot of questions being asked that really get to the heart of how the regulation of blockchain and digital assets need to change or expand.

Derek Edward Schloss: Marc, on behalf of The Digital Wrapper, thanks for your time.

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Footnotes

¹ A protocol is a system of rules that define how something is to be done. In computer terminology, a protocol is usually an agreed-upon or standardized method for transmitting data and/or establishing communications between different devices.

² Mining is the act of validating new transactions and recording them on a blockchain’s ledger. With Bitcoin, a new block (the structure containing recent transactions) is mined every ten minutes. Miners compete to solve a difficult mathematical problem. The solution found is called the “Proof-Of-Work”. This proof proves that a miner spent time and resources to solve the complex problem. When a block is solved, the transactions contained in that block are considered confirmed.

³ Cap Table is a spreadsheet or table that shows the equity capitalization for a given company.

⁴ Carta is one of the leading cap table management software companies.

⁵ Rule 12(g) of the Securities Exchange Act of 1934 states that an issuer is required to register as a publicly reporting company with the SEC if and when specific conditions are met — subjecting the company to specific reporting requirements.

⁶ Ethereum is an open-source, blockchain-based, distributed computing platform and operating system featuring smart contract (scripting) functionality.

⁷ ERC-20 is a common list of rules and standards for all Ethereum tokens to follow, empowering developers to predict how new tokens might function within the larger Ethereum ecosystem.

⁸ Transfer Agents are trust companies, banks, or similar institutions assigned by a corporation for the purposes of maintaining an investor’s financial records and tracking his or her account balance. The transfer agent records transactions, cancels and issues certificates, processes investor mailings, and handles other investor problems — including reissuing lost or stolen certificates.

⁹ Aubrey Chernick is the Founder/CEO of Security Token Academy.

Legal Disclaimer

Security Token Academy is the leading platform for educational information about security tokens and digital securities. Security Token Academy is not a registered broker-dealer or investment advisor. You cannot purchase or invest in tokens through our website SecurityTokenAcademy.com. We do not offer investment or purchase advice, nor do we endorse or recommend purchases or investments in tokens of any kind (security tokens, utility tokens, network tokens, etc.). In addition, Security Token Academy does not tell you if any purchase or investment is suitable for you. All investments entail risk, and investments in start-ups as well as security tokens involve a potentially greater risk. This interview is not investment advice — it is strictly informational. Do not trade or invest in any tokens, companies, or entities based upon the information in this interview.

The Digital Wrapper | Fisher Broyles — Marc Boiron was originally published in Security Token Academy on Medium, where people are continuing the conversation by highlighting and responding to this story.

The Digital Wrapper | Securitize

Derek Edward Schloss (TDW): Jamie, Brian — great to have you both on The Digital Wrapper. For those new to Securitize, let’s start at the very beginning. How did Securitize get started?

Jamie Finn (Securitize): Sure. So a few years ago, Carlos Domingo¹ approached me with this idea of creating a tokenized venture fund called SPiCE VC. At the time, we found there wasn’t any technology yet to tokenize a venture fund. So Carlos went ahead and built his own.

Derek Edward Schloss (TDW): The classic story of entrepreneurship — building a solution to solve his own problem.

Jamie Finn (Securitize): Exactly. And I got involved initially as an investor in SPiCE VC, just because I believed in what Carlos was doing. He and I had worked together previously at Telefonica. That — combined with the giant crypto pump back then — led me down the rabbit hole of wanting to learn everything I could possibly learn about blockchain and crypto. I realized there was going to be a massive opportunity for digital versions of securities. Almost all securities today end up being paper-based, and the process is very manual. In contrast, everything I’ve done in my life has always been digital. In November 2017 we spun out Securitize as a new company.

Derek Edward Schloss: It’s a great origin story. Brian, how’d you get involved with the team?

Brian Farber (Securitize): I joined Securitize earlier this year, back in February. Prior to that I spent a number of years as a securities lawyer in New York at Sullivan & Cromwell. I’ve had an interest in blockchain for a long time, and eventually, I went in-house at ConsenSys² in Brooklyn. After Securitize closed their Series A, it made sense with my background as a securities lawyer to jump in and help build what they were working on.

Derek Edward Schloss: I noticed Securitize recently opened up offices in New York.

Brian Farber: Yes, we’re excited about that. The capital markets are a global industry, and our company is spread out across the globe. But New York and London are the center of the global capital markets, and it made sense for us to have teams in these locations to meet with institutions that were interested in exploring the space — in addition to law firms, auditors, accountants.

Derek Edward Schloss: Can you share a bit about London — and do you have additional expansion plans on the radar?

Brian Farber: Similar to New York, London is a small but growing operation for us. We’ve been more active in the US space so far, but as I mentioned, capital markets are global. The EU and UK are huge markets that we feel are really sort of untapped. There are certainly competitors over there doing great things right now, and we’re looking at building our own infrastructure there too.

Derek Edward Schloss: This idea of Securitize having an increasingly global presence is pretty interesting.

Jamie Finn: We agree. Practically speaking, our customers are global to begin with. Our first customer, SPiCE VC, is based in London. Our follow-on customers have been from all over the world. For us, it’s natural to put sales and service as close to our customers as possible so that we can engage with them directly.

Derek Edward Schloss: What’s been your experience working across multiple jurisdictions so far?

Jamie Finn: We’ve seen other jurisdictions be a bit more amenable to different types of offerings than the US. That’s really been another reason for us to explore it, and really understand it better. As an example, I would probably highlight our work in Thailand with the Thai regulators, Tezos³, and Stephane De Baets from Elevated Returns⁴. Being closer to them, closer to the customer, we’re better at engaging with the regulators and engaging with the overall financial community.

Derek Edward Schloss: As you look out across the jurisdictions you’ve started operating in, have you noticed any trends or countries with an overwhelming amount of growth potential?

