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Securities Attorneys
Discuss Regulations Affecting
the Security Token Industry


 

Georgia Quinn

General Counsel of CoinList

Georgia Quinn is general counsel of CoinList, a platform that helps issuers conduct compliant ICO, token and digital asset offerings. She is also the co-founder of iDisclose, a legal technology company focused on the disclosure and legal document needs of small business and startup entrepreneurs. Ms. Quinn has been recognized each year since 2014 as a Top Female Attorney in New York City by Thomson-Reuters and as a "Super Lawyer" featured in the New York Times. Quinn is a senior contributor to Crowdfund Insider, an online crowdfunding publication. Ms. Quinn began her practice at Weil, Gotshal and Manges and later moved to Seyfarth Shaw before founding iDisclose. Ms. Quinn has presented to the Securities and Exchange Commission, Congressional staff-members, leaders of US and UK crowdfunding portals and peer-to-peer lending platforms, the American Bar Association, the American Banker P2P Conference, the Council of Development Finance Agencies, the Canadian Equity Crowdfunding Alliance, the New York State Bar Association, and the Small Business Administration. Ms. Quinn received a Juris Doctor from Columbia Law School, and received a Bachelor of Fine Arts from New York University.

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David Felsenthal

Partner, Clifford Chance

David Felsenthal is a leader of Clifford Chance's pre-eminent global fintech practice. He has worked on a range of new and developing structures including blockchain and token sales. David is an experienced finance lawyer whose practice focuses on fintech, structured finance and derivatives transactions. He has been a leader in developing and executing structured products, including securities linked to credit and equity and structured financing arrangements. David also advises extensively on trading transactions including repo and securities lending financing.

David's expertise has been recognized by leading trade associations: he has represented ISDA in its advocacy on swaps, and he gives the industry-wide opinions for SIFMA for the standard documentation for repo, securities lending and forwards. He is a frequent speaker at conferences organized by PLI, ISDA, and others. He has written articles that have been featured in various publications and websites, including the Harvard Law School Forum on Corporate Governance and Financial Regulation and the Columbia Blue Sky Blog.

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Clifford Chance is one of the world's elite law firms, with over 3,200 legal resources delivering innovative solutions to emerging fintech companies and leading financial institutions in the Americas, Europe, Asia Pacific, Africa and the Middle East.

 

Troy Paredes

Founder, Paredes Strategies LLC
SEC Commissioner (2008-2013)

Troy A. Paredes is the founder of Paredes Strategies LLC. From 2008-2013, Paredes was an SEC Commissioner, appointed by President Bush and confirmed by the U.S. Senate.

Paredes advises on financial regulation, compliance, risk management, corporate governance, and governmental and regulatory affairs. He also serves as an expert and advisor in regulatory enforcement investigations and in private litigation involving securities law and corporate law. Paredes has brought his extensive government, compliance, enforcement, and regulatory experience to bear in serving as an independent compliance consultant/corporate monitor.

Paredes was a professor of law at Washington University. Currently, he is a Distinguished Scholar in Residence at NYU School of Law and a Lecturer on Law at Harvard Law School.

Paredes co-hosts a podcast on fintech called “Appetite for Disruption.”

Paredes is a member of the board of advisors of Templum, a member of the board of advisors of StreetShares, a member of the compliance advisory council of Balyasny Asset Management, and a member of the board of directors of NAVEX Global.

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Lee Schneider

General Counsel of block.one

Lee Schneider is a financial services and technology lawyer based in New York and the General Counsel of block.one. Lee also co-founded Genesis Block, LLC, a blockchain consulting company. He is the father of two wonderful, exhausting teenage ladies and learns about Japanese art history from his wife. Troy Paredes and Lee do a FinTech podcast called Appetite for Disruption, available on iTunes and elsewhere.

