An Open Letter to Congresswoman Waters
Updated: Mar 4, 2020
Dear Congresswoman Waters,
We appreciate your 15 terms of service to California’s 43rd Congressional District as well as your service as the Chairwoman of the Financial Services Committee. I run a regulatory compliance firm called TokenSoft, which we operate at the intersection of securities laws and blockchain technology. We were delighted to see your recent amendments seek to better protect investors, as that closely resembles our ethos of best interest for the every day market participant. We respect your moratorium on Facebook’s proposed cryptocurrency Libra and wanted to use this opportunity to tell you a bit more about how decentralized blockchain technology can help bring greater transparency and protections to the every day investor and issuers alike.
At TokenSoft our clients are enterprises who seek to not only issue standard company stock, but also to reflect these shares on a blockchain. They are frequently referred to as ‘security tokens’ or ‘digital securities’ and represent a growing trend of mainstream issuers seeking to gain broader market access when raising money. These blockchain-enabled securities provide a new level of transparency and an enhanced level of compliance, the properties of which we think can provide better protections to issuers and investors alike.
When securities are reflected and tracked on the blockchain, this enables an immutable record of events when it comes to the number of shareholders, the time and amount of transfer between parties, as well as the total number of outstanding shares. When an immutable record of every transfer of ownership for a security exists, this makes it very simple for a third party auditor like EY, Deloitte or even a government regulator to verify transfers or any associated claims with a high level of confidence and accuracy. This is all afforded due to the unique properties of the blockchain which provide a timestamped, immutable record of events. It is worth noting that there are privacy mechanisms that enable private transfers on the blockchain provided by companies like EY with Nightfall and Blockstream with Liquid Securities. This means that information about transfers are not viewable publicly, but are verifiable by a third-party with access to certain pieces of information provided by the issuer.
To us, the most exciting blockchain-enabled enhancements are the facilitation of compliance for corporate finance and capital markets. Our implementation of blockchain technology enforces a permissioned network layer over public blockchains. This means that an issuer can require all investors to undergo onboarding procedures based on their applicable compliance requirements prior to being afforded the opportunity to own a blockchain enabled security. Due to the level of automation the blockchain provides, we’ve been able to keep our clients in compliance as global regulations change and evolve. Some examples of recently introduced regulations that have affected our clients are EU General Data Protection Rule (GDPR) or the CDD Final Rule under the Bank Secrecy Act. The blockchain also provides us the ability to screen all investors against sanctions lists periodically and to almost instantly revoke access to the security if an individual or entity appears on such a list. Blockchains also feature “smart-contract” technology, which enable interactions and associated transfers of value between any two parties to comply with business logic that cannot be circumvented.
One application of smart contract technology that we’ve developed is called ERC-1404, it enables a shift from the status-quo of discretionary compliance to one of preventative compliance. The business logic is enforced by the issuer or other regulated party licensed or required to enforce compliance (e.g. transfer agent). This means that a non-compliant transfer of securities between two parties can now be prevented in lieu of breaking applicable laws. One of our favorite examples is the ability to prevent the “flow back” of a Regulation S security into the hands of a US person. Since our issuing clients have a database of all investors, where they reside and their associated blockchain addresses, the smart contract is able to prevent a non-compliant transfer of a security from ever occurring.
In your letter to Facebook, you mentioned that “these products may lend themselves to an entirely new global financial system that is based out of Switzerland”. We also share this concern, and wanted to bring up an opportunity that the House Financial Services Committee has to counter this threat. The technology previously described can also enable a US government endorsed virtual currency. The adoption of which will be limited to individuals not found on sanctions lists unlike the physical cash equivalent. Perhaps one where the tax is automatically collected on every transfer. All of these are possibilities with recent developments and innovations in blockchain technology and we hope that its benefits are not viewed as counter to the interests of the US government but also a tool to better protect and enhance the integrity of its operations.
As a community and as a company operating here in the United States, we hope that the impression that the proprietary Facebook Libra network has left will not negatively impact your perception of the work that the rest of us are doing to bring transparency and fairness to financial markets. We take our role and the opportunity to help US market participants comply with applicable banking, securities and tax regulations very seriously. To date, we’ve helped the local Securities and Exchange Commission here in San Francisco by providing educational presentations about the work we’re doing on the blockchain. If you feel like you or your colleagues would also benefit from the same, we’d love to provide further information about how the blockchain can be used to enhance the agenda of the US House Committee on Financial Services as it pertains your interest in Consumer Protection and Financial Institutions in your Oversight Plan.
Thanks to Okiki Famutimi.