“Cypherpunks and Wall Street”: The Security Token Revolution & Regulation
Bruce Fenton presents at the World Blockchain Forum — and will cryptocurrency bring us to utopia or dystopia?
Keynote sessions at the World Blockchain Forum alternated between pitches by cryptocurrency and ICO products and broader philosophical talks by leaders in the space.
One of the talks from the latter category was by Bruce Fenton, a 20-year Wall Street veteran who has brought his knowledge of traditional finance to cryptocurrency.
“At 21, I became a Vice President at Morgan Stanley, [but then] left and founded the first full-service investment firm to use the Internet.”
In 2013, Bruce set his successful traditional finance business aside to take advantage of the great opportunity he saw in blockchain, moving to “a combination of my old career as stock broker and this new technology.”
Now, Bruce directs Satoshi Roundtable — an invite-only retreat for top leaders in the space. He’s a board member at The Bitcoin Foundation and tZero, a security token exchange associated with Overstock.com, as well as at successful investment group Medici Ventures. In addition to being creator and/or CEO of a number of other projects.
Yet Bruce found time to present at the World Blockchain Forum. His motivation was clear: as security tokens become more popular, he sees both naïveté and moderating influences in the revolution.
In his session, “Cypherpunks and Wall Street,” Bruce explained securities, the drawbacks of the current system, and the revolution of cryptocurrency.
1. Securities are agreements
“Securities under U.S. laws are basically agreements. As long as agreements exist … they will be considered securities.”
Securities are a broader category than many people think. To use Bruce’s example, I could sign a piece of paper saying “whoever holds this paper owns 10% of my company” and then sell the paper on Twitter. That sale would be subject to securities laws.
And agreements can reference a blockchain, even when that blockchain itself is unaware of the outside world.
Many philosophical debates over security tokens miss these simple points, complicating the matter beyond its core: agreements are securities, agreements can reference blockchains, and agreements are regulated. For the foreseeable future, securities are here to stay, even as blockchain takes over.
Now, contrary to recent belief in the cryptocurrency community, registered securities can be purchased by everyone. But sometimes securities issuers use exemptions, most commonly Regulation D, since registering a security is so involved. These exemptions require less on the company’s part, but they also limit which U.S. citizens can invest.
ICOs are usually unable to fully register as securities at their current stage of development, so if they wish to be compliant with U.S. securities laws when they sell their tokens, they need to use one of these exemptions.
2. The current system is a mess
Today, securities are managed by hundreds of separate parties who do not trust each other and have to rely on trusted third parties.
“Try moving 100 trillion dollars in volume with 350 broker firms managing security ledgers who don’t even trust each other — and they don’t even trust the issuer!”
Securities are tracked on a haphazard archipelago of ledgers, all related and in some sense interdependent but all completely isolated.
The controllers of each ledger are unwilling to share with each other, for good reason. Their incentives are at odds. For reasons of competition, Goldman Sachs doesn’t want Merrill Lynch to know its ledger. And neither of them wants Apple to know who owns Apple shares, especially since their contact at Apple — or someone at Apple who manages to access the ledger should it be shared with Apple — might be a bad actor.
3. Security tokens promise to fix the problem
“Cryptocurrency is a $40 trillion+ market … as significant as the Internet, maybe just as significant as the printing press.”
The popularity and profit potential of cryptocurrency and security tokens is drawing in a large number of people from a variety of financial and professional fields, and many of these newcomers have no interest in revolution.
But the many decentralization projects in the world will upheave and upset the institutions of old. In his session, Bruce put up the Cypherpunk’s Manifesto on the screen and announced that revolution is at the core of Bitcoin and blockchain, and if you’re not about the revolution,
“You’re in the wrong space, man!”
Bruce’s favorite line in the manifesto is simply this: “cypherpunks write code.”
“That’s it! It’s an idea, you express it in the form of code, and you publish it for the world. That difference changes the alignment. It aligns interests in a way like nothing else ever has.”
Unlike the clumsy modern securities system, tokens align the incentives of security issuers and holders, employees, and even customers, removing the need for a panoply of third parties and enabling a degree of trustless transacting.
Bruce pointed out that this brings everyone down to “the same field,” unlike the old financial system, which is so dependent on knowing and becoming a powerful person. “There’s no advantage that anyone has” once this new system is in place.
Commentary: Three Problems to Solve
Bruce is an energetic speaker who brought a number of important messages to his session. But of all of Bruce’s points, the one most saturated with conviction was revolution.
Only the most obtuse observer would miss the tone of revolution in the blockchain and cryptocurrency space. Even here at ICO Alert — a company that strives to always be compliant and to reach an audience that includes sophisticated investors — our slogan has a revolutionary feel to it: “Become Your Own Venture Capitalist.”
