Security Tokens Series Part 2: STO and ICO Law With Steven Nerayoff – Transcript

This is a transcript of the Podcast – Security Tokens Series Part 2: STO and ICO Law With Steven Nerayoff – You can listen the audio here


Nye : What is going on everybody? What is going on? It is your boy Nae and welcome to another episode of evolvement, the financial podcast where we talking about bitcoin and cryptocurrency and the future of our financial systems. Today I’m here with a very special guest, Steven. Welcome Steven. How you doing my man?

Steven : Yeah, it’s been great to be here.

Nye : Yeah, glad to have you on dude. So today we’re going to sit down and we were talk a little bit about ICO is STOs and really the legality behind them. So this is an episode, the goal with this series is, it’s called a security token series. The goal is I want it to get five or six different experts who know heavily about security tokens and different aspects, different perspectives around security tokens to bring, different educational content to people. I think that, there’s a lot of hype being built around Security Tokens right now, people are like talking about them a lot, but I think there’s a lot of confusion about, who’s going to be involved with this industry, who’s going to be able to trade these coins? How these coins are structured from a legal standpoint? And you being like the legal expert that I’ve ever met or ever heard of, behind ICOs and the mastermind behind structuring the legality of the theory of ICO and a bunch of other things I wanted to bring you on. So thanks for coming

Steven : Yeah. I’m really excited about them. I love your podcast, huge fans and they’re really excited about what security tokens can bring to the world.

Nye : Sweet. So before we get into talking about security tokens, can you just give the audience, and even myself, who are you, what’s your background? What you’ve been doing before crypto and what inspired you to step into this space?

Steven : Sometimes I don’t remember that there was a life before crypto, this rabbit hole is deep. I was a tech entrepreneur both in silicon valley, in New York for 20 plus years, started a whole bunch of different tech companies, mostly in the Internet area. And then, I’m also an attorney by training, and venture capitalist as well. So it kind of did all three of those.

Steven : Then I was primarily working in artificial intelligence, when somebody explained what bitcoin was to me, and then I read the white paper, and eureka moment went off in my head. I look at it the bitcoin to me is like the ink spot tests that psychologists use and it’s like bitcoin, everybody looks at big coin and see something different in it. So some people it’s like money, some people it’s like freedom and it’s everybody, and that’s one of the amazing beauties of this great invention.

Steven : And so I came, a lot of people in this space came from a fairly libertarian background and spent a lot of years in the gold market and thinking about, it was going to be hyperinflation and war in this horrible thing, and then we would reset the whole economy and a new monetary system, and then when I saw bitcoin, I was floored. Because I was like, “oh my God!” This is to me, it looked like new monetary system. Even though I wouldn’t intact though as thing I, even if when think about that it was going to be a technology invention that could usher in a new monetary system. So to me it was a super exciting when I first saw it.

Nye : I like it. Do you still think it’s going to be the new monetary system? Is that still your hope with bitcoin or-

Steven : It’s I’m more convinced today than I’ve ever been. Absolutely. So I wouldn’t, there’s, I believe I there’s a little part of me that’s a big climax was as far as monetary goes. But then, the rest of me is not in terms of, I believe that the underlying technology, that situation gave us as terms of blockchain has upon multiple revolutions, and like said it sounds like ancestral roots, and bitcoin itself is one of those.

Nye : Perfect. I love that. And your official title with, working with a Ethereum or that this the very beginning was you were like illegal architects.

Steven : Right. So yeah. So role there was to figure out a way for us to do a crowd sale, and we have very ambitious plans for a crowd sale, but for it not to be deemed to be a security. In fact that has never happened before. There was a few crowd sales in Crypto, there were like three before that, and each hadn’t given any thought to what they were doing and how they were doing it. So fortunately, you had a really thoughtful group of guys there, frankly…. in hindsight when I look back I’m just in awe of the brain power that was in that group of guys. And in particular, Vatara gave me the room of explaining, backed off everybody in the said we need to figure this out and do this properly. Problem was there wasn’t any so legal construct ever created to figure out how the issue, a token in a crowd sale that would not be deemed to be a security.

Steven : So what happened was is, the story basically, the backstory to how it happened was pretty interesting and was taking drinks from the town one night, and we were so early on, this was early 2014. We’re still kind of getting our hands around the concept of gas, and what that means and how it operates within the protocol and that you need it kind of to send it so to speak, and then it feeds the dubs and smart contracts, and so it dawned on me, this was one of those just Eureka moments that I didn’t think was going to amount too much, and I asked him, I said, “isn’t aspheteric?” Isn’t, I said, “ you agree, you need?” It was a very rudimentary, I said, you need this stuff to send this stuff. Right?

Steven : We were talking about Ether and he said, “yeah, why?” And I said, “well, it’s good actual real gas, you need to put in a car to get the car to go to a different location.” And he said, “yeah, that’s right.” and I suppose probably and also by definition, every body who purchases Ether in the cell, will eventually be a user of the system. Even if they’re really just using some to send their Ether to somebody else. So it was an interesting use case, frankly that you have that where everybody had to be a user of the system.

