Doug Ellenoff is a Managing Partner of Ellenoff, Grossman & Schole, a Manhattan law firm with a track record of working with the SEC throughout the ongoing evolution of Fintech. In a recent interview, Ellenoff discussed both a major challenge for the future of security tokens, and a possible solution which could enable their future implementation across the globe.
Many in the blockchain sector conceive of a future revolving around tokenized securities. Advocates argue that the benefits of added liquidity and a decrease of barriers for investor access will result in the largest change to hit traditional financial securities.
Yet the traditional securities industry is strictly regulated, which creates for much conversation concerning the current legislation for the emerging realm of security tokens. Ellenoff shared his views on the state of Security Token Offerings (STOs) and their relationship with the SEC’s regulations.
The Difficulty of Compliance Beyond Token Issuance
Ellenoff believes that compliance during an offering under the SEC’s criteria such as a Regulation D Rule 506c/b is just the start. He says that secondary market trading— which was conveniently ignored in the 2017 ICO phase— contains further problems.
“This is not just the obligation of the original purchaser. The answer is not just simply inserting an ‘exchange’, or alternative trading system, into the sale process – this fails to satisfy the blue sky laws of most of the 50 states in the union. So, yes, in a very practical sense an STO is a very different animal than an ICO. Although, I don’t accept the notion that there was ever a true ICO – it was a mythical construct.”
The caution in Ellenoff’s remarks didn’t end there. He went on to add that in this upcoming wave of STOs, there will be a complete absence of regulatory leniency, unlike the recent ICO surge.
“While vast amounts of creativity, energy and capital have gone into establishing blockchain through ICOs and now STO issuances, the reputational damage has been substantial and regulators will not ease up anytime soon, nor investors who have been burned. To be clear, unaccredited investors domestically and internationally were taken advantage of by mischaracterizing tokens as non-securities (Utility Tokens) and making them available for purchase free from any type of responsible restrictions. So rebuilding the trust that is required to re-establish the opportunity will require time, good results and better behavior going forward- this will take years.”
Much of his criticism seemed to focus on the classic ICO, which has suffered significant scrutiny from most regulatory bodies across the globe. He went on to describe the utility token as a ‘myth’, which has the possibility of theoretical existence, but very limited practical existence.
The opposite seems to be true of security tokens, given the rapid pace of their real-world implementation: SEC compliant exchanges, such as the OpenFinance Network, already offer security token trading. Experts predict a future of government issued Stablecoins in as little as two years. STOs— they say— are already the new IPOs.
The Popular Push for a Globally Regulated Security Token Framework
Despite the hesitancy in Ellenoff’s remarks, his overall view was optimistic about the future of STOs. He supports the establishment of a ‘committee of worldwide regulators’ to harmonize the many different jurisdiction-based laws and regulations.
Ellenoff isn’t the only individual to promote such an initiative. Just recently, Circle CEO Jeremy Allaire called for global regulation at the G20 level.
Before this can happen, however, regulatory bodies will have to first clarify certain aspects of tokenized securities, something still underway in the US and Europe.
What do you think of Ellenoff’s recent remarks? Is a global regulatory framework necessary for the successful adoption of tokenized securities? Or will technology advance to accommodate the pre-existing legislation? Let us know what you think in the comments below.
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