Bitcoin and cryptocurrency is undeniably a revolution. The only debate is how much of a revolution it will be.
This is the ideal future promoted by many cryptocurrency revolutionaries:
- Regulatory authorities embrace the revolution (or just eventually give up).
- Fiscal and organizational agreements are enforced by unprejudiced, reliable code rather than powerful, biased, fallible humans.
- The playing field is leveled, extending equal opportunity to all.
This cypherpunk utopia, though, brings up some discussions we must have — unless we want to slide into a cyberpunk dystopia unawares.
These discussions share some overlap, but I’m starting to think of them in three categories: unforeseen oppression, the problem of inflexible enforcement, and the hope for an unrevolutionary revolution.
1. Unforeseen Oppression
Most freedom revolutions create new places for slavery to dwell.
This “leveling of the field” is far from the first passionate mention of égalité in our history.
Humans will do their best to find ways to take advantage of new systems to consolidate their power and to oppress people. Even as some implement systems to level the field, others are dedicating their efforts to finding new ways to game the system and enslave others, even in a world of decentralization.
The tactics they will employ may not be obvious right now. Like the massively powerful mining pools dominating the Bitcoin and (currently) Ethereum networks, the schemes of the next decade’s powermongers may be predictable only with deep forethought.
I know that discussions of possible dangers will be labelled “FUD.” But discussing potential dangers isn’t pure fear or pessimism when the discussion then progresses to solutions. We can’t be so afraid of spreading FUD that we don’t talk about potential pitfalls, or we risk being blindsided, repeatedly postponing the uncomfortable conversations until it’s too late.
2. Unbendable Enforcement
The idea of removing prejudice by subjecting agreements to the arbitration of code is an alluring one. However, contract enforcement requires a good deal of information and consideration that are not (yet) processable by code alone.
I agree with Nassim Nicholas Taleb’s point in Skin in the Game and elsewhere that “ethical rules aren’t universal.” Some rules do not apply — or apply differently — under various circumstances. People who think they can create a set of universal ethical laws that are not adaptable to specific people and situations and yet remain just haven’t had much experience with (in)justice systems.
I’ll save this — and Taleb’s points — for a later discussion, but legal frameworks without flexibility and mercy devolve into disturbing dystopias when subjected to a few thought experiments.
I believe we need to work on hybrid systems that provide enforcement by code in some set cases and decentralized flexibility in others.
3. Unrevolutionary Revolution
Admittedly, I haven’t thought about this one enough yet. Perhaps you can help.
The cryptocurrency (and even the security token) space is in a difficult place, trying to have its cake and eat it too. We want to revolutionize the regulations of the financial system without violating those regulations. We want to replace most regulators without even inciting any serious opposition from them along the way.
Bruce made it clear he’s not an activist, at least not in the sense that he’s planning to buck regulation for the sake of breaking “unjust laws” and go to jail for the cause. And of course I’m not suggesting that you the reader break any laws.
But the question persists: Can people avoiding revolutionary behavior successfully pull off a true revolution? If so, how?
Already we see the old guard seeking profit and power in the cryptocurrency space. Buying exchanges and businesses, manipulating cryptocurrency markets, creating monopolies, and starting cryptocurrencies controlled by large corporations and governments. Are these signs that the crypto revolution is being brought to heel? Is increasing legitimacy actually rendering this cypherpunk movement impotent?
Or will someone emerge waving the revolutionary flag and fanning the flames once again, but only because they wish to declare themselves Emperor in the end?
Has that person already emerged? Are they now amassing recruits and resources, deceiving thousands into trusting the purity of their intentions?
Few revolutions have ended well, even for the revolutionaries. All too often, they only create new oppressors.
Recent fictional examples like Amita and Sabal from Far Cry 4 and Alma Coin from The Hunger Games are hardly dystopian exaggerations. They draw their material from recent revolutions in Asia, South America, and Africa, from the Russian Revolution, from the French Revolution, and from countless histories before them of a revolution turning into stronger oppression.
Non-political revolutions, too — such as industrial revolutions — arguably brought evils into society that took decades to remedy, and created new kinds of tyrants in non-political circles.
In many cases, revolutionary leaders fighting for the people’s interests or the “good of all” should never have been trusted. And whether their motivations were for power or for the universal and merciless extension of the ideology they had preached, they even turned on the revolutionaries in the end.
Will this revolution of trustless technology, of distributed ledgers and decentralized organizations, be one of the few in history to truly level the field?
The revolution seems so inevitable. Just as inevitable as many of the aforementioned revolutions throughout history seem.
But are we underestimating the sacrifices we will have to make to see it through to the end?
And will we even like the world after this revolution rebuilds it?
We’ll discuss these problems — and potential solutions — in future installments. In the meantime, tell me: