Unchained - Unconfirmed: Caitlin Long on How 'Utility Tokens' Are Now Legal In Wyoming

Episode Date: March 16, 2018

Wyoming now has five blockchain-specific laws. Caitlin Long, cofounder of the Wyoming Blockchain Coalition, describes what these laws are, what they mean, and how our least populous state became a crypto leader. The former chairman and president of Symbiont explains what this could mean for any project that aims to launch a utility token, whether or not ICOs held in Wyoming would only be available to Wyoming residents, and what big issue she thinks remains for the SEC to address. Caitlin Long: https://www.linkedin.com/in/caitlin-long-/ To read the laws: https://legiscan.com/WY/bill/HB0070/2018 An op-ed Caitlin co-authored with WY House Rep. Tyler Lindholm: https://www.coindesk.com/haven-blockchain-case-wyoming/ Thank you to our sponsors, Onramp http://www.thinkonramp.com/ and Quantstamp: https://quantstamp.com/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey everyone. Here is the latest episode from my new podcast, Unconfirmed, Insights and Analysis from from the Topmines in Crypto. My guest this week is Caitlin Long, co-founder of the Wyoming Blockchain Coalition and former chairman and president of Symbient. We discussed the recent passage of five blockchain-specific laws in Wyoming that could be a significant development in the questions around securities law, utility tokens, and initial coin offerings. It's a fascinating episode, one that you should all check out. If you like the show, be sure to go to the feed for Unconfirmed, insights and analysis from the top minds in crypto and subscribe now. Hi everyone.

Welcome to Unconfirmed, the podcast that reveals how the marquee names and crypto are reacting to the week's top headlines and gets the inside scoop on what they see on the horizon. I'm your host, Laura Shin. This episode is brought to you by OnRamp. Your branding and websites are the first things your users will see. And in the current Wild West of ICOs and blockchain startups, you need to stand out from the pack. OnRamp is a full service creative and design agency that will help amplify your brand with the perfect website, logo, collateral, or custom design project. Get big results in no time by visiting

ThinkOnRamp.com. This episode is also brought to you by Kwanstamp. Quant Stamp is building the first smart contract security auditing protocol designed to secure all smart contracts in a cost-effective and scalable manner. Being developed by a team of PhDs with over 500 Google Scholar Citations, they're about to finish Y Combinator's Winter 18 batch. To learn more or request an audit, visit quantstamp.com. My guest today for Unconfirmed is Caitlin Long, co-founder of the Wyoming Blockchain Coalition and former chairman and president of Symbient. Welcome, Caitlin. Thank you. It's an honor to be on your show. I've been a big fan for a long time.

So you were instrumental in the recent passage of five new blockchain-specific laws in Wyoming. What do those laws say? Well, they essentially welcome the blockchain community to the state of Wyoming. One exempts the exchanges and wallet providers from money transmission laws. Another exempts everyone from paying property taxes on crypto. There are already no income taxes in Wyoming. So it makes it very tax friendly for both businesses and people to be there. And the one that probably gets the most attention is the utility tokens bill.

We also had two bills that are aimed more at the enterprise part of. the sector, one of which copied the Delaware blockchain initiative. And so let's dive into this one about the utility tokens. The way that this is defined is it calls them open blockchain tokens, and it says that they're not securities as long as they fulfill certain requirements. What are those requirements? Well, essentially, after filing a notice with the Secretary of State, which is really important, you don't get the benefit of the law if you don't file an advance notice with the Secretary of state. And all that is is a way for the state to come find you if you're a fraudster. So it's just a notice requirement, no, you know, no review of the business plans, et cetera, as you would do with

traditional securities filing. But the other critical components are that the token cannot be marketed as an investment. And it must be usable for a consumptive purpose, such as exchangeable for goods or services or content. And what would be an example? of something like that. Oh, gosh, there are so many of them. I like to point to Kodak coin, even though that one gets chuckles among the blockchain community, but a layperson can really understand that, that in order to sell a photograph on the Kodak coin blockchain, a photographer has to upload the photograph using a Kodak coin, and someone who wants to license it and download it has to purchase that with a Kodak coin. So that is, that would be a,

a digital rights platform, and that would be a utility token that unlocked a license to use content on the internet. And do you know if the regulators were also thinking whether or not something like Ether on the Ethereum Network would qualify? I don't know the answer to that. I think at this point there's so much that has been done on the Ethereum Network that it would be difficult for the regulators to contend that that was a security and an unauthorized. securities offering, the fact that they took an enforcement action against the Dow, which was, of course, subsequent to the Ethereum blockchain, does lead me to conclude that they're not likely to pursue an enforcement action. But I'm not an attorney. Well, I'm not a practicing attorney. And in this day and age, I think a lot of folks are nervous, for sure. So another jurisdiction that has created this official category called utility token, and they even used that term is Switzerland. And obviously here in the U.S., this is one of the big questions everyone's wondering about at the federal level with the SEC. Do you have a sense of what

