"Cypherpunks and Wall Street": The Security Token Revolution & Regulation
By: Peter Keay
Tags: Decentralization, Blockchain, Cryptocurrency, Philosophy, News

One of the talks from the latter category was by Bruce Fenton, a 20-year Wall Street veteran who has brought his knowledge of traditional finance to cryptocurrency.

“At 21, I became a Vice President at Morgan Stanley, [but then] left and founded the first full-service investment firm to use the Internet.”

In 2013, Bruce set his successful traditional finance business aside to take advantage of the great opportunity he saw in blockchain, moving to “a combination of my old career as stock broker and this new technology.”

Now, Bruce directs Satoshi Roundtable — an invite-only retreat for top leaders in the space. He’s a board member at The Bitcoin Foundation and tZero, a security token exchange associated with Overstock.com, as well as at successful investment group Medici Ventures. In addition to being creator and/or CEO of a number of other projects.

Yet Bruce found time to present at the World Blockchain Forum. His motivation was clear: as security tokens become more popular, he sees both naïveté and moderating influences in the revolution.

In his session, “Cypherpunks and Wall Street,” Bruce explained securities, the drawbacks of the current system, and the revolution of cryptocurrency.

1. Securities are agreements

“Securities under U.S. laws are basically agreements. As long as agreements exist … they will be considered securities.”

Securities are a broader category than many people think. To use Bruce’s example, I could sign a piece of paper saying “whoever holds this paper owns 10% of my company” and then sell the paper on Twitter. That sale would be subject to securities laws.

And agreements can reference a blockchain, even when that blockchain itself is unaware of the outside world.

Many philosophical debates over security tokens miss these simple points, complicating the matter beyond its core: agreements are securities, agreements can reference blockchains, and agreements are regulated. For the foreseeable future, securities are here to stay, even as blockchain takes over.

Now, contrary to recent belief in the cryptocurrency community, registered securities can be purchased by everyone. But sometimes securities issuers use exemptions, most commonly Regulation D, since registering a security is so involved. These exemptions require less on the company’s part, but they also limit which U.S. citizens can invest.

ICOs are usually unable to fully register as securities at their current stage of development, so if they wish to be compliant with U.S. securities laws when they sell their tokens, they need to use one of these exemptions.

So despite widespread ignorance to the contrary, securities are going to stick around for a long time, and they’re not as exclusive as people think.

2. But the current system is a mess

Today, securities are managed by hundreds of separate parties who do not trust each other and have to rely on trusted third parties.

“Try moving 100 trillion dollars in volume with 350 broker firms managing security ledgers who don’t even trust each other — and they don’t even trust the issuer!”

Securities are tracked on a haphazard archipelago of ledgers, all related and in some sense interdependent but in another sense all completely isolated.

The controllers of each ledger are unwilling to share with each other, for good reason. Their incentives are at odds. For reasons of competition, Goldman Sachs doesn’t want Merrill Lynch to know its ledger. And neither of them wants Apple to know who owns Apple shares, especially since their contact at Apple — or someone at Apple who manages to access the ledger should it be shared with Apple — might be a bad actor.

The result is a complex system of secret ledgers that is phenomenally difficult to manage, to audit, to regulate, and to trust.

3. Security tokens promise to fix the system