Bearer Bonds & Token Securities
The emergence of the crypto securities market has led to important questions of how to treat the tokens in relation to possession and ownership. A common comparison made is that token securities are much like bearer bonds; whoever holds the security owns the security. Some believe this to be a positive comparison, while others believe that more regulation and process need to be in place for securities tokens to avoid the fate of bearer bonds.
To understand the comparison, we have to go back to the beginning. Bearer bonds first appeared in the U.S. around the time of the Civil War, and they remained in use until 1982, when the issuing of new bearer bonds was outlawed. A bearer bond, or a bearer stock, differs from a registered security in that possession constitutes ownership. There is no record of ownership, as with a registered bond or stock. Whoever holds the paper owns the paper.
Advocates for bearer bonds hailed their fluidity. Anyone could invest in them, and companies or governments could easily issue them. At an institutional level, bearer bonds were favored because large amounts of bonds could be issued on a relatively low number of certificates. For large investors, it was far easier to transport a few certificates rather than trunks of currency. During the Civil War, the Confederacy funded its war effort through the issuance of bearer bonds, among other methods.
This very liquidity and ease of transfer were the reasons that bearer bonds became popular among less savory groups. Bearer bonds issued by highly-rated issuers were as good as cash, and the large denominations made them an effective way to manage the proceeds of illegal activity. Money launderers, tax evaders, and other individuals or enterprises who wished to avoid scrutiny became large buyers of the bonds. Bearer bonds were the preferred instrument in the growth and development of the Eurobond market in the 1970s and 80s. Billion dollar offerings were not uncommon, and issuers flocked to the Euro markets to take advantage of favorable financing terms, limited regulation, and low transaction costs.
In 1982, the Tax Equity and Fiscal Responsibility Act outlawed the issuance of new bearer bonds in the U.S. This legislation was a direct response to the cloud of criminal activity that had surrounded the bonds since at least the 1920s. Most state governments followed suit by outlawing the issuance of bearer shares, or equity securities, by any company chartered in their states. In 2007, Nevada became the last state to outlaw bearer shares.
Today, we’re witnessing a resurgence of this instrument in digital form: crypto digital securities have emerged as the modern day bearer share. The arguments against the regulation of crypto digital assets are the same as arguments against any form of government regulation: regulation is expensive and inefficient, it restricts innovation and economic growth, and it may prevent the development of new markets. However, governments worldwide, led by the United States, have accepted that there is a compelling public interest in preventing the free flow of currency to support criminal activity. Governments recognize that money laundering, terrorism financing, and fraud are all easier to carry out when money can be moved easily, free of scrutiny or oversight. In the U.S., the FinCEN system was developed specifically to address this need.
Ironically, the argument against bearer tokens is not an argument against blockchain technology or crypto digital assets in particular. The oft-reported crackdowns on crypto digital assets have been focused on applying existing regulations and basic AML standards to these emerging markets. Global regulators are saying, in effect, “we have an existing regulatory framework — — FinCEN and its overseas equivalents — -and you must comply with it.” Proponents of crypto digital assets who believe that their core value proposition is secrecy and anonymity are sure to be disappointed, given this regulatory backdrop.
Is there a future for bearer bonds and shares, but in digital form? Probably not much of one. Governments’ interest in preventing crime and terrorist financing is likely to outweigh end-users right to privacy for the foreseeable future. This will not prevent innovators from trying to defeat regulation and oversight, but the likelihood of a large, unregulated global market for bearer tokens is highly unlikely.
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