Steven : And so the idea that I had, I saw one of them which I say we’re actually, this is the future sale of a good, and it’s effective like a piece of code and I said, we’re going to be selling this future piece of code to people, to use it in the system. And kind of a rough analogy that we were using back at that time was, imagine you, there was a new subway that was being developed and I said, if you are building this new subway and where we’re selling people tokens for the subway, and we’re saying that once the subway is built you’ll get your tokens, to ride this subway. And even if you want to sell your tokens and you want to do nothing else, you have to at least take one sprite on the subway for one stop and use one token in order to do that.So by definition, everybody buying it will be user of the system.

Steven : Though we anticipated to be fair when we actually went forward with this was that, we didn’t, we were very clear. We were not selling this as an investment, we told people do not buy this if you looking to buy this as an investment. We were telling, we told people that this is a good your mind and the purpose if you’re buying it, you should only be buying it if you intend to actually use it. There’s many different ways you could be using, you could be building a DAB, you could be saving little soap for that, you can just work contracts, all kinds of things, but it wasn’t for price appreciation. It doesn’t mean that price appreciation can’t happen, but the basis of when you looked at things, how we test some small clings for different prongs and one of those is profit motive. And we wanted to be really clear to people that, that should not be their motive. We went out of her way to tell them that.

Steven : Fortunately, I was working with a former chairman of the FCC. I frankly sheepishly, went to him with this idea that we’re not raising money and that we’re going to him and sell the good. And I say sheepish, not because I didn’t believe it, I actually thought that it made sense. It was logical or what we were doing. This was a new thing that had never happened before, but when I explained it to him and was outside of anything that happened before, he actually came back very shocking to me and said he thought it was like a brilliant idea.

Steven : And then, we had a firm that we were working with, and we presented the idea to them, but this is the legal contract, this is how we want to conduct the sale of these goods. And so there was some aspects to work out, we were buying it now, but the main and had not gone live. So how did you handle? In that case what we did was, we said the Ether will be there, but you can’t access it until we go live with men that, we’d, was really shocking, was that was I think nine or 10 months later they actually built a varium.

Nye : So you guys were pretty much building out the structure of what the future or what the current ICO, like the gallery model looks like. Through this whole process too it wasn’t even you that gives you didn’t come anywhere, though this is the clear regulation of what needs to be done. Well, it doesn’t mean that, you pretty much helped set it up and create that structure. Am I right?

Steven : Right. So none of this existed.

Nye : Yeah.

Steven : So this, there was no legal construct to implement the idea that I can come up and ran by them, to how does this a sale of a future good, future good because we’re delivering it later or you’ll have access to this good that youtube later. Yeah, that was in hindsight revolutionary, I didn’t anticipate it frankly at the time, and if it was up to me, I told people let’s not telling anybody that we’re doing this. Not because anything was anything wrong, but it was just, this was our, private legal matter and we did explain it to people what we’re doing.

Steven : Of course, things on how it happened that way, and what happened was word got out in terms of what we were doing, and it wasn’t that difficult if you understood the current regime of securities, and you took a look at our terms of service, and our other legal documents that were available publicly. Then you could fairly tell what it was that we were doing differently than other folks had done before. That effectively with one of the main development who has done this ERC20 standard.

Steven : So if you take the ERC20 standard and then legal contract that I came up with for the cell, you marry those two, that effectively give rise to the booming ICOs a couple of years later.

Nye : And what’s the C20 standard?

Steven : The ERC20 [crosstalk 00:11:37]is that ERC20 standard was super important because now we had, with what I did was you had a legal construct to say, okay, if you go down this route, and it’s really important because you have to actually really do what we said we were doing.

Steven : We were super strict about the way we went it, and it was not a securities offering and it didn’t look like a securities offering, and in reality it wasn’t a substance. And then you marry that with the standard token model. And so the ERC20 was really a brilliant stroke that came out of the dream foundation. Those two gave rise to this boom and I’ll say in utility tokens, but then the ICO fundraising model.

Steven : That all being said, I was a huge vocal voice while it was happening because I saw what was happening, and I saw folks that we’re not actually doing what we said we were doing, but they were actually doing real securities offerings. And they were just, it was a wolf in sheep’s clothes, so to speak. And those, there were abuses fraud, but I think the fraud actually in this market wasn’t as big as more the abuses where they were really doing securities offerings and they were saying that it was, our legal construct when most of the times more often than not was not.

Nye : Interesting. And when you’re first setting this up, what was like the biggest struggle for you guys? Was working, you said you marking you mentioned you were talking with the SCC, Was that challenging to do, to work with them to figure out the struggle, or what was the biggest over here, over a barrier that you overcame?

Steven : So we weren’t actually work directly with SCC, had access to was, a guy who used to be the chairman of the SCC previously. But what really the biggest challenge was what you have any time there’s an invention, it was like getting people comfortable with here is a completely new instrument, just like programmable code thing that people use as in ways that, they had never used it before because, tokens had never existed. And what the issue really was is that the regal securities machine, particularly at 33 and 34 Act in the US, and the Regulations under there, there was a round peg square hole situation. If it just did not apply, there were almost a hundred years old and nobody else is obviously anticipated this, and they’re outdated laws.

Steven : And so we had, I guess the biggest issue would be getting people comfortable with here changing this, and if we conduct the sale in a certain manner, and we have this new instrument that has never existed before, with characteristics that no instrument had before this. You had to get people through the logic, and say logically here’s what we’ve have, logically here’s the current legal precedents and how do we, we’ve through that in a really fair conservative manner. By the venture, that the good thing there was that, the logic actually pro, even today I believe it’s a fairly solid in hindsight, and if you really follow it diligently, and it’s not really a securities offering and draped into this, then it should work.

