DFINITY @ Nasdaq, Presentation & Part 2: Ed Knight, Dominic Williams & Kathryn Haun Discuss Tokens and Regulation
Thursday, the 28th of June, 2018, Dominic Williams, Chief Scientist and Founder of DFINITY, Olaf Carlson-Wee, Founder of Polychain Capital, Ed Knight, Chief Regulatory Officer of Nasdaq, and Kathryn Haun, General Partner at Andreessen Horowitz, participated in two panel discussions at the Nasdaq Entrepreneurial Center.
This panel was an opportunity to hear perspectives of a blockchain project founder, venture capitalist, and securities regulator side-by-side. This is the second post covering the event (the first is here). What follows is a synopsis of panelists’ perspectives on the various topics covered on stage, either direct quotations or paraphrased thoughts from the panel.
Synopsis of the Panel
What is, and what is not a security?
“…an investment of money in a common enterprise, where there’s an expectation of profits and those profits come from the efforts of others.” — Kathryn Haun, Andreessen Horowitz
The Howey Test, derived from a Supreme Court case from 1946, helps identify a security in the US. More recently, the Howey Test was reaffirmed by a Federal Court in Florida on the 27th of June when applied to the Centra ICO, which was found to be an unregistered security and shut down.
The term ICO connotes a public offering in the style of an IPO but not all ICOs are public offerings. Many ICOs conducted in the past have been done so pursuant to exemptions to securities law. Many planned for the future also aim to take advantage of exemptions.
The Reg D exemption allows securities to be sold to accredited investors without being registered with the Securities and Exchange Commission (SEC). The Reg A Plus offering included in the Jumpstart Our Business Startups (JOBS) Act also offers a path to exemption.
Capital markets
“…[The Silicon Valley is] the epicenter of research and development arguably of the world.” — Ed Knight, Nasdaq
There are three elements that economists focus on that drive innovation, research, development, and capital creation:
- Research universities like Stanford University and UC Berkeley.
- Entrepreneurship and entrepreneurial risk taking.
- Well-functioning capital markets like Nasdaq.
At the core of a well-functioning capital market like Nasdaq is enforceable investment contracts and regulations to protect investors. Through different cases and statutes, these have been expanded. Enforceable investment contracts and regulations form a foundation on which to raise and create capital and are needed to respond to the presence of bad actors.
In the case of the European carbon credits market, immature regulation allowed the market to be manipulated.
“That is what happens when the law has not evolved to catch up with the innovation, I think this is a situation where we’re facing with many of these new products we’re talking about here. The law hasn’t caught up to them, we need a Reg Crypto.” — Ed Knight, Nasdaq
Regulation
“I think there is a lot that can be done by working with some of these regulators. They want to have the good projects that are out there, that are trying to be thoughtful about regulations and law, come and work with them and help inform what makes sense in this new world.” — Kathryn Haun, Andreessen Horowitz
Most projects and entrepreneurs want to be regulatorily compliant that are based in the U.S. Unfortunately they are having trouble determining how the law applies. Entrepreneurs with no experience with the government have a view based on what they hear in media and from the conservative statements of their legal counsel. This makes it difficult for government agencies to reach out to entrepreneurs to collaborate with them in making smarter regulation.
Unfortunately, bad actors, outside of the reach of these regulatory bodies, can still raise funds from their jurisdiction with relative impunity. Heavier handed regulation disadvantages legitimate actors without being enforceable against bad actors.
Why isn’t Nasdaq listing tokens?
“The law hasn’t caught up to the innovation. To give you one example, the rules that the SEC has say that we have to require that security be clearable at DTCC [the Depository Trust & Clearing Corporation], the central clearinghouse utility in the United States. These coins they will not accept for clearing at DTCC. So, just to start off it wouldn’t qualify and you have to build an infrastructure somewhere to allow that clearing. So the law is not advanced enough to accept such a security and for us to list it at this point” — Ed Knight, Nasdaq
Part of the reason existing U.S. capital markets can’t support ICO tokens is that regulation requires a security to be clearable by the DTCC, meaning that legitimizing ICO funding requires the DTCC to support the clearance of ICO tokens. Another challenge remains the storage of the tokens and the assurance of their safety from theft or loss.
“This really is … the next revolution of the internet, it’s huge, it’s happening worldwide and it’s unstoppable.” — Dominic Williams, DFINITY
Blockchain technology is being developed worldwide, and it will continue to develop independent of jurisdiction and speed of regulation. Hidden from view are a multitude of massive projects driven by well-intentioned and brilliant people, and backed not only by a new means of raising financial capital, but also a huge amount of intellectual capital.
It used to be that entrepreneurs escaped their localities to come innovate in the U.S. Today, however, startups are choosing to locate themselves in places like Berlin and Switzerland because of the ease of employing the ICO funding mechanism. This is leading to a renaissance of the tech industry where increasingly startups appear worldwide.
How can the U.S. be more supportive in this regulatory environment?
“I think the SEC is starting to do it … The Director of the Division of Corporation Clients which regulates this area, as we discussed, has put out more detail. What I think is needed is, a clear safe harbor for people to understand if they use these coins, how can they do it safely under the securities law?…
…So, there was confusion one time in our investment history around private placements and Reg D was developed to allow that. We need a Reg Crypto where the rules are clear … these are laws that are fundamental to our economy, and are fundamental to Silicon Valley and help Silicon Valley in many ways and allow Nasdaq, for instance, to trade this year 11 trillion dollars in securities.” — Ed Knight
“I think two things: I don’t think we should have a Crypto Reg because I think if you do it, it’s going to be outdated within a year. Because the technology keeps changing so quickly. I do think … we need guidance, formal guidance that people can rely on … One, it comes in the form of no-action letters … So we can see that’s clearly on this side of the law and they’re not taking action. We also need to see, ironically, more enforcement action. Spelled out against who and why. If you look at a lot of the enforcement actions to date … I think everyone has had an allegation of fraud.” — Kathryn Haun
“… Silicon Valley is an amazing powerhouse of talent and creativity. It’s very important that’s not hurt, so that needs a light [regulatory] touch. On the other hand … there’s lots of outrageous and shady operations out there that probably do need to be curtailed. So I would definitely encourage them be bold and go after these people.” — Dominic Williams