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Transcript


 

Georgia Quinn:

Welcome everybody. Thank you so much. Yes, I know you’ve all been waiting for the regulatory panel for lawyers walk onto a stage. We were really going to knock your socks off today. We have an amazing panel. I guess I’ll let our panelists give just a very brief introduction about themselves and a bit of their career and then we’re going to launch into some really interesting topics. So Lee, can we start with you and we’ll just move down this way.

Lee Schneider:

Sure. Thank you, Georgia Quinn. My name is Lee Schneider. I’m a financial services and technology lawyer based here in New York. I’ve done all different kinds of things in the regulated space and then I’m Blockchain lawyer for a number of years now and trying to figure out where the regulated space on the unregulated space exists in Blockchain. I also do a Fintech podcast with Troy Paredes here, so if any of you are interested, appetite for disruption is on iTunes and other places. We talked with a lot of people in Blockchain, but a lot of other areas as well.

Troy Paredes:

So, I’m trying to Troy Paredes and I have my own consulting practice doing financial regulation, compliance, governance, fair amount, as you might imagine in the Crypto Blockchain as bases in Fintech RegTech. And the life before doing that from 2008 to 2013, I was the commissioner at the Securities and Exchange Commission. If you rewind the clock a little bit. I was a law professor and at one point earlier it was a DO lawyer. So it’s great to be here again. I’m looking forward to it.

David Felsenthal:

Thanks Georgia and I’m David Felsenthal and I’m a partner at Clifford Chance. I’m also a financial services lawyer, and in this space we’ve been working a lot with issuers who are trying to access the market in a fully compliant way as well as with more traditional banks who were just interested in using the Blockchain for their existing securities and see how they can make the ecosystem work for them as best as possible.

Georgia Quinn:

And I’m Georgia Quinn, general counsel of Coin List. I am a securities attorney, started at a firm called Weil Gotshal then co-founded a company called iDisclose that automates securities filings and now I’m in this fascinating new space. So as Amy mentioned, there’s a lot of discussion about the Howey Test and frankly you guys are probably pretty sick of talking about it, so we’re not going to dwell on that, but we are going to touch a bit on what is a security and what is not a security and this was very important, and the subject of a lot of discussion several months back and then it died down and people were just accepting that most of these sorts of tokens were securities.

But now we’re seeing a lot more activity and discussion about where that line is actually drawn, and if something can convert once it ... after initial issuance, once the network is up and running can it then convert into a non-security. We have Mr. Hyndman from the SEC giving a speech discussing some of those points. And then most recently, last week a congressman David Felsenthal submitted a letter to the SEC requesting guidance in this area. So Lee, we don’t need to go again through the Howey Test, but why is this an important discussion and what are your thoughts?

Lee Schneider:

So a couple things. First of all, the thing that I like to remind everybody about Howey, regardless of what the test says is the Supreme Court definitely did not say that oranges were securities in the Howey case. It was all about an investment contract related to oranges. And this is an incredibly important point because I think oftentimes we’ve gotten away from looking at what is the token really, whether that token is in existence when it sold or not. And thinking about whether or not the features of that token make it a security. We can certainly say that if the token represents shares in a company, equity in a company that’s going to be a security token. And a lot of the things that the prior panels have been speaking about, all apply in those cases. Where it gets harder is where the token is not a typical form of security that we were familiar with. And I think that’s the area where a lot of people have trouble.

Just a quick example of that, the way that I like to think about tokens is that they are a digital representation of something. And we see digital representations every day in our lives. For example, I was on Amazon the other day buying a new pair of shoes, and I looked at a lot of digital representations of shoes. I didn’t want to think that those digital representations were securities. I thought that they were shoes, and we need to sort of bring that same thinking to Blockchain and in my view.

Georgia Quinn:

Great. And Troy Paredes, from a regulatory perspective, how might a regulator look at this and why is this such a difficult issue?

Troy Paredes:

Wow. So I’ll try to be brief. Few thoughts here.

Georgia Quinn:

In one minute.