Nye : I like it. And we’re moving into the STLS, right?

Steven : Yeah. So that’s actually what gave me the impetus for us too. So it was around 2017. It was getting super uncomfortable with what was going on out there, and to be clear, we were-

Nye : Super uncomfortable with the ICO is that were popping out. They were handling regulations and [crosstalk 00:15:36]

Steven : Yeah. So when I was looking around these ICOs and saying, these, one after another, I was looking like a securities offering to me, and I said, this is not what we intended. This was not the point of this. And it looked like people were trying to effectively sell equity or equity likes stuff, and people were looking for price appreciation, again price appreciation happening is not really what it’s the intent going into it.

Steven : And so it seemed like it was very much of that mix. And so I fortunate got involved in a couple of projects early on, what’s working with the[inaudible 00:16:15] guys, the polymath guys. And so this was like an earlier part of 2017 and I said, Okay. So that is the answer. And so to me, the security token concepts seemed so elegant for couple of reasons. One, it really differentiated, so if you still have a token and you want to sell this token, that’s okay, you have to work within legal regulations. And in particular it’s important for folks on the international scene, meaning non you as in this respect. This is mostly a US phenomenon, but that’s important today because the US is either, the standard where the rest of the world goes, or if it’s not it seems to be, it will definitely be an impediment to the worst of the world’s advancement.

Steven : And that’s more often than now it’s the ladder. What I saw here as I said, okay, he was a clear way if you don’t fall under a utility token, and so that’s having something that you’re purchasing to participate in a network, so to speak, but you really want to do something that’s more investor, and suddenly here’s your other option, you can go on under this realm. And that opens up, pretty quickly it started dawning on me that, that opened up a massive condential market. And when I say condential, there’s some estimates that runs into, the multiple quadrillions of dollars, which is the first time I said that word I had to look it up because it was , I’m 30 thousand trillion like that? It is. So that’s it’s a big number.

Nye : It’s a big number. That’s a real big number. And to a super basic definition, what’s the difference between an STO and normal equity? Like why would someone utilize the security token standard versus going just a normal equity route? Or we’re going a normal IPO route?

Steven : At a super high level, one way to think about a security token is, it’s kind of just the form of the issuance, it’s not the underlying legal construct. What I mean by that is, you could have a stock certificate physical, that probably seen these physical stock certificate, but underlying that meaning you own equity in a company. So it’s different. So the equity is like the legal definition of what it is and of what you own, and then, the physical form happens to be a piece of paper in that respect or a tshirt on your screen. And so what security tokens offered were, this was like the key differentiator, was the jump from digital to programmable or cryptic graphic. And that made a big difference. So you’d previously, you had just digits on the screen basically.

Steven : Now you have this piece of program that will code, which that in of itself is just what holds whatever rights you have. So the security token is just holding the right so when you ask about equity, the rights that you have could he equity rights, as a show like a traditional shareholder? They could be a revenue share, they could be a profit participation. Many different ways that you can skin the cat, and in particular with security tokens, it gets super interesting and complicated because it can actually change because it’s programmable, and we never had that before. And that is a game changer. You wouldn’t before say, well it can be equity and sometimes, and if you do something as an equity holder, you have the rights to do maybe certain additional participation, and it’s really interesting that changes the whole structure of investing, it changes the idea of how companies interact with their shareholders. So the implications are pretty far reaching.

Nye : That’s super interesting. So the security token itself can house multiple different benefits based upon what the company is setting up the security token decides to offer.

Steven : Correct. And they’re not all, they have, because really interesting is that they’re not always security features either. So you can take features that a lot of us would have associated with utility tokens. Let’s say a, discount on services, on purchases of goods from this company that’s issuing the security token, and the security token may say, okay, you have rights to an equity holder, you have shareholder. But at the same time, if you have 10,000 tokens, you also have the right to get 10% off of our products. Or maybe go right to exclusive access and the marketing department can think all the ways that they want in terms of how they do that.

Steven : But what now it kind of happens with that is one implication of that particular example where I’ve seen it a number on the drawing board that are looking at that, it’s like your investor relations department and your marketing department, and start kind of colliding with each other. And one of these used to be very just different areas, and now companies can actually use raising capital, but they also can say, okay, I want my suppliers to actually buy this and invest in me, so there am more invested in my success and return, based on how much they purchase, they’re going to get discounts.When they are buying, when they’re moving doing business together.

Steven : It’s certainly confusing, and this is part of the reason, the main issue comes down to why I guess they’re so confusing? Legal issues aside is that, it’s programmable. And so we just never have it, it was you bought stock, you own stock, end the story. You got a dividend, the entire class got a dividend. It didn’t matter what you did differently than what somebody else in the same class of shareholders did. But tokens changes that.

Nye : Is it more complicated than the ICO legality? We have a structure for securities already built. So you didn’t, not necessarily having to build everything from scratch, but it seems like you might be having to build some things from scratch since it’s digital and programmable. What’s the difference there?

Steven : Yeah. So I would say so it’s like a wedding cake. The securities laws is the base layer of the cake and now you’re adding additional components to that wedding cake. Additional layers to it and so another layer to the wedding cake is, what we think of as utility token features can be embedded into the security token. One way to think about it as if there’s security token features and utility token features, it’s probably a safe bet to assume the regulators think it’s a security first. It doesn’t like the utility token, it can get a discount on services that’s going to whitewash the fact that you also getting equity like features out of this. So it’s the securities law will probably always trumpet, but the two can now mix together. Some companies will issue both, because they want to separate them and some conditions on together.

