Security Token Academy encourages you to read our

Why Security Tokens Will Transform
the Real Estate Industry

ICO Insight Top Section

Expert Interview


 
Steven Gatti - Partner, Clifford Chance

Steven Gatti

Partner, Clifford Chance

Steve Gatti is a partner in Clifford Chance's Financial Services Regulatory Group and head of the U.S. securities regulation practice. His practice concentrates on securities enforcement and counseling, with a focus on broker-dealer, investment management, and payment systems regulation, and issues unique to cross-border, multi-national financial services clients.

Steve represents U.S. and international financial institutions, including broker-dealers, banks, and investment advisers in regulatory, enforcement, fintech, cybersecurity, data privacy, and commercial matters. Steve represents institutions and individuals in examinations, investigations, and enforcement matters before the U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the U.S. Commodity Futures Trading Commission (CFTC) and other self-regulatory organizations as well as state regulatory authorities.

Steve also has years of experience conducting internal investigations involving potential securities law violations and financial fraud, and in conducting internal compliance audits. Steve’s practice includes strategic counseling on financial markets and trading regulation, anti-money laundering compliance, investment management compliance, broker-dealer regulation, trading systems, distribution and marketing issues, new products, privacy, transactions in the financial institutions sector, and Dodd-Frank.

LinkedIn    |    Twitter    |    Company

Jessee Overall - Associate, Clifford Chance

Jessee Overall

Associate, Clifford Chance

Jesse Overall is an associate in Clifford Chance's New York office and a member of the Capital Markets group. He focuses on a wide variety of complex financial transactions and regulation, reflecting his background as a former CFTC and SEC intern. He has extensive experience advising on U.S. regulation of digital assets such as virtual currency products and derivatives, and initial coin offerings. He has also helped asset managers set up private credit programs, and advised banks and sponsors in connection with complex structured debt and securitization transactions and regulation, banks and hedge funds on par and distressed syndicated loan trading, companies and financial institutions in negotiating OTC derivatives transactions, issuers and underwriters on public and private securities offerings, SEC filings, and corporate governance.

While in law school, Jesse served as a two-semester intern at the U.S. Commodity Futures Trading Commission (CFTC), in the Divisions of Swap Dealer and Intermediary Oversight (DSIO) and Enforcement, and as a two-semester intern at the U.S. Securities and Exchange Commission (SEC), in the Division of Corporation Finance and in the Office of International Affairs.

LinkedIn   |    Company

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.

Transcript


 

Adam Chapnick:

Hello and thanks for joining us here at the Security Token Academy. I’m Adam Chapnick. 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. Clifford Chance is a gold corporate member of the Security Token Academy.

Today, we are talking to two attorneys from the New York office. Joining us from New York is Steven Gatti, partner at Clifford Chance, as well as Clifford Chance associate, Jesse Overall. Thanks to you both for spending some time to chat with us today. First, let’s start with an overview of Clifford Chance. Your firm’s a global law firm. It’s one of the 10 largest firms in the world, actually. Steve, can you tell us more about Clifford Chance and what led you to becoming one of the world’s really premiere law firms?

Steven Gatti:

Sure. You’ve got to go back to about 1987 when two leading London-based firms decided to merge with the, even back to that point, the ambition of being the leading global law firm as they saw the consolidation of legal services well before that had already taken place. In 2000, that firm, Clifford Chance, essentially acquired a New York-based firm, Rogers & Wells and a German firm, called Pünder, creating, in essence, the modern Clifford Chance. Over time, over the last 18 to 19 years, the firm has continued to grow with major presence in every major financial market, every continent except Antarctica, and across many practice areas.

Adam Chapnick:

Amazing. On your website, you mention a focus on responsible business. Steve, what does that mean? Why is it important?

Steven Gatti:

Well, it’s very important. We’re a well-known brand and a leader in legal services and we’re active in every community in which we are located or not located. Clifford Chance wants to always strive to be a positive contributor to that community whether through access to justice, education, environmental concerns, general charitable and good works. We’re very committed to our role as a member of the global community, not just legal community, but overall community.

Adam Chapnick:

Jesse, what made Clifford Chance decide to get into the security token space?