the SEC's attitude is to the Wyoming law? I don't. I did have a conference call with them. In fact, periodically I do just an informational conversation with the SEC at their request. And they did request this one. And I did the call a couple of weeks ago from the lobby of the Wyoming Capitol. And we had a good conversation. These are usually one-way conversations where they're asking me questions and I don't get responses back from them. They were very interested in what was happening, but I don't have any official comment or even any unofficial body language from them that we can share. I can share with you, though, that we did work very closely with the Wyoming Securities commissioner, who's the Secretary of State. And she got input from, she was the acting Secretary of State

at the time. She got input from the National Association of State Securities Administrators. So she actually had requests for amendments to the bill at two different times during the process. So we definitely had securities industry input into the bill. That does not suggest that it's a green light under SEC standards. In fact, I would give one very clear warning, which is talk to an attorney in the utility token field before you issue a utility token under the Wyoming law. The Wyoming law is state law. It does not address the federal issues head on. But that said, personally, I actually do believe that this law works with federal with the federal securities laws. And why do you believe that? Well, we have some of the same requirements that the SEC has required. So such as not marketing your

investment as a your utility token as an investment. Also having a utility, a true functionality, in other words, exchangeable for goods and services immediately. And if it's not immediately exchangeable for goods and services, then the token is locked up until it is. And so I think we address a lot of the concerns that the SEC has publicly stated. And therefore, I think we go directionally where the federal securities laws are going to go. But again, this is a gray area. So don't rely on this as legal advice. You definitely need to get someone who is practicing in front of the SEC and is very current on their thinking. And I would also, from what I can tell, encourage folks to go in and talk to the SEC before they do their token offering.

Yes. And I would actually just make a blanket statement for all of my podcast, which is that nothing on the podcast or my longer podcast is a, is investment advice or legal advice or any kind of advice at all. Sure. So another thing I wanted to ask about, which, which you had mentioned earlier, was the national, you said that you worked with the national securities administrators or sorry, the state's securities administrators. And I know that in general there's attention when it comes to regulation between state

regulators and federal regulators. And we see this playing out. also with this money transmission issue, which we'll talk about more in a moment. But in this instance, do you worry that maybe if we again end up with this like state by state regime that that could cause an issue and that then we won't end up with a federal regime? Sure. And that is in fact what we have for the money transmitters. So that is actually one of the reasons why Wyoming ended up in this position because we were behind as a state. Wyoming was one of the three states that had a really punitive money transmission law. Hawaii and Minnesota are the other two. And so the

coin bases of the world, for example, were not in three states. And in fact, actually, I just saw Circle came out with a new app. And it's not in four states. Wyoming, Minnesota, Hawaii, and of course, New York, because it doesn't have a bit license yet. But we've now fixed that issue in Wyoming. And so it does make it difficult that states may have different laws. But that said, every business is really going to be domiciled in one home state. And what Wyoming gives to a token issuer is clarity that what they're doing is expressly legal in the state of Wyoming. In every other state, it is a bit of a gray area. And so Wyoming attorneys could give a legal opinion that these token offerings are legal under Wyoming law,

in the state of Wyoming. The federal issue is, again, a separate issue. And I'm hoping that we end up with the Uniform Law Commission adopting standards that are very similar to what Wyoming has proposed. But as you know, the law is changing so quickly, well, this field is changing so quickly that we wrote the law to be pretty broad. And it got narrowed down as a result of the feedback from the securities commissioner in Wyoming. But we think we've got something that will stand the test of time, but only time will tell.

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in annual credits for travel and dining means you not only satisfy your travel bug, but your taste Buds 2. That's the powerful backing of Amex. Conditions apply. And you mentioned the Uniform Law Commission. What is that? That's a group of the 50 states that tries in these circumstances to have uniform laws so that businesses don't have to navigate a patchwork of laws. And indeed, in a lot of commercial law and a lot of insurance law, insurance is state regulated, not federally regulated. And so

the states actually work together to try to make it easier for businesses to comply with the 50 state laws because they're actually pretty uniform across the states. I think last year there was another attempt, and I don't remember in what area it was, but I think there was something pertaining to the crypto space where they try to use the uniform law commission, but then I think it's like opt in for the states, right? So only some states opted in. It's right. That's right. It's always all. in. So the states have to decide that it's important enough to put it on their legislative agenda. Usually when you're going through a uniform law commission process, it takes up to 10 years for every state to adopt it. So it's not a fast process. I would not rely on that as the panacea to the legal issues. I think the legal issues are going to be resolved most likely by Congress and potentially by litigation over time. Okay, yeah, I just wanted to draw those points out because I think basically, you know, through those routes, I don't think we're going to see some method by which an ICO can launch in every single state in the U.S. and feel comfortable selling to every, to residents of every state until we get something at the federal level. But before we move on to many other topics, I want to give a quick word to our fabulous sponsor, OnRamp. If you're starting up a new project or need some design or branding help on an existing one. OnRamp has you covered.