Jamie Finn: Fundamentally, the US has the most potential. It’s the largest market for securities. It’s the largest financial market on the planet. And actually, the laws here in the US are really great. They work perfectly for what we need. But we need to continue educating investors about this new kind of product type, so that they feel more comfortable with it. That’s really the gap that we’re seeing right now. It’s not so much a regulatory issue as it is an investor understanding problem.

Derek Edward Schloss: What are some of the projects you’re working on right now?

Jamie Finn: We’ve been very focused on delivering. Every time we make an announcement, it’s really important that whatever we’re announcing is actually functioning and real. For example, we just released the third version of our platform which brings a bunch of really amazing functionality to our customers. Issuers will have the ability to issue dividends not only in crypto, but also in US dollars. We have new tax reporting features — if you’re an issuer, this is actually super exciting. Maybe that’s a bit less exciting for investors.

Derek Edward Schloss: Are there new investor-facing features in the new platform updates?

Jamie Finn: Definitely. On the investor side, we have an upgraded dashboard with a bunch of new security features. We’ve also integrated new wallets — we’ve done an integration with BitGo on the custody side, which makes it really easy to just put your digital securities into an account so you don’t have to worry and futz with a wallet of any sort, which is fantastic.

Derek Edward Schloss: Let’s talk secondary trading — there’s been some partnership coverage between you and tZERO⁵ over the last few months.

Jamie Finn: We’ve been hard at work with tZERO over the last six months, and we’ve actually just completed our integration with them. Moving forward, our customers will be able to list their securities on tZERO, which is probably the best known marketplace in the US. We’ve already been working closely with OpenFinance and SharesPost, so bringing tZERO into the fold is really bringing together all of the US-based trading platforms. We’re really excited about that. As a piece to this, we’ve also recently announced that we’ve open sourced our DS Protocol interface — that’s now on GitHub⁶. We’ve already had our first submission of an application that’s going to use these interfaces, which is fantastic from an ecosystem standpoint.

Derek Edward Schloss: Congratulations, that is pretty exciting. You mentioned DS Protocol in there, Securitize’s compliance protocol for digital securities — this is probably a great transition into Brian’s day to day work. Brian, can you share how your team thinks about lifecycle compliance, in light of these Securitize-issued security tokens starting to hit secondary markets?

Brian Farber: When I think about this space right now, the two most important things are compliance and liquidity⁷. Most of the existing digital securities are private securities which have very strict compliance rules, transfer restrictions, that have been well entrenched with US securities laws for decades. With that, you have liquidity potential in this securities market that’s unprecedented. This comes with a compliance responsibility for ensuring that securities that once were paper-based and slow-moving are still in compliance now that they’re moving faster. I think it’s really important for us and other players in the space, whether they be broker-dealers⁸ or exchanges, to act as gatekeepers. I think the SEC and other regulators will want to see that because it’s what they’re accustomed to in the traditional securities markets. So to the extent that we, and other actors in the space, can enforce compliance within the existing framework, then I think that is a huge value for the industry.

Derek Edward Schloss: For those unfamiliar, can you expand on the liquidity piece here? It’s one of the more stated benefits of tokenization, especially as it relates to our private markets.

Brian Farber: A security is like any other asset — it’s worth what someone will pay for it. It may be technically true that the market price of your security has appreciated 4x in value since you’ve owned it, but if no one’s going to buy it, then you’re never going to get out from that investment. Today, we’ve seen people who issued digital securities and invest in digital securities receive an increase in value on their investment, but there’s still a difficulty at times to get out of that investment. We think that will change, and you may even see private digital securities approach the same liquidity levels of traditional public securities on NYSE and Nasdaq. In addition, most of the digital securities that are out there right now are fairly straightforward. As the industry develops and issuers launch more complex instruments, I think it will start to get very interesting.

Derek Edward Schloss: Jamie, I’m interested in hearing more about working alongside new issuers. If an issuer is considering a security token, what are some of the services Securitize provides at the very start?

Jamie Finn: First and foremost, Securitize is a technical service provider — we’re there to support you on the technology side. We start by helping investors get onboarded through KYC/AML and accreditation, on a country by country basis. Once that’s happened, investors can sign a subscription agreement and fund their investment — Securitize provides all the technology to enable this. It’s important to note, however, that we’re not a money transmitter — we would have a custodian or an escrow agent involved in that process.

Derek Edward Schloss: What are Securitize’s next steps once investors have been properly onboarded into the investment?

Jamie Finn: Once onboarding is complete, our team writes the smart contract, which will digitally represent the security on Ethereum, Tezos, or other additional blockchains. We’ll create that digital security and give the issuer the key so they can distribute the securities to their investors, based on the executed subscription agreement and amount invested.

Derek Edward Schloss: Got it. Then Securitize will provide services that focus on lifecycle management of the tokens?

Jamie Finn: Right. Once the security token has been created, we’ll provide the ongoing compliance software that keeps track of who owns which digital securities, when those digital securities can be transferred, how those digital securities can be transferred, and all the variations of order sizes and rules that might occur. In summary, Securitize will create the investment platform, onboard the investors, create the actual digital security, and then make sure that the security can be traded in a way that’s liquid and easy for anyone to use. It’s also important to note that Securitize is there to provide ongoing support. If you have changes, or if the laws change and you need to upgrade your smart contracts, Securitize will be there as your service provider to manage those upgrades and make sure that you can stay compliant with the relevant laws.

Derek Edward Schloss: You mentioned Ethereum, a blockchain where many of the early security tokens are being issued — but you also mentioned Tezos, and potentially other blockchains. If I’m an issuer, why might I pick one chain over another for my security token?

Jamie Finn: That’s a great question. For issuers, I think it’s important to understand the full ecosystem around the blockchain you’re going to use. Today, Ethereum is probably the most well developed blockchain and has a great ecosystem of custodians that can hold these securities. There are marketplaces where you can trade them. Ethereum also has some drawbacks, and other issuers are looking at a different set of tradeoffs. Tezos is just one example of a blockchain we’ve been working on recently. There’s actually a full blown exchange in Thailand where Tezos security tokens will trade.

