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Security Token Exchanges and Trading Organizations Take on Wall Street

Jesse Overall, Clifford Chance

Summit Interview

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Transcript


 

Adam Chapnick:

Hey everybody, it’s me again, Adam Chapnick with the Security Token Academy. Thanks for being with us. I’m excited to be joined by super attorney, Jesse Overall from Clifford Chance. Thanks so much for being with us.

Jesse Overall:

It’s great to be here, thank you.

Adam Chapnick:

We don’t get super attorneys here very often, but when we do we’re excited. So, what has brought you into this exciting space of security tokens?

Jesse Overall:

So, it’s been kind of a journey for me. When I was in law school, which was not that many years ago, I was an intern at the SEC and then subsequently at the CFTC. And so I gained exposure to kind of the two different regulatory frameworks for commodities, commodity derivatives, stock commodities, commodity derivatives, as well as securities and then when entering private practice it was, as the fintech, especially the Blockchain distributive ledger-based assets class space field, you know, has grown so much in the last few years.

I started paying attention to the different developments at the SEC and CFTC, and it’s kind of my interest and also my evolving client relationships, and the kind of work that I’m doing has generally evolved in this direction.

Adam Chapnick:

What is it that excites you about this space?

Jesse Overall:

I think the most exciting thing about this is how dynamic and how quickly changing this space is. It’s, as I think you said this morning, it’s like months are like years here. Or weeks are like years here. I feel like that. It just grows and sort of changes so quickly. Everything can kind of be thrown out the window when a new force in action, a new precedent gets set. Then so everyone’s trying to digest the import of, “What does this mean?” Sort of like Kremlinology, trying to figure it out.

Adam Chapnick:

Exactly. That’s right.

Jesse Overall:

But I enjoy it.

Adam Chapnick:

Yeah, well it’s good that you do what you do, because if you enjoy that then you’re in the right place. So, what kind of stuff do you handle in day to day these days, as a respect to the Blockchain community?

Jesse Overall:

So, I’ve worked on a number of ... I’ve provided advice on a number of initial coin offerings, domestic, foreign, outside of the U.S.. We’ve also worked on tokenized asset offerings. So, tokenized securities where ... Kind of in-line with the general ethos of the Securities Token Summit. The extension of the Securities laws and the regulated securities framework to building it out to all of the necessary parts of the ecosystem, beyond just a focus on the issuer.

We’ve been quite involved in that kind of work as well. So, it’s very interesting and it’s kind of ... It’s very diverse.

Adam Chapnick:

Tremendous. So, what do you think about the sort of the new rage in going into the Securities Tokens as opposed to what 2017 saw as just sort of this free-for-all in ICOs. Do you feel like this is the inevitable and everything’s going to go this way? Do you think there’ll be a little of both? What do you see?

Jesse Overall:

Well, as a lawyer it’s very difficult for me to reconcile myself to a world in which you could exist in the absence of regulation once it’s clear what the perimeters are. I think that there’s not really a second option other than comply. If that means going overseas and not touching the U.S., that may be what you have to do to bring yourself into compliance.

For me, I see the evolution of the Securities Token space, or I should say the Token space has been evolving into this Securities Token space. I do think that there will be eventually there will definitely be, in my opinion, a differentiation between Securities Tokens. Things which either look like traditional Securities or are backed by assets, but in a way that differentiates them from spot commodities, on the one hand.

Then on the other hand, I think that there will be an emerging asset class of spot commodities that are precisely ... I mean, all that they are is commodities, and they’re not part of an investment scheme or arrangement. I do think that we will get regulatory differentiation, but right now, a lot of the time it’s too murky to tell.

Adam Chapnick:

What would be an example of something that would behave just like a spot commodity? Are we talking how Bitcoin is a commodity, and how some people talk about that way? Is that what you’re talking about?

Jesse Overall:

That is the 64 thousand dollar question. I think every lawyer in the world is trying to figure this out.

Adam Chapnick:

Now, should I put that into Bitcoin, or?

Jesse Overall:

One thing that was very interesting was SEC chairman, Jay Clayton, recently said something to the effect of if what your digital asset scheme is about is replacing a sovereign currency, like the dollar or the euro. I think his remarks were something to the effect of we wouldn’t regulate that.

So, to me it’s an interesting question about the emergence of so-called Stable Coins, which kind of ... Their value is moored. I almost said tethered, but I wanted to avoid that.

Adam Chapnick:

Careful. That’s wise. That’s wise.

