On The Brink with Castle Island - Mason Borda (Tokensoft) on the convergence of tokens and capital markets (EP.134)

Episode Date: October 5, 2020

Mason Borda, CEO and cofounder of Tokensoft, joins the show. In this episode:  Tokensoft's ERC-1404 standard Why put securities on chain? Commonalities between the spirit of securities laws and the values of crypto markets The possibility of making stock transactions into a real time phenomenon Transparency through registered security offerings versus on-chain cash flows and freely viewable contracts How on-chain tokens are transparent and where they should volunteer additional disclosures Tokensoft's Arcoin and INX issuances Mason's response to the critiques of the INX offering Why regular companies don't just "hold their own securities on a centralized database" DTCC explained for Bitcoiners How Mason thinks about securities regulation today as compared with 2017 Is the 'complexity defense' sufficient to ward off securities regulators? Mason's desired approach to the market from the SEC Lessons that the SEC can take from MAS (Singapore) and FINMA (Switzerland) The outstanding barriers to security tokens gaining liquidity and market share

Hello and welcome back to On the Brink with Castle Island. Today we have Mason Borda on the show. Mason is the CEO and co-founder of TokenSoft. TokenSoft is a firm that exists to facilitate the issuance and circulation of securities on public blockchains. They created the ERC 1404 standard, which mediates the transfers of tokens like I&X and Arcoin and Commerce Blocks novel token on Ethereum. they help support some of these SEC registered token offerings. They effectively sit at the intersection of public blockchains and the regulated securities

industry. In this episode, we talk about the somewhat controversial INX public offering, how the custody of stock certificates actually works in traditional markets and how it could be improved, and why tokenizing equity and inserting it onto blockchains might actually make sense. We also talk about the SEC's current perspective. and how to take a pragmatic approach to securities regulation as it relates to the crypto markets today. So without further ado, let's jump right into it. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated.

The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped $75 billion. more to Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin.

Mason Borda, thank you so much for coming on the show. It's long overdue and we're glad to have you finally. Thank you, Nick, for having me. It's my pleasure. I'm glad to be here. Today, you know, your task, should you choose to accept it, is to convince our audience that security tokens are worth doing and interesting in their own right. So that's the challenge I pose to you,

nothing that you probably haven't encountered before. All right. Let's see what happens. Let's do it. Yeah. Let's start with TokenSoft itself. So tell me about the prongs of the business, because there's, like Howie, it's multi-pronged.

That's right. We, you know, we really model our company after the regulations. And so there's, there's, so our company, we basically help funds or companies issue security tokens. And as they go through that process, we help them do three things, really. So one is they can use our platform to fundraise and they can use our platform to fundraise internationally. We can help them follow securities regulations around the world. The most countries that we've done is 56. And we basically automate that fundraising process and process for.

them. The second thing that we do is, let's say, they just sold 10 shares in their fund. The next thing that we do is we put those shares onto the blockchain. And so now those are now on the public blockchain and they can go transfer and be visible and people can hold them. And the third thing that we help people do is we help investors hold their security tokens. And through that interface, they can also submit a buyer or sell order as well. based on the assets that they're holding or they're intending to hold. So there's just three things that we help them do. So one is fundraise.

Two is issued the asset on the blockchain. And three is manage their investors and enable them to trade. So tell me about the standard that you built on Ethereum. Yeah. So one thing that sort of organically happened in the space is obviously your company equity, it's something that, you know, if you run a company, you give it out to the people that you want to give it out to. And they can't necessarily go run away with it or just give it to someone else.

And so early on we were sort of faced with the task of, okay, how do we make the blockchain tokens behave in the same way? And so we made something called ERC 1404. You can go to the website, ERC1404.org. And this is a EIP that we proposed a couple of years ago. couple years ago. And basically what it does is it enables transfer restrictions on the tokens. And so before a investor of a security token can actually hold the token, they have to go through a set of onboarding procedures, and then their address can be whitelisted to hold the token.

And so the ERC-1404 functionality, it basically has two functions, and one is to detect if an address, if a transfer for one at us to another is going to have a transfer restriction on it, and the other one is to sort of set the transfer restrictions on the holders. And so that's the standard that all the stuff that we do is based around, and it basically helps us to enforce the compliance requirements around securities transferring on the blockchain. Because I guess with normal securities, you can't actually just give them to your buddy or trade them without approval. Actually, I'm realizing now I don't exactly know how it works with regular stock certificates. Yeah, and I think it's different in like private and public markets.

So if you worked at like a startup and they gave you equity, the way that most people go and resell those is they go through a broker dealer. like shares posts is a good example of that. You have to basically register with their broker dealer. You have to provide a bunch of KYC information, go through this very long form to get approved there. And then they can help facilitate the secondary trade, but there's a lot of paperwork involved. And you can't exactly just hand your equity to someone else.

But when you put these equities on the blockchain, now there is the potential to just hand them to some, someone else. And so, and the problem is the blockchain makes it so easy that it also makes it illegal if you do it with a normal ERC 20 token that's really transferable. And it's illegal in the sense that it can force the company to breach the regulatory requirements as to what sort of transfers they can allow, they shouldn't allow. And so anyways, there's all these complex rules around transferring and basically we simplified it into a very simple standard. that basically prevents unauthorized transactions and allows authorized transactions to happen on their own.

