Billions, perhaps trillions, are on the line. One man, or one agency, stands on the way. In parallel, twelve ordinary men and women are to decide in a most historic case whether tokens are a security. Watching stands Congress.
In the most fascinating discussion of private deliberations between the Securities and Exchanges Commission (SEC) and this industry, which were leaked, presumably by SEC, industry “insiders” have revealed just what was said.
“What we’re doing, primarily, is educating the SEC on what blockchain technology is, how cryptocurrency is utilized in that technology, because I think there was just a misunderstanding by them as to what cryptocurrency is all about.
They see cryptocurrency and they see fraud and what we see is moving the technology.”
So says Nancy Wojtas, a former Counsel to SEC’s Chairman of the Commission with Brad Burnham of Union Square Ventures sharing a presentation he gave to the Securities and Exchanges Commission. We quote/transcribe in full:
“We’re living in an area of very rapid consolidation around Google, Facebook, Amazon, and competing with those, what I would call data monopolies, is not really possible by offering a better service.
We actually saw this movie in the mid 90s when Microsoft consolidated the entire PC software industry. IBM tried to compete with Microsoft by offering a better operating system called OS2, and it failed miserably.
What ultimately undid Microsoft’s hegemony in the mid 90s was a shift in venue from the desktop to the web and a shift in business model from packaged software to open software.
It was really impossible for Microsoft to open source Windows given how much they had invested in their existing business model, their distribution channels.
So the only way that one can expect to compete with these dominant data monopolies is by changing the game, by changing the way the market works.
If we think of the internet as an open public communications medium that fundamentally altered the way the entire media industry works, blockchains are open public data stores.
The thing that Google, Apple, Facebook, Amazon, will not be able to do is open up their data sets. And so the argument we made to SEC is that this is the next wave of technology.
If we’re going to open the market for another wave of innovation, for another emergent bottom-up start-up innovation, the only possibility we have is to change the game. And this is the best chance we have.”
Lowell Ness, a lawyer at Perkins Coie says: “The first question we get asked at SEC… is why can’t this just be a security? Why can’t we regulate this as a security, what’s the problem with that?… Why isn’t that enough?” In reply, Burnham says:
“The challenge there is we had a lot of conversations about whether something starts as a security, then becomes something else, and where to draw that line.
The real challenge is that we are envisioning a world where you end up with networks interacting with each other.
If you think about a software stack and you think about what the ultimate decentralized stack will look like, there’s going to be… the foundational layer is going to be computer services, and file storage services and caches and all sorts of services that are assembled to create a single user experience.
You can imagine a world where tokens are being exchanged in nanoseconds, millions of times a second, and you can’t do that in a world where every single one of those tokens has to be registered, has to comply with securities laws. You can’t have that kind of fluidity in a software stack.”
Ness, who asked the question, nodded in agreement during the answer, with Nancy Wojtas further stating:
“There is a role for government. There is fraud going on. My wish is that SEC would actually focus on the fraud cases, rather than focusing on companies who did a token offering where there is utility in that token. May not be the full functionality… but…
The SEC’s point that investors protection, disclosure takes care of everything. Well, disclosure doesn’t take care in my view.
I was former staffer at SEC… the dotcom boom, we had more than enough disclosure there yet that didn’t stop the chaos we had in 2001-2002, didn’t stop the financial crisis in 2008. So disclosure is not the only answer.
My hope is congress would act, that we need a new regulatory agency that would come in with a lighter touch to regulation that they’re not stuck with the baggage of the 33 Act the 34 Act. And that the agency has an understanding of what blockchain technology can do.
We are only talking about one jurisdiction. Keep in mind that these offerings are global now. Our client did a public token sale and it went into 102 countries.
You have to be concerned not just about US and what we’re doing but you do have to be cognizant of what other countries are doing and there are efforts starting in virtually every country…
We have at least five agencies you have to be worried about… we’re a very fragmented regulatory system at this point. I would like it under one agency, a smart agency.
What we have is, for example with SEC, they come in with a little box and say, ok, here is our box of regulations, you have to fit in it. And we’re going, well, no, we’re kind of, really, outside the box. No, no, no, no, this is our box, you tell us how you fit in it. And they don’t have answers at this point…
We have to be concerned about Congress because they’re taking an interest in this. I do find that the democrats seem to be less inclined to be more flexible with respect to cryptocurrency, which I find kind of surprising myself.
If there’s a shift in our Congress as result of the mid-term elections, that hill just got really much higher. We keep working at it, we need a solution. Either we keep innovation in the US or we move it off-shore.
What the commission has said to us in our conversations is, look we don’t want that happening, we want to get a solution, and I think they were actually fairly open minded in our conversations with them other than the chairman who has, I don’t know, his belief is everything is a security, it stays a security.”
It stays a security? Interesting. Jay Clayton, former banks’ lawyer now Chairman of the SEC, has often come across as knowing little about this space save for the same old tired points old bankers make.
New bankers are leaving Wall Street in droves, including some very senior executives, to join this space, but the above discussion is utterly interesting.
First, Burnham gives a rare view of this space from the perspective of some big movers and shakers in Silicon Valley. Bits and pieces may have previously been said, but his holistic articulation is very much enlightening.
Second, the former SEC’s staffer take on the matter is just as interesting, especially the suggestion that they are, perhaps very seriously, considering moving the industry off-shore.
Silicon Valley is very much a home for this space, but in many ways it is a second home. Neutral Switzerland has somewhat organically risen as a centre of sorts, with many ICOs held there and of course with the Crypto Valley taking root there.
Yet one can’t really call that a home because this space, perhaps unlike the beginnings of the internet which was mostly focused on US, is very much global.
They would therefore fairly easily be able to move to Europe, where a number of jurisdictions are vying up to attract potentially billions in investment and perhaps the next growth engine.
A number of SEC commissioners have appeared to be very friendly to this space, with the former staffer so in a way confirming our suspicions, this may be all just Clayton.
He is very new to the job. He comes from the banking industry, has no clue about tech, and has been trying to wing it for now months, with even America’s civil service in a way snubbing him in a congressional report.
Finally, the comment about democrats is right as far as we have seen, but that they are a bit colder is in no way surprising. They have been misled by a vocal few, especially early on, trying to represent what is a neutral technology, no different than 1+1=2.
It has no political leanings, and as far as the topic in question is concerned, the democrats and the left in general should be riling in support of this space for the Securities Act 1933 discriminates against all in favor of the rich, so violating their core belief of equality.
But the matter isn’t really left or right. It is more fundamental to concern equitableness. In addition, it concerns the progress of innovation and how this unique network which preserves history forever and facilitates so much that is completely apolitical, from supply chains to games, is to evolve, at least in US.