Jesse Overall:

I think that as a firm, we see the security tokens, specifically in blockchain distributed ledger technology, more generally as a phenomenon that holds the potential to be a next evolution of global financial markets, I would say capital markets specifically. We were attracted by the ability to enter the space at an early stage and to help shape the norms and the practices and the customs in this space. We saw an opportunity to do that, to contribute while the space was still developing.

Having recognized the potential early, we sought to channel our participation through a number of different channels. We’ve actually been involved in a number of market-leading, pioneering transactions, particularly in the real estate space. We also participate in a number of global trade groups, industry consortia, standard-setting bodies, in an effort to help shape the standards and norms going forward and to do things outside of our direct transactional work in an effort to help the space develop and to shape it while we have the chance.

I think that’s definitely something that we found attractive and that motivated our recognizing the potential early and getting involved in it as we have. I think a slightly related, but slightly different motivation for engagement in the sector is we see it as an outgrowth of our wider tech practice and our wider engagement with technology more broadly. We have market-leading cybersecurity, data privacy, AI practices and so we see our involvement with blockchain and distributed ledger and security tokens as a logical outgrowth of that wider engagement.

Adam Chapnick:

Got it. Steve, how do you go about managing a large firm such as yours with such a diverse array of client needs?

Steven Gatti:

Well, it’s certainly not easy, but the Clifford Chance model, and really ethos, is how do we get the best people, the right people, for a particular project working on that project in the right region. The structure of the firm is such that you’re incentivized to always get the best people working on the most important work. We have a relentless focus on clients. Everything is about client service, everything is about best delivery to those clients.

If you focus on the clients and where the clients are heading and how you can serve them, you can address the issues ... If you’re focused on the clients, you’re going to be able to manage that type of business. If you’re focused on other things other than clients, you’re not going to be able to keep up.

Adam Chapnick:

Could you both describe the regulatory and legal framework for security tokens? Maybe let’s start first with Steve.

Steven Gatti:

Sure. Well, to date, what’s been happening, and I think will continue to happen, is how do we fit security tokens as a new asset class into the existing regulatory framework for the regulation of securities. That’s what the SEC has been trying to do over the last three years in dealing with these assets. I think that’s the appropriate approach. There’ll certainly be adjustments to regulation over time, but there is a framework for how securities are offered, how securities are traded, how securities are held, how securities are marketed. If a digital asset is a security, then that framework should apply.

Now, that sounds a lot easier than it is because this is a new type of asset. It has some indicia of a traditional security but it also has characteristics of a different kind of economic arrangement between the holder and the issuer of that asset. The SEC’s approach to date has been started with, and I think rightfully so, getting rid of fraud. Who are the fraudsters? Who are the people who are just using this asset to harm investors and clean that up? Over time, the SEC has issued reports, like the DOW report in the summer of 2017, explaining their position on when is a digital asset a security.

That was followed by other enforcement actions where there was not fraud, but they made statements about what constitutes a security in this environment under the Munchee case. Now, most recently, there’s been settlements involving the Paragon and Airfox settlements where they really designed a way for an ICO issuer to come forward, make restitution, pay a fine, and restructure their business in a way that they can move forward.

I think the ground is now fertilized to allow for ... initial coin offering, I think, is the wrong term. An offering of digital securities can be done in a compliant manner.

Adam Chapnick:

Jesse, can you add anything about the regulatory and legal framework around security tokens?

Jesse Overall:

Yeah, so I think Steve did a great job of laying the groundwork for understanding the legal and regulatory framework that applies to security tokens. I think that, as Steve noted, in 2016, 2017, as the price of Bitcoin increased almost exponentially, there was a great deal of enthusiasm for the potential, what was seen as the potentially transformative properties, of digital assets and initial coin offerings as being the new way to raise capital outside of traditional channels and without the involvement of traditional intermediaries.

That motivated a large number of, in many cases, unscrupulous actors and in other cases, obviously, good faith actors to become interested in initial coin offerings as a capital-raising mechanism or a new way to structure their business. We think that the SEC and a number of other federal regulators saw that almost gold rush going on and were worried about the potential excesses that could accompany that phenomenon. The SEC focused early on on defining digital assets that might be securities in a way that is quite broad using the traditional catchall test that has emerged under a body of Supreme Court jurisprudence, focusing on a test called the SEC vs. W.J. Howey Co. This is a catchall test for an investment when an arrangement or structure or transaction constitutes an investment contract.