So I guess the obvious question here, and I'm sure you get this a lot, is why would you be interested in using, you know, a public blockchain, which is meant to give you strong transactional autonomy for something, which is permissioned by default? So what would be, what purposes would that kind of be most suitable for? Yeah. Yeah, so I think, like at Tokensoff, we're all like crypto people. We've been in the crypto space for a long time. And so naturally, you know, we say, okay, well, if you want to put your securities on the blockchain, you know, you have to do it right. And so we allow issuers to self-custody their securities.

So they can hold them in coal storage multi-sig wallets if they'd like, where they own all the keys. You can have investors around the world. come and purchase your securities and they can hold it in their own wallets. And so we always looked at it from that perspective. We never really looked at it from another perspective. So we always saw, okay, so here's the block train. Everyone wants to issue on Ethereum. And now, okay, so how do we help these people that want an issue on Ethereum follow the regulations?

So it's very iterative in that manner. And, you know, we did want it to be as peer-to-peer and decentralized as possible. And that's one thing we found that regulators really like is that we, We try to make our infrastructure as decentralized as possible. So if token soft goes down, you don't lose your security tokens. Your security tokens can keep transferring without us, and you have all the information you need to either go to another provider or start running this yourself.

And I think that's really core to the blockchain space. It's the reason we're all here. And it's also, surprisingly to us, it's also core to, the SEC and the way that the regulations are designed. And the SEC also, this is sort of my inference of how I picked up everything, but if you look at all the regulations, they're really forcing decentralization, but with a different flavor. So the SEC regulations basically require a different license for every different type of activity.

And it sort of forces, you know, if a company wants to go public, It forces them to work with, you know, five to ten different parties to sort of get public. And so there's this sort of inherent decentralization that's baked into the regulations, which is sort of interesting. So half of it was just the tech. It's how we've always seen the tech. And the other half of it was the regulations just sort of pulled us in that direction even further and made sure that we were decentralizing as much as possible. So we were talking about this yesterday a little bit. So your kind of observation is that the spirit of securities laws actually has a lot of overlap with the spirit of the crypto industry.

So you mentioned decentralization. Tell me the other ways where there's kind of commonalities there, which maybe crypto-native folks might not realize about securities laws. Yeah. So one is definitely the sort of enforcement of decentralization. So if we actually, you know, held our customer's tokens and we held the investors tokens and, you know, we were helping them fundraise and basically helping them get through the entire process, we would probably need three to four licenses just to do those activities. And the reason I think is just historically on Wall Street, it seems like when a single person tried to do too many things, you know, people. were taking advantage of or a single entity was trying to do a little bit too much of the process, they would sort of do everything in their own favor. And so the one thing we sort of noticed was

different activities do require different licenses. The SEC does prefer that they're sort of all managed by different entities. So there's checks and balances. And that's sort of very similar to the Bitcoin space, right? Everything is completely decentralized, except for the exchanges that have licenses to enable exchange. But otherwise, anyone can sort of plug into the service and provide a different type of application on top of Bitcoin. I guess the other feature you mentioned was the fact that security's laws, especially as they relate to disclosure, have to do with transparency.

Yeah, the second thing is, I think we saw this with the INX IPO. If you look at their F1 filing, there are a ton of disclosures in there. And the SEC really wants investors to know what they're buying if they're buying into a security. And if you look at really early in the Bitcoin space and in the crypto space in general, just publicly announcing everything that you're doing and being super transparent about what's going to happen, how coins are distributed or allocated, and all the sort of underpinnings of the company were super important to sort of build that trust and rapport online.

And with securities as well, it's really important. The SEC sees it really important that companies over-disclose all of the risks. They disclose exactly what's going to happen with the company, what's the company going to do, where the potential risk there in terms of execution. And disclosures are really a core piece of the fundraising process when it comes to securities. And so I think that's one thing that's really interesting and one sort of connection there that's interesting is disclosures are heavily enforced legally.

And if you do mislead, if you're found misleading, obviously there's big penalties for that. So I think that's one thing that's really interesting. The other thing is with these tokens now on the blockchain and trading on a public blockchain where every transaction is viewable and verifiable, there's now a very interesting like audit trail. And I think that transparency is really interesting. So Bitcoin, obviously, public blockchain, you can see everything that's happening. Now there's these wonderful analytics tools, which will also disclose your identity.

if they can, you know, if they scan a bunch of addresses. So it's a very public sort of network. The one thing that security tokens are sort of doing to Wall Street are, everything in Wall Street is centralized. It runs in their own databases. There's a potential for these different parties on Wall Street to tamper with information, to, let's say they're being investigated. They might not be able to find some information or things can happen.