Derek Edward Schloss: Today, what advice would you give an issuer who is looking closely at both Ethereum and Tezos?

Jamie Finn: If you’re anywhere in the US, you’ll probably want to use Ethereum. Otherwise, it’s possible that Tezos could be a really great option for you. We’ll see if additional marketplaces start to adopt Tezos and be more broadly supported across different markets. Again, it’s all about the ecosystem and making sure the pieces are there for the investors and for the issuer — making sure that whole ecosystem works together.

Derek Edward Schloss: Transitioning a bit — what are some of the ways Securitize adds value on the investor side today? Do you see that changing as more security tokens hit the market?

Jamie Finn: With any deal we work on, investors will always have questions — some of the questions are technical, others are more about the investment product. If an investor goes to the issuer with a technical problem, we’ll help the issuer solve those problems for the investor. In addition, if there are items that come up like legitimate disputes — for example, divorce, death, a lost wallet, things of that nature — we’ll provide the technical support to be able to burn the securities, reissue them to their new wallet, and solve those legal issues that arise.

Derek Edward Schloss: Before we end — Securitize made some pretty big waves this month. You recently registered as a transfer agent with the SEC, which now allows Securitize to act as the official record keeper for changes in securities ownership. Brian, can you provide some background on the role that transfer agents typically play in our securities markets?

Brian Farber: Transfer agents usually act as the intermediary between an issuer of securities and shareholders of securities. They’re an agent of the issuer, but they serve multiple roles. Primarily, they keep what is known as a master security holder file for the issuer, or a cap table, which shows the issuer who holds its securities. This allows the issuer to conduct corporate actions through the transfer agent.

Derek Edward Schloss: Can you walk through an example of a corporate action that might involve a transfer agent?

Brian Farber: If an issuer is paying a dividend or an interest payment — they can work with the transfer agent. The transfer agent can act as a paying agent and flow the payments, which could be dividends or interest, for example, through the transfer agent to the holders, since the transfer agent keeps all the info on who those holders are. They make it so the transaction is pretty easy. They can also work as a voting or tabulation agent to tabulate votes for a shareholder vote, or work with issuers to conduct redemptions or tender offers of securities. They can also work with investors to help mitigate issues that come up.

Derek Edward Schloss: What sort of issues tend to arise on the investor side that transfer agents can help with?

Brian Farber: Let’s say you lose access to the wallet in which you have your digital securities. We have procedures in place where holders can come to us and the issuer, prove to us that they are who they say they are and that they actually owned the existing wallet, and then we’re able to burn those inaccessible tokens and reissue them to a new wallet of that holder’s choosing so there’s no change in the overall float of securities. We can also help issuers with stolen securities. As the transfer agent, we try to act as a gatekeeper for the securities and the information and the records relating to the securities.

Derek Edward Schloss: Why do you think integrating the role of the transfer agent with the Securitize protocol and platform is so important? What does vertically integrating this regulatory feature set change for your clients?

Brian Farber: As an SEC-registered transfer agent, we have to maintain accurate real time and historical information such that if the issuer or regulator requests it — we can produce it for them. If they want to pay a dividend on a certain record date, we can produce the entire cap table at that point in time, with all their wallet addresses, email addresses, and other contact information. And all of this is tied to the blockchain, which to my knowledge, no other registered transfer agents can do at this point. In terms of paying dividends — we have capabilities to do all of this on chain and off chain — across the country and internationally. Transfer agents are part of the plumbing of the capital markets. It’s the kind of stuff in the background of our capital markets that makes it run, and we’re trying to make it more efficient and less painful for issuers and investors than they experience with legacy transfer agents.

Derek Edward Schloss: That’s really helpful — what has the process been like educating the SEC on both security tokens and what the team is building at Securitize?

Brian Farber: Our interactions with the SEC have been highly positive — and that’s consistent with the feedback of a lot of broker-dealers and ATSs⁹ we know in the space that have worked with the SEC as well, that interactions are highly positive. The SEC seems to genuinely want to learn about blockchain and they are certainly doing that, but they also want to ensure that entities using blockchain in the capital markets are doing all that can be done to protect investors, particularly in these private markets. Understandably, they do want to see more regulated actors adhering to existing rules, rather than trying to modify existing rules because of advent of the blockchain. Our goal right now is to ensure compliance with all of the rules that are applicable to transfer agents — and we think the blockchain is a great supplemental record for that. We hope to continue to advocate for the usage of blockchain technology in the transfer agent realm with the SEC in the future.

Derek Edward Schloss: That’s great. Jamie, can you close us out? What’s your vision for the security token industry over the rest of this year?

Jamie Finn: We’re starting to see the early innings of all securities becoming digital. That’s really our long-term vision. We think digital securities are fundamentally better than paper, and while we continue to push the message out, we’ve started to delivering better products for investors and issuers. We’re starting to see the early signs of liquidity appear in the market. That’s what we’re most excited about in 2019 — the legitimate start to this industry.

Derek Edward Schloss: Jamie, Brian — on behalf of The Digital Wrapper, thanks for your time.

Did you enjoy The Digital Wrapper? Have suggestions for future guests? Clap 50x, leave comments below, or email / tweet Derek Edward Schloss, Security Token Academy’s Director of Strategy.

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Footnotes

¹ Carlos Domingo is the CEO / Co-Founder of Securitize.

² ConsenSys is a software foundry to develop software services and applications that operate on the Ethereum blockchain.

³ Tezos is a blockchain project that aims to offer “the world’s first self­amending cryptocurrency”. Tezos’ modular architecture and formal upgrade mechanism allow the network to propose and adopt new technological innovations smoothly as they emerge. Its native smart contract language, Michelson, facilitates formal verification, a methodology commonly used in mission-critical environments such as the aerospace, nuclear, and semiconductor industries.

