It’s Time to Change the Conversation on Blockchain Terminology
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Want to buy some Apple stock certificates? How about some IBM bond certificates?
Sounds silly, and frankly doesn’t even make sense. Yet that’s exactly what some people are saying with “want to buy some [name-of-company] security tokens?” — It’s confusing to investors. It’s confusing to regulators.
In the industry we geek out on terms like blockchain, token, DLT, ERC20, smart contract, etc. And that’s absolutely appropriate from an infrastructure perspective. In the public markets the infrastructure folks have geeked out for decades with terms like DTC, NSCC, DVP, T+3, ACAT, etc.
But those things are confusing to investors. And the new terminology is confusing to those who are tasked with protecting them. And that leads to problems for the industry that are at least partially self-inflicted due to the lexicon used.
If a doctor tells you that you have “acute viral rhinopharyngitis”, you might ask “oh my god, really? Am I going to die?” whereas if he used a different word for the same thing (“common cold”) you would be much more relaxed.
In the airport in Hong Kong a few weeks ago I noticed a billboard saying that people can use AliPay to buy things at stores there.
Does AliPay use a blockchain? Are the units of currency in the form of tokens? Do people have to store tokens in an electronic or specialized hardware wallet? The ad didn’t say…because it’s irrelevant and confusing to users (consumers and merchants).
The same with Venmo, which is enormously popular in the United States. And what about ApplePay? Is it blockchain? Is it tokenized? Does it matter to users?
Someone from a major, Fortune 100, firm asked me the other day if Prime Trust supports securities token exchanges?
“That’s the wrong question,” I responded, causing a confused pause.
“The right question is ‘do we support exchanges which focus on private securities?’ — and the answer is yes, our PrimeX API’s make life easy for these private securities (er, token) exchanges.”
I am often asked if Prime Trust supports STO’s. {{sigh}} At any given time we are the escrow agent and handling compliance, funds processing, reporting and other functions for over 1,200 concurrent securities offerings under Reg’s D, A, S, CF, etc.
We don’t care about the manner in which issuers will be sending equity and debt securities to their investors, whether they be physical certificates, paper notifications of book-entry certificate ownership, electronic notifications of book-entry certificate ownership, electronic certificates in the form of tokens, or electronic notifications from a custodian (e.g. Schwab) of fractionalized ownership in a single physical certificate that has been placed with another custodian (DTCC).
The regulatory and banking mechanics are the same and so we support all securities offerings, regardless of what form of delivery the issuer is using for their securities.
Now, does blockchain technology and the tokenization of securities make for easier trading of private securities, fractionalized real-estate and other assets? Definitely. We’ve seen entrepreneurs build exchanges like Second Market and SharesPost to create trading platforms for private securities, only to watch them struggle as it’s nearly impossible to process private securities transactions since traditional custodians won’t hold them and the risks and friction of dealing with physical share certificates are overwhelming. Blockchain solves those problems. Which is terrific from an infrastructure perspective and opens the door for incredible things to be built.
If a company makes use of blockchain technology to improve backend efficiency, frontend delivery, and secondary transactions, that’s fantastic.
But let’s stop saying things like “security token exchange”. It should simply be “securities exchange” or perhaps “exchange focusing on private securities”. Let’s stop saying “tokenized Reg A” offerings, and just file “Reg A” offerings, perhaps, if required, referencing an “electronic delivery of certificates”.
I’m sending out this blog via Layer 5 of TCP/IP via SMTP in MIME and it can only be read by people with proper DHCP and IMAP or POP3 decryption clients. Oh wait, I mean “I’m sending this via email and it can be read with your Outlook, Gmail or other such program.”
About the Author: Scott is the CEO and Chief Trust Officer of Prime Trust, the technology-driven trust company, and close partner of Vertalo. His firm provides trustee, custody, escrow, AML, KYC, payment processing, accounting, and compliance for numerous stablecoins, exchanges, OTC desks, platforms, broker-dealers, investment advisers, portals and others who are building business that are changing the world.
