Another great discussion initiated by @lex_node based on a valuable piece on @coindesk written by @Frances_Coppola. As with many threads on Twitter, the tone quickly gets ... acerbic but it is a useful starting point to make a couple of important observations in both directions.
2/ As comments in the thread make clear, Coppola is focusing on “tokenizing” fungible and tangible assets. Her (spot on) point is that it is absurd to think that “blockchain“ can fix the trust issue when it comes to tangible IRL assets. However, I want to get to a deeper point.
3/ I spend quite a lot of time debating what is, and what is not a “security“. However, one thing is clear: in almost all cases, when you create a financial instrument backed by a pool of physical assets, under US law you have created a security.
4/ As the “ICO boom” of 2007-08 faded, there was a new thesis: look at how smoothly and easily BTC, ETH and other “tokens” trade 24/7 around the world in a market place that never stops. Wouldn’t the world be better if we could do this with real estate, gold or ... steel girders?
5/ The “trust issue” identified by Kapalama is an important consideration, but as others pointed out it is one that has and can be addressed through means like bonded custodians.
6/ In fact as @xethalis, one of the world’s leading experts on the topic will be happy tell you, those issues have been largely addressed with commodity “securitization“ through ETPs/ETFs for at least 20 years now. I would argue that that issue is somewhat of a red herring.
7/ The real reason why @lex_node is correct is that all of these attempts to tokenize physical assets will be treated as “securities” in almost every major market and jurisdiction.
9/ Before the development of scarce digital assets, the spot markets for #commodities were almost exclusively wholesale and the only people who dealt in them were large businesses that could manage the complex logistics of transportation and storage of bulky physical items.
10/ Scarce digital assets *that are not securities* created a gaping lacunae in the global regulatory framework that has, sadly (er, inevitably?), been exploited by many unscrupulous markets and traders around the world. This needs to be addressed.
11/ The reason tokenizing fungible physical assets (and, even more so, fractionalizing single physical assets to create fungible sub-units) doesn’t work is because these are all plainly securities and thus fall clearly within the global securities law framework.
12/ So what folks discovered is that, rather than creating new sources of liquidity, by tokenizing physical assets, they were introduced to the joys and challenges of attempting to conduct a coordinated securities offering around the world. Have fun!!
13/ As @phildaian and many others have pointed out, the spot markets for digital assets that are not considered securities are rife with problems. See: arxiv.org/abs/1904.05234. This needs to be addressed at a national level in the US and in a coordinated global fashion as well.
14/ We must now live with and accept the fact that there are vibrant markets for scarce digital assets that are not securities and develop a new framework for these.
15/ However, temporarily treating digital assets that are not securities as if they were in order to get a different regulatory treatment for them in the secondary market is not the right answer.
16/ Digital assets that are not securities should all trade together on common and *well-regulated* spot markets, regardless of whether the digital asset was sold in a scheme that would be considered and “investment contract“ in the US or other countries. @HesterPeirce.
17/ The policy issues presented by the creation of scarce digital assets are complex, but neither pretending everything is okay, nor labeling everything a “security“, is the right answer. We need a third path. Those interested in discussing offline, please DM me.
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