things can happen and do happen. And so for the first time, these securities transfers are now tracked on a public blockchain. So everyone can see what address holds how much. Everyone can see all the transfers that are happening. When it comes to issuing more securities, when it comes to sending tokens to, I don't know, let's say there's a new investment round, all of these transfers are tracked on the blockchain. And so now anyone can come in and sort of audit exactly what's happening with the tokens. And that's sort of a very interesting dynamic that the blockchain is bringing

to Wall Street. And that transparency is really interesting. So now if a regulator wants to audit the transfers just to see who owns what, just to make sure there's no insider trading or nothing fishy happening, they can just look at the blockchain and see all the transactions on there. And same goes for a third-party auditor. If Ernst & Young was to look at this, now, there's a third-party record, the blockchain, that has an audit trail of literally every interaction with the securities. Yeah, I think that's a very important point. And that's maybe a domain where putting securities on chain actually dramatically represents

potentially a very dramatic improvement over the way that things work on Wall Street. I mean, obviously auditability is quite important in the eyes of regulator. And, you know, the holders of security is not exactly meant to be private. I mean, if you're a sufficiently large holder of a security in the U.S., you generally have to disclose your position. And, you know, we have hedge funds doing their quarterly disclosures on 13Fs and so on. So there's no real expectation of privacy the way there is with just basic financial transactions. And so in this context, the transparency of blockchains, which some people, considered to be a bug is actually pretty useful here and gives you the ability to some really

interesting stuff like potentially real-time financial metrics. You know, you could find out the P.E. of a company assuming their cash flows were on chain on a per block basis as opposed to a quarterly basis, as well as those other auditability advantages you mentioned. Yeah, I think the shift towards making everything real time is going to be more fascinating. Just like you said, you can sort of track cash flows in real time. And right now, things are a little bit more traditional. Like when we, when token softs, the token soft transfer agent distributes the INX tokens to investors, it happens same day, but we are working on sort of making this a little bit more real time. And I think that's going to happen with any type of transaction that happens between parties on Wall Street on traditional rails is going to be made real time with security tokens.

And I think that's one aspect of it that I'm really excited for. One thing I want to ask you, I mean, you mentioned about how there's this overlap between the spirit of securities laws and between the ethos of crypto to the extent the one exists. and you talk about transparency and the maybe the fact that we kind of backslid in terms of the quality of disclosure you know with Bitcoin was very cleanly disclosed

and Satoshi gave everyone lots of notice and published the code and published a pretty comprehensive white paper that said everything and then wrote a bunch of additional stuff on Bitcoin talk and then the early Bitcoin talk Alcoins were pretty good

it again in terms of disclosure. And it seems like it kind of got progressively worse over time. And then, you know, now you have this interesting barbell where you have effectively public offerings, which are done under the existing securities regime like INX, where the disclosures match, they adhere to the standard that the SEC expects from public markets. So there's a lot of disclosure. It's not necessarily in the format. crypto investors would expect. And then you have these kind of on-chain pseudo-equities, which probably resemble securities in some key ways, but there's very little disclosure. And the only disclosure is the existence of the code and the fact that in theory,

anybody could go and audit that code and look and see how that code generates cash flows, which are maybe accretive to token holders. So you have this really, these two dramatically different approaches. One involves lots of legal oversight and doing it under a process that the SEC is a steward of. The other is, you know, buyer beware, but here's the code. It exists on Ethereum. Here are the cash flows. Here's the governance rights. Do you expect these two dramatically different models to converge at some point? I mean, is it possible we get a more crypto-friendly disclosure regime that token holders could potentially employ as opposed to the pretty empty standard of today? What do you expect to happen there in terms of disclosure?

Yeah, I think this is a tough one because I think the best disclosure obviously is having the entire code base be open source and online. Then you can actually go see how everything even functions internally. The one thing that I guess crypto disclosures don't necessarily account for are execution of the team. And anything that's sort of non-code related in terms of execution and fulfilling the promise of, you know, making the company very successful, I think that might always be hard to sort of disclose and evaluate. way, especially in like a crypto first world. I think generally with with everything in crypto, I think it always averages out somewhere in the middle. And so we always start out with technology.

That's just based technology and just organically growing out there in the world, just like Bitcoin did on its own. And on the other side, you have regulations, which are very old. They're adapted for older technologies, older companies. The regulators have obviously an older understanding of how the technology works as well, not necessarily being the ones to follow the innovation as closely as the tech folks. And I think naturally all this stuff lands somewhere in the middle. And we sort of saw this with ICOs and securities laws as well. Fundamentally, the ICO technology is a securities offering in the real world. if you consider the asset that's being sent back of security. And so I think 2017, we probably had the technological ideal and the experimentation.

And I think 2018 until now, we sort of have, at least at least at Tocinsoft, we've been focusing on the opposite, which is how can we find that middle ground and how can we map the regulations to the technology and find the sweet spot in the middle. and, you know, to your question, will there be a disclosure that's somewhere in the middle? I think we're sort of seeing that. I think hopefully this will get better and better. With INX, there was the token smart contract was disclosed, and there was an audit of the procedures used to create the tokens. what's sort of, I think, missing, and this is obviously not practical in this case,

but I think in the future it would be great to see the code base, at least elements of the code base of the company also be disclosed in public. So to the extent the companies out there can get more and more decentralized and operate more on chain, I think that would sort of get to a middle ground where we can have a balance of disclosures and how does the code even work and how do the numbers all flow or how does the tech work under the hood and sort of what the what how how bitcoin sort of got out there in the world. I think there's a middle ground, but I think it might take a few more years before people start experimenting with that aspect of it. Yeah, it is interesting to see because, you know, arguably something

