, 40 tweets, 26 min read Read on Twitter
1/ TWEETSTORM about #Wyoming’s BIG REVEAL. This is long & info-packed, so buckle in. My native state is about to do bigger things for #blockchain, & the sector is about to pay Wyoming back big-time. Win-win! @Tyler_Lindholm @SenatorDriskill @TraceMayer @ForbesCrypto
3/ New bill 2 parts. 1-Digital asset custody via #SEC #CustodyRule wld create first true #QualifiedCustodian for digital assets (for investors who by law can’t self-custody). 2-Defines property rights for digital assets—doing something HUGELY IMPT for #bitcoin/virtual currencies
4/ Link to the proposed bill—Sen Tara Nethercott main sponsor; leadership of both houses co-sponsors; bi-partisan wyoleg.gov/Legislation/20… It’s pretty human-readable. Lawyers will geek out on it & technologists will see we had a lot of input from people who know what they’re doing
5/ Highlights=Choice of custody as #bailment (consumer still owns coins so isn't forced into debtor/creditor relationship w/ intermediary, as is the case w/ securities), OR consumer can choose pooled custody but wld bear all risk of losses (#NoBailouts). Big consumer protections
6/ PLUS legal clarity regarding status of digital assets & how lenders can enforce liens on them (thus facilitating good #financialization). AND...drum roll...wait for it…#bitcoin & other virtual currencies are subject to same super-negotiability rules as money(!!!)
7/ That treatment solves what some called #bitcoin's Achilles heel—that old liens may pop up years later & hurt owners. The bill proposes that liens expire after 2 yrs—that’s a HUGE reason to store coins in a Wyoming custodian (cleanse them of possible unknown liens). #GoWyo
8/ Next, definitions: #Wyoming law recognizes 3 types of digital assets—digital securities, digital consumer assets (#UtilityTokens) & #VirtualCurrencies (incl #bitcoin). All 3 types are issued, traded & settled on blockchain so their custody is v different than trad. custody biz
9/ #Wyoming banks would have option to OPT INTO an enhanced regulatory regime for digital asset custody which meets #SEC #CustodyRule requirements, incl surprise audits. Why important? This is a #Bank not a #TrustCompany. Banks can do biz in all 50 states but trust cos can’t
10/ Also-trust cos are also excluded from definition of “securities intermediary” under UCC Article 8, but banks are included. More important tho, #SEC has raised questions abt trust cos as #QualifiedCustodians (esp lack of clarity if a trust company ever goes bust). The #SEC
11/ #CustodyRule on its face permits trust cos to be QCs but try to get a legal opinion on that! #Wyoming’s bill specifically addresses #SEC concerns & allows a #bank to be a #QualifiedCustodian for digital assets (w/ clear wind-up rules if the bank ever goes bust).
12/ Wearing my former hat as a #fiduciary of pension plans & an endowment I asked what fiduciaries of big institutional investors will require to invest in this asset class. They can't agree to the vague, one-sided contracts commonly used by digital asset exchanges today. For ex,
13/ a contract that defines #bitcoin vaguely as “a digital asset” or says “we have sole discretion regarding forks & airdrops” won’t cut it. Sorry, such vague, one-sided terms won’t pass muster of big-time #fiduciaries. Time to get professional. Tell clients which version
14/ of source code you’re using for each coin & put it in the contract. If you’re a directed custodian, all value belongs to your customers—not you—unless you & your clients expressly agree to share fork/airdrop/staking gains. Of course, custodians can still pick which forks &
15/ airdrops to support but must provide a way for customer to claim all unclaimed forks & airdrops (eg, roll keys & give customers old keys so they have option to claim unclaimed value). And…NO REHYPOTHECATION. Not happening in #Wyoming, where our laws protect #PROPERTY RIGHTS.
16/ #Rehypothecation is a form of #fraud—like 3-Card Monte. If an asset has already been pledged as collateral for a loan once, re-pledging that same asset for a new & different loan is fraud. In NY, that’s legal (& it wins bankers big bonuses). In WY, that’s a crime (& it could
17/ land you in jail--#AsItShouldBe #CommonSense). A #Wyoming Supreme Ct case (SmithvState, 1986) upheld a criminal conviction for #rehypothecation of diamonds. Yes, I know #rehypothecation is rampant in traditional financial mkts, but that doesn’t make it right.
18/ Financial institutions that #rehypothecate are insolvent by def'n & are at risk of a bank run. But it's especially dangerous to rehypothecate digital assets bc they’re scarce & there’s no lender of last resort. Failing to deliver a digital asset=default, period. #NotInWyoming
19/ So, if you must use a custodian, use a #Wyoming custodian--nowhere else will your property rights in digital assets be better protected. STAY AWAY from NY especially, bc NY permits #rehypothecation & allows failures to deliver. WY protects investor rights better than NY does!