⁴ Elevated Returns is the company behind the first tokenized real estate offering — Aspencoin. In 2019, Elevated Returns and Securitize announced a partnership to tokenize $1 billion of real estate assets on the Tezos blockchain.

⁵ tZERO is a blockchain-based capital markets platform, enabling secondary liquidity for cryptoassets and security tokens.

⁶ Github is a subsidiary of Microsoft that provides hosting for software development version control using Git, a distributed version-control system for tracking changes in source code during software development.

⁷ Liquidity is the ability to find someone on the other side of the market, at a reasonable price, for the size that you’re looking for. It’s both the size of the “bid-ask” spread, which is the difference between what people are willing to sell and buy for, and also how deep those markets are.

⁸ Broker-Dealers are organizations engaged in the business of trading securities, for its own account or on behalf of its customers. When executing trade orders on behalf of a customer, the organization is said to be acting as a broker. When executing trades for its own account, the organization is said to be acting as a dealer.

⁹ ATS is a non-exchange trading venue that matches buyers and sellers to find counterparties for transactions. Alternative trading systems are typically regulated as broker-dealers rather than as exchanges, and must be approved by the SEC.

Legal Disclaimer

Security Token Academy is the leading platform for educational information about security tokens and digital securities. Security Token Academy is not a registered broker-dealer or investment advisor. You cannot purchase or invest in tokens through our website SecurityTokenAcademy.com. We do not offer investment or purchase advice, nor do we endorse or recommend purchases or investments in tokens of any kind (security tokens, utility tokens, network tokens, etc.). In addition, Security Token Academy does not tell you if any purchase or investment is suitable for you. All investments entail risk, and investments in start-ups as well as security tokens involve a potentially greater risk. This interview is not investment advice — it is strictly informational. Do not trade or invest in any tokens, companies, or entities based upon the information in this interview.

The Digital Wrapper | Securitize — Jamie Finn/Brian Farber was originally published in Security Token Academy on Medium, where people are continuing the conversation by highlighting and responding to this story.

On March 12, 2019, the SEC’s Division of Investment Management wrote a letter titled “Engaging on Non-DVP Custodial Practices and Digital Assets” which referred closely to Rule 206(4) of the Investment Advisers Act of 1940. The SEC’s letter asked for and welcomed engagement from advisers, market participants, and the public on issues related to custodial trading practices not processed or settled on a delivery versus payment (“Non-DVP”) basis, in addition to questions regarding the application of the Custody Rule to digital assets, and whether revisions to the Custody Rule might be helpful.

Scott Purcell, CEO of Prime Trust, a Security Token Academy Corporate Member, sent the following comments to the SEC:

To: Securities & Exchange Commission

Per your request for comments, I would like to provide thoughts from Prime Trust on select questions.

As a technology-driven, Nevada chartered trust company, Prime Trust has been deeply involved in working with broker dealers, investment advisers, securities issuers, crowdfunding portals, real estate syndicators, cryptocurrency exchanges and others in both traditional and emerging digital markets. We have, for many years, provided escrow services to Reg A, D, S, CF and other traditional securities offerings. We enable customers, including self-directed IRA’s and other account types, to purchase private securities, cryptocurrency and other assets for their accounts, which we hold on their behalf. We offer extensive KYC and AML compliance services. And we enable ATS’ and other exchanges to affect and settle transactions of private securities and cryptocurrency for accounts we custody.

What role do custodians play in the settlement process of Non-DVP trading?
Secondary transactions in private securities, as well as cryptocurrency, are fraught with risk when conducted directly by individual owners. Custodians can mitigate this risk for private securities and cryptocurrency similar to what they do with public, DTC-registered securities. This is because custodians effectively replicate the DVP process by holding assets, ensuring payment is received and cleared, and then permitting the transaction to occur. The issue has always been that traditional custodians, including both clearing brokers and trust companies, have been unwilling to custody securities which are not DTC eligible, and unwilling to custody digital (tokenized) assets and cryptocurrency. However, a new generation of custodians, which includes Prime Trust, are building the technology and infrastructure to provide custody and settlement services that enable market participants to eliminate systemic risks and inefficiencies.

What role do (custodians) play in mitigating risks of misappropriation of loss arising from such trading?
By settling transactions only upon receiving into custody the funds and assets, custodians eliminate the risk of counterparties failing to fulfill their side of a transaction. Thus the investor is protected since their assets never leave custody unless the counterparty fulfills their obligations. Also, as Prime Trust and other qualified custodians are US-regulated entities, customers are far better protected than if they use unregulated custodians such as software and hardware wallet providers, and other entities both domestic and global purporting to offer custody services for digital assets.

To what extent do Non-DVP assets appear on client account statements from qualified custodians?
To a trust company it doesn’t matter whether the assets are cash, publicly traded stock, private stock, public or private debentures, fractional interests (e.g. tokenized asset), cryptocurrency, or real estate. They are just asset classes, and all of them appear on customer statements.

To what extent does an investment adviser have any influence over, or input into whether and how such assets appear on account statements?
None. Prime Trust maintains sole and exclusive control over what appears on customer statements and how the information is presented. No third-party, including investment advisers, have any control or ability to change this.

Are there any assets that trade on a Non-DVP basis that would not appear on a qualified custodians account statements?
No. All assets that Prime Trust holds in custody are displayed on statements.

To what extent could evolving technologies, such as blockchain/distributed ledger technology (“DLT”) provide enhanced or diminished client protection in the context of Non-DVP trading?
From a custodian’s perspective, when it comes to “custody” the form of the security is irrelevant when it comes to custody. An equity asset might be represented by a physical stock certificate, a book-entry confirmation from an issuer or transfer agent, or a token on a blockchain.

Now, that said, when it comes to “settlement”, and in particular cross-custodian settlement, blockchain provides an interesting opportunity for regulated counterparties to work together to efficiently and safely settle transactions without the need for a DTC-like infrastructure.