like uniswap is very transparent in its own way, but then also relative to the kind of hundreds of pages of disclosures you might see in an S1, it's very untransparent too. You know, there's certain features of the system that are more subjective, and they're not necessarily code-based, like, you know, for instance, committing to and enumerating the governance rights that token holders have, for instance. I mean, it's kind of hard to anticipate and determine how that's going to change over time and what the standard kind of governance processes are even going to look like in D5. and, you know, five years from now, so it's hard to commit to anything. But that's the kind of thing

you'd expect to be highly codified in the traditional kind of securities industry. I mean, shareholder governance is very, very well understood. And the procedures are very clear. And they have to be because that's basically that determines who can, you know, exert power over a company. So it's things like that, which seem very poorly codified to me from kind of a cursory look so far. Yeah, I think governance is probably the most interesting thing that's happening right now because, yeah, that is something that exists with shares in private companies. Those governance rights are traditionally reserved for the board with public securities. Shareholders can also vote on various elements of the company. And I think the interesting thing is that these governance tokens that are out there are either for, so some,

are for upgrading the code base. And then others are for product decisions. And so it's kind of like interesting what blockchain companies are giving out governance rights for. And, you know, it sort of made me think at some point, you know, because I always try to map the real world and the blockchain world to see, like, you know, are there any analogies there that can give me sort of a mental framework for this? And if you think of, you know, Apple and like Google and all these companies, out there, they would probably go crazy if shareholders were deciding which products they would have to launch next. Yeah, I can just imagine Steve Jobs' response to that.

Yeah, and that probably works with blockchain because everything is open source and everything is public. And so as code changes or as code is being worked on, it's all public. like R&D is even public. And so it works. And so it's going to be interesting to see if any like traditional companies actually start to adopt this model and allow their users to vote on different product features or different company direction perhaps.

You know, would it be more interesting if we went this direction or that direction and here's all the data that you can use to make that decision? But it's going to be interesting, like, yeah, where that middle ground sort of lands on. Yeah, I think the one big phenomenon here that obviously, crypto people have talked about for a long time and is actually trickling into the public markets is this notion of users as owners, you know, so conjoining usage of a system and being a shareholder or an owner of that system. And this is something that we're seeing in discussions around Uber, you know, with kind of drivers, vesting shares of Uber based on how much value there

providing to that to the system to the network which is obviously that was kind of the whole premise of you know lots and lots of these uh these kind of air drop situations you know obviously liquidity and mining but that's not the first time we've had this that was basically one of the key premises of the crypto industry as a whole is that users should be entitled to kind of the fruits of their labor in a network defined system you know where they're actually adding value well, maybe they should be entitled to some of that value. So I don't know if I would attribute that solely to the growth of the crypto industry, but it seems like that idea has gained a huge amount of currency in the last few years

as it relates to actual public markets, even though I guess there's kind of implementation difficulties. Yeah, I can't remember the name of the company, but in the dot-com boom, I believe there was a company that gave out shares to their users as well, the first form of an air drop, you could say. And I think what Uniswap did was really interesting. So huge user base, lots of activity. And they sort of did a retroactive air drop to all the users for governance tokens.

And, you know, I do think it does create a different type of user. And I do think it creates a little bit of a religious movement, which we obviously have in the blockchain space, very, very, very obvious. obviously. And so I think I think that's sort of an interesting aspect. The users are no longer passive users that are more focused on, you know, where can I get this, maybe where can I get the same service for cheaper or, you know, they're sort of seeing a service as a means to an end. And it does create a different mentality, I think, where users are no longer just users. They are evangelists for the company. And in reading some of, some of INX's marketing material,

or their educational material, it seems like that's something that that could be possible with that structure as well. And maybe they're trying to achieve a similar sort of goal there. Yeah, I think we kind of informally saw that with Tesla as well. You had people that would own Tesla. They'd also own Tesla stock and they'd be very loud evangelists. That kind of happened in an informal way. But you can imagine that being formalized into the growth plans of these kind of network-based companies in the future as well. Although I guess there's kind of barriers to doing that. I mean, especially private companies just structurally can't have a big base of especially retail shareholders for the most part. So maybe the security slots would have to change to accommodate that.

Yeah, it's, yeah, it's going to be interesting to see if, uh, if companies just sort of run for this and start doing it. Um, but I think, you know, I think it's going to, like with all this stuff, It always takes like one really big name that does it and becomes 100x more successful as a result before everyone else comes in. So I think it's going to be interesting to see which company is going to be the first one to do that on the more traditional side. So you guys have had a really big last couple months. So the main offerings that you've kind of mediated are I&X, of course. A lot of noise about that on Twitter. And maybe less well known would be the Arcoigne offering, which is a wrapped.