Nye : And you see this is massive in terms of the whole STR security token market. Do you think this is going to be something that plays a very large role in the way our financial and economic system is working and things like that? Or-

Steven : Yeah. And I think when companies start realizing that they can, raising money and they want their shareholders always to be advocates for the company, but they didn’t really have the way of connecting the shareholders economically to the fortunes of the entity. Now you’re actually saying to people, all right, I’m going to embed these various benefits into, otherwise what you would think of as the shares you’re buying, but I’m going to bet it into the security token, and based upon things that you do, or how many security tokens you own, you’ll get these various benefits. And it’s very much actually in line with the trend that you’re seeing where we’re moving away because of the decentral model. We’re moving away from the monolithic company, just dealing with the customer one on one, where now they’re becoming, they’re moving away from the center of the circle to become an also a participant with everybody else, and hoping the network grow.

Steven : And in line with that also the way they’re raise capital, is and the benefits they can get from that or advancing too. So the smart companies are going to jump on that, and utilize those. But there to be fair also in security tokens, that’s one aspect of what’s happening, it’s new, anything that would you be talking about in quadrillions of dollars is a little more granular than that, and there’s a few other areas of things that are happening as well.

Nye : Like what?

Steven : So…[inaudible 00:25:22] decentralize everything for years that was the big. You sort tee shirts and everything and then, now there’s a new one called tokenize everything. And it’s there, a big chunk of that in a multiple quadrillion of dollars that people talk about is, the tokenization of assets that currently are not in liquid form. Easy example to look at is, the physical brick and mortar real estate out there. Most of that stuff is like physical, and some estimates are right now there’s about 250 trillion dollars worth of that in the world. Security tokens are really good, easy, lends itself super well to taking a very highly illiquid asset, and one that may be very specialized. Sounds like real estate is not, but really it’s actually very local, each building is different than the other building, and you can even get as specifics of floor, but security tokens you can issue spin out a security token on a building, on a group of buildings, and people can invest in that specific building, and then also affords liquidity, to the people that own the buildings right now.

Steven : So you’ve seen that, the people at that are looking at that, and basically every major illiquid asset clause. So you can look at for example, venture funds and private equity funds, which are highly illiquid assets for the limited partners in those, they invest, they typically have seven to 10 years, they’ll get outflows from time to time based upon, potentially based upon exits that the fund may have, they tend not to be in the early years, and may not be at any point.

Steven : All security tokens also changes I came because you can tokenize the fund itself, now all of sudden, instead of having limited partner interests, and [inaudible 00:27:17] against the shell of it is a security token. That’s something that can then trade on a security token exchange, and that means they’ll have liquidity. So somebody may say, I’m investing in this fund, and it changes the nature of how you think about that. Because limited partners right now, only on investing in that fund would a conservative estimate generally say I don’t need this money for seven to 10 years, and they may never get any of it back. And that’s, But when you have a security token offering, the fund is probably going to start using its funds over five, six, seven, eight years, and it will have a different value throughout that period.

Steven : But you can’t ever trade on that previous now, or not in a very way that was good generically worldwide, just like any fund could they use this technology to give liquidity to some of partners, security tokens to now allow that. And so you may be an investor, you would may not have been an investor in that fund because you wouldn’t have a seven to 10 year time horizon, but maybe had a two year time horizon.

Steven : So I want to get into this fund for the next two years. And maybe I don’t want to sell all of it after two years, but every year thereafter I want to take a certain percentage off the table, and you can’t do that currently. With the security token if you’re limited partner interest is wrapped in a security token, you could say, all right, after two years I want to take x percent off the table and you just go into the market and you sell it.

Nye : sell more liquidity and more flexibility pretty much.

Steven : Right. And that opens up the doors to, in many levels when you’re tokenize things that are totally liquid right now, and you’re allowing for more flexibility, it changes the nature of the whole game, and it changes the mindset of investors in a little limited, in the funds, but also changes the funds themselves. Venture funds and hedge funds for example, start to blend into each other. And also hedge funds are doing trading and venture funds are generally longterm investors. But with security tokens, they end up doing a lot of the same stuff because the venture funds are going to need, the skillsets of how trading is happening, and the hedge funds are going to start being able to, they used to having more liquidity and now they can get into the venture game because there’s more of a liquid asset for them to deal with.

Nye : Interesting. Really interesting. And for the normal investor, how does this process work? Right. So for ICOs is sadly for, happily or Sadly depending upon your perspective for a period of time, you could go in, no KYC, no AML, you could buy a token, you could sell it the next week for five excess. That’s what made them so attractive during the 2017 hype phase? What does it look like for STOs? What are the legalities in terms of, what are people going to have to share to the extent of information they’re going to have to share before they’re able to purchase STOs? Is everyone going to be able to be getting on this or is this more of institutional investors? Or what, how do you view that? And what’s the process like?