The SEC deployed this weapon to address what it saw as investors essentially getting ripped off and the prevalence of fraud in the space. Over time, the SEC’s focus has shifted somewhat from policing issuers with potentially obvious fraud, shall we say, or in some cases, that’s arguable, but at least policing offerings that have the indicia of fraud to policing cases where issuers have issued tokens in violation of the securities laws but not necessarily involving fraud. So, making more technical violations of the securities laws and not necessarily engaging in wrongdoing vis-à-vis their investors other than not registering with the SEC.

Over time, the SEC’s focus has shifted somewhat and, as Steve mentioned, these are the foundational cases that we think articulate a path that issuers can follow if they want to comply with the regulations. We have a better sense of what the regulatory perimeter is as a result of these enforcement actions having come out. I think that it’s been useful to learn SEC’s attitude.

Adam Chapnick:

Yeah, is the legal and regulatory regime for securities adapting to the use of blockchain technology and selling token? Let’s start with you, Jesse.

Jesse Overall:

The framework has been adapting over time and, as we mentioned in our previous response, the SEC’s attitude and that of certain other federal agencies has been evolving on the question of digital assets. Initially, there was a focus on fraud and on issuers. Then, as time has gone on, the SEC has broadened its enforcement focus to include financial market intermediaries who facilitate trading in digital assets or investing in digital assets.

For instance, in the last year, you had the SEC brought a number of cases, one against a token-trading platform for operating as an unregistered broker-dealer for facilitating trading and taking transaction-based compensation in connection therewith. You also had an SEC action against another trading platform and specifically against its original developer and creator for operating as an unregistered national securities exchange. Equally, you’ve had on the buy side, you’ve had SEC cases against, for the first time, an investment manager for operating an unregistered investment company that had invested in digital assets that the SEC deemed to be securities.

So, the SEC has broadened its focus from fraud and from issuers towards financial market intermediaries.

Adam Chapnick:

Yeah, Steve, do you see any evidence additionally about how the regulatory regime is adapting to specifically the blockchain technology in selling the tokens?

Steven Gatti:

Yes. In addition to, we’ve been talking a lot about enforcement developments and how the SEC is using the enforcement process to articulate regulatory developments that will then be applied across the industry. But, at the same time, they’ve also put out a number of statements over the last year to 18 months setting goalposts without the use of enforcement. For example, about six months ago, the SEC released a statement on exchanges or participation or trading in digital assets that one, sent a message to the market but also laid down some parameters.

Very recently they put out a statement relating to the custody of digital assets. As many people know, Commissioner Peirce has been very active in reaching out to the industry, speaking about digital asset issues, security token issues. I think what’s happening over there is there’s a maturation of the SEC’s thinking about these issues and understanding that there are, like most of our clients, certainly all of our clients, most people in the industry want to do the right thing and try to get it right.

Adam Chapnick:

Yeah, I’ve been quite impressed with how nimble and, dare I say, even creative the SEC has been through this evolution. Just from one man’s opinion, I think that they’ve been quite impressive. But, shifting gears, let’s talk a little institutional. Are you guys seeing that institutional investors are buying digital assets? What sort of legal or regulatory and structuring considerations should institutional investors think about if they’re considering investing in the sector? What do you think, Steve?

Steven Gatti:

Well, look, there’s always initially the viability of the investment. Do you believe the investment is going to appreciate in value? Is it consistent with the investment objectives that you as an advisor have set out to your clients? Is it consistent with the risk profile? The same considerations that an investment manager may bring to any asset, they would also bring to a digital asset. Concerns about liquidity. Will I be able to get out of it? Concerns about volatility, concerns about consistency or portfolio drift because of the swings in value of these assets.

I think over time as there’s a stabilization in the volatility within digital asset markets, whether it’s cryptocurrencies or security tokens or otherwise, you will see even greater acceptance that digital assets, security tokens are a viable component of a diversified asset allocation strategy.