Treasury Fund. So tell me about both of those and the role you play it and and why they are kind of important. Why why people should be what lessons we should be taking from them. Yeah. So I think so so one key element here is if a just if a company is going public, there's a little piece of infrastructure that's he requires that's called the transfer agent. And and so that's sort of one company that we have set up is, is a little piece of infrastructure that's, a transfer agent. And basically, they're sort of the shareholder registry. And it's basically a fail safe if you lose your wallet or in traditional markets if you lose access to your accounts or, you know, someone, the owner of the shares passed away. There has to be a way to get those shares back. And so we have

a transfer agent. We also have a technology company. And like you said, our technology company helps issuers, cross investors, fundraise, put their token on the blockchain. And then if they're public, our transfer agent helps just watch over everything and minister everything. And so we had two customers come to us really early on. They were looking at doing SEC registered or publicly traded offerings. And one was called ARCA funds and the other one is called INX. And so ARCA is basically doing a, they have the ARCA U.S. Treasury Fund. and basically the premise of this is

a investor sort of wants to investor comes to our platform they put in $100 for example I think the minimum investment is actually $1,000 to say it's $100. That comes in to a bank account. That money is used to buy

$100 shares in U.S. treasuries or $100 in U.S. treasuries and then our technology creates a total that represents those $100 in treasuries and sends it back to the investor. And this is basically structured, if you think about it, it's basically a stable coin that's backed by U.S. treasuries. And so there's the opportunity to collect interest. It's really transferable to those that have registered.

And it's basically a better stable coin. It's a stable coin that's backed by real assets and that you can go ahead and redeem for on a quarterly basis. So is this kind of a tokenized money market mutual fund? Is that the right way to think about it? Yeah, it's a closed end fund. And how is the interest actually paid out? Is that kind of daily, monthly?

How does that work? So this one I'd have to check. I believe this one is quarterly payments. And so this was released by ARCA and the addressable owner basis just American entities, right? Correct, yep. So the other big offering, which got a lot of attention, was INX, which is, was very interesting to me personally, because for years now I've been very, maybe not loudly saying, but saying,

you know, in closed circles, you know, to the extent that these tokens are, they mirror or recapture the qualities of equity, you know, it's obviously likely that the regulators would eventually consider them equity and institute all of the obligations that go along with that. But the issuers should treat them like equity too, and they should really strongly codify the rights that token holders have, and they should delineate those rights and very, you know, stipulate where token holders stand relative to the business itself and where the tokens are in terms of seniority on the cap table, you know, are they, where are they junior, you know, where do the token sit in that capital stack to the extent that they're a novel piece of it? And I-NX was one

of the first, I thought, that actually did a really good job of laying out where token holders sit. What duties the company has towards them and what the token holders are entitled to. And now, I'm not commenting on the worthiness of the asset or the raise or whether you should invest in it or not. But just from a structural perspective, I was impressed by the amount of diligence that had gone into that and the transparency that the INX team showed in terms of what the token holders are actually getting with their investment. Yeah. And I think that's one thing that the IPO process, there's a really good job of forcing, is just making sure that every single little detail is really thought through and that is sort of structured in the appropriate manner.

And their token is for, it's for, so if you purchase the tokens, the pool of investors that purchase those tokens has rights to 40% of the cash flows. And I think that's, that's really interesting because it's a really novel way to sort of bootstrap a company. And it's sort of similar to what you're seeing with like, with a lot of the apps out there. there is sort of a ref share component to it. So if you have a governance token, you can get a percentage of the revenues or a certain

allocation of the revenues. And I think that's sort of, you know, it's definitely a novel concept we haven't seen before in traditional markets where you can actually hold the token on the blockchain that gives you rights to something. So I think this was really exciting for us to see once it got out the door. So what did you make of the critiques of I and I? actually, I mean, there were a few. So on the big corner side, there were critiques that, you know, the INX was a platform created by Bitcoiners, but then it was using an ERC20. So maybe you could address that.

And then the other critique from the kind of defy or more, I don't know, crypto anarchist, Ethereum side of the house was, well, why not just create something like BNB outside the confines of the law and make this fully on chain and why bother with these long disclosures and all these restrictions and this isn't really true crypto because it's whitelisted. So yeah, I'd like to hear your responses to kind of both of those strawman objections. I think, yeah, on one side, and I don't speak for, I guess, either INX or the maximalists. I sort of just followed on Twitter, you know, like everyone else did. Yeah, so I think there's definitely a lot of tribalism in crypto, and it's hard not to be sort of passionate about what we believe in in terms of what assets we hold or how we see the world.

So, yeah, in this case, there were several folks that were advisors of this project that align. more with Bitcoin maximalism values. And there was a bit of an outcry, you know, that given that, you know, why are these guys advising this company that's, you know, issuing a token that's on Ethereum? Why not do something, do it on a platform that's more aligned with the Bitcoin ethos? And so the liquid network was thrown out as that alternative online. And, you know, like, I think, I think, yeah, so that's sort of the ironic thing is, you know, there's a lot of people that were saying, you know, this should be done on a centralized database, you know, why even put it on the blockchain and all that stuff. And it's funny because, yeah, there were, there were ICOs that were going on maybe, you know, a couple years ago that don't align well with Bitcoin values at all.

You throw a bunch of money in, you get a token back, and who's accountable and, you know, how does this all work? And now you have some regulations that actually align very well with Bitcoin values. And now there's a little bit of an outcry against that. And, you know, like there's a lot of people saying, why not do this on a centralized database? Well, no one in the history of public companies has ever managed their share. shareholder registry on their own database. And like that just simply doesn't happen. Every company would have to integrate with every exchange out there separately.