Troy Paredes:

In one minute. Alright, I’ll keep an eye on the clock here. So one of the reasons is because the stakes are so high, right? And the stakes are so high and the prior panel touched on this as well. The stakes are so high because if it’s a security, you’ve now triggered the totality of the federal securities laws. Now, if it’s not a security, you may have triggered other regulatory and legal regimes and quite frankly, even if you trigger the entirety of the federal securities laws, you may in addition to be triggering lots of other regulatory regimes, set aside things like tax or what have you, which is a table stakes in terms of that’s always going to be president. So this question of is it a security or not is a threshold jurisdictional question as to whether or not you have to worry about and focus on all aspects of the federal securities laws. And we’ve seen that underscored, the discussion around how it tends to, I think get people focused on what the regulatory requirements are in order to conduct the offering.

But another important aspect of it of course is as well if it’s a security and if you’re facilitating the offering of it, well, are you now a broker dealer and then you trigger the entirety of the broker dealer regime. And even if you set aside tokens, there’s still a lot of questions around what exactly is or isn’t a broker dealer finder, et Cetera, and all the rest. So you have that kind of threshold triggering aspect to it, which makes the stakes are incredibly high.

The other quick point I’ll just make is this, is to Lee’s point, I think it’s important not to get too distracted by whatever you call the thing. Call it whatever you want to call it. The question is, what are the economics? What’s the substance? What are the real substantive features of whatever the thing is? That’s really what Howey Test says, what do you like or dislike the Howey test? Would you agree or disagree with how it’s been applied? It’s to say, “Look, we’re not going to focus too much on labels. Fair enough. It’s an investment contract, but it’s patients flexible concept.” It’s really about what is this thing in terms of its substance and its and its economics. And that’s what I think where the regulator is going to continue to be focused. Why do I think that? Well, because they’ve said that and they made it clear not just in terms of speeches, but they’ve also made it clear in terms of backing up what they said with enforcement actions which continued to come out.

The question of whether or not you can, if you will, be a security one day and not a security down the road, fascinating question. We can come back and talk more about that, but I do think that’s one of the interesting things. One of the reasons is so interesting is one, it changes the do, you trigger the regulatory regime analysis, but number two, that’s something that at least as I think about it, the commission hasn’t had to focus on ever, and so this is a brand new, if you will, conceptual question, but it’s also stemming from the new technology. That’s something that regulator is going to want to be very judicious about in terms of thinking that through before they make any either big grand pronouncements, which I wouldn’t expect or even specific judgments when it comes to things that come to before them.

Georgia Quinn:

Okay, so I definitely want to put a pin in that because a lot of thoughts on that issue, but while we’re just on the topic of regulation more generally, we have a lot of laws in this country already. So, in this new industry, do we need more, David Felsenthal? Do we need to add to those rule books or do we need less? What are your thoughts?

David Felsenthal:

Certainly sounds like you’ve got a position by the way you asked that question, but I guess I wouldn’t, I don’t focus on-

Georgia Quinn:

No I’m a lawyer. I want lots of laws.

David Felsenthal:

Anyway. I wouldn’t focus so much on more or less. I think what strikes me most about the regulation overall that we’ve got in place is that it’s very focused on regulating intermediaries and the roles and responsibilities of intermediaries. And the Blockchain and tokens are just not about that. I think today’s panel, actually the panel we’ve heard so far had been a great illustration. One of the speakers got up and defined the Blockchain as transfers without intermediaries. And then the last panel we just heard was about transfer agents and custodians who are in fact intermediaries who are in fact required. So you’ve got a fundamental tension there with the rules and how they interact with Blockchain. Now that is something I think all of us would like the regulators to address.

How do we have smart contracts and the one hand, but have registered transfer agents who have to be responsible and the other. And that’s a tough issue. I don’t think there are easy answers and I don’t think to the earlier panels point, I don’t think we’re going to get a simple answer out of the SEC anytime soon, but I think it’s incumbent on us to work with the regulators and to propose things that can be done to address the concerns behind it. And again, obviously we talked a lot about transfers, transfer to accredited investors that we’ve heard about different systems. I think from a regulator’s perspective, and I defer with others on the panel, but there are issues there. There are issues about how do we verify? How do we as regulators verify what’s essentially a system based response to requirement?