Adam Chapnick:

Are you guys seeing right now that institutions are already in or is that in the future, yet to be determined?

Steven Gatti:

Recent recent statistics have been published about the number of investment managers who have created a slice of their pie into digital assets. There are managers out there who are marketing crypto asset funds and are focusing on that area of the marketplace in terms of investments. There is some statistical information out there, I just don’t have it at the ready, but clearly, you’re seeing it.

In fact, in one example, Fidelity, I think about six months ago, five months ago, announced a component of their private wealth program that would be focused on digital assets. That would be getting down into people whose money is managed by a Fidelity asset manager, so bringing even to the high net-worth area managed access to digital assets.

Adam Chapnick:

One of your areas in particular of expertise is real estate. Jesse, how do you see the security token changing the real estate space?

Jesse Overall:

We think that security tokens have the potential to be very transformative on real estate financing and investment. We worked on the pioneering transaction involving the tokenization of a minority interest in the St. Regis Aspen Hotel in Colorado. I think that that transaction illustrates the potential that tokenization has to serve as a means of financing in a more efficient and streamlined way for fractions of single-fee, simple real estate properties.

We think that tokenization will enable the financing and carving up of smaller stakes in an individual property and then the divvying up of those stakes among the security token holders proportionately in a way that is superior to existing methods of finance which can be very complex and very paperwork-intensive and full of friction and difficulties. We think that there’s great potential for security tokens to represent a new development in the financing of real estate particularly.

Adam Chapnick:

Again, we agree here at Security Token Academy. What other verticals do you see being prominent in the security token space? Are there any reactions you’ve seen from the corporate world specifically around blockchain technology and security tokens, Jesse?

Jesse Overall:

At its heart, blockchain and distributed ledger technology, these are really just ways to record information in a new way. There’s not really constraints on what the content that information should be. This is something that enables these technologies to be industry agnostic and to be applied to potentially every industry. The benefits are not confined to just, let’s say, finance. That being said, a lot of the activity that we’ve seen, and maybe it’s because the original digital asset, Bitcoin, is a payment mechanism, we’ve seen a lot of interest and we’ve seen a lot of developing applications in the financial services industry.

For instance, there have been attempts to apply the underlying technology to a variety of different financial instruments from originating loans, for instance, to securitizing the loans and issuing interest in pools of loans. There’s also been interest in applying the technology to the derivatives market. Actually, today, as the show’s being taped, the Commodity Futures Trading Commission, which it the U.S. derivatives regulatory, is holding a hearing on the potential applications of blockchain and distributed ledger technology to, among other, the swaps market.

We think that financial services has been an area where there’s been a lot of interest in security tokens and in the underlying technology. Outside of financial services, a number of traditional technology providers, IBM, Microsoft, Amazon, all offer blockchain technology that developers can build on. As these infrastructural services are being provided by these technology providers, we think that the applications will become increasingly common across many different industries.

Adam Chapnick:

Got it. What do you think are some of the biggest challenges that face clients who are looking to launch a security token? What do you think about that?

Steven Gatti:

What they’re faced with right now is a regulatory framework that, again, is not designed to accommodate a digital asset in the sense that secondary markets have not yet developed to adequately, say, transfer or create liquidity once you’ve offered the token. I think we’ve moved to a good spot in terms of being able to engage in a compliant offering, primary offering or a securities token.

You can fit into that framework relatively easy. There are some limitations perhaps on marketing depending on what exemption or what route you take in terms of the offering registration requirements. But, thereafter it’s liquidity with respect to that security that creates issues because the process of transfer, the process of custody in terms of exchanging those assets has not fully developed yet. That’s a real challenge for someone engaging in an offering.

The other challenge is do I really, truly have a security or I may have a security at the time that I offer it, but over time my security token truly will be a token, a utility token that allows someone within the ecosystem that I’ve created to exchange that token for some other item of value similar to a ticket at an amusement park. To use an example, if you want to do a securities token offering to raise money to build your amusement park and you go out and you sell these tokens and you take the capital and you build the amusement park ... Those people have those tokens and they’re going to be using them in your amusement park a year later.

