“Decentralization is a loaded word,” Says Amy Wan CEO of Sagewise: Squaring Blockchain’s Spirit of Decentralization with Security Tokens
One of the most common misunderstandings of security tokens is that they go against the spirit of decentralization initially introduced by Satoshi Nakamoto’s Bitcoin white paper, but the reaction to this criticism at this year’s Security Token Summit (STS), hosted by Goren Holm Ventures in Los Angeles on April 8th, 2019, was vehement. The speakers and attendees of STS who we spoke to believe strongly in blockchain technology’s capabilities to increase efficiency and transparency within various asset industries and expressed that comparing security tokens to bitcoin or ether to be a false dichotomy.
Michael Nye, Host of the Evolvement podcast, commented, “While one of the initial purposes of [blockchain] was decentralization, security tokens will allow for an entirely different sector of the world to become affected by this tech. Instead of looking at it as a negative thing, I see the implementation of security tokens as a positive force for the industry.”
Austin Margulies, Business Development at Sieo, said, “Tokenizing or digitizing traditional securities has little to do with theoretical decentralization, and is more relevant for creating efficiencies for asset ownership, liquidity and fungibility. Security tokens do play a role in decentralizing assets, but the critical piece to focus on is how the technology can functionally allow those securities to be issued, owned and traded with greater ease.”
Adding to this point, Marc Boiron, Partner at FisherBroyles, LLP, expressed, “The best approach to decentralizing securities is to walk the regulators from a centralized to decentralized path by proving that blockchain technology can successfully remove one middleman and then move on to the next middleman until peer to peer transactions become the norm.”
Questions from crypto purists are based in the reality that security tokens utilize the same underlying blockchain technology as cryptocurrencies like bitcoin and ether. Furthermore, though many security token believers are adamant in the dramatic difference between security tokens and other cryptocurrencies, it’s important to note that even the SEC’s recently published Framework for “Investment Contract” Analysis of Digital Assets notes the factors discussed in the guidelines “are not intended to be exhaustive in evaluating whether a digital asset is an investment contract or any other type of security, and no single factor is determinative; rather, we are providing them to assist those engaging in the offer, sale, or distribution of a digital asset, and their counsel, as they consider these issues.”
In the words of Amy Wan, CEO of Sagewise, “Decentralization is a loaded word, and one needs to understand that it’s not a black/white concept but really a spectrum,” insightfully suggesting that the question of whether a particular asset is a security or a utility should be examined in terms of a fluid security-to-utility scale.
Mirroring Wan’s perspective, the SEC leaves the door open when it comes to tokens being used on sufficiently decentralized networks or to pay for goods and services on a platform. Bitcoin and Ethereum have already been cited as cryptocurrencies that are not securities because of adequate decentralization.
Josh Lawler, Partner at Zuber Lawler & Del Duca LLP, told us, “Generally speaking, the Ethereum chain is considered to be decentralized, but it does not mean that issued ERC tokens are not securities. At the same time, many issuers of security tokens are also staunch believers in decentralization. Often an issuer will also create a foundation to administer the blockchain at such time as there are sufficient third-party participants (nodes/validators, etc.) to provide proper governance and support.” As highlighted in the SEC’s Framework, tokens originally issued as securities may be reevaluated upon launch of a decentralized network and recategorized as utility tokens.
It turns out, no one industry, sphere, or philosophy holds a monopoly on blockchain, as there is no reason why more traditional financial industries shouldn’t also benefit from applying the advantages of the technology to improve transparency, security, and efficiency. While it’s debatable as to whether security tokens can embody the spirit of decentralization originally introduced by Bitcoin, the rise of security tokens no doubt continues the spirit of innovation first sparked by Nakamoto’s famous white paper.