Sign Georgia Banking Contract Secure

Industry sign banking georgia contract secure

[Music] welcome everybody thank you so much yes I know you've all been waiting for the regulatory panel for lawyers walk into a stage so yeah we've we're really gonna knock your socks off today we have an amazing panel we're I guess I'll let our panelists kind of give just a very brief introduction about themselves and you know a bit of their career and then we're gonna launch into some really interesting topics so Lee can we start with you and we'll just move down this way sure Thank You Georgia my name is Lee Schneider I'm a financial service as a technology lawyer based here in New York I've done all different kinds of things in the regulated space and then a 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 thin tech podcast with Troy here so if any of you are interested appetite for disruption is on iTunes and other places we talk with a lot of people in blockchain but a lot of other areas as well so I'm Troy brightest and I'm my own consulting practice doing financial regulation compliance governance fair amount as you might imagine in the crypto blockchain a space FinTech right reg tech and the like before doing that from 2008 to 2013 I was a commissioner at the Securities and Exchange Commission you rerun the clock a little bit I was a law professor and at one point earlier I was a deal lawyer so that's great to be here again looking forward to it thanks George and I'm David Felson thought a partner for 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 a completely compliant way as well as more traditional banks who are just interested in using and the blockchain for their existing securities and seeing how they can make the ecosystem work for them as best as possible and I'm Georgia Quinn general counsel of coin list I am a securities attorney started at a firm called wall Kochel then co-founded a company called I disclosed that automates securities filings and now am 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 the security and what is not a security and this was very important you know and and the subject of a lot of discussion several months back and then it kind of 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 you know after initial issuance once the network is up and running can it then convert into a non security we have mister Hinman from the SEC giving a speech you know discussing some of those points and then most recently last week congressman Davidson submitted a letter to the SEC requesting guidance in this area so Lee you know we don't need to go again through the Howey test but why is this an important discussion and what are your thoughts so a couple things first of all the the thing that I like to remind everybody about Howie regardless of what the test says is the Supreme Court definitely did not say that oranges were securities in Howey case it was all about an investment contract related to oranges and this is an incredibly important point because I think often times we've gotten away from looking at what is the token really whether that token is in existence when it's sold or not and thinking about whether or not the features of that token make it a security I mean we can certainly say that if the token is represents shares and accompany equity in a company that's gonna be a security token and a lot of the things that that the prior panel and 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 we're 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 once think that those digital representations were securities I thought that they were shoes and we need to sort of bring that same kind of thinking to to blockchain and in my view great and Troy from a regulatory perspective how might a regulator look at this and why is this such a difficult issue Wow try to be brief a few thoughts here in one minute yeah and one minute are I'll keep an eye on a clock here so one of the reasons is because the stakes are so high right and the stakes just so high and the prior panel touched on 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 be triggering lots of other regulatory regimes set aside things like tax what-have-you which is table stakes in terms of that's always going to be present 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 he 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 is well it's the 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 etc 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 is what are the economics what's the substance what are the the real substantive features of whatever the thing is that's really what the howie test says whether you like or dislike the how we test whether 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 a patience flexible concept it's really about what is this thing in terms of its substance and its and its economics and that's I think where the regulator is going to continue to be focused why do I think that well because they've 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 continue which continue 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 kind of do you trigger the regulatory regime analysis but number two that's something that at least is I think about it the Commission hasn't had to focus on ever ever and so this is this is a brand new if you will kind of conceptual question but it's also stemming from the new technology that's something the 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 come to come before them 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 this country already so in this new industry do we need more David do we do we need to add to those rule books or do we need less what are your thoughts well certainly sounds like you've got a position by the way you have I want lots of love anyway I wouldn't throw so much one 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 you know the bar chain and tokens are just not about that and I think today's panel I should the panel's we've heard so far have been a great illustration I mean one of the speaker's 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 bar chain now that is something I think all of us would like the regulators to address how do we have smart contracts on the one hand but have registered transfer agents who have to be responsible on the other and that's a tough issue I don't think they're 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 you know and again obviously we talked a lot about transfers transfers to accredited investors and we've heard about different systems i think from a regulators perspective and i deferred i was in the panel but their issues they're their issues about how do we verify how do we as regulators verify what's essentially a systems based response to requirement I mean the regulators like like us here are mostly lawyers or academics who are less focused towards the IT side we make ourselves comfortable and that's not just an immediate verification issue at the time to be 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 in 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 bar chain it's not easy to answer that but that is something where I think the regulator's could be more interactive and there could be development I think I'm sorry you know I think David'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 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 in 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 the industry what different industries need to do but 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 are going to be people