Well, if you successfully build the amusement park and the tokens are then used, are they still a security or am I just using it to get on a roller coaster even though it was used to fund your business? It’s fitting what your actual business and what your goals are into the framework and that’s still being worked out.

Adam Chapnick:

In your example, that question has yet to be answered, the amusement park example of a token ... it’s a great one ... they still haven’t got a definitive answer on that.

Steven Gatti:

It hasn’t and the SEC, thankfully, is sensitive to it and they’re accepting of the concept of an evolving instrument. They’ve talked about it in the context of ether and the Ethereum blockchain and how it may have been a security when offered but now functions as a decentralized unit of value for a unit of exchange. Many of these cases, even recent cases, the Airfox and the Paragon, I think the founders, the issuers of those tokens viewed what they were issuing ultimately to be something to be used within that ecosystem in order to receive goods or services through that ecosystem.

They were used to raise money to build the ecosystem and I think the SEC therefor said, at least at their inception, they represented a security under the Howey test that Jesse mentioned.

Adam Chapnick:

Right. Jesse, is there anything that occurs to you as other challenges that you’ve seen or you can perceive for clients who are looking to launch a security token offering?

Jesse Overall:

Well, I think Steve got it perfect. Really, the two areas that he identified, I see that regulatory uncertainty is one of the biggest hurdles that clients have to face and it’s always difficult to be the first as we know from our representation on certain of our first of their kind transactions. It’s always difficult to be the first and particularly when a lot of the obstacles are based on uncertainty as to the exact regulatory status you have a particular problem because you don’t know if you’re complying with the law. I think Steve is exactly right that the two material areas, most material areas of uncertainty really is one, are you a security or if you are something that started life as a security, at what point does it change into a non-security?

As Steve was alluding to, the SEC has signaled that they think there are potentially two ways that a digital token could be not a security or even if it began as a security, it could change into something that’s not security. One of them is decentralization. As Steve noted, the example there is Ether. Ether was sold in what the SEC Director of the Division of Corporation Finance, William Hinman, referred to as a fundraising in 2014 at an initial point at which time the fundraising looked a lot like a traditional securities offering. The entity or group of entities that were involved in organizing the fundraising were what the SEC would refer to as centralized and they looked to the SEC like an issuer or a promoter that’s familiar from the SEC’s jurisprudence and regulation.

Those are familiar concepts to the SEC. The SEC said that initial fundraising by what looks like an issuer/promoter of Ethereum could have been a securities offering. Over time, the network became sufficiently decentralized. The ownership of ether became sufficiently dispersed. Ether’s open source and the use of ether for its functionality, these are all things that the SEC may have taken into consideration expressing the view that ether had become sufficiently decentralized that current sales of ether are no longer transactions and securities.

The question is, when exactly does that point occur and when exactly can we pin down from a legal perspective that decentralization has occurred, and you are no longer subject to securities regulations? We don’t know that. That’s a major area of uncertainty that’s facing us and our clients that want to do digital asset offerings, but don’t, for a variety of reasons, especially when it comes to embracing new business models that are based on utility tokens and the usage of utility tokens or the consumption of utility tokens in decentralized market places or over decentralized peer-to-peer networks. These are things that we’re not sure about and we’re waiting on the SEC to clarify these things.

That’s one major area of uncertainty. The second area of uncertainty is, as Steve highlighted precisely, is the area of secondary trading and the regulation of the intermediaries that facilitate secondary trading and the issues surrounding custody. For broker-dealers that are facilitating digital asset transactions, what exactly is a good control location for purposed of SEC regulation when you’re holding onto private keys? Another issue is DTC hasn’t added any digital assets to date to the list of eligible assets. That’s another issue for market intermediaries that are looking to facilitate trading in these instruments.

We think that these are two significant barriers, two significant regulation-based barriers to the continued evolution development of the digital asset markets. We’ve seen these issues come up in representing our clients.

Adam Chapnick:

Got it. Are you guys seeing a need for more regulations in the security token world? You have a unique perch from which to view this. What do you think, Steve?