Steven : So part of that depends upon the jurisdiction that you’re in right now, and it also depends on the kind of offering. So there’s no one answer. The typical private placement in the US is, oftentimes you don’t under what’s called Reg D, and then for foreign investors in the US offering right to us. And in those situations generally you’ll have to be an accredited investor, after a period of time, often times it’s a year afterwards, then unaccredited investors can participate. An example of this right now is actually literally security token exchange which did a security token offering, and that I was involved with, it’s called tZERO. And so tZERO raised a whole bunch of money to build out the security token offering that, Patrick Byrne had been, really he was ahead of everybody pretty much in this space.

Steven : And that right now is trading on the security token exchange itself, but in all this it’ll be one year since the offering clause, and then it’ll be really interesting event because that’s when unaccredited investors, challenge if it’s an asset and income test or allowed to participate in the US. And the anticipation will be like volumes should sore, liquidity should increase, Of course it’s very early in the process right now. In general in terms of security tokens I have them a lot of issuances yet. So that’s the basic, but there are other areas where unaccredited can participate in the US, but abroad they will have different standards. So in each country can have its own standards. So the only issue is that they’re still trying to figure this out right now, is how do they have different standards than let’s say, the US standards when there’s such an international component to abuse.One of the benefits that security tokens offer.

Steven : And really the lesson of the ICO boom was that capital with security crypto, we know crypto everybody talks about, I can send bitcoin in 20 seconds, a minute, few minutes, whatever it is to a cross border, very low transaction fees relatively speaking to somebody in Africa and really saying is that, crypto is like water, just wants to freely flow. It doesn’t have the power, the barriers of orders and regulations and the [inaudible 00:32:59] show that capital in the form of crypto will flow exactly where it wants to go, and so people can say that, the abuses and all that, but the point that really underlying point in that was that, these people decided that the capital wants to go to this project and it just flew right to that project.

Steven : And that I think is just a very tiny because maybe there was a few dozen millions of people around the world. It’s actually very small percentage number of people in the world that actually participated in these ICOs, but what it showed as an example is broader, when I believe all securities are eventually going to become tokens, he had stock, he had bonds, equity, that, everything and illiquid assets that we almost all of that is going to eventually go into the form of a security token. So everything on Nasdaq or New York Stock Exchange. And so what it’s showing is like the ability for capital to flow globally into something using crypto, and security tokens are still crypto is tremendous. And imagine the setting we were talking about this tiny market of blockchain projects.

Steven : You have entire world of assets that we know or even assets that we’re not even counting today. Some people are looking out, for example, intellectual property, how much you can do with intellectual property right now, but there are some really interesting efforts to turn ridiculous amount of valuable intellectual property like patents, and things like that, licenses and turn that into security tokens. And where people can invest in those assets for their just sitting dormant on a company’s balance sheet. Company may have billions of dollars worth of IP patents on the balance sheet, and once they get a really complicated one-on-one negotiated licensing of that, it’s really hard to get investors into the, specifically into the pants, put that off as a separate asset of the company with them. Now they can monetize that asset. And what can you do with that? Once capital freeze up and you can do a lot of amazing things with that,

Nye : That’s really interesting. That wouldn’t allow investors to pick out specific idea that’s been patented, and say, “wow, that’s genius,” and invest into that based upon their interest. That’s-

Steven : Yeah. So there’s, you can look at companies that are doing multiple lines of businesses, where let’s say I look at this beverage company, and I like their regular offering, but I don’t like their diet offering. I want to just agree and I think that diet fads is increasing and people are going to the regular sugar, and you can now, before you now have a way to really get granular on that for investments, you can spin off a security token that specifically attracts the revenue from the diet line and revenue from the non diet line. And so whichever investors want to invest, and I know that may not be the biggest example, this is probably not an unrealistic one, but when we’re looking at other things where you look at, say a company that has multiple, a form big pharma that may have 10 blockbuster drugs and then they may also have another 30 drugs in clinical trials.

Steven : Well now that becomes really interesting because right now you’re investing in Merck Johnson and Johnson, Pfizer as a big monolithic company. And I may be really interested in this one, Alzheimer’s, you know, stage three trial, a drug that I happened to because I have expertise in that area, but I have no way of really investing in that area. It’s embedded into this like 100 billion dollar company. Now they can specifically target the investors that are interested in each one. And that a would probably bring the value of the entire enterprise when you add them all up, to some will be more greater than the part, but it’s interesting where that, you’re getting the whole leverage buyout boom that happened years ago, and has continued where people have taken companies and broken them up, and then take another company’s and combined them together, you don’t need to do that anymore necessarily. It’s the old I financial engineering now tokens can accomplish many of the things that they not on, I recall they were trying to accomplish, but they can accomplish many of the things that they were trying to accomplish. Where you’re saying, I want to break out and get investors just for this line and this line and this line, and sell them off separately. It pretty much can sell them off separately and still keeping them one company if you want to.

Nye : How far away do you think we are from something like that?

Steven : So I think security tokens as a general construct of, let’s put it as Wall Street 2.0 and I think that’s basing on constructable we’re talking about here, this is, this is the next evolution of Wall Street. So like a lot of technologies, I think that it’s, people over have overly expected near term results, and vastly under expected longterm results. So it’s probably, it’s not a 2019 event where you’re going to see a lot of liquidity but, 2020, 2021, certainly by 2022. So it’s the next two, three years, where you’re going to see this really mature in the sense that right now we’re still finishing putting the infrastructure in place. So there’s issuance providers, there’s custody providers, as the exchanges themselves, and all these guys agreeing on standards and connecting to each other, so there’s an ecosystem much the way it places stock and bond markets around the world of work today, where they’re all connected, everybody understands how things work. And so the players are right now feverishly putting all that into place and there’s a lot of capital, a lot of really smart people working on that.So people were expecting that to be right now.