who say absolutely not I want to do my stuff on my own on the blockchain leave me alone and there 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 henshin to think about here and if i can just add one thought to take one step back which is the 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 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 i have been going on and on and on and i think thats constructive and helpful to the process to try to 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 and they're going to be different what's that regulation gonna 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 to 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 have the title tis supposed to have and the money go right these are basic we can go on and on regulatory objectives and interest that the regulatory regime is designed to address and I think there's a lot to all of that I think what that then leads us to and and and the others have made reference to this is is all right to the extent the regulatory regime right now does it fit so well with the technology or 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 would 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 and one other point that I'll add to what Troy said the question of whether or not a token is a security which then leads us to certain regulatory outcomes is sort of 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 right and just to put a little more practical guidance into what you guys are seeing because I think this is extremely important and it's really getting to how we can help the regulator's almost what are your thoughts based on you know your experiences in working with regulators and addressing these really frankly gray areas are you guys more of the ilk to creative a framework and go forward and have you know something more concrete as a proposal and kind of ask permission or just go and simply ask for guidance I'll speak for for us I mean I think in general the regulatory process is very slow if we have a specific issue or a 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 I mean it is a useful exercise to try to educate the regulator's that 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 you know we just have a hard time operating that timeframe for having any given project I mean look I certainly have part of me that says we s ould just go for it and 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 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 technology it gets implemented in different industries and so when we're thinking about how to quote-unquote 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 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 Laurie 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 right so and there's it's more complimentary we're not just 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 you know 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 you know for those who realize the importance of it okay just one specific examine just to that is that for us for example we're expected to give opinions about securities offerings being regulatory compliant and you know we've had a couple instances now where people have said to us yeah we've got the smart contracts in place you can use that and you know for us as lawyers and I think the same apply to regulators if you know we are still just grappling with what does it mean to give an opinion based on a smart contract and that's again just an example a place where we need to interact more with the software with the developers to understand what's going on plus even just on something like smart contracts if you look at that through a traditional compliance lens any time any time 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 focus on I mean the simplest one is what kind of testing have you done and do you do that testing on an ongoing basis I mean that's the simplest right so but again I think the urge of your point is if you think about and and leader your point if you think about the regulatory construct that's in place that that gives you that gives you in fact a lot of guidance and may give you more than guidance it may give you flat-out requirements right but but there is a lot there that one can already draw from in order to try to figure out what you need do in a way that's gonna meet the requirements or subject to you and quite frankly may otherwise just be good business practices and good overall risk management great thank you guys I'm I want to shift the discussion just a little bit and this our discussion thus far has really been focused on the US regulatory landscape and you know we talked to a lot of issuers at coinless that you know say things like well if I only offer my tokens to foreign investors then I don't have to worry about securities laws or if I incorporate my company in Malta then I don't have to worry David is this an accurate assessment of the law again as a tendentious question they're no fine you know I think there are two sets of issues I mean the first is the obvious one which is other countries have securities laws too now I will say other countries tend to be more relaxed about characters i characterizing tokens as not being securities in general but there are exceptions there 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 then the second point is that even if you're outside the US the test the securities law 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 issuer that that alone means you're outside the US for securities law purposes and I promise not to get too granular but there was a recent case called in Rao's in which the court looked at among other things where the validation noes were located for purposes of determining whether an offering was in the US or not and you know in the context of this offering which involved payment through aetherium you know the fact that they were validation knows in the US shouldn't have come as any surprise but that was used and 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 you know how does the foreign regulation work so Troy we have a lot of jurisdictions out there that are kind of scrambling to develop their own laws in this area and you know promote their jurisdictions as a safe haven or a you know place for innovation how does that interplay with the US securities laws it's a great question well David answered it in one respect let me answer it in a different respect which is I think that from a policymaking 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 that I think it is is depending upon the u.s. approach to regulating the space that's gonna have an impact on where the economic economic activity takes place we have to recognize that and again this is not unique to BA chain not unique to security tokens not unique to crypto currencies more or more broadly you say the same thing about a whole lot of stuff like you know derivatives and how you gonna regulate them under Title 7 or Frank right so there's a lot of points of common but that has to be taken into account that's not to say that you then just you know 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's engaging in what activity where with respect to what is a function of the regulatory environment around the globe and so you have to think that through and figuring out all right 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 make that into our judgments here in the u.s 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 kind of international dynamics piece is certainly part of the mix 