If individuals effect transactions directly, without using a regulated custodian, then it doesn’t matter whether the asset ownership is evidenced by a physical certificate or a token as there is a risk of a counterparty not fulfilling their part of a transaction.

What challenges do investment advisers face in complying with the Custody Rule with respect to digital assets?
We don’t see why there would be any challenges. Digital assets are “assets”. All assets must be held by a qualified custodian. Qualified custodians can hold assets in digital form, just as they do assets in physical and other forms.

To what extent do investment advisers use state-chartered trust companies…to custody digital assets?
Currently state-chartered trust companies such as Prime Trust are the only qualified custodians in the US who are willing to custody non-DTC eligible assets, including private securities, cryptocurrency and assets where the ownership is evidenced by tokens on a blockchain (“digital”) instead of paper certificates.

What is the settlement process for intermediated transactions in digital assets…?
It is not very different than settlement of transactions of non-digital assets.

1. A customer requests a transaction, either directly or via their investment adviser.
2. The transaction may be posted to a securities exchange, a cryptocurrency exchange, a direct counterparty, or other participant.
3. The custodian holds assets until receipt of counterparty assets, and then fulfills the transaction on behalf of the customer. Where the counterparty is another qualified custodian, such as a trust company or clearing broker, the registered parties may cross-settle simultaneously or rely on one or the other to perform settlement and remit funds or assets.
4. The transaction is posted by the custodian to the customers statement.

To what extent do investment advisers construe digital assets as “securities”…?
No party other than the Commission and the courts have authority to deem any asset to be a security. An asset is either a security or it’s not. This is true regardless of the form of evidence of ownership (physical, book-entry or token).

To what extent can DLT be used more broadly for purposes of evidencing ownership of Securities?
For direct registration, where securities are held by an individual in their possession and not by a custodian, then DLT can make it easier for them to hold instead of paper certificates. An issuer will need to ensure that the smart contract enforces disclosure of holders’ KYC/AML information and not enable holding in anonymous form. Regardless, holding any asset directly instead of via a regulated custodian creates risk of loss or misappropriation for investors.

Conclusion:
Regulated custodians can (and will) play a crucial role in the evolution of the markets in providing liquidity for private securities and other non-DTC assets. These firms, generally trust companies, provide a safe and efficient ecosystem for customers to hold assets, and for market participants to create alternative forms of evidencing ownership (e.g. tokens) and of providing mechanisms for secondary liquidity for private securities. In short, regulated custodians help ensure market integrity and maximize investor protection.

Sincerely,
Scott Purcell
CEO, Chief Trust Officer

Engaging on Non-DVP Custodial Practices and Digital Assets was originally published in Security Token Academy on Medium, where people are continuing the conversation by highlighting and responding to this story.

Security Token Academy | Industry Update: Deputy Banking Commissioner Joins Prime Trust

In August 2019, Prime Trust — the digital asset custody and escrow platform — announced the hire of Amanda Ortega as its new Chief of Regulatory Affairs and Compliance. Ortega had previously served as the Deputy Banking Commissioner for the state of Wyoming, a key jurisdiction in establishing cryptoasset-friendly regulation at the state level.

The following is a letter from Prime Trust CEO Scott Purcell announcing the important hire.

I’m pleased to announce that the Deputy Banking Commissioner of Wyoming has left her post to join Prime Trust as our Chief of Regulatory Affairs & Compliance.

As I think you know, at Prime Trust we take two things very seriously:

• Technology to deliver financial services, and,
• Compliance.

Our B2B customers rely on us for these when it comes to KYC, AML, escrow, trust, funds processing and custody. Adding Amanda Ortega to the team puts an exclamation mark on how seriously we take our compliance obligations and reinforces to our customers and our regulators the integrity of our services.

During her 12 years with the Wyoming Division of Banking, Amanda was responsible for the oversight and examination of the state’s banks and trust companies. She led the financial institution examination team to ensure regulatory compliance and the safety & soundness of the state’s financial institutions for the customers they serve.

She was also instrumental in assisting the Commissioner in providing counsel to legislators regarding new banking models in general, and blockchain in particular in what is known as one of the most innovative and progressive states in the country. Her work laid the foundation for the State of Wyoming to become the first to embrace blockchain technology.

Her role at Prime Trust is to ensure overall compliance for the company and our customers; working to see that our financial services are delivered compliantly and with as much automation and minimal friction as possible. She will work closely with our CCO on our BSA program, our wire room team, our security team, our trust officers, customer service, accounting, product and other departments as she ensures that Prime Trust remains the best-in-class provider of compliant, technology-delivered financial services.

Best Regards,

Scott Purcell
CEO, Chief Trust Officer
Prime Trust

Deputy Banking Commissioner Joins Prime Trust was originally published in Security Token Academy on Medium, where people are continuing the conversation by highlighting and responding to this story.

The networking event brought together industry executives, financial services professionals and those interested in leveraging security tokens for their businesses for an evening of insightful discussion, drinks and bites.

A top-notch lineup of panelists joined us to discuss the state of the security token industry. Those panelists included:

• Daniel Coheur, co-founder and CSO of Tokeny
• Henry James, deputy CEO of Fincross International
• Graham Rodford, CEO of Archax
• Breige Tinnelly, Head of Europe for Securitize

Here are some of the event’s insights shared by our esteemed panelists:

The Benefits of Security Tokens

Henry James, deputy CEO of Fincross International, summarized the point of security tokens as bringing liquidity to illiquid assets. This was a major point of discussion throughout the panel discussion, but the audience wasn’t so sure.

As audience members questioned the potential for increased liquidity during the Q&A session, Tokeny co-founder and CEO Daniel Coheur jumped in and noted other benefits outside the hope for liquidity, such as reduced costs for custody and improved technology for issuers.

But, other panelists reinforced the liquidity benefits, adding that efficiency is the key to leveraging tokenization to improve liquidity. In addition, it was noted that creating a VC fund with some liquidity (such as SpiceVC), rather than being locked for seven to 10 years, was not possible before security tokens.