The regulators like us here are mostly lawyers or academics who are less focused toward the IT side. How do we make ourselves comfortable? And that’s not just an immediate verification issue at the time of being put into place, it’s an ongoing problem. We want to incentivize people to continue to comply. A lot of the way that the securities markets work now is you have people like broker dealers, banks and so forth whose whole franchise depends on ongoing compliance and showing ongoing appliance showing that they do well on the exams. So they have a built in incentive over time to comply with what an earlier speaker referred to as both the letter and the spirit of the law. How do we build that into the Blockchain? It’s not easy to answer that, but that is something where I think the regulators could be more interactive and there could be development.

Lee Schneider:

I think ... I’m sorry Georgia if you don’t mind.

Georgia Quinn:

No. Please ...

Lee Schneider:

I think David Felsenthal’s making an excellent point about intermediaries, and some people who might be Blockchain purists would say, “Well, Blockchain is trying to get rid of all of the intermediaries.” Other people’s, myself included, say “From a practical standpoint, we’re going to have intermediaries because people are not always going to be comfortable doing everything themselves.” I for one fall in that category and a lot of areas in my life, right? And so thinking about how to regulate intermediaries is a very important part of what regulators need to do, what different industries need to do.

But the further point is to recognize that in situations where intermediaries aren’t involved, do we need to impose an intermediary for some reason? And that’s going to be a really difficult discussion to have. There’re going to be people who say, “Absolutely not. I want to do my stuff on my own, on the Blockchain, leave me alone.” And they’re going to be other people who say, “Wait a minute. The only way to impose fairness here is if there is a regulator and how are we going to have that work? Or some other intermediary and how are we going to make that work?” So to me that’s a very, very important tension to think about here.

David Felsenthal:

And if I can just add one thought to take one step back which is, the regulators have certain regulatory goals and objectives that they think need to be met, and they have regulatory regimes that we can again talk about whether we think they have the right regime where we can have that discussion about the stuff that people have been doing forever versus the stuff that people are doing now. Crypto, Blockchain, right? These debates about is the regime calibrated exactly the right way go on and on and on and have been going on and on and on. And I think that’s constructive and helpful to the process to try and get it right. But the regulators have certain objectives and goals, and I think it’s important to be mindful of that as well.

So whether it’s they’re going to be intermediaries that are going to be different with that regulation going to look like, whether it goes to anti-fraud, anti-manipulation, whether it goes to well, are the assets actually there when investors want them? Which is the core question when it comes to custody, whether it goes too well is the process by which the asset goes from person A to person B, is that going to be smooth and frictionless and done in the right way and everybody had the title disposed to have, and the money go ...right? These are basic. We can go on and on. Regulatory objectives and interests that the regulatory regime is designed to address, and I think there was a lot to all of that.

I think what that then leads us to, and the others have made reference to this is; all right, to the extent the regulatory regime right now doesn’t fit so well with the technology. Are there better ways to shape the regulatory regime to continue to advance the regulatory goals? And I think the answer that is going to be yes, because of the nature of the technology. Lots of things will be able to be done leveraging the technology that allows for some more flexibility or other changes to be made to the regulatory regime. But the way that works itself through, as David was mentioning is, is the engagement with the regulator to get them to understand exactly what those refinements are. That is a process. There’s lots of mechanisms to facilitate that process, but that’s the process. But I say all that to come back to I think is the most important point, which is not overlooking the regulatory objectives that they’re focused on looking to advance and certainly don’t want to have compromised and orienting a lot of the discussion around those objectives, and I think that’s a good way to make progress.

