State of Regulation for Blockchain and Security Tokens in the United States
The purpose of the legal panel was to improve the wellbeing of those who are chasing innovation in the realm of security tokens. The panel expressed their concern that the speed of regulation is chasing technological development. The panel covered ICO issues that fell in violation of securities law and urged token issuers in the DeFi space to become educated on the compliance and regulation through these laws. By promoting education for builders, the framework and infrastructure will change the way investments can be made. HB 1576 mandated the existence of “a work group on blockchain matters concerning this state.” To avoid the plateau of productivity, there needs to be more understanding and awareness of a natural paradigm shift. Do you think this industry will be bigger or smaller in 5 years?
Below we have attached brief backgrounds of the panelists who lead the regulation talk.
Lee Bratcher, founder and president of Texas Blockchain Council. Lee Bratcher is the President and Founder of the Texas Blockchain Council and a faculty member at DBU teaching international relations and blockchain courses. The Texas Blockchain Council is an industry association with more than 50 member companies that seeks to make Texas the jurisdiction of choice for blockchain innovation. He is also a Captain in the US Army reserves working as Tech Scout for the 75th Innovation Command that supports Army Futures Command. Lee was awarded a master’s in International Relations from St. Mary’s University and is in his sixth year as a Ph.D. candidate at UT Dallas.
Steven Baum, CPA and Partner at Freidman LLP. Steven is a leader in the firm’s Public and Private Company Assurance group, where he helps clients address issues relating to digital currency and emerging technology and assesses the potential impact of blockchain in various scenarios and industries. Notably, Steven works with colleagues with Friedman to develop software that is among the first generation designed to ensure the accuracy of audits involving digital assets, and to build audit procedures involving a unique class of assets. He brings substantive experience to transactional engagements involving Initial Public Offerings, Regulation A Offerings, Private Placement Offerings, business acquisitions, mergers and other equity or capital raises.
Tyler J Harttraft, Esq, partner at Bull Blockchain Law. Tyler J Harttraft focuses his practice on protecting the business interests of clients in various industries, providing efficient legal strategies for complex issues related to corporate governance, FinTech and digital asset regulations, and intellectual property matters. Tyler regularly counsels global and U.S.-based clients on regulatory and compliance requirements for cutting-edge technologies such as blockchain technology and digital assets, offering clarity in navigating complex federal regulations enforced by FinCEN, the SEC, and the CFTC and overlapping state laws and regulations. Tyler also advises entrepreneurs, corporate clients, and fund managers on regulatory frameworks applicable to crowdfunding and private security offerings, private investment funds, investment companies, private equity fund sponsors, broker-dealers, and money services businesses. Tyler also counsels start-up clients on a host of legal matters, offering counsel on commercial transactions, developing protective website policies, and implementing on brand protection strategies.
Key takeaways: Understanding securities law is a challenge in and of itself. That is why there are trusted and licensed professionals that focus on helping the public understand and comply with the laws and regulations. As new innovations become present, such as blockchain and tokenization of real-world assets, the panel expressed the importance of being compliant with current laws.
Unfortunately, technological development seems to outpace regulators. This creates an inherent risk that the regulators may not enact the best policies going forward. The panel also discussed what the issue was for many ICOs back in 2017. Many of these ICOs were issued and fit the criteria for a security. The problem was none of these ICOs were registered through the SEC, making the investment inherently riskier than others. These ICOs were in-fact in violation of securities law in the US.
The Coins fit the criteria for a security or what is formally known as an investment contract. Under the Securities Act of 1933, an investment contract is just one of the many forms a security can take. An investment contract is determined primarily through the Howey Test. If the transaction meets the criteria, it is a security by law and subject to regulation. The Howey test defines an investment contract with the following 4 criteria. If the transaction is “ (1) an investment of money, (2) in a common enterprise (common enterprise in this situation is defined as a prevalent goal for two or more entities to follow), (3) with the expectation of profit, (4) and is to be derived from the efforts of others, the underlying transaction is a security. When unregistered ICOs aren’t held to the same regulation as other securities, many investors are unaware of the risks they were assuming when investing in these ICOs.
Going forward, it is important we are aware of what crypto/digital assets will qualify as a security and will be subject to SEC law. There are less issues when selling to accredited investors, but the retail investors have little to no protection and that is where the SEC comes into play. There are more laws to govern the retail investors to protect them, and that is why it is going to take some time to give appropriate regulation to this market. As regulators, they shouldn’t hinder the growth of this industry, but they also need to keep in mind for the average person and their lack of knowledge.
The Blockchain Real Estate Summit held in Austin, Texas on September 10th
With the broader market of non-accredited investors, there will be the need for more regulation. There are many ways coins or tokens can be used as liquidity vs being used to fund operations and expansion of investment. The purpose of the coin or token and what the digital asset backs, will largely determine how it is regulated. Stable coins and transactions alike, will likely be subject to different bylaws than asset backed coins or security tokens. That is just an idea of what different kinds of regulation there will be and shows how far we are from proper implementation of laws that are accustomed to each and every aspect of these new digital assets.
Where do we go from here? Well, because of the vast potential for real estate to be integrated into the blockchain, there will be a gold rush to tokenize these assets. Either in the form of current compliance with securities laws, or maybe there will be new regulations that help these new innovations thrive and create an ecosystem that promotes integrity.
It seems as if the panel’s biggest hurdle for adoption was education both on what blockchain is and how it works here in the US. But at the rate of which the technology is being adopted, some people do not understand how to make this legal and compliant.
In the panel’s opinion, since investors will not change the way they invest, it is up to builders and industry pioneers to create the proper framework for investors.
For Texas specifically, HB 1576 was a giant leap forward for the industry. This law stated that a work council will be enacted to study the adoption of this new industry. Texas has great reason to be an early adopter for blockchain development, and the Texas Blockchain Council aims at encouraging the state for growth and adoption. There are already virtual currency laws that allow banks/Texas charter banks to custody digital assets. This can be integral for banks to make a play for adoption.
If the industry wants to be resilient to a plateau of productivity, then there needs to be more understanding and awareness of the paradigm shift about to occur. This is a technological advance we believe will be bigger in 5 years than it is today. We are still early adopters, but we have a great opportunity to transfer a lot of value to the blockchain.
Check out the main references we used to help us write this article: Statement of cryptocurrencies and Initial Coin Offerings, When is a crypto-asset a security and why does it matter?, The Blockchain Real Estate Summit Speakers List
This article is brought to you by the Team at SafeREIX. SafeREIX is a community defi token that is built around the integration of real estate to the blockchain. As real estate professionals, we aim to reach those engaged with real estate or blockchain and get both parties to talk about what the separate industries can do together. We had a great time writing this article for you to read. We are so excited to keep bringing you articles just like this one. We think that writing articles of this nature will expand our reach through the foundation of community enrichment. Hope you enjoyed this article, and we will keep you updated when the next piece of content is ready for your engagement. Join us on our social networks to stay connected!
Speaker socials: Lee Bratcher, Texas Blockchain Council Twitter, Friedman LLP Twitter
Other references/links: Texas Blockchain Council, Lee Bratcher and Turning Texas into a Blockchain Hub, HB 1576
Author: Zach Cuellar (Website, Twitter)
Editor: Hunter Carter (Twitter)