The Industry’s Technology Advancements

When it comes to why companies are investing in security token infrastructure, Archax CEO Graham Rodford shared, “Because the technology is going to completely change financial services because the whole infrastructure can be improved.”

“In the long-run, it just makes sense for everything to be on chain,” noted Rodford, while highlighting the ability to code “if this, then that” into a security using smart contracts.

James of Fincross added, “The token economy is one that becomes accessible to anyone with an internet connection.”

The Regulatory Environment

When it comes to the application of regulations to security tokens, Tokeny’s Coheur declared, “Securities law is the law. You need a compliance platform to bridge the gap between the law and technology.”

Securitize Head of Europe, Briege Tinnelly, added, “The (United States) SEC has been quite clear in terms of what constitutes a security. But there are lots of things still to clarify.”

Added James of Fincross: “The regulatory compliance sounds like a nightmare, but the point of blockchain is to simplify the process.”

Benefitting and Reaching Investors

Tinnelly described three key components of digital securities on the investor side:

(1) Access to a wider range of investments (like AspenCoin);

(2) Diversification of the pool of assets;

(3) Ability to sell and have liquidity.

Adding to the range of investments, James noted that the applications for security tokens could range from tokenizing real estate in a vanilla format to tokenizing debt or soft assets.

Coheur added that what is lacking in terms of reaching retail investors is the platform to create visibility for those assets.

Advancing The Security Token Industry

All of the panelists agreed that quality projects are required to help move the industry ahead. Coheur also added that we need to improve investor education in addition to bringing good projects to market.

James of Fincross noted that, at the end of the day, the leaders in this space will be technology companies because of the need for distribution. Ultimately, however, every global player in the financial industry will look into security token technology. And, financial institutions getting involved will be what ultimately helps the industry realize its disruptive potential.

Many thanks to the sponsors of the event:

Fincross International, an investment banking, securities and investment management firm specializing in traditional and digital assets, is sponsoring the event.

Merrill Lynch’s Private Banking & Investment Group

Clifford Chance, a law firm serving emerging fintech companies and leading financial institutions.

Fincross International, Merrill Lynch PBIG and Clifford Chance are Gold Corporate Members of the Security Token Academy. Learn more here.

Security Token London Meetup Recap was originally published in Security Token Academy on Medium, where people are continuing the conversation by highlighting and responding to this story.

You might not know it yet, but security tokens are having a strong year.

According to a recent PwC report, companies last year (2018) raised $442M from security token offerings, up from just $22M the year prior (2017) — a 20x jump.

Even more striking is the number of already-announced tokenization projects in 2019, a list that includes heavyweights like Facebook and Overstock. At the year’s halfway mark, security token deals are likely an order of magnitude greater than the last two years combined.

More on this in a minute.

For background, a security token is a digitized asset (e.g. stock), classed as a security under the laws of a governing jurisdiction (e.g. United States), issued, tracked, and traded using blockchain — a type of shared accounting database. Last year I wrote Security Tokens and the Digital Wrapper, a piece that spoke to the unique features of security tokens in the context of another technological advancement: the digitization of mail in the United States.

One year later, it’s more clear to me that the intersection between blockchains and our global pool of assets is inevitable. What digitization did for mail, it will also do for all the world’s value — regardless of kind or type. A new programmable format for assets (digitization), paired with a new model for how assets can be tracked and owned (trustless ledgers), will provide transformative value in both our public and private markets.

For those studying the space, it seems the question is no longer if — but when?

Historically Transformative Innovations

In a research report released last month by Brett Winton, Director of Research at ARK Invest, Winton wrote that economic historians tend to find transformative innovations (think steam engines, electricity, the internet) fascinating to study, because their macroeconomic effects tend to be quite puzzling. Instead of adding to economic momentum in their earliest years, disruptive technologies seemed to impede growth.

Let’s take electricity for example.

Winton’s research showed that while electrification caused an improvement in productivity across the manufacturing industry in the 1920s, it actually placed a drag on the economy for more than a decade prior. To leverage the new productivity benefits offered by electricity, manufacturing sub-sectors had to first sunset existing technologies, and invest (at a low-yield) until electrification finally reached critical mass.

Sound familiar?

Before we get to blockchain and security tokens, let’s walk through another historically transformative innovation — the internet. Winton’s research might help color what we know about internet-based venture over the last few decades. Here, industry-specific disruptors have been trained to prioritize user growth at the expense of short-term profitability, largely as a response to historical analogues.

Uber, which has all but demolished the taxi industry, continues to burn cash. Airbnb sprinted for nine years before posting its first annual profit. Amazon, which redefined global retail, spent much of its early history losing money. We know that travel, hospitality, and retail have been forever changed by the internet — but reviewing the early economics of each industry’s investment stage might paint a slightly different picture.

Clearly then, transformative innovation does not necessitate immediate profits. And that can look pretty scary for industry pioneers, especially as cash burns and adoption remains low during those first years. During the investment stage, it’s easy to highlight the shortcomings of new applications built on top of disruptive technology.

But make no mistake — once an investment stage rounds out in the right places, economic growth can be realized with an impact that’s massively felt across an industry.

That’s the power of historically transformative innovations.

Measurable Optimization

Building on Winton’s research, I tend to think about security token activity (during the investment stage) happening in three broad categories:

(1) Deal Flow

(2) Infrastructure

(3) Regulatory

While investment stage efforts in these categories appear bumpy today, those same bumps, measured and refined, are preparing the tokenization machine for mass adoption. When I taught at the University of Oregon, one way I explained this concept — optimization — was to anchor new ventures to the methodology popularized by Steve Blank:

(1) Learn

(2) Generate Idea

(3) Build

(4) Test and Measure

(5) Repeat Steps (until you have measurable proof of “product-market fit”)

Although it’s rooted in iterative entrepreneurship, this feedback loop can also be helpful in studying the ups and downs that occur during the earliest stages of disruption. Whether it’s building security token lifecycle solutions (“Infrastructure”), curating a stronger pipeline for security token deals (“Deal Flow”), or identifying balanced ways to legislate/regulate blockchain-based securities (“Regulatory”), it’s important to contextualize what the public sees with the optimization efforts actually taking place within the machine.