OnRamp is a full service creative agency that has helped numerous companies, including many in the crypto space, maximize their brand awareness, gain traction, and accelerate growth. OnRamp has a passion for assisting brands and boosting business results and can help with everything from website and logo design to social and content strategy. Focus on your core technology and leave the rest to OnRamp. To learn more and see how they've helped passionate entrepreneurs achieve their dreams. Go to ThinkOnRamp.com. This episode is also brought to you by Kwan Stamp. Founded in the aftermath of the Dow Hack, Kwanstamp is building the first smart contract security auditing protocol designed to secure all smart contracts in a cost-effective

and scalable manner, relying on humans to audit smart contracts as expensive and error-prone, and with the exploding growth of smart contracts, that solution won't scale. The team at Kwanstamp is developing a solution to audit smart contracts on the Ethereum network in an automated and decentralized way that can scale with growing demand. Being built by a team of PhDs who collectively have over 500 Google Scholar Citations, Quansdamp is paving the way for safer and more reliable smart contracts that will power the decentralized world. To learn more or request an audit, visit Quantstamp.com. I'm speaking with Caitlin Long, co-founder of the Wyoming Blockchain Coalition. So something that you sort of mentioned earlier was that the tokens cannot be sold until after the

network is live. That sort of seems to validate some of the thinking in this space that when tokens are or promises of future tokens are sold, that that's essentially a security, but that once the network is live, then that is no longer a security. And maybe according to this Wyoming law, it's a utility token. Would you say that that validates that model? Well, it certainly mirrors that model. And that's one of the ways, by the way, that you can comply with the Wyoming law is if your if your platform is not operating and therefore the tokens are not immediately exchangeable for goods or services at or near at the time that the offering happens, then you lock them up until the platform is operating. So it does fit in many ways with the direction the industry is going. But it's

interesting because I actually think that there's not much of a debate anymore as to whether those early stage that, you know, if you're thinking about these as two stage transactions, the first stage, pretty much everyone is acknowledging that that is a security and therefore you need to do it under an exemption or a classic registration statement. No one would ever do a classic registration statement as a startup with no financial history. But most folks, I think, are doing them either under reg A plus or reg D. So they're getting an exemption. Then the interesting question becomes, once the platform is up and running, what happens to the token? Is it, what makes it no longer a security? And in that regard, I know Chairman Clayton's statement got lots of

folks up in arms about the fact that he hasn't seen an ICO yet that isn't a security, but most of the ICOs are actually still in that first stage. The platforms are not yet functioning in most cases. They're still in their build stage. So if you take it for face value and step back and think objectively about what we just said, that that first phase, in many cases, is a security, then Jeremy Clayton's statement is not that inconsistent with the direction the industry is already going. Whether rubber's going to meet the road when the utility tokens become functional. And then we have to determine whether they are no longer a security. Well, according to Wyoming law, it sounds like they will not be, at least in that state,

but you mean the question will be whether or not the SEC also views it that way? Exactly. Exactly. And I think even for the tokens that are acknowledging that they're securities, Kodak coin is one. The T0 offering is another. They interested. question is going to be what happens once the platform is functional? Are they still securities? If they are in the SEC's view, then do you need a Charles Schwab account to, if you're a photographer, upload a photograph to sell it on the Kodak coin blockchain? That seems like it's an extreme outcome. Maybe in T0, it's not since they're in the securities trading business, but in Kodak coin or Starbucks coin or file coin, it's, it's a, it's, you. It's a

It seems like an extreme outcome that you have to go get a securities brokerage account just to use your token. And I think that's the bigger issue the SEC should be focusing on. If there's one thing that your listeners take away from this podcast, I'd like it to be that. That the real issue is not whether these are securities or utility tokens. The real issue is if you grant the SEC's statement that everything is a security, then do you really have to go get a securities brokerage account in order to use the token? So if Starbucks coin ever comes out, as they alluded to their thinking that they would, do you have to have a Schwab account to buy a cup of coffee? And frankly, I don't think that I keep using Schwab, but any of the big retail broker dealers like Morgan Stanley, Merrill Lynch, etc., I don't think any of them are ready for this. And effectively, what that does is it means that the industry is dead.