Steven Gatti:

Well, more regulation I think is not the issue. The issue is more understanding of how to apply these assets within the existing regulatory framework. I don’t think this asset class will lead us to having… you know we have the Securities Act of 1933, the Securities Exchange Act of 1934, Investment Company Act and Investment Advisor’s Act of 1940. I don’t think we’ll necessarily need the Digital Asset Security Token Act of 2019, but the existing framework and this is happening, the markets have led the regulators to this point ... will need to accommodate these assets and will need to be flexible enough to fit these assets within the existing framework or, in certain areas, Jesse mentioned custody as one.

There will likely be additional regulation. Additional regulation is not harmful. If it’s smart regulation, it actually allows for a level of certainty and to build a durable business based upon certainty in the law and in regulation. That’s truly what industry participants want. They want to know what the rules are. They want to work within those rules and they want to do what they do best which is build business.

Adam Chapnick:

Right. Jesse, what do you think about regulations? Lots more needed?

Jesse Overall:

I would definitely echo Steve’s points for sure. I would note, and we feel, that regulators have been quite proactive and have been very engaged in trying to understand these new technologies. I think the SEC, but certain other federal regulators and state regulators have been very engaged in trying to understand the impact of these technologies on the markets that they regulate. The SEC regularly has engaged in consultation with the industry.

Like Steve mentioned earlier, they’re asking about custody of digital assets right now and trying to learn more information so they can understand better how to apply the existing framework to these new assets. Another regulator that’s been very proactive has been the derivatives regulators, the nation’s derivatives regulator, which is the Commodity Futures Trading Commission. Today, they’re holding a hearing on distributed ledger technology, the potential for it to act as a financial market infrastructure and the potential impacts it may have on the swap market, which is under their jurisdiction.

I think that there’s a trend here that regulators are trying to learn more and understand these things, but for purposes of our clients and for commercial market participants, there’s definitely an eagerness for the agencies to proceed expeditiously because it’s very difficult to contend with the uncertainty and the not knowing how your regulatory posture is going to change as a result of an unexpected announcement or unexpected speech two months from now or six months from now. At the same time, there are a number of outstanding issues that haven’t been clarified and haven’t been addressed.

Definitely, we’re hoping that the agencies will continue to make those things clear over time.

Adam Chapnick:

All right, understanding that we can’t talk about Antarctica because it’s pretty much the only place you guy don’t operate, let’s talk about the rest of the world. How is the global regulatory environment taking shape compared to the U.S.? Do you guys think there are more opportunities here or globally for security token offerings? Steve, why don’t we start with you?

Steven Gatti:

Well, I think every jurisdiction is struggling. The regulators in every jurisdiction are struggling with how, again, the first impulse is to try to fit security tokens into the existing regulatory framework because that’s what you know and that’s what participants can understand and that’s how securities have been offered or traded or custodied within your market for a number of years.

We know from given the nature of our practice and being active in every major financial market and many other secondary markets, we have a great sense of what’s going on in each jurisdiction through our global FinTech and technology groups and financial regulatory groups. I have to tell you that there are some markets that have embraced securities tokens and are trying to develop a regulatory framework that will accommodate and maybe attract more capital to those markets or more technology companies to those markets. There’s others that are behind the U.S. in the sense that they really haven’t given it the focus.

Europe, for example, you have home country regulation, but then you have European Union directives sitting on top of that home country regulation. Firms trying to do a securities token offering in an EU jurisdiction have to both look to the directives and to the home country. I would say right now, it’s a mixed bag. I think there are more places than not that take a more liberal view of what constitutes a security than the U.S. meaning certain digital assets that would be considered a security in the U.S. may not be considered a security in that country. If that’s the case, then offering it doesn’t bring in the regulatory regime.

That being said, in other areas, particularly Europe, has applied their laws extraterritorially, whether you see on GDPR on Method or in other areas. As an issuer of a security token, you need to take into account regardless of where you are, where do you feel comfortable offering it, where do markets exist where it could be traded after it’s offered, and what are jurisdictions I have to avoid?

Adam Chapnick:

In 2019, what is Clifford Chance most excited to expand into or move into? Is there something you guys can share about where you’re headed?

Steven Gatti:

Well, I’ll take it first. We’re excited on a number of fronts. The firm has invested a serious amount of human and actual capital in building out our technology practice, our FinTech practice, looking for, like ourselves, any business looking at how technology can improve how we deliver our services to our clients, applied solutions group, Clifford Chance Create. There’s a lot of work being done around how technology can facilitate the provisions of legal services in a more efficient manner.