Are blockchain securities perfect today? No. But neither were the first commercial products for electricity or the internet. Consistent feedback during the earliest stages of development — no matter how harsh or critical — laid the groundwork for even stronger applications. With enough time and optimization, many categories of products found product-market fit within their respective industries.

Similarly, security tokens (today) aren’t widely understood by the general public. They’re more expensive to issue on blockchains than traditional methods. Many potential issuers, investors, and regulators are struggling to understand their value in the context of already well-run public and private markets.

But they’ve arrived. And with continued optimization over the next few years, they promise to change everything we know about the way value is recorded, offered, and exchanged. With these analytical frameworks in place, let’s address some of the traction (and optimization) taking place in our three investment stage categories today.

Category One — Deal Flow

Before we jump in to this first category, it’s important to recognize that security token deal flow is heavily chained to the second (“Infrastructure”) and third (“Regulatory”) investment stage categories. If history is any indication, most issuers and investors will continue to seek out well-oiled legacy systems and avoid investing additional resources (e.g. cost, education, time) until infrastructure and regulation is proven.

With that said, security token deal flow is already starting to hit its stride. Here’s a list of already-announced tokenization projects in 2019 across industries like real estate, media, venture, oil, mining, and financial services.

• Interest Profits. An STO for Facebook’s “Libra Investment Token”, which carries rights to interest profits generated by Libra’s asset reserves.
• Real Estate. A tokenized 37-unit condo/retail property in New York City.
• Real Estate. $1B in tokenized Thai real estate.
• Publicly Traded. The tokenization of a US public company’s Series A-1 preferred shares.
• Media. A $16M video game STO.
• VC. A tokenized Pennsylvania state-backed VC fund.
• Real Estate. A tokenized RE fund up to $700M across four rounds.
• Bond. A $500M tokenized Islamic bond by an Abu Dhabi government-owned investment bank.
• Synthetic. A tokenized US S&P 500.
• Oil. Tokenized royalty interests of US oil assets.
• Real Estate. $260M in four separate CRE tokenization projects.
• Real Estate. A $15M STO backed by Brazilian real estate.
• Med-Tech. A US-based medical technology platform STO.
• Bond. $112M in a tokenized covered bonds pilot by Societe Generale Group.
• Real Estate. A $226M tokenized RE fund in Germany.
• Media. A $100M media-rights STO.
• Financial Services. A $20M blockchain-based financial services STO.
• Bond. A tokenized Belarusian government bond.
• Energy. An STO for a renewable energy project in Africa and the Middle East.
• Financial Services. A $3.9M lending platform STO.
• Real Estate. Tokenized mortgages in California and New York.
• Mining. A $250M mining sector-focused STO.
• Real Estate. A tokenized $100M RE fund.

It’s also important to recognize that some of these projects may run into roadblocks that prevent successful adoption or demand. After all, the fact that these securities are blockchain-issued does not improve the underlying economics of the asset.

However, the increasing volume of global assets opting into tokenized structures appears significant. Over time, products and deals will get optimized based on previous success and failures to create even stronger markets. And as the industry continues to optimize Category Two (“Infrastructure”) and Category Three (“Regulatory”), it’s not unlikely that exponential growth could follow close behind.

Category Two— Infrastructure

A fully compliant end-to-end ecosystem is required for mainstream security token adoption. This includes areas like legal, broker-dealing, issuance, trading, custody, and lifecycle compliance. If you want to dive in to each segment specifically, Vertalo’s security token ecosystem map does a nice job showcasing the projects building solutions across the stack today.

As an example of the infrastructure construction happening within the industry, let’s focus on one specific area — secondary trade. Below is a list of relevant announcements from 2019:

• USA. The Boston Security Token Exchange (a tZERO + BOX Joint-Venture) filed its rulebook with the SEC.
• Gibraltar. The Gibraltar Stock Exchange will list security tokens on its blockchain-based GSX Global Market.
• England. The London Stock Exchange is testing issuance, trading, and settling of security tokens.
• Switzerland. SIX, the Swiss stock exchange, is building an end-to-end security token platform for issuance and trading.
• Germany. Deutsche Börse, Swisscom, and Sygnum are creating a security tokenization ecosystem in Germany.
• Israel. eToro, the global investing platform based in Israel, has acquired security token platform Firmo.
• USA. Republic, the Angel List and Binance-backed crowdfunding platform, acquired security tokenization platform RenGen Labs.
• Switzerland. Mt Pelerin, the Geneva-based blockchain bank, will launch a security token platform.
• Australia. The Australia Stock Exchange is testing a blockchain-based clearing and settlement system for equities.
• Jamaica. The Jamaica Stock Exchange is building a streamlined end-to-end security token platform for issuance and trading.
• Mauritius. The Stock Exchange of Mauritius is building an end-to-end security token platform for issuance, trading, settlement, and custody.
• Barbados. The Barbados Stock Exchange is building an end-to-end security token platform.
• USA. Open Finance Network, the security token trading platform, has opened trading to non-accredited investors for two security tokens (BCAP, SPiCE).
• USA. Circle-acquired SeedInvest received approval to operate a secondary trading platform for securities.
• Bahrain. Bahrain-based SprinkleXchange, a security token exchange, will list its first company in June 2019.
• Russia. Russia’s National Settlement Depository is launching a security token blockchain.

Secondary trading of security tokens will be offered in a number of unique packages, to a variety of demographics. This includes narrowly tailored solutions for both public and private markets, and rails to serve the specific demands of institutions and retail. The list above indicates a rapidly-growing appetite to build security token infrastructure — increasingly by larger international firms.