if you end up needing to have a securities brokerage account to use your utility token to exchange it for goods or services and the securities industry refuses to plug into the various blockchains, it effectively means the utility tokens can't operate in the United States. And that is really an anti-competitive outcome for the United States. So I really do believe that the priority for the SEC should be if they are going to enforce a rule that everything is a security and must be exempt or registered as such, then they need to lay out how it's possible to use these utility tokens without requiring people to have a brokerage account. And therefore, that opens up a whole nest of questions about securities custody because the clearing and settlement infrastructure of Wall Street is not prepared to integrate into

blockchains. Yeah, just everything you're describing, it seems. so absurd on the face of it. So hopefully I do know that there are people at the SEC who listen to this show or maybe at least I don't know about this show, but my longer podcast for sure. So I guess we'll find out someday whether or not they have thought that through. But one thing I wanted to go back to because we just touched on this briefly at the beginning was the money transmission issue, which as far as I understand for certain crypto companies, they need to get money transmission licenses from 53 states and territories. And so,

even a company like Coinbase that has, you know, hundreds of millions of dollars and is obviously raking in billions or at least a billion in revenue, as was reported in 2017, they had to pull out of Wyoming at a certain point because, you know, of some arcane Wyoming law. And as you mentioned earlier, they are still not in some states. And it costs a tremendous amount of money. It takes a lot of time to go state by state like that and get a license from each one. So do you feel, does any of these new laws in Wyoming attempt to address that issue? It does. And one of the interesting things about Wyoming is that you could do a Wyoming-only token offering. Now, I'm not suggesting a lawyer would advise this, but here's the idea. Wyoming also passed a series LLC bill. And what you

could do is have all of your purchasers have a Wyoming LLC that the token issuer sets up at the Inception. So every purchaser of your ICO is actually a Wyoming resident for Wyoming legal purposes. Now, lawyers are going to say that doesn't mean that it's black and white. If anything ever goes wrong, they're all going to sue in their local state of residency or country of residency. But that is something that has been bandied about and that some folks are looking into, especially if they don't have a large number of purchasers, that each purchaser is actually doing it through a Wyoming element. LLC. Oh, interesting. So that's sort of similar to how we see a lot of companies that are domicol in, for instance, Delaware, even though they're actually based elsewhere, that kind of situation? That's exactly the concept, yes. And is that one of the reasons why Wyoming was sort of motivated to implement these crypto-friendly laws? Yes. It's really a couple things. They want to attract the software industry into the state. and Wyoming also is one of the largest states for registering new business entities.

So Delaware is number one, Nevada's number two, and then Wyoming, believe it or not, is number three. And the reason is Wyoming invented the Limited Liability Corporation in 1977. And then Delaware grabbed the lead from Wyoming. And this is actually a way for Wyoming to try to grab that lead back. That's a revenue generator for the state, which is, is looking for diversification of revenues at the state level. And so what we really are hoping is that there's a huge increase in the number of LLCs that register with the state of Wyoming. And the state of Wyoming collects $99, I believe, is the fee every time an LLC registers in Wyoming.

Oh, interesting. One other thing I wanted to ask you about is the, I think there's a law that affects exchanges. What does that one say? Ah, well, it actually mirrors the language for the issuers of utility tokens and says that the exchanges are also exempt from broker-dealer requirements in the state of Wyoming as long as the tokens that are trading are indeed utility tokens. Okay. And before we hop off, I wanted to also ask you, what was, how did you come into this role to play this crucial role in getting these laws implemented? Oh, gosh, I grew up in Wyoming and have stayed very close, even though I haven't lived there for quite some time to the state. My father was a University of Wyoming professor, and I tried to donate Bitcoin to my undergraduate alma mater, the University of Wyoming last summer, and ran smack dab into that money transmitter issue. They could not accept my Bitcoin because no one would liquidate it for them as a Wyoming corporation. And so I said, well, all right, let's go fix this.

And that's how this whole thing got started. And when we met up with Tyler Lindholm, who is the legislator who was the main sponsor of these bills, he was just brilliant. He dug into this issue. He's a big, Bitcoin supporter for years. And he said, you know, let's not just fix this issue. Let's actually go try to make Wyoming the leading state for crypto. And we did. Wow, that's a great story. I love that attitude. Okay, well, it's been great having you on the show. Thanks so much for coming on Unconfirmed.

Thank you so much. It's an honor to be on your show. Thanks so much for joining us today. To learn more about the topics we discussed, be sure to check out the links in the show notes of your podcast episode. Also be sure to follow me on Twitter at Laura Shin. New episodes of Unconfirmed come out every Friday. If you haven't already, rate, review, and subscribe on Apple Podcasts. If you like this episode, share it with your friends on Facebook, Twitter, or LinkedIn. Unconfirmed, is produced by me, Laura Shin, with help from Elaine Selby and fractional recording. Thanks for listening.