And so that just wouldn't make any sense. And today there's something called DTCC that basically plugs into all the exchanges and clears all the trades and settles all the trades. And so it's not very, decentralized. It's a little decentralized today, but not much so, but like the companies themselves don't obviously manage these registries themselves. And so what INX has is they have really good disclosures. The token is on a public blockchain, so it's decentralized. So you can go hold this in your own wallet if you want to. And you can transfer to anyone else that's,

that's whitelisted as well. If token soft goes down, if any of the service providers, go down, I-NX still does have control and access to all their tokens. And so I think this does a pretty good job of sort of merging the two worlds and getting as decentralized as possible. And, you know, on the other side of things is, you know, a lot of times people don't like sort of ICOs because they can be scams. There's potential for that. And so now you have, you actually have a regulator, a U.S. regulator that is looking out for you as an investor and has vetted this company and has asked them a bunch of tough questions that's actually out there to ensure that investors don't get taken advantage of and investors aren't scammed. And so I think when you're looking

at the level of integrity, you know, any project that the SEC or any company that the SEC lets IPO or get publicly traded is heavily vetted by them because it's their name on the line as well, right? It's the U.S. regulators name on the line, and they are accountable to sort of watching over all these projects and making sure investors aren't being taken advantage of. So I thought, you know, definitely a lot of irony there in terms of the critiques of INX. And, you know, some of the things aren't necessarily possible. Like, you know, why don't they do it on their own database? Well, no one does that. Yeah.

And, you know, that's not to say that securities fraud doesn't happen. and for sure I could probably name 10 or 12 public companies today, which I think are really closely skating on that boundary, including a certain electric truck company that shall remain nameless. I don't know if they actually sell trucks. They definitely make renderings of trucks. I don't believe they've actually sold any trucks. Anyway, leaving that aside.

But, you know, it's much easier. easier to commit kind of securities fraud if you are not doing hundreds of pages disclosure and going through that registry securities offering process under the aegis of the SEC. It's much easier to do it if you're just throwing up a website and accepting Ethereum and saying here's a token and we'll see what we can do to, you know, cause value to accrue to it, but we're not making any promises basically. Yeah, yeah. On the kind of crypto anarchist side, I guess, the critique, maybe this wasn't as strident,

but I saw it a little bit. You know, why bother creating this asset on chain if it's not going to be natively interoperable with the established crypto financial infrastructure? You know, you couldn't put those INAX tokens into Maker or compound or uniswap, for instance. So that was definitely the other side of the token that I saw. saw. Yeah, so no pun intended, right? Yeah. Yeah, so the one thing we did was, uh, we did make this like the ERC 4D4 standard compatible with everything that's out there today. Um, so, uh, one good example of that is, uh, ARCA has a, um, they have a proposal out to, uh, get our coin, which is

the coin of the issue, um, integrated into Maker as, uh, collateral. And so obviously Maker has this big MCD initiative where they want to diversify the collateral that they accept. And so this is one proposal that's out there. So that claim, Nick, I would have to say is false. This was designed to be integrated with the different wallets and services out there. So changing focus a little bit. So I want to talk about DFI a bit because I think you have really good insight into it. You know, you are crypto-native and then you also have a really good understanding.

standing of what the kind of securities regulators expect. The current fixation is trying to figure out are some of these new airdrops, you know, the same questions that we grappled with in 2017. Are these securities? Is the SEC going to, you know, continue their somewhat hands-off approach? Is there going to be a broad enforcement action here? are we going to get more guidance, which doesn't really clear everything up? Tell me what you make of the current defy space,

especially mindful of the fact that a lot of these assets explicitly encode the features of equity in terms of governance and cash flows, which is maybe different from 2017, when a lot of these things were quote-unquote utility tokens. what do you make of that and what do you see is the kind of near-term outcome here? I mean, I think most people recognize that the SEC can't sit on their hands forever. Yeah, so I think the one thing that's really great is, you know, in 2017 we saw basically money come in, token come out. And it was very simple model.

And I think that was the good thing and the bad thing about it. it did sort of create a wave of innovation where people were trying to explore different ideas. But the problem was it was too easy. And I think what I really like about the defy space is that it's very complex. You have to be very technical to figure out how it works and how to use them, how to use different products that are out there. And so it's sort of a different flavor of investor accreditation. and it's one that's sort of reinforcing technical understanding.

And now with the Ethereum fees, you do have to be an credit investor to use the Ethereum network. And so I think the complexity in DFI is really interesting. I think that for the first time, we're seeing real technological experimentation and innovation. And I hope that continues. And because these are sort of structured, you know, a lot of people call them the different products in the DFI space money Legos, and it's sort of referencing the concept that these smart contracts are sort of composable and you can sort of mix and match different concepts. I think Uniswap recently deployed a token and then put the compound governance module on top of it, which was really

interesting. And so because these things are composable and they're like Legos, people are sort of mixing and matching at a pace that we haven't seen before and innovating and trying new concepts. And I think that's really beautiful. And I hope that keeps continuing. You know, these do touch on a variety of regulations. And so that's the, that's sort of the scary part is these are touching on regulations. The space is moving really fast. It's hard to break apart the products and to sort of peel back which regulations. they're sort of bumping into. I was at some point on a legal call with this company I was advising. It was a defy company.