Steven : So that takes a little while. However, when it happens I believe that the expectations over a period of time it’s people are going to look at the chart and say, “it’s going to go up into the right, to this number, and I think it’s going to continue and continue going further and further.” because the creativity of people in particularly the financial sector, we are giving them this new tool. All the financial sectors, like them or don’t like them, they’re creative as any other sector, and maybe more so than almost every other sector in the economy. They almost live and breathe off their creativity and you’re giving them a tool like they’ve never had before in order to create new financial engineering.

Steven : And I laugh because it’s a little ironic. There’s a lot of people that are saying, all the banks are going to die because of bitcoin. And, and it’s a little ironic because the very technology that was spawned by big coin, the underlying blockchain technology on the crypto aspect of it, that spawn security tokens, has the likelihood or potential to cause the financial sector to be many times what it is today. And the banks or financial institutions that recognize that, and also take advantage of a sudden, that means they have to pivot their business lines. They can’t just continue to in business the same way. We are going into a more decentralized world. And so they have to understand that they have to be participants in this broader network. They can’t just be proprietary of everything, them, their customers and that’s it.

Steven : But they saw a very valuable service to offer, they could benefit them vastly. Other ones will not, other ones will wither and die. And then there’s a whole new crop that I think you’re going to either see large tech companies taking a big bite out of this. You’ve seen this with Facebook and the Facebook coin, that we put crypto and then into Facebook and there’s usually potential at least 3 billion people and hundreds of millions of businesses that they could become the largest bank in the world, largest financial institution. So there’s a lot of potential creativity that can be used here where, why is I think that the end number over decades to be sure, because this is not a short term phenomenon, its long secular trend that’s got ignited by this tech. We’ll go further than I think most people can imagine right now.

Nye : Interesting. A couple of more questions for you here. Security tokens exchanges, what’s something like that going to look like? It is going to look like a finance where you can on and obviously you would probably have to submit KYC and AML and all those things? But is it going to look like a normal exchange that looks today, where you’re trading assets back and forth like that? Or what’s form is it going to take?

Steven : Yeah. So in some ways, it’ll mimic current exchanges. When let’s say finance or even Nasdaq, where you have trading, you have market makers, especially on the Nasdaq platform, so a lot of that stuff doesn’t necessarily change. What really changes is the nature of the instrument that you have and the things that can be done with that. So it’s not just, it’s the world is no longer clear cut worth. You’re a debt investor or an equity investor. You can mix those two in a security token, you can say, I have a claim on the company from a debt, I’m going to get an interest because of debt that they have issued and part of my money goes to the debt, part of my money goes to as a shareholder.

Steven : It’s like the worlds are now colliding and, but that’s cool because the companies can tailor these instruments exactly to what they want. Exchanges will be, I think there’s a few differences though. One of them is not going to be global, so as this infrastructure is building out, these exchanges are [inaudible 00:42:53] they had a global mindset from day one. It wasn’t like we’re just going to be doing the US. Oftentimes you’re doing this with partners or you’re building out other, because you have regulations and other jurisdictions to think about, but the end goal here will be 24/7 global.

Steven : So once we have regulations and standards in place, what’s going to be different is that, when you’re selling, you may be selling in the US to somebody in Korea. And it is more of a peer to peer decentral system, so some of the other things that are different is, it’s very hard right now oftentimes to untangle traits. There’s no clear, the immutability and the things that we know blockchain does really well are game changers and securities. There’s, a lot of people don’t know that in 2008, the financial crisis actually got triggered because of the system froze, people don’t remember. A lot of people don’t know that, that was usual settlement.

Steven : Settlement when you have a peer to peer settlement issue, system like this particularly you don’t have multiple days maybe just seconds or minutes, but when a trade settles or instantaneous settlement, that removes the possibility of the system freezing or dramatically reduces that. We’ve seen the implications of what can happen when that happens. So that’s one of the three biggest systemic risks of the financial markets that this resolves. And that’s a huge one.

Steven : There’s bunch of other things that will be different but, it sounds so much that when you’re looking at the screen, maybe it’ll look a little bit better and, but it’s really what’s happening really inside the markets that’s very different. And then your selection, when you’re, I don’t think you’re going to see the word stock exchange, or bond exchange, 10, 20 years from now, it may just be securities exchange, or it may be instrument exchange. I don’t know what the word is but, because these instruments are going to be so mixed with each other, those clear lines won’t be the same, there’s a lot of things that the regulators are going to have to grapple with.

Steven : So the bond market has certain regulations that it deals with, the stock market has its regulations, the commodity markets has their regulations, derivatives either do or don’t have regulations, that’s a whole nother aspect of this derivatives on the security tokens, super interesting. And so, all of those have to be rethought because they’re now a company has the ability to just issue all of it in one instrument potentially. And so how regular I don’t, end the regulators and having a chill with this. What’s been spawned by tokens is really, I think they’re doing the best that they can, they’re trying to stay ahead of protecting the investors, but also keeping innovation going. And that’s not an enviable position, a lot of people come down on the SCC in the US and they’re tasked with not spawning innovation, they tasked protecting the investor, but they’re showing a very strong inclination that they do want to continue innovation.