Lee Schneider:

And one other point that I’ll add to what Troy said, the question of whether or not the token is a security, which then leads us to certain regulatory outcomes is one of the linchpins here. We may nevertheless decide, even if the tokens are not securities that we need to regulate the intermediaries that are involved in that or we need to impose intermediaries into that space. So these are not two entirely separate questions.

Georgia Quinn:

Right. And just to put a little more practical guidance into what you guys are saying because I think this is extremely important, and it’s really getting to how we can help the regulators almost. What are your thoughts based on your experiences in working with regulators and addressing these really frankly gray areas? Are you guys more of the ILC to creative a framework and go forward and have something more concrete as a proposal and kind of ask permission or just go and simply ask for guidance?

Troy Paredes:

I’ll speak for us. I think in general the regulator process is very slow. If we have a specific issue or specific client who needs to get something done in a realistic timeframe, really, I think the way forward is to come up with a proposal that meets the rules and move forward with that framework. It is a useful exercise to try to educate the regulators and work with them over time. I just think that’s a very long-term timeframe, at least for us as a law firm that represents specific clients. We just have a hard time operating a timeframe for any given project.

Lee Schneider:

Look, I certainly have part of me that says we should just go freaking do stuff and see what happens. But I’m also a lawyer and so I tend not to give that as legal advice to my client, but I want to make a slightly different point, which is, getting back to this idea of, well what exactly are Blockchain tokens, right? Blockchain is a technology and like any other technology, it gets implemented in different industries. And so when we’re thinking about how to “regulate Blockchain”, one of the things we have to think about is what is the industry implementation? If we’re thinking about how Blockchain works in the healthcare industry, we need to be cognizant of all of the rules and regulations around healthcare. Same thing in the auto industry and you can go down the list. And all of those industries are already regulated places. So it’s to my mind a little bit of a difficult thing to say, “Well, Blockchain just means that there’s no regulation.” We all know that that’s really not true.

But we do need to, again, to my earlier point, to my mind at least think about what’s going on here? What are we doing with this technology? And then let’s think about where are we? If that’s what we’re doing with it. How is that activity already regulated? And let’s start with some things that we already know are in existence so that we have some grounding in the existing world.

Georgia Quinn:

Right. It’s more complimentary. It’s really not a vacuum. There’s a whole framework there in all of these different industries. I think that’s a really important point. And I think everybody in this room right now is here because they understand compliance. They want to follow regulation. Everybody who’s having a coffee break right now, maybe not so much, but that’s what’s really helpful about this panel because we can provide some real concrete guidance for those who realize the importance of it. Okay-

David Felsenthal:

Can I just add one specific example just to that is that, for us, for example, we’re expected to give opinions about security offerings being regulatory compliant. And we’ve had a couple of instances now where people have said to us, “Yeah, we’ve got the smart contracts in place. You can use that.” And for us as lawyers and I think the same applies to regulators, we are still grappling with what does it mean to give an opinion based on a smart contract. And that’s again just an example of a place where we need to interact more with the software, with the developers to understand what’s going on.

Lee Schneider:

Plus, even just on something like smart contracts, if you look at that through a traditional compliance lens, anytime any institution is leveraging technology and applying technology set aside what purpose, there’s a whole host of questions that go around that, that regulators are focus on. In the simplest one, is what kind of testing have you done? And do you do that testing on an ongoing basis? That’s the simplest, right? But again, I think to enter your point and lead your point is, if you think about the regulatory construct that’s in place that gives you in fact a lot of guidance, it may give you more than guidance and may give you flat out requirements, right? But there is a lot there that one can already draw from in order to try to figure out what you need to do in a way that’s going to meet the requirements or subject to and quite frankly, may otherwise be good business practices and good overall risk management.

Georgia Quinn:

Great. Thank you guys. I want to shift the discussion just a little bit, and our discussion as far has really been focused on the US regulatory landscape and we talked to a lot of issuers at Coin List that say things like, “Well, if I only offer my tokens to foreign investors then I don’t have to worry about security’s law is. Or if I incorporate my company in Malta, then I don’t have to worry.” David, is this an accurate assessment of the law?