And the lawyers pointed out by the end of the call that there was about five or six different regulations that this product was touching on. And it really made me take a step back. And number one, appreciate how complex everyone has made the space. But number two, it's also sort of a scary thought to think that, you know, to create products that are this interesting and innovative, you do need that many licenses to sort of get the products out there. So, you know, I think, you know, these are bumping into different regulations. I think the ones, the things that do help, like, that are good facts are, these products are really

technical. So there's a huge focus on that instead of just like fundraising, something that is very squarely within a very specific regulatory regime. And so I think, I think that's a good thing. And I think it's a great thing that there's a huge focus on keeping these products as decentralized as possible. I don't think a lot of people appreciate how much thought went into sort of Bitcoin itself. And it's very clear that Satoshi thought through the regulatory threat model as he was going to launch that and made sure to sort of hedge his bets in all the right places. So pseudo-anonymous, decentralized network, it's peer-to-peer. many servers are running this, not a single server. And I think the good thing is, I think people in the crypto space also get that.

So when I'm seeing products out there, I'm seeing a huge focus on keeping the governance tokens as decentralized as possible, making sure, like, some companies are thinking about not keeping anything, you know, server side or keeping server side code. I think that's great. You know, the more you can decentralize, the better. But, you know, there are regulations out there. and, you know, these innovators have to decide for themselves, how do they fall on the rights, you know, how are they getting comfortable with falling on the right side of that stuff? And decentralizing as much as

possible is definitely, you know, one thing that's a good thing that people are doing. That's going to help the space a lot. And I'm not sure how the regulatory stuff will play out. My gut feeling is that, you know, just like the SEC had the Dow report before. And I'm not saying, saying the SC is the only regulator that's pertinent to defy. Like I said, there's many regulators out there that are there for watching out, watching over the loan industry, watching over securities, watching over commodities. And so all of these sort of come into play from one angle or the other. But if there was a certain activity that was under SEC jurisdiction that perhaps they didn't like, my guess is that it's going to be similar to what happened with the

Dow report in 2017 where they saw the Dow sort of grow big and fall and and you know people lost money so a very bad event happened and then they put out some guidance saying hey this was probably a security because of X, Y and Z. And so if if the projects out there are doing something new and novel like I imagine we're going to see something very similar where they'll put a stake in the ground saying, hey, this is what we think of this type of activity. And then enforcements will begin, you know, after that. I, you know, I do hope the innovation continues, though. I think I'm very, it would be a really, you know, sad, sad thing if it did slow down in some form or fashion. You mentioned the immense complexity of the defy space in particular. That's definitely

something that I would agree with. That's often used by kind of advocates. to as a way to effectively say, well, this is too difficult for any regulator who's not necessarily that sophisticated in the crypto space to dig their kind of talons into. And for that reason, we don't feel that any material enforcement is likely because it's too complicated and they won't be able to get up to speed on it. What do you make of that kind of line of reasoning? And do you find it convincing? Yeah, so that's something I hear as well is, you know, people are like, well, these smart contracts, you know, I don't even understand them myself. How can a regulator understand them?

And there's the notion that these, the code is so complex and, you know, the SEC staff doesn't have any developers on staff. And so they won't be able to figure it out. And I think that's sort of building a false sense of confidence. I think that's like, you know, I don't think, you know, anyone should ever assume that, that an adversary or someone that can have an adversarial effect towards what they're doing is dumb. I think, and I have sort of an experience that sort of reinforced that for me. We were sitting with the SEC at some point a long time ago, and I was presenting how ERC 1404 works.

you know, has this white, white listing mechanism and built into it. And, you know, they asked me, you know, how does this, how does this sort of interoperate with decentralized exchanges? And I didn't really have an answer for that because it was so early. And I have no idea how, you know, the Dex smart contracts worked at the time. And, you know, they aptly pointed out to me that if we wanted this to work with the Dex, it would have to be. whitelisted as well. And so, you know, I, that was, that was the first time the SEC taught me something about smart contracts. So I don't think, I don't think we should assume that the SEC isn't familiar with, with code or can't figure what's, figure out what's going on. So I don't

think that's necessarily the strongest argument that one could have in any situation, really. What would be the optimal, you kind of laid out what you think is likely, but what would be the optimal approach here? I mean, would it be something like Hester Persis safe harbor where kind of crypto-native companies had room to experiment for a few years and then had to prove that they were sufficiently decentralized or would it be a new kind of listing standard for crypto-seudo-equity or a new disclosure framework? what would you like to see here? So if we look overseas, there's a couple of regulators that are very forward thinking that have moved really quickly. And so historically we've seen Singapore and Switzerland regulators move really fast. And they've been able to, I would say they've made some good decisions to which at least

put a stake in the ground, made things very clear where things stand and the industry can keep moving forward. I think what we don't want to see is everyone to just stop innovating overnight. And I think that's what regulators don't want to do either. They don't want to kill an industry. And, you know, that would just force everyone to go to another jurisdiction or go overseas, which we've already been seeing to some degree. So, you know, if we look at Singapore and Switzerland,

they're much more hands-on and they sort of understand the tech a little bit better. So they've been able to understand the tech, put forth regulation to make sense, and sort of have everyone move on. I think that's sort of the challenge the U.S. faces is, The SEC is a much larger organization, and the technology is just moving at a rapid pace that, you know, this is probably, like, the defy space is probably moving faster than any other technology vertical in the history of technology. There's, there's like a, there's several new projects every week, and, you know, the code is actually done. It's not like the ICO space where it was a few white papers every week. Like now it's actually proper innovation.