Steven : And frankly, at the end of the day, security tokens are a really good thing for bodies like the SCC. The SCC has things where it needs to untangle trades and find out if, let’s say for example, there was insider trading or illegal short telling. And right now there’s a very easy way and I don’t say easy, but I’m saying from a big institutional way of kind of covering your tracks so to speak, it’s just a lot of other things in more chain, it’s is just transparent, it’s there, you can seen it’s on the blockchain, you can’t change it, and you did something they shouldn’t have done, it’s immutable, it’s there.

Steven : There is nothing that you can do, you can create other trades to cover up these trades or whatever, so a lot of those shenanigans go out of the way and that, makes the SSC job really easy and I think one of the reasons they’ve been accepting of security tokens exchange is, that they see that their job as a regulator, becomes a lot easier with these. And then frankly the becomes even more simpler for them because a lot of people will stop doing the things that they’re not supposed to be doing just because they know they’re not going to be able to get away with it. So there’s, it makes our job even easier in that respect.

Nye : What are you excited about right now, in terms of the crypto space? Even in terms of STOs or whatever projects maybe you’re working on? What excites you the most?

Steven : Mainly to crypto in a couple of different ways. I look at to me bitcoin is its own thing. It’s own dominion, that’s some new monetary system and I don’t know that that’s where the taller, wherever it’s going to go away but it certainly, I believe it’s going to sit amongst once, amongst equals at least. Then you look at this whole utility token and the revolution that at Ethereum spawned. And I looked at that more as an operating system type, and then you have blockchain technology underlying that’s disrupting all kinds of industries. To me, they’re all exciting in particular got really involved in an effort that, I looked at the layer one stuff, we’re moving to layer two solutions, we’re moving to more stop solutions, applications and we haven’t fixed layer one yet.

Steven : Bitcoin has spoken for itself in terms of how it wants to move forward on its layer one layer, two solutions. Let me actually be okay for monetary system, I get the arguments there, where you don’t want to touch layer one and maybe layer two solutions are okay, but we’ve got a much more complex system like a smart contract system, that’s a worldwide virtual computers, it’s a lot more complex. And the things they, the interaction with the stakeholders are having as a lot more intense in a lot more taxing on the system, and the layer one solution is just not sufficient currently. I don’t believe any of the solutions out there. I think they’re valuable use case ones is super valuable, maybe [inaudible 00:49:06] or relevant anything on the planet right now, but they’re just not, going and talking about a general main chain thing.

Steven : And then in our efforts I was the Casper labs project is what came by that I got involved with. And I’m chairman of the parent company, which is adoptive holdings. And to me they really exciting, I wasn’t the technology but really an invention of Vlad Zamfir. And Vlad invented some of the, in my opinion is on par was Satoshi or the talented and that’s, I think those are two of the greatest inventions in human history. And his was, how do we then scale this? And so they come, look at him like he’s standing on their shoulders and so it’s certainly you needed all three of those. But he figured out a way to actually scale layer one and the Casper protocols.

Steven : And so we’re going to be releasing that, relatively near term, and we’re super excited about it because it’s, you still need the financial system as an example. So you have visa, and nobody wants to get to visa light levels, in blockchain they always talk about what we’re doing visa? we’re doing visa like, okay, but how are you doing it? And what I’ve seen out there is that, virtually all the protocols are doing that in a way that has some centralized feature to it. Some may be significant centralized, or some maybe really low, like the muse randomization or other kinds of things that try to minimize the centralized component. But at the end of the day, there’s always some central point of failure. There’s always some central point of possible collusion.

Steven : And I believe the reason bitcoin and Ethereum are the two most widely accepted protocols and networks out there, most widely understood of the biggest brands. It wasn’t, I don’t believe only because they were the first. It was also because they’re fully decentralized, both of them are fully decentralized. And I have a hard time understanding, that a main chain that’s going to be like Internet 3.0 literally and they are going to stick hundreds and possibly thousands of trillions of dollars of value on these chains. And even if there’s 0.0001% chance of collusion or other happenings because of a central point of failure, or central point of misconduct, is hard to accept. I do think that there’s very valuable use cases and we were seeing some of the chains that are getting really good adoption and I think that, there’s room for many chance.

Steven : But for the big ones that are going to handle like monetary system like bitcoin, or it’s going to be the main smart contract systems, I think they have to be decentralized. And that’s what this technology does. So I’m super excited about it, I haven’t been excited about this since anything, since Ethereum or when I first heard about bitcoin, so it’s really cool. Interesting is that the coin was 2009, and 2014 was variance of five years later then five later is this. So there’s a nice symmetry to the whole thing.

Nye : I like it. I appreciate you coming on. I got one more of just an opinion question for you here. We talked about ICOs, we talked about STOs, but the new big thing right now is IEOs, Internal Exchange Offerings. To me, they’re really similar to the high ICO, high phase where everybody’s as much as they can, they’re grabbing it. And if they, if you can get a little bit your, for the retail investor, they’re looking at good returns at a very short period of time, which makes it very attractive to a lot of people. We’ve seen Binance do it, we’re seeing Bittrex attempted to do it. I’ve seen a bunch of exchanges pick it up. What are your thoughts on this? Is it fully legal? What’s kind of the thought pattern with it?

