Since the explosion (and subsequent retreat) of crypto assets, there has been much deliberation and chatter about the various nature and legitimacy of tokens across the spectrum of business and finance.
A lot of confusion exists around how to govern securities tokens, the existing law, how to regulate, etc… Quite simply, it isn’t that difficult, and I am frustrated at the crypto industry’s attempt to create something new when there’s nothing new here at all. The litany of laws governing securities and securities transactions has been around for a long time.
The advent of new technology doesn’t really change the spirit and intent of the conceptual basis of existing transactions.
Especially when it comes to securities or the transactions involving securities.
One of the most confusing aspects of crypto and blockchain is the fact that a token persists after a transaction as a digital asset. This is, in my opinion, the result of the first mass application of blockchain being payments and “digital money” with bitcoin and variants.
When looking at the hierarchy, the token itself does persist in the wallet of the holder. But the token is not, nor should it be the primary focus. What matters is the actual transaction that resulted in the token.
The transaction is what matters. The type of transaction establishes the context for the transaction — and the resulting token.
By adjusting the view that the token is subordinate to the transaction, we can see the token is a form of “receipt” for the transaction. This simplifies the confusion around the context of the token and its attributes — which is a primary point of debate across the range of use cases and especially the regulatory concerns.
Let’s apply this to a specific example:
I’ve previously discussed that in many (most) cases, the a token is a digital representation of something else in the real world — an asset of some sort. If we’re talking about a securities instrument like equity in a company, the token is not the equity, the token represents the equity that is evidenced by a Secretary of State filing and a shareholder subscription agreement. The token, at present, is not the security.
When examining a securities token, we see how the security itself comes into being as the result of a corporate action, which is the transaction itself. The officers of the company authorize shares, file the documents with the state, and then subsequently issue the shares.
Moving this to a ledger and tokens doesn’t change this at all. The token simply represents the conceptual basis of the ownership and share in lieu of having a physical certificate. In fact, this is no different than “uncertificable” electronic shares, which have existed since the advent of spreadsheets.
The share exists as the product of the transactions between the company, the government authority, the management team, and the shareholder. The transactions are evidenced by the existence and possession of the token after the fact — because the share itself is evidenced by these transactions.
What matters is the nature and constraints of the transaction itself. The share and/or the token comes after the fact.
If a token represents a security, any transaction involving that token is already governed by law. In the instance the security is a private share sold under Regulation D, the token issued is restricted by existing laws including things like the need for the buyer to be accredited, Rule 144 lockup, transfer agents, licensed exchanges, etc… Nothing changes.
By moving the focus off of the token and back to the transaction, there’s an amazing clarity that can be achieved — which hopefully brings some sanity to the overall discussion as we continue forward.
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