Gabriel Shapiro, a UCLA grad with eight years of legal practice in technology and blockchain, has put forth some serious concerns regarding the supposed benefits and overall functionality of legitimate tokenization of securities.
Shapiro— an attorney who specializes in blockchain and corporate transactions— claims that given the current technology and global legislation, there is a high risk of security tokens being traded as something other than what they actually represent. Such an environment requires much needed development for the successful implementation of security tokens. Shapiro’s claim can be better understood through a breakdown of two layers involved in the tokenization of securities: the network layer, and the social layer.
The Network Layer vs. The Social Layer
As pointed out via twitter, the network layer consists of “the power to spend a token [being equal to] the ownership of the token, [which in turn is equal to] the right to transfer ownership of the token”.
This conflicts however with the social layer, where “securities instruments issued in ‘bearer form’ are legally prohibited in most places and disfavored even where allowed. Even Panama, while still technically allowing bearer stock certs, has recently imposed registration & custodial requirements on them”.
Such a situation then results in the possibility of securities tokens as being traded separately from what they represent. This, says Shapiro, “dramatically undermines the advertised benefits of securities tokenization”.
Shapiro clearly does not feel as though such problems have to remain permanent. In order to see the full benefits of securities tokenization, he claims that significant changes in both law and new technology will need to happen. We’ve seen some of this initiate in places like Delaware and Wyoming, but Shapiro points out that this isn’t nearly enough.
Not only won’t these things (changes in law and tech) happen overnight— in a very real sense they are barely even ‘in process’. There is not a critical mass of lawyers/legislators rushing to try to make the tokenized securities market real. Some have contrary interests and will actively resist it.
The Growing Surge of Securities Tokenization
The tweet comes in the midst of market atmospherics where security tokens seem to be the next major application of blockchain technology. For example, Patrick Byrne— Overstock.com CEO and Bitcoin visionary who allowed for payment in Bitcoin since 2014— has publicly invested millions of USD into Ravencoin. Byrne also serves as Executive Chairman to tZero, the first exchange for security tokens, which raised $134 million during its ICO. But Byrne isn’t the only leader of this trend. In fact, there were seven security token projects launched in 2014— a number which grew to 342 in 2017.
Such figures certainly seem to brighten the future of security tokens. The push is there. But as Shapiro points out, the legislation is simply lacking. And he is right to emphasize that the law must change: the world’s established laws were drafted and implemented prior to the technology that exists today, meaning it would be very rare for that legislation to account for such new technology. The laws simply have to adapt to new advancements in the world; the contrary is extremely difficult, if not impossible.
A Positive Outlook
Despite such circumstances, Shapiro himself seems to remain cautiously optimistic:
Personally I am excited about it— it means everyone who’d like a role in making the future happen has a big opportunity to help.
Is Shapiro right to emphasize such legal obstacles? Or will the pre-existent push for security tokens be enough to motivate lawmakers and overcome the current legal barriers? We’d love to hear what you think below!
Images courtesy of Bitcoin Exchange Guide and Finder.com.
Meet Tim. Tim is a co-founder of The Tokenist. Originally from Kalamazoo, Michigan, Tim is a mechanical engineer by training and has been investing his whole life. He started his career with GE in engineering and operations management where he held various leadership roles before leaving to pursue an MBA (he is a proud former co-chair of the Milton Friedman Group at Chicago Booth). After business school, Tim spent several years with Baird Capital where he made private equity investments in consumer and industrial companies. He left Baird to found Protective Technologies Capital in 2018, where he continues to make private equity investments in family businesses looking for help with succession planning. Tim lives in Chicago, where he enjoys watching Michigan football and basketball and traveling with his wife Kristen. Like Sia, he also likes telling jokes. However, his wife adamantly insists that he not share his “dad jokes” publicly so he reluctantly sticks to writing about finance and technology.