Steven : You can nitpick with this comment that we make, but it’s really just high level [inaudible 00:53:25] aspect of is that, IEOs are ICO that are being issued on a sister platform to a utility token exchange. So by Natchez launchpad and each one of these KOB, they’re all coming out or have announced one similar. I don’t think there’s anything wrong with that. it’s just you’re still back in the same regulatory framework. So the fact that it’s issued and there’s an I instead of a C in the name, and then it’s issued on an exchange platform or exchange own platform, doesn’t change any of the regulatory aspects. What it does do, where I have a lot more hope that, because I still believe that utility tokens are going to be a massive market of that, a lot of people think they’re dead, and I don’t think ICOs are dead or the utility talking about, I think both of them are going to come back in a huge way. Utility tokens are this entire new asset that we’ve just never had before.

Steven : What they were, were these are more beneficial? Is that a couple of things. One, the exchanges act as a little bit more of a rational mindset in terms of they’re the gatekeepers. And so if the new ICO is done on an exchange type of system, you really need to get through these people are probably some of the smartest guys in the space, and it’s less likely that scams or even things that are maybe securities because they have their own legal departments reviewing things are going to get through.

Steven : But especially the scams or frankly, projects just don’t have any validity to them. They’re unlikely to, may argue with, is it or not, and just meet a lot still more than going to fail over time, but there’s this, loads of these smart group of people there, that are analyzing that. So that’s a huge thing. And so we were seeing is that, instead of seeing a 50 or 100 million dollar offering, you’re seeing like 5 million dollar offerings. And instead of seeing a project that just has a white paper, you’re seeing things like, the first one that I think just big was a bit torn and hey, I agree or don’t agree with the token, but nobody’s disagree with the validity of bit torrent and how many users that has, and it’s a super amazing open source project and been around for almost 20 years and looking well established brand, and that, if that’s the kind of thing that’s coming, that’s a lot. So world difference when we were talking about before.

Steven : Other things that they can do, but was a lot more easier for them to do is, if you want to have an offering and let’s say people don’t, because of regulatory and certainly don’t want to touch the US right now, or by the way other jurisdictions, we’re not the only unclear jurisdiction out there right now. There’s more unclear than clear, or let’s say China, which is pretty clear now, and especially when ICOs I don’t know if they’ve taken a hard stands and I used, there’s been rumblings, but it’s hard to tell what’s real and not, and I just came back from there and I didn’t get a clearance for myself on that.But it does seem like the exchanges that are going forward.

Steven : So the exchanges have the ability where you want to do an IEO there and you can say look, I don’t want, because of the jurisdiction, I’m located in as the issuer, and my legal teams telling me I don’t want to be in this country, that country and this country. And so they can pretty easily block any of the accounts that come from those countries. You are relying on the AML KYC of the exchanges when people sign up for their accounts initially. And so you have to put trust in us, you have to investigate [inaudible 00:57:20] exchange that I trust that do that.

Steven : And the top ones do it pretty decent job of that, so I’m sure they can always do a better job. But it’s, you have to be pretty good to get around some of their stuff and I’m sure people do, but it’s a lot better than saying I’m going to set up a smart contract to some website that nobody’s ever gone to, I know security measures on these websites. These websites get attacked like incessantly during the sales. And you are in a much more controlled, secure environment, it’s you don’t have fishing websites where it’s one letter off, or something and then people send a whole bunch of Ether or Bitcoin to this address and it’s not even the real address, and so a lot of these problems that did play get, they clean up a lot of that. I want to hope for that I use, because I think the IEOs have the potential to find a way to legitimize this market. And it will come at some point, and I think that it’s really early so they need some time to figure it out themselves, but the ones that I’ve talked to, their heads are in the right place, their interest in illegitimacy, they’re not interested in a quick hit, and they’re doing their due diligence on the projects themselves. So it was a lot more confidence in the ones that the investors come to.

Nye : Cool. So you think this is actually something that has the potential to be around for a while isn’t just like a hype phase?

Steven : No, I don’t know. I think these are the ICO just changes it stripes in terms of how it is. [crosstalk 00:58:44] Yeah. this gets, yeah. I think this is the potential to eliminate a lot of the abuses we saw on the ICO arena, but keeping the benefit of people being able to buy a participatory right in a new network. That’s kind of what they’re doing, and so people still want to participate in these new networks and there’s going to be, pick your number with however many zeroes behind it networks and tokens and it’s the whole economy and you see billions or trillions or whatever the number is of different tokens over time, that’s its own economy. And it’s own home asset class, and not asset in the sense of necessarily increasing in value, some of them do. But asset in, access in terms of all these new networks that we want to participate in. How do we participate in them? Tokens to the answer. And I think down the road a lot of people think that we may have tens of thousands or thousands of tokens in our wallet, to access all kinds of services that we’re looking to access.

Nye : Interesting. I like it man. Thanks for coming and joining me today. I appreciate it a lot.

Steven : It’s a real pleasure and this was, enjoy your podcast and hope to the back.

Nye : I appreciate the love. You got anything you want to plug yourself, Casper labs, anything that you want to share with the audience?

Steven : Yeah, we’re looking, Casper labs is, we’re very much focused right now, and we’re one as bunch community support as possible. We’re very much collaborative of all the other protocols out there, and we want to be a good member of the community, so anybody’s interested should go to Casper labs, that owe, check it out, pang us, and we’d love to have them participate.

Nye : [inaudible 01:00:23] Thank you so much.

Steven : Thanks a lot.

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