EthCC 2: Stephane Gosselin

hi everyone thank you for hanging in there despite fire-alarm delays hunger we can make it through the seats are comfortable so I mean it's a good place to be I'm Stefan I'm gonna talk about ERC 1,400 and security tokens but that's what what I'm sort of doing full time I'm working with new Mirai and we're building an unstoppable marketplace for predictions we are hiring and I am giving out t-shirts so if you're interested in that stuff come talk to me offline but what I'll be talking about is sort of my previous role as a digital Security's researcher and some of the advisory work I continue to do in the space I was fortunate enough to work at polymath feel a little bit and I was a co-author on the ERC 1400 standard so that's what this talk is going to focus on is how do we represent digital securities on aetherium how has this standards first approach to representing these securities evolved from when it was initially released in September to now and where do we see it going in the future I'm sort of split up the talk in two segments the first one a general overview of my own personal perspective on securities on a public blockchain White's there is that something actually valuable and the second part what is a RC 1400 and was the context around around the technology so I'm not a securities lawyer I'm a technologist but I have sort of started to approach securities from more of a legal perspective and what I've come to conclude is really where you look at tokens whether they are securities or utilities it's an abstraction of rights an abstraction of ownership over a certain set of Rights so on any sort of ledger that you have all you have is a certain balance associated with an identity all the sort of value of that specific asset is derived by the rights are associated with that ownership for example stocks your rights are over voting over dividends and over liquidation same thing with bonds we often talk about principle interests and liquidation rights for derivatives you get a little bit more fancy you start talking about cash flows risk valuation and for utilities you're talking about access to a certain protocol which often has Network effects so they're all sort of the same from a technology perspective the rights are associated with it can be described in any way possible but there should be a common way to describe all of them and and separate out the different properties that you want to represent so why are security tokens worthwhile we already have securities and it works pretty well I mean the financial system is quite inclusive and in most modern countries so is there really demand for these things I just pulled here on the left of the screen the points are raised by Stephen McKinnon on his article which I invite you to read I think it's probably the best overview of why do we tokenize in the first place the two points I'm particularly interested in and the ones that a lot of people tend to talk about are increased liquidity it's sort of a magic word in this security token space that there's gonna be additional liquidity for all these private market assets and it's a thesis that hasn't necessarily come to fruition yet but something that is definitely valid and people are working on figuring out how do we unlock all this this latent liquidity and then the other one that I'm particularly interested in is programmable securities what can you do right when you start expand the design space for the irides which are often limited in the traditional finance world by you know the lawyers are comfortable signing up on and signing off on there's sort of these implicit standards for the kind of products are able to that you're able to offer that don't explore into sort of this vast pool of interoperable assets and composable assets because the cost of the financial overhead of dealing with all these different systems is so high they just doesn't allow you to build a business off of it and and this is something that gets addressed once you have interoperable systems another to that I sort of added and on the writer screen our international participation because blockchain technology is inherently international there's an opportunity to have participants and and access markets investor markets from all around the globe but obviously this goes beyond the technology right it goes into standardization of a whole range of different services you know regulatory standardization and I'm gonna talk a little bit about that too the other one is freedom or substantive rights so this is sort of a concept that hasn't had a lot of attention but it's very in line and in touch with the the ideas of censorship resistance of public blockchains and something that has been explored in the financial markets I'll talk about that as well so why use aetherium securities are already distributed right you have as I VA presented sort of what the the ecosystem looks like and you have all these broker dealers these custodians that have all these different Ledger's at the reconcile with each other to figure out who owns what so it is very distributed but it is not permissionless this is something that Gabriel Shapiro sort of pointed me to he talks about certificated stock versus book entry stock the idea that in the past what you would have as a stock holder into a company is a physical certificate that claimed the ownership over these rights and you were able to go in a peer-to-peer fashion meet with a potential buyer and transact with them so this right to dispose and to acquire was unsensible from the company perspective from the issuer perspective and unsensible from the perspective of other purchasers in the space or other stockholders for the company so these these are sort of the substantive rights that come with ownership of stock that have not been replicated into the financial world that is now desert iced the way that is structured now you have broker dealers that manage sort of their own internal order books and then they delegate the actual holding of those stock certificate over to Central Depository and if that particular broker dealer it doesn't want you to perform a trade they have all the freedom to prevent you from it using the blockchain that's not the case anymore inside of the token itself you can encode the rules that say whether or not an individual is able to transact and there's no way to move away from those rules those rules become law in many ways so this distinction between substantive rights and intrinsic rights initially came out of the geneva securities convection which