20/ So the proposed bill enables the first crop of institutional-quality digital asset custodians. Investors get true protection. Custodians get optimal license regime + legal clarity. But there’s more. Customers of a #Wyoming enhanced digital asset custodian aren’t forced into a
21/ a debtor/creditor relationship—customer can elect a bailment (a common-law term where you still hold title to your coins even tho you give control to the custodian). Best example of a bailment=valet parking (you retain title to your car but give up control). How does this
22/ jive with #NotYourKeysNotYourCoins? It doesn’t, clearly. It’s inferior to holding your own private keys. But it addresses the reality that big institutional investors & investment advisers are required by law to hold assets in a 3rd party custodian. All 3rd parties=
23/ security risks, but until Congress changes #SEC’s #CustodyRule it’s the law of the land. 2nd best is you retain title to your coins but give control to a #Wyoming custodian via a non-fungible #bailment, where custodian owes you a fiduciary duty of care. 3rd best =
24/ you choose to allow your custodian to pool your coins in an omnibus account & you participate in gains from financing/staking, etc. But if you do that & your custodian fails, you won’t be bailed out. All fair, all clearly disclosed & acknowledged by contract. No surprises!
25/ So, that’s custody. Now let’s move to legal clarity. Commercial law in the US is defined by state laws called UCC. #Wyoming isn’t changing its UCC but is adding an addendum to classify UCC treatment of digital assets. This ties back to the #SEC
26/ concern about the wind-up of an insolvent financial institution, bc bankruptcy judges look to state law to determine the nature & quality of an asset--& if state law isn’t clear, no one knows how a bankruptcy judge will handle it. One wonders why no other state has clarified
27/ this yet—it’s not rocket science & #Wyoming isn’t inventing anything new (except a new def'n of control that reflects how the tech actually works). Wyoming is giving a clear roadmap to lawyers & judges that REFLECTS THE TECHNOLOGY. Plus it allows a #smartcontract to control
28/ a digital asset. Most lawyers will appreciate this & technologists shld see that these rules reflect (enable!!) the peer-to-peer reality of #blockchain technology. We've been deep in the weeds on these topics & studied an alternative proposal for digital assets under UCC that
29/ wld require owner to keep digital assets at an intermediary--sorry that's just WRONG! This is fundamentally peer-to-peer technology & Wyoming's proposed law affirms this (you can still choose to use an intermediary, but aren't forced to do so to gain legal recognition of your
30/ PROPERTY RIGHTS in your digital assets). Had other states enacted that requirement (to own coins via an intermediary) before WY came in for the BIG SAVE, it would've been a disaster for #blockchain IMHO. That proposal would have turned direct ownership into indirect
31/ ownership & turned a direct PROPERTY RIGHT into an IOU. That’s how securities work—you don’t directly own your stocks anymore; you own an IOU from your broker/dealer via layers of intermediaries. But that legal regime is the cause of many probs in securities (eg, Dole Food
32/ litigation-Dole had 36.8mil shares outstanding but 49.2m valid claims were filed for the 36.8m, all w/ valid brokerage statements as proof.) Indirect ownership (IOUs) is an awful legal regime for investor protection! Would be esp bad for digital assets bloomberg.com/opinion/articl…
33/ Leadership in #Wyoming gets this--#Wyoming has a long tradition of respecting PROPERTY RIGHTS. If this bill passes, Wyoming bank charters become more valuable & I will continue to volunteer to make this win-win for the State of Wyoming and the best #blockchain companies!
34/ I’m so grateful to the small army of people who provided feedback on bill drafts—we landed in a great place for #Wyoming & #blockchain. Special shout-outs to @TraceMayer, @SteveLupien, @asset_trade & attorneys at @DLxLawLLP, @lex_node, @ConsenSys, @TheBKP_Official
35/ @MilbankLaw, @sullcrom, @ColumbiaLaw's Prof Ronald Mann & @CardozoLaw's Prof Jeanne Schroeder + many parties looking at setting up #Wyoming digital-asset custodians—you won’t agree w/ everything in the bill but prob w/ most. EXTRA THANKS to Wyoming Legislative Service Office
36/ for doing an amazing research & drafting job! But BIGGEST thanks go to #Wyoming's legislators, who last year decided to lead the world in #blockchain. It has been good to Wyoming so far, & vice versa. If this bill becomes law it will be momentous for both—JOBS & REVENUES
37/ for #Wyoming; for #blockchain sector, superior regulatory path to #QualifiedCustodian of digital assets. #WinWin Digital asset industry is $125 billion today. Securities custody industry today is $114 trillion but growing slice of that $114 trn of securities will be issued on
38/ #blockchains (#WorldBank recently issued A$110 million bond in digital-asset form). A chunk of that $114 trillion will migrate from trad. custodians to digital-asset custodians, & #Wyoming should dominate--remember, only a WY custodian can cleanse old liens after 2 years!
39/ But there’s more--diff bills also propose to authorize a special purpose depository institution, fintech sandbox, Sec of State integrating w/ a #blockchain, tokenized securities + a chancery court. Plus the Governor & Sec of State gave shout-outs to #blockchain in inaugural
40/ speeches last week. Zero income taxes. No property tax on digital assets. Very business friendly. #Wyoming wants cream-of-the-crop #blockchain companies to move here. So, ponder this: If you're in blockchain why aren’t you in Wyoming yet?? #TheWorldNeedsMoreCowboys

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