David Felsenthal:

Again, that’s a tendentious question there, no. I think there are two sets of issues. The first is the obvious one, which is other countries have securities laws too. Now I will say other countries tend to be a more relaxed about characterizing tokens as not being securities in general, but there are exceptions. There are quite a few countries that still do treat them like the US does. So you do have to think about what’s going on outside the US, in the local jurisdictions and in the second point is that even if you’re outside of us test the securities law task for what it means to be outside the US in the local jurisdictions.

And then the second point is that, even if you are outside the US, the security laws test for what it means to be outside the US is strict, and can be interpreted in different ways. And people, you can’t take it for granted that because you’ve got an offshore issue or that, that alone means you are outside of the US for securities law purposes. And I promise not to get too granular, but there was a recent case called Enray Tezos in which the court looked at among other things where the validation knows were located for purposes of determining whether an offering within the US or not. And in the context of this offering, which involved payment through ethereum, the fact that they were validation knows in the US shouldn’t have come as any surprise, but then it was used in to overlay US jurisdiction on the offering was I think, surprising for a lot of people. So there is this whole question of what does it mean to be outside the US? In addition to how does the foreign regulation work.

Georgia Quinn:

So Troy, we have a lot of jurisdictions out there that are scrambling to develop their own laws in this area, and promote their jurisdictions as a safe haven or a place for innovation. How does that interplay with the US securities laws?

Troy Paredes:

Great question. Well, David answered it in one respect. Let me answer it in a different respect, which is I think that from a policy making perspective, whether that’s the ways in which Congress is focusing on these questions or the regulators are focusing on these questions that one of the things that ought to be in people’s minds and I think it is, is depending upon the US approach to regulating this space that’s going to have an impact on where the economic activity takes place. We have to recognize that. And again, this is not unique to Blockchain, not unique to security tokens, not unique to cryptocurrencies more broadly. And you say the same thing about a whole lot of stuff like derivatives and how you’re going to regulate them under title seven of Dodd Frank. Right? So there’s a lot of points of commonality here, but that has to be taken into account.

And that’s not to say that you then just let it rip. But it is to say that you need to be mindful of the ways in which the marketplace itself is dynamic and who is engaging in what activity, where with respect to what is the function of the regulatory environment around the globe? And so you have to think that through and figure out, “Alright, if we regulate this way or if we don’t give that particular guidance or if there’s a lot of uncertainty, how is the market going to react and is that on balance? A good thing or a bad thing? And how do we then bake that into our judgments here in the US?” And I’m sure other jurisdictions are engaging in a similar type of analysis.

So it’s hard to say in the abstract where that leads you exactly, but it is certainly part of the mix in addition to the things we’ve been talking about in effect so far this morning, which is, alright, the more granular detailed stuff, this bigger picture, international dynamics piece is certainly part of the mix.

Lee Schneider:

And I would just add one point to that which to follow on the very last thing Troy just said, blockchain is this truly international phenomenon in a way that I feel like many things have not been. And so, if the regulators are not trying to learn from each other than I think that’s going to make it very much tougher for Blockchain implementations to really be truly decentralized and truly global in nature. Speaking personally, I think that would be terrible. So I heartily endorse regulators talking to each other and learning from each other and hopefully eventually developing some common standards so that, that truly decentralized Blockchains can flourish and be beneficial to people all over the world.

Troy Paredes:

On the last point I agree. I think there should be lots of discussion and sharing of insights and understanding. I think that’s really important because no one has all the answers to be sure. I certainly don’t have all the answers, that’s for sure. But on the question of common standards or approaches, because a lot of people raise that question, harmonization oftentimes being the buzzword, one thing I think that’s just worth noting, which is more pragmatic about all this is even if you have five jurisdictions, and they have the same standard so you hold up the written page and it all says these are our rules, these are our standards that the life that those standards or those rules or those regulations are going to be given jurisdiction, jurisdiction is going to be very different.