In terms of securities tokens, we are very aggressively and enthusiastically supporting our clients on the issuer side. Jesse mentioned the Aspen St. Regis transaction. We are working with a number, of whether it’s real estate or other issuers looking to use digital assets to raise capital. We’re very interested with our clients, larger financial services clients and newly emerging leaders in building out the plumbing of this sale, transfer, custody of digital assets. So, all the things that are happening behind the scenes that will ultimately allow for digital assets to be traded without friction within the capital markets, we’re working with a number of clients in that area.

Then, outside of the issuer or, say, broker-dealer exchange community, our investment management clients, whether they’re going to use digital assets in terms of a digital fund in offering fund interest to their investors or increasing the allocation within a portfolio to digital assets. That’s just in the financial services area and capital markets. Our tech group is active in any number of other industries in terms of the use of blockchain technology.

Adam Chapnick:

Amazing. Jesse, what are you excited about?

Jesse Overall:

I think that in the near term, the, just like Steve said, the plumbing and the infrastructure, these critical enablers of the transformation of financial services as it exists today, I think that these frameworks will become more articulated and more services will become available and more entrants will enter the space. You’ll have more providers and more vendors and more regulated exchanges and regulated intermediaries. Because I think that in many cases, a number of these things are missing today and that’s a shortcoming of the present state of the digital asset market is there’s a shortage of regulated, compliant, intermediaries who have both the technical capabilities and the legal license to be engaging in the activity that they’re engaging in.

The combination of these things, I think that in the near term to the medium term, that’s where you’re going to see the most development. There’s manifold evidence of that. Just to give one example, new Bitcoin futures venture called Backed, which is affiliated with the parent company of the New York Stock Exchange, is seeking to obtain licenses and begin operations. As Steve mentioned earlier, Fidelity has entered the digital assets space. I think that these players will come, and they’ll bring their professionalism and the full spectrum of capabilities that they have to offer to the space and I think that all members of the entire digital asset, digital security ecosystem will benefit from that.

I think that it’s a very exciting time to be around for that. In the medium to longer term, what that enables is everything can be put on blockchain and you can do everything using distributed ledgers and you don’t have to use legacy paperwork intensive systems. I think that in the medium to longer term, when you have all of these infrastructure providers online, you’ll be able to move everything on chain.

Adam Chapnick:

So, Steve-

Jesse Overall:

That’s what will be truly revolutionary.

Adam Chapnick:

Yeah, I think we’re right into the crystal ball territory, which I love talking about. Steve, if I forced you to look ahead into a crystal ball, where do you see the security token industry heading? Do you have any predictions?

Steven Gatti:

I predict that the security token industry, I guess you want to call it, or the use of a securities offering framework to sell a digital asset will continue to increase, will continue to grow. Think about it this way, right now, if you bought a security, you would just go to your, I don’t know, go to E-Trade or your Robinhood account or wherever you go and you would type in a message. You would send an order. You’d buy the security. It would show up in your account and all kinds of things are happening behind the scenes to make that transaction occur in a very frictionless way with a whole lot of people involved in that.

I believe over the course of this year we will see greater and greater development of that frictionless intermediary transfer of value process that will allow an issuer, who’s offering a security token, to do so in a manner that’s not only compliant, but also reaps the benefits of using the capital markets to raise capital. At the same time, looking at the crystal ball, I think over time, the SEC and the markets will understand that there are certain tokens that are maybe used in a capital-raising capacity, but ultimately will migrate into a utility framework and therefore investors no longer need the protection of the securities laws through the filing of annual reports and quarterly reports [00:47:30] and audited financial statements and any of the number of things that a public-issuer of securities has to file.

I think times are good. I think it’s going to be an area that will continue to grow and we’ll see more and more offerings.

Adam Chapnick:

I’d like to thank Steven Gatti, partner at Clifford Chance, as well as associate Jesse Overall for giving us this fantastic overview of Clifford Chance.

Steven Gatti:

Thank you, Adam.

Jesse Overall:

Thanks, Adam.