Jesse Overall:

Their value is tied to sovereign currencies. In those cases, I think you would have an argument to make potentially that you would look through the tokenized form, and through to the underlying. If they’re essentially the same, I don’t see why ... I mean, regulators are always talking about being technology neutral. I don’t see substantively why that would be considered to be a security or investment scheme of some kind and not simply just a mirror image of the underlying, which is not a security.

Adam Chapnick:

But it is a commodity?

Jesse Overall:

Generally, I believe that the CFTC has stated its opinion that generally digital assets that would not be considered securities ... A lot of them, tokenized assets, a lot of them would be considered spot commodities.

Adam Chapnick:

Interesting. Wow, that’s just that broad. If it ain’t that, it’s that?

Jesse Overall:

The full of sort of the CFTC’s powers are still under dispute. Obviously, the CFTC is the Commodity Futures Trading Commission. So, under those circumstances asserting that broadly that well, tokens if they’re not securities they’re probably commodities. If there’s not some linkage with a futures market or the derivatives market, it’s ... The question is the jurisdiction sort of open ended and infinite. Is all activity in the united states regulated as fuck.

I don’t think that’s the right answer, and there’s recently a case in California in the Monex case, where a court held that the CFTC’s authority over fraud in spot markets requires the presence of both fraud as well as a manipulative element. You are manipulating a market of some kind.

Without that element, the CFTC according to that court would not have jurisdiction purely over spot fraud. That would go to state regulators or the attorney general’s office.

Adam Chapnick:

With the criminals.

Jesse Overall:

Not the CFTC.

Adam Chapnick:

Wow. Interesting. So, that’s stuff that I don’t usually talk about, but totally fascinating.

So, what do you think is the future in terms of the fractionalization of global assets. The tokenization of not so much people raising money for their company, but, “I’ve got my house, and maybe I should tokenize it.”

“I want to keep 51%, but maybe it would be nice instead of going to Chase and getting a line of credit, maybe I can sell some tokens.” Is that going to happen?

Jesse Overall:

Absolutely. I think that’s really the future of this space. I don’t know to what extent we will think of that future in terms of regulation, as opposed to in terms of operationally, substantively, what it is. I’m not sure. It was mooted this morning, people could go out there and sell a percentage ... They could buy a small percentage of a Picasso painting, and then so you would own part of the underlying painting. Then when the painting was displayed in a museum, you would get a share of the revenues per share.

I think that that’s so fascinating, because you have ownership. Not only, you have part of the title to an asset, but you also have the benefits that come along with ownership of title of an asset. I think that if we can put that all on the internet and track it in a way that everybody can see, I think that it’s going to turn the entire universe upside down.

Adam Chapnick:

Interesting. Yeah, I agree. I always force everyone to talk about stuff like that. So, I loved the idea that you’re alluding to in the panel, where they talk about having just the tokenized museum. Where anything in that museum was tokenized and the revenue stream went back to the token holders. I mean, that makes so much sense on one level.

There’s something satisfying about not having it be these like Robber Barons who just ..all of these fine artworks, and then donate them for the benefit ... There’s something more satisfying about it being democratized. So, from your perspective as an attorney, what do you hope to be working on in the coming year?

Jesse Overall:

I would like to continue working on tokenization of financial instruments, like securities. Traditional financial instruments like securities and extending the work that we’ve been doing to all kind of corners of the regulated financial ecosystem. Sort of figuring out, dealing with all of the novel legal questions that arise. Everything from, for instance, “Can we rely on a Blockchain to satisfy a books and records requirement under state law.”

Delaware has made some interesting moves in that direction.

Adam Chapnick:

Yeah. There’s the Delaware Blockchain Initiative. I don’t know the first thing about that. How is that significant?

Jesse Overall:

I think the main import of it is that a record that is maintained in a distributed electronic network is not to be denied validity solely on the basis of its manner of storage. You can satisfy the books and records requirements as long as you can print out the records that are stored on that network. If you can reduce it to a writing, a printed out writing, then it’s valid for purposed of Delaware law.

Now, one thing that is interesting is that while Delaware has addressed that issue straight on, other states which have drafted their corporate laws in a forward thinking manner where some states will say something to the effect of books and records can be maintained in a writing or in any other form. So, trying to figure out the import of, “Well, what does that mean? Can we adapt that to a distributive ledger based system.”

I don’t think it’s that much of a stretch. It’s very early days, but those are some of the sort of dilemmas that we’re facing in the legal realm.

Adam Chapnick:

Yeah, it’s mediate. It’s exciting to see what happens. Well, you’ll have to come back and join us for one of our legal round tables, because you’re a joy to talk to. Jesse, super lawyer. Thanks for being here.

Jesse Overall:

Thank you.