What about infrastructure areas outside of secondary trade? These areas are also solidifying. TokenSoft (ERC-1404), Harbor (R-Token), and Polymath (ERC-1400) have launched open standards for ongoing lifecycle compliance. International law firm DLA Piper is partnering with tokenization platform Tokeny to offer new issuers a legal/tech package with security token distribution in ten countries. And just this month, Coinbase Custody announced it opened custodial services for Securitize-issued security tokens.

Category Three — Regulatory

Throughout the course of history, laws and regulations have always lagged disruptive technology innovations. Unsurprisingly, that’s largely what we’ve seen in the blockchain space to date.

In a Greenwich Associates market report released in June 2019, a whopping 63% of executives in the blockchain and financial technology space cited “Lack of regulatory clarity” as the top challenge to security token adoption.

And frankly, the competition wasn’t very close.

During the infrastructure stage, I tend to split “regulatory clarity” for security tokens into two distinct categories:

• (1) Clarity Today. While security tokens are mapped to the exact same compliance requirements as non-blockchain securities, many legacy institutions continue to avoid blockchain projects altogether due to regulatory uncertainty. Jurisdictions would benefit from regulatory clarity that: (a) better delineates between non-security cryptoassets and regulated security tokens; and (b) specifies the exact technological rails by which security tokens can (and cannot) operate on today.
• (2) Clarity Tomorrow. The unique combination of digitized assets and trustless ledgers aims to serve our financial markets with a number of important benefits. To fully leverage the potential of blockchain-based securities, existing securities laws should be optimized (over time) to better facilitate, instead of work against, these killer new features.

On this second point (“Clarity Tomorrow”), here are three ideas I’ve heard opined in some form over the last year:

• Improved Access. With the new investor protection benefits that security tokens bring (e.g. ledger accuracy, asset peer-through, automated compliance), should we update accreditation standards to improve retail access for certain categories of investments?
• Security Token Mandate. With the ability to hard-code regulations at the token/chain level, should regulators require the digitization of all securities?
• Modified Rules. With the ability to divide assets into much smaller units (while maintaining a perfect record of ownership), are there still policy reasons to maintain Rule 12(g)’s 2,000 max shareholder limit for non-public asset-backed and equity securities?

These are difficult questions with nuanced answers. The good news? There’s already been a significant amount of regulatory investments made by legislators and regulators since the start of 2019:

• France. The French Government issued a decree outlining the utilization of blockchain for securities.
• Mauritius. Mauritius’ Financial Services Commission (FSC) published guidance on security tokens.
• Hong Kong. The Hong Kong Securities and Futures Commission (SFC) published guidance on STOs.
• USA (Fed). The SEC published its “Digital Asset Framework” providing guidance for blockchain-based tokens offered and sold as investment contracts.
• Thailand. The Thai government amended its law to allow blockchain-based securities to be issued and traded in the country.
• USA (State). Wyoming passed 13 blockchain-enabling laws, including the ability to issue certificate tokens on a blockchain in lieu of stock certificates.
• Taiwan. Taiwan’s Financial Supervisory Commission (FSC) will introduce new laws for security tokens in June 2019.
• USA (Fed). US Lawmakers reintroduced the Token Taxonomy Act, which seeks to exempt certain cryptoassets from federal securities laws.
• Philippines. The Philippines’ offshore economic zone’s regulatory body (CEZA), published new rules governing cryptoassets and security tokens.
• Luxembourg. Luxembourg passed a legal framework for blockchain-issued securities.
• USA (State). Maryland amended its corporate laws to permit a company’s stock ledger, annual statements, and notices to be maintained and issued using blockchain.
• USA (State). Washington passed a bill recognizing and protecting the legal status of records generated or stored using distributed ledger technology.
• Germany. Germany will introduce draft regs approving blockchain-based bonds.
• USA (Fed). The SEC is requesting public comment on ways to improve the private securities exempt offering framework to expand investment opportunities.

Leaving The Investment Stage

Blockchain has forced us to rethink what’s possible during the exchange of value, regardless of that value’s form. With security tokens, we now find ourselves creating a radically new financial architecture — one where every asset imaginable can be digitally wrapped, tracked, and traded in concert with trustless ledgers. There’s evidence that momentum is ramping quickly— but there’s still work to do before we can leave the security token investment stage.

We need to secure the industry’s foundation for a variety of use cases and end users — the right tools for the right demographics.

We need attorneys and service providers committed to understanding asset digitization — to view tokenization as a strong path forward for clients.

We need legislators and regulators providing the right guidance at the right times. And if legislators and regulators can work together across jurisdictions — even better.

We need to continue improving the education in this space. That’s something we’re focused on at Security Token Academy.

Over time, the work being done during this investment stage will get optimized — from the infrastructure being built, to the deals that get structured, to the laws that enable this technology to really thrive. Eventually, issuers will prefer tokenization and investors will demand it.

The transformation of value has started. The security tokens are coming.

We’ll see you on the other side.

A special thanks to my colleague Stephen McKeon (@sbmckeon) — Partner at Collaborative Fund and Security Token Academy’s Chief Strategy Advisor. You can read the security token piece that started it all— The Security Token Thesis — here.

Derek Edward Schloss (@derekedws) is the Director of Strategy at Security Token Academy (@security_token), the leading educational platform for the security token industry.

To stay current on the latest happening across the security token industry, make sure to read (and subscribe) to the industry-leading weekend newsletter, The Security Token Edge, delivered right to your email inbox each Saturday. You can subscribe here!

For more content from the security token industry’s leading educational platform, visit us online at Security Token Academy, join the conversation on Twitter @security_token, and jump in to our industry-leading security token Telegram group at https://t.me/SecTokenAcademy.

Security Token Academy | Security Tokens and The Investment Stage was originally published in Security Token Academy on Medium, where people are continuing the conversation by highlighting and responding to this story.