ICO’s and the Fed’s Two Minute Warning – Ep005

In this episode, join us in our August Blockchain Meetup held in Nashville, TN. Our guests are Josh Rosenblatt, Gray Sasser, and John Wagster of Frost Brown Todd. Our topic for this discussion is the regulatory environment for blockchain.

Full Podcast Transcript

[00:00:06] Hello I’m Philip Claudio and you’re listening to the Hashed Health podcast. This show is dedicated to everything healthcare and blockchain related. Here at Hashed Health, we have begun this incredible journey of developing blockchain solutions for healthcare. And we have the privilege of being able to talk with amazing people about this subject every single day. The goal of this show is to include you in these conversations. Join us as we host meet-ups, attend conferences, and conduct interviews with our friends and other industry thought leaders. You can find more content like this at hashedhealth.com. That’s, w w w . h a s h e d h e a l t h . c o m, or connect with us on Twitter @Hashed Health. Here we go.

[00:00:59] We are the members the co-chairs of the Frost Brown Todd blockchain team. We actually have 18 lawyers in total that work on blockchain technology and related things, because we are a diverse audience here, we’re kind of going to go high level. We’re going to talk about regulation and some other things. Feel free to jump in with questions if they’re burning, if not we’re going to have a question and answer period at the end, uh, and don’t hold back, we invite your scrutiny. Blockchain generally, you know, the title of this is Regulatory Environment for Blockchain, but blockchain as a technology is not regulated. It’s like any other technology or any other type of software. It is open source software. So if you use it don’t think that just because it’s open source you can’t protect it. You know a lot of the applications that are built out of it be they mobile or otherwise are protectable and you need to take the same intellectual property precautions you take with any other software you develop. It’s subject to licensing. You can assign those licenses. If you get a, if you have a team coding for you you need to have contractors agreements where they sign what they’re doing to you just like any other protectable, uh, intellectual property. So the challenge with blockchain technology isn’t that it’s not IP it’s that a lot of the things, a lot of the areas where block change technology is becoming most popular are areas that are traditionally the subject of regulation by state and federal governments.

[00:02:21] So it’s banking. It’s insurance.

[00:02:25] So, uh, regulatory bodies like the Securities Exchange Commission, or the CFTC, or FinCEN, are all going to have a number, uh, they’re all going to have their fingers in the pie. Um, so it’s not right now that we’re heavily regulated environment. We’re not. Uh, but anybody can see the writing on the walls that