The flight to Barbados isn’t a short one. I left home at 5am and didn’t get into Barbados until after midnight thanks to a minor delay caused by inclement weather surrounding Miami. I heard that it’ll take roughly 35 hours for another person who’s coming into Barbados from Beijing tomorrow. People are coming from many parts of the world…Europe, Asia, South America, North America and beyond. We are all here in the spirit of collaboration to help create the basic building blocks of a regulated securities industry powered by decentralized ledger technology and to resolve the issues that inevitably arise when nascent technologies threaten to disrupt entrenched industries.
Creating the basic building blocks of a regulated securities industry powered by decentralized ledger technology and to resolve the issues that inevitably arise when nascent technologies threaten to disrupt entrenched industries #Blockchain #DLT #STOsClick To Tweet
2017 was the breakout year for Initial Coin Offerings (ICOs). ICOs were covered by mainstream media. Many conducted ICOs simply to raise capital for a business or idea, essentially seeking investment capital. Though they would pretend that these were unregulated capital raises, the reality is that a good number of them conducted raises that were illegal under multiple jurisdictions around the world.
So the regulators came, and they did so in force in 2017. All around the world, regulatory bodies took their stances. Some were extreme and banned all ICOs. Others tried to apply their existing regulatory regime to the industry. Some adopted a wait-and-see approach.
The enterprising adopted favorable regulation to encourage businesses to relocate to their jurisdictions. Though multiple regulatory issues can arise in connection with ICOs, most people focused on securities regulations. In particular, the US Securities and Exchange Commission (SEC) became this dreaded agency even though they actually exist to protect capital markets through efficient regulations that ensure a healthy and safe environment.
Somewhere along the line, “ICO”, became a dangerous acronym, and “Security Token Offerings” (STO) became the new kid on the block.
The industry has a bad habit of classifying all token offerings by one term, and that’s not helped by everyone rushing to take street credit for coining a new acronym or “inventing” a new structure. In reality, nothing is new.
People are just coming up with fancy names for structures that have existed before ICOs were around. Frankly, it all just boils down to the fact that you have token sales, some of which may be considered “offerings”, of which a portion may involve “securities”. If you have an offering of tokens that involve securities, then you have an STO or whatever name you prefer to call it.
Initial Coin Offerings or Security Token Offerings
Governments usually regulate securities offerings, so the STO is a regulated offering. This is important because the anonymous, decentralized, and freely transferable nature of most decentralized ledger technologies makes it difficult for companies to comply with regulatory requirements. It’s part of the reason why many ICOs have been illegally conducted. It’d be ideal to have more favorable legislation that is understanding of the new realities of decentralized ledger technology, but until that comes around, we need a way to legally conduct STOs within existing legal frameworks and in anticipation of what future legal frameworks might look like. STOs are here to stay, and many expect that all capital raises will eventually be tokenized.
the anonymous, decentralized, and freely transferable nature of most decentralized ledger technologies makes it difficult for companies to comply with regulatory requirements. It’s part of the reason why many #ICOs have been illegally conductedClick To Tweet
The Digital Asset Evolution
Most token offerings are conducted through Ethereum using the ERC20 standard. ERC20 is important because it standardized an Ethereum token so that everyone knows how to interact with it. For all its greatness, however, ERC20 lacks the additional elements that are required when tokens represent securities. As a result, some companies, such as Polymath, Harbor, and Securitize have attempted to release protocols of their own that provide a method of standardization.
It’s a great first step, but it’s only a baby step.
Now we have differing standards that can be made to be compatible through awkward workarounds, but nothing simple and uniform like ERC20. For example, though Polymath, Harbor, and Securitize have transfer mechanisms, they each use a different command. How great would it be if the command were the same between all three of them, just like they are with ERC20? How great would it be if you told someone that you were doing a security token and they knew exactly how to interact with it without being familiar with the details of how your particular tokenized security functioned?
Creating a Consensus for a Security Token Future
That’s what we’re here to discuss, all the way in Barbados, away from the hustle and bustle and distraction of our everyday lives. Just a group of securities industry veterans and blockchain disruptors working together to figure out what we all need in order to have each of our businesses work together.
We’re exploring whether a new ERC standard needs to be created to handle the unique requirements of security tokens and what that standard might look like. This isn’t a meeting for participants to show off or brag. People were invited not because they were prestigious, but because they were willing to show up to work. If they thought they were too important, or if they thought they were going to come for a vacation, they weren’t invited and they probably wouldn’t have wanted to come anyway. The participants here are workers, soldiers on a mission to improve the securities landscape.
The Security Token Roundtable is exploring whether a new ERC standard needs to be created to handle the unique requirements of security tokensClick To Tweet
The Security Token Roundtable guest list includes Fabian Vogelsteller, the author of ERC20, as well as representatives from numerous crypto exchanges, AML / KYC providers, tax firms, law firms, trust companies, escrow and qualified custodians, blockchain services companies, transfer agents, developers and more.
This type of collaboration doesn’t just happen by itself; Polymath took the initiative to organize this event to bring together a purposely diverse working group that can improve and push forward this new standard.
Over the next few days, we’ll need to discuss the needs of different jurisdictions around the world (and even within a particular country), the implications of different laws (tax, corporate, securities, etc.), the requirements of market participants (issuers, investors, broker-dealers, transfer agents, exchanges, regulators, etc.), how to bridge the gap between the practical needs of law / finance against the limitations of the current implementation of Ethereum, and much more.
The Securities Token Roundtable
I’m excited about the next few days because these are exactly the topics that I’ve explored extensively as an attorney, an advisor, and as an entrepreneur. Hopefully, something definitive and actionable will come out of the Securities Token Roundtable, but even if not, deeper collaboration and relationships will have been formed which may be the stepping stones to something greater in the future. Stay tuned for more updates and coverage of this event.
(Editors Note: Jor Law is an advisor to Polymath and friend to Harbor and Securitize. Jor is the founder of VerifyInvestor.com, a tZERO subsidiary, which plans to work with Polymath, Securitize, Harbor and similar companies.)
Jor Law is a pioneer in building out the ecosystem for digitizing and trading securities on the blockchain and other distributed ledger technologies. A corporate, finance, and securities attorney, he is most well-known for his expertise in alternative finance, including EB-5, venture capital, crowdfunding, and initial coin offerings (ICOs) or security token offerings (STOs). He is a co-founder of VerifyInvestor.com, the dominant accredited investor verification service in the world and a founding shareholder of Homeier Law PC. He is an expert on attracting and verifying accredited investors. Within the crypto space, he’s most passionate about securities regulations affecting tokens, identity for regulatory purposes vs privacy and anonymity, and cross-ledger or cross-chain technologies.