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 kind of feel like many things have not been and so if the regulators are not trying to learn from each other then 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 block chains can can flourish and and be beneficial to people all over the world on that last 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 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 pragmatic about all this is even if you have you know you have five jurisdictions right and they have the same standard right so we hold up the the written page and it all says these are our rules these are our standards the life that those that those standards are 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 is going to be different so I just think as one thinks through you know the commonality of standards and and the kind of internet that international aspect of this from that perspective to realize one I'm not sure we're gonna see a commodore product you 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 gonna play out in very different ways within challenges the question whether or not you've in fact achieved the harmonization that you thought simply because everybody's holding up the same rule or set of standards and I think we've seen that with the Basel Basel 3 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 and then the but the applications differently well that doesn't seem very optimistic but you know I have not lost hope because we have examples there's the internet and most countries do have that and you know these companies are able to operate their businesses throughout so don't lose hope folks you know the name of this event is this 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 sure so I'll focus on what I would call traditional securities like common stock 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 for transactions how understanding who your shareholders are can be made much easier through through blockchain and related means and and just generally moving away from highly centralized and complex systems to more decentralized and hopefully less complex systems for for securities so III see lots of benefits from a technology standpoint that that flow from it III don't know that that changes anything from a regulatory standpoint with regard to common stock and how it's sold etcetera etc but if you can clear out some of the underbrush and make it cheaper for people to transact that's generally a better outcome any you guys have any additional thoughts yeah I mean I would also say that one advantage from our perspective is that given the history of security tokens had given sort of the ingenuity involved there's much more flexibility in tailoring the economics of the token to the what the issuer need so I recognize that's not a necessary link to Lou 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 it's again it's 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 small or bottarga offerings that represent very tailored property rights and I think I mean one thing going hand-in-hand with that it's a point that my fellow panelist is 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 how we can divvy it up but I do think there's an enormous potential there within the token market and you know you mentioned really tailoring it to what the issuer wants but we can also really tailor them to what the investor appetite is absolutely what about the ability to fractionalize assets does this technology help facilitate that as well I mean 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 can be tailored to somewhat smaller offerings and sort of 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 great okay so where if that's the case if it's a fractionalization of a piece of property is that token of security it's really a rhetorical question right I mean you know I don't know that anybody has a clear answer to that question but I've talked you know you talk 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 kind of 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 kind of think it's probably not because it's a Picasso but maybe it is well what's it what entity is it held in how are the rights you know assigned to the individuals yeah well yes for this right all right sorry guys oranges and friends and the oranges were not securities in Howey so hopefully the Picasso is not either but but these are these are some of the really interesting questions that lawyers and 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 is crypto Kitty's right I don't think I've ever heard anybody argue that crypto kitties were security right but I I think I could make a pretty good argument under some readings of the Howey test and and whatnot that the crypto kitty is a Security'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 you know 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 do you have any idea why this might be well I think we're gonna have a panel on that here so I won't steal any of that don't spoil it of that particular under but it comes back in in part whoa look the space depending on how you exactly want to find it there's still new stuff right so it's it's not even as if you think about you know everything else in our capital markets I mean we've been doing this for decades to get to where we are so it's gonna take some time so for things to take two three four or five years and the regulatory world or in the financial services world I can be moving pretty quick now I realize that in other worlds and from other dimensions that's moving pretty slow but one is just this stuff takes a little bit time but one of the reason it takes time is not only in terms of just the marketplace to get to that point in its own evolution right for supply and demand conditions if you will ove all to line up so that a business idea really can become a business model and actually have a real life and succeed as a business and not be too early there's a lot of great ideas there little too early so timing from that perspective just your business matters but it's the regulatory environment as well which is to to be an ATS Broker Dealer to be annexed you don't just decide oh that's a label I want right you have to satisfy very demanding regulatory requirements why because the regulator's 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 is process and takes time and so I think as this continues to evolve will see more market participants wearing different kinds of hats and having 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 kind of a lot of where we are versus perhaps where others might have thought things would be at this point and if I could just jump in I mean 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 crypto currencies there is a whole different set of regulation that applies to transfers of crypto currencies the New York bit license for example and so if 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 to account 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 kinds of things that we've discussed already today so for example if your token is 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 that some kind of trading venue in order to facilitate all those securities transactions so the maneuvered the temptation of just saying I'm just gonna do a security token because it has all these other knock-on impacts away from the trading that that occur as well so I think it's pretty clear that we are just scratching the surface here unfortunately this fascinating panel 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 [Music] you [Music]