happened in 2009 and it was really an effort to standardize the way that securities are modeled from a legal perspective around the world nothing came of it they sort of had this convention discussed what would we want international law to reflect for securities but as many international regulation happens it needs to be demand driven needs to be market driven and at the time there just wasn't demand in the market for the application of these laws so jumping into ERC 1,400 what what does that have to do with sort of what I've been talking about I've been talking about a lot of legal stuff but ERC 1,400 is it's a code it's an interface it's like ERC 20 so I'm gonna sort of say what is my perspective on how's standards grow from simply code and actually inform the standardization of business processes and information flow inside of an ecosystem inside of an industry and how that helps inform legislators to sort of standardize or compliance requirements and think about how their assets can be represented worldwide the argument that I that I make is that it has to be a code first initiative because the code and sort of the technology is what gives confidence for businesses to explore these different assets explore integrating these assets if they don't have a like high level of confidence that all these assets are going to be able to talk to each other you're gonna end up with the same financial system that is now where you have a lot of different systems that don't communicate very well and then from behind the scenes you have a bunch of standards organizations that really recognize that this private this prevents a lot of new products in being developed and then they're retro actively try to standardize all of all of their systems but in this case we have an opportunity to do that from the get-go and that's sort of what a RC 1400 tries to achieve to look at the broad spectrum of what's required from modeling securities and provide a standard set of tools that anyone can use to fit any of their needs once we have a substantial amount of participation in that process companies like custodians broker-dealers become confident in knowing this technology and building sort of their own infrastructure around it once they build this infrastructure around it and there's many many participants that build their business off of it all of a sudden you have a demand for regulators to look at these standards these processes and then regulate accordingly and I think that's probably the only way that we're gonna be able to get regulators involved so where are we today I sort of talked about what's the thesis was that what's the philosophy was the vision a lot has happened so when we were initially launched GRC 1400 was sort of a monolithic standard that encompassed all of the lessons learned that we had so far and adam has an incredible job at separating out all the different components of that standard getting into how to actually create a family of standards that interoperates with each other and allows for different individuals different issuers in different jurisdictions to pick and choose the items that they need and avoid the complexity that comes with a monolithic implementation so I've listed sort of some of the the core components that at the code level have been standardized so far are sort of public and and people have contributed to it's only a start in many ways there's there's so much more that needs to be done one of sort of the components that that's at the bottom there is a RC 1616 which is about identity it's about abstract away a standard approach to doing access control on top of these tokens by taking sort of a HTTP certificate approach and having a trusted set of parties are able to say provide that identity verification for multiple different tokens and therefore sort of pool that service so these kinds of service of standards or what's needed to really push this this effort forward in terms of the business side that standardization of business processes I've seen a lot of movement from Asda the International Swaps and Derivatives Association around standardizing information flow for derivatives trading and they've specifically targeted towards things that happen on top of smart contract platforms there's still a lot more to be done around pooling of liquidity between broker-dealers formation of syndicates for for these tokens and around kyc an identity around automated monitoring and reporting I think you know it's clear that all the sudden regulators have access to like a much broader wealth of information about these securities there's a level of transparency that we've never seen before so we still need to sort of provide a good way to process that information to ingest it and and know what's important and then token holder management so how do you actually help the companies that issue these token manage their cap table how do you help them manage their documents and their short holder communications these are all sort of things that can be standardized and really business opportunities for people to come in and provide those services on the legislation side a lot of it has been around sort of standardizing compliance requirements we saw recently out of Wyoming the legislation that changes a lot of the wording around how corporate capital stock is represented and allows for a smart contract on the blockchain to be the single source of truth around who owns what in a company who owned these stock certificates and this is sort of one of many countries many examples in Singapore the MAS and the Singapore Exchange are actively working with tech providers in trying to see if they can bring forward this technology and I know in Malta the MF sa is actually hiring slowly developers on their own staff so you know these regulators are taking quite a proactive role and they're they're willing to engage they're willing to participate in the process but they sort of waiting for the ecosystem to grow and and to develop from from a technology perspective what's next this is my call to action this is my this this is my question to you guys how do you guys want to participate in this in this process I have here a list of standards which I think have not been written yet technologies that haven't been bored yet but are in demand people need these things so if any of them are interest to you please you know take them down look at them write a draft send it to myself or anyone else in in in this space and it will be happy to give feedback on it one of the quite you know interesting ones is confidential transaction the