One reason to be very different is because the enforcement mechanisms are going to be different across jurisdictions. There’s a whole host of other reasons that it’s going to be different. So I just think is one thing through the commonality of standards, and that international aspect of this from that perspective to realize, one, I’m not sure we’re going to see a common approach. We haven’t seen that when it comes to the rest of our capital markets, but even number two, even if the words on the page are the same, they’re going to play out in very different ways within challenge, the question whether or not you’ve in fact achieved the harmonization that you thought simply because everybody is holding up the same rule or set of standards.

Lee Schneider:

And I think we’ve seen that with the Basel III standards. I think we’ve seen that with anti-money laundering standards. You can point to a whole bunch of examples where the words look pretty darn similar, especially when they’re translated, but the application is different.

Georgia Quinn:

Well, that doesn’t seem very optimistic, but I have not lost hope because we have examples. There’s the Internet and most countries do have that and these companies are able to operate their businesses throughout. So don’t lose hope folks. The name of this event is the Security Token Launch Event, security token being the key element. What are the advantages of tokenizing these assets versus just issuing a more traditional type of security? And Lee, I’ll let you start.

Lee Schneider:

Sure. So I’ll focus on what I would call traditional securities like common stocks. I think there’s a number of advantages. First of all, the last panel I thought did a really good job talking about how settlement will be much easier for four transactions how understanding who your shareholders are can be made much easier through Blockchain and related means, and just generally, moving away from highly centralized and complex systems to more decentralized and hopefully less complex systems for securities. So I see lots of benefits from a technology standpoint that flow from it. I don’t know that, that changes anything from a regulatory standpoint with regard to common stock and how it’s sold, et cetera, et cetera. But if you can clear out some of the underbrush and make it cheaper for people to transact, that’s generally a better outcome.

Georgia Quinn:

You guys have any additional thoughts?

David Felsenthal:

Yeah. I would also say that one advantage from our perspective is that given the history of security tokens and given the ingenuity involved, there’s much more flexibility and tailoring the economics of the token with the issue or needs. So I recognize that not a necessary link to the technology, but in practice I think it is something we’re seeing and particularly the real estate space. We’re getting a real estate panel next, but there’s a great deal of openness to saying this token represents these rights and I think that is an area where obviously there’s an enormous potential to develop tokens that represent property rights in real estate of a certain type or that represent an interest in certain specific cash flows. Again, we’re not completely reinventing the wheel here. I think we’re leveraging off of existing ideas, but given the fact that it can be done in an efficient way or we believe it can be done in an efficient way, I do think that there’s a future for, I think potentially smaller but targeted offerings that represent very tailored property rights.

One thing going hand in hand with that and it’s a point that my fellow panelists are making, the disclosure rules will still apply. I think that we have to be very clear and possibly some of the white papers that are out there in the past haven’t been as clear as they should have been about what exactly those property rights are, and how we can divvy it up. But I do think there’s an enormous potential there within the token market.

Georgia Quinn:

And you mentioned really tailoring it to what the issuer wants, but we can also really tailor them to what the investor appetite is.

David Felsenthal:

Absolutely. Yeah.

Georgia Quinn:

What about the ability to fractionalize assets? Does this technology help facilitate that as well?

David Felsenthal:

Again, I don’t know that the technology per se is what drives the ability to do it, but I think that the existence of this market, the fact that it’s more, we believe it’s more efficient, that it could be tailored to somewhat smaller offerings and a broad public offerings all lends itself to doing that, to offering securities or the tokens that represent some fraction of an overall piece of property.

Georgia Quinn:

Great. Okay. So we’re getting-

Lee Schneider:

So if that’s the case. If it’s a fractionalization of a piece of property, is that token a security? It’s really a rhetorical question, right? I don’t know that anybody has a clear answer to that question, but you’ve talked with people who are looking at real estate. I’ve talked with people who are looking at fine art, right? I would think it might be cool to carry around the picture of the Picasso in my phone that I own a thousand dollars-worth of. But owning a thousand dollars-worth of a Picasso because it’s a blockchain token, I don’t know if that’s a security or not. Think it’s probably not because it’s a Picasso, but maybe it is.