And so I think the balance is going to be, you know, how do we put something out that makes sense that doesn't stop everyone, but maybe slows them down a little bit so they can think about a few more things before they move forward. And I think the safe harbor approach is more saying, you know, that's sort of we don't get what's going on. So follow these basic guidelines and you have safe harbor for a little bit to do what you want. I think that's just maybe leading to a softer enforcement maybe. But like, why not just enforce the bad actors at that point, right? And so that's basically saying, hey, we're going to watch this for a little bit. And then we'll take down whoever we think, you know, is not doing things in the right way. And I don't know if that necessarily solves it.

I still think just like a little bit more clear guidance would be helpful. Like if you look at Switzerland, they put out like a framework. So they say, here are the possible facts. If you fall in line with these facts and go down this path, you fall in with those facts, go down this path. And I think that's just a much more clear way to sort of drive the industry forward. And so I think what I'd prefer to see is something like that where there's maybe at least a elementary understanding of the various. fundamental concepts in the defy space that are broken down and you know from there once you know the various activities that people are engaging in you can say okay so you either fall in line into this

bucket of people in which case you should do this or you fall in line with this bucket in which case you should do that and i think that's a better way to ease the industry forward uh without without necessarily scaring them or taking any i guess just just stopping the industry in its tracks And so that's always what I'm in favor of is just like regular sort of being the tech in the middle and sort of more so guiding versus, you know, bringing people down like right away and slowing down the industry. So returning to kind of established security tokens, it's been a few years now since that concept has sort of existed in the wild. we still have a real posity of ATS venues, you know, places to trade these things, and custodians that are willing to hold them. What are the major hindrances to STOs? I mean, is there any truth to that general feeling that they're kind of key blockers there?

And what are the prospects for the kind of security token market becoming more liquid and more ubiquitous? Yeah, I think one of the undercurrents that we've sort of had to fight is the assumption that security tokens work a lot like Bitcoin. And so, you know, I think we've had to do a lot of education that sort of got away from that and proved that, hey, this is not the case. And so there is sort of a, you know, we still don't see any broker-dealer custodians in the same. security token space. The ATSs out there don't have broker-dealer custodians either. They're not supposed to custody the assets themselves. And so where does the asset go? And so that's sort of the last big stop that sort of slow down the industry a little bit. I think all of this from our perspective is an education problem. I think we've been just really good to explain. We've been just really good

explaining how everything works, where all the risks are, how are we making sure everything's secure. And I think it just takes a little bit of a more hands-on approach. And you could sort of look at the sandbox models that like the UK and Singapore have. And, you know, that's one great way for regulators to become more familiar with the tech without, you know, stopping the space. And, you know, if Hester Purst's safe harbor is sort of a model of that, then I think that's wonderful. because I think anywhere where we can sort of learn together, the tech people can learn a little bit more about the regulations. Regulators can learn a little bit more about the new tech that's coming up.

I think that definitely helps. So I think there's definitely a knowledge gap on the custody side in terms of how everything's supposed to work. We've built a few technical solutions that just decentralize everything and make everything more peer-to-peer that help get around that. And so that sort of just reinforces that the SEC really likes to do. centralization. And so, yeah, so custody has been the main one.

And I think it's just going to take a little bit more education. So either it's going to be like new parties seeking a custody license, approach them and educate them in a way that actually gets, you know, gets the concepts across in a way that they're happy. I think they're on the other side of things, there has to be companies that are, sophisticated enough to interact with the SEC and sophisticated enough on the tech side to have a solution that that makes sense. So sometimes it's a product market fit problem with companies.

Like the problem we ran into was there was there was there's a lot of other companies out there that went and educated the SEC on the wrong things that were not true of security tokens. And so we faced some challenges having to overcome those things. And so I think in the custody space as well, There just has to be the right party that approaches with the right solution and gets a license through the door. Well, Mason, we're going to wrap there because we're over time. But what are the places that people can follow you and follow your work? Yeah. So you can go to our website, tokensoft.io, and you can sign up for the mailing list there.

You can also follow Tokensoft on Twitter. the handle is Tokensoft Inc, Tokensoft INC because we couldn't get the Tokensoft handle. You can also follow me on Twitter. My handle is Masonic underscore tweets. And those are the only places where I think we have a presence online.

But yeah, feel free to shoot us an email at info at tokensoft.io if you have any questions. And yeah, we'd be happy to help. still selling those hats? I almost forgot. Thank you, Nick. We are also, not only do we make quality and highly secure software, we also make these wonderful hats. So if you're not an accredited investor, but you'd like to look like one, you can go to shop.tokinsoft.io and purchase our credit investor hats. And more recently, if you're, if you're, if you, if you are not a qualified institutional buyer, but you would like to look like one. You can now buy our Tokensoft qualified institutional buyer hats, which retail for $499. Higher bar to become a quib,

higher price tag. It was our rationale there. And so yeah, so you can buy our software as well as our hats now. I'm very satisfied with my accredited investor hat. And thanks to the SEC rule change, it's now true. So thank you both for the hat and for the SEC for changing the role. It's great. Well, thanks so much for having you. It's a pleasure. It's been great.