ability to bring this sort of privacy that's required by these put these public market participants around their transactions their their their set of securities that they're actually holding and and give them the level of privacy that they need this is sort of a big demand from a lot of industry folks and so if there's some standard around this then great I have also a few resources for you guys so we have three implementations that we've seen that are being actively maintained if want to go look at this er C 1400 code and then you're free to contact me there's my info send me any sort of question that you have I'm happy to engage I want to open up the floor to questions [Applause] thank you very much very clear I was wondering about what what do you think about atomization and standardization of the legal work required for example for prospectus or something like that do you mean from like a regulatory perspective what a regular expects from a company to be able to issue securities yes that's gonna come like very far down the line right so I I the way that I see that playing out is there's two sides there sort of allowing a company to issue in a security right inside of a jurisdiction and then inside that jurisdiction what that regular is also looking at is allowing outside companies to sell their securities to their their citizens so I think like those are sort of the two broad sides of that questions from like a standardization of prospectus and like sort of the documents are required as far as I know there isn't any every jurisdiction has their own approach to it and yeah I've been heard of sort of any efforts yet to try to standardize that the the sort of challenge that you have there is a lot of different markets have different information requirements and so it might be something that takes longer to happen yeah but do you think it's possible for a single jurisdiction for example the USA or something I think like they already have it right like that's what securities legislation is about all the different types of assets that you can issue is the facto standard that every company on what's the issue in that jurisdiction has to abide with yeah I know in the Netherlands that's where I come from the the law is explicitly fake so that issuers handover more information than the bare minimum yeah so so in the Netherlands it's pretty hard to standardize the creation of a prospectus which yeah which i think is also required to to have a cos that are really cheap to issue yeah I agree I think primary issuance cost is super hot it's like prohibitively high and I don't really see that going down just because you know regulars aren't familiar with these assets that aren't familiar with what are the the goals they sort of approach it with their existing regulatory framework and copy-paste it over which is fine right like it's okay but it doesn't sort of meet the potential that it has the difficult thing about that is that you're asking questions around how do companies as a whole do reporting and you can't sort of select a certain set of requirements for companies are trying to issue as those versus companies who are try to issue using like the regular financial market it has to bridge both I thanks for dog I was wondering what kind of efforts we should like to see from like the legal community where do you think most research still needed it's a big offer on the on the legal side its I sort of basis talk around like a legal philosophy right which is like how do we think about these rights and and how do we want to manage them I think if there's a an approach that says here's sort of a simplified view on which jurisdictions have compatible requirements compatible sort of frameworks for for modeling these securities it would sort of provide a good basis from which to then you know present other jurisdiction and they can sort of self select into the approach that they're interested in I know there's already a lot of effort from the legal community just to meet with these regulators and educate them on the technology but I I think one of the the core you know needs is around identifying the core items that the technology provides sort of the core benefits of it and then saying how does that bridge over into the regulatory standards that you know a certain set of countries have versus another set of countries which set of sort of philosophies match better with certain implementations versus others so that connection between the code the technology and and the legal side could be made a lot clearer right because I think one of the main difficulties what what we're trying to do this still securities is basically trying to create an open more global market right could you talk a little bit louder yeah sure so what we're trying to do with digital securities is basically trying to create a more open more international market right like you said of course the difficulty with that is that you're dealing with a lot of directions at the same time where each jurisdiction is going to have different laws regarding property law KY caml implementation securities laws etc right so you know when you say you of course it would be nice to have a better overview of what are the limitations per country but I think for a single securities offering or digital security it's very difficult to take all all variances in each country in mind and I was wondering if if there's any kind of solution you could think of just doesn't have to be right now right but it's like a good thinking point I think for the last three I definitely agree right like that you both in these questions raised some of the core issues and questions that issuers have with launching their securities one of them is you know how much is it going to cost me to actually do all the compliance requirements on the primary issuance the second one is like how do I access investors overseas how do I access bigger pockets of capital I think from from that specific question right my intuition tells me there are certain jurisdictions where their regulations are more compatible and closer together than other I haven't seen like a proper analysis on what those are I would love to be able to see that and see you know maybe like an overview of these specific jurisdictions are leaning in this direction versus these other jurisdictions are leaning in this other direction that would be an incredibly useful report for I think everyone in the space to see thank you okay so if there's nothing else thank you so much for listening [Applause] [Music] hello everyone we're gonna have a 30 minutes