Georgia Quinn:

Well, what entity is it held in? How were the rights assigned to the individuals?

Lee Schneider:

Well, the oranges were not securities in Howey, so hopefully the Picasso was not either, but these are some of the really interesting questions that lawyers and others in the space have to grapple with when they’re talking about these issues. The example that I always love to give people as CryptoKitty’s, right? I don’t think I’ve ever heard anybody argue that CryptoKitties were a security. Right? But I think I can make a pretty good argument under some readings of the Howey Test and what not that the CryptoKitty is a security.

Georgia Quinn:

It’s definitely the efforts of others. All right. So we’re really getting to the end here. Final question is, we’ve been promised these secondary markets. That’s part of the allure of the assets. There’s this liquidity they’re supposed to encapsulate, but we’re not really seeing a lot of exchanges out there for security tokens. Troy Paredes, do you have any idea why this might be?

Lee Schneider:

Well, I think we’re going to have a panel on that here. So I won’t steal any of that-

Georgia Quinn:

You don’t spoil it?

Troy Paredes:

... of that particular thunder, but it comes back in part two. Well look, the space, depending on how exactly you want to find it, this is still new stuff, right? So it’s not even as if you think about everything else in our capital markets. We’ve been doing this for decades to get to where we are. So, it’s going to take some time. So for things to take two, three, four, five years and the regulatory world or in the financial services world that can move them pretty quick. Now I realize that in other worlds and from other dimensions that’s moving pretty slow, but one is just the stuff takes a little bit of time.

But one of the reasons it takes a time is not only in terms of just the market place to get to that point and its own evolution, right? For supply and demand conditions, if you will, overall to line up so that a business idea really can become a business model and actually have a real life and to succeed as a business and not be too early? There’s a lot of great ideas are a little too early. So timing from that perspective, just your business matters, but it’s the regulatory environment as well, which is to be an ATS broker dealer to be an exchange. You don’t just decide, oh, that’s a label I want, right? You have to satisfy very demanding regulatory requirements. Why? Because the regulators thought that those venues for transacting need to be able to meet certain requirements in order to meet certain regulatory objectives. And so all of that is process and takes time.

And so I think as this continues to evolve, we’ll see more and market participants and wearing different kinds of hats and have a different kinds of regulatory status enter into the space. I’m sure you’ll hear some of that again this afternoon. But I think that, in combo accounts for a lot of where we are versus perhaps where others might have thought things would be at this point.

David Felsenthal:

If I could just jump in, we’ve talked about some of the other regulation that could conceivably apply in addition to securities regulation. For some exchanges, if they’re contemplating using security tokens that are denominated in Bitcoin or other cryptocurrencies, there is a whole different set of regulation that applies to transfer as a cryptocurrencies, the New York bit license for example. And so, for those exchanges they have to deal with that regulation in addition to the regulation that Troy mentioned. So another sort of factor that has to be taken into account.

Lee Schneider:

And maybe I’ll just throw in one last point from my perspective which is, saying that your token is going to be a security, brings a whole bunch of knock on implications that are even aside from the things that we’ve discussed already today. So for example, if your token is a security, every time it moves on your Blockchain, that’s a securities transaction. So you have all kinds of issues that flow from that fact, including by the way, whether or not your Blockchain needs to be registered as a trading venue in order to facilitate all those securities transactions. So I think people should avoid the temptation of just saying, “I’m just going to do a security token” because it has all these other knock on impacts away from the trading that occur as well.

Georgia Quinn:

So, I think it’s pretty clear that we are just scratching the surface here. Unfortunately, this fascinating panel does have to come to an end and I see the coffee break people are coming back in now for the next panel, but I just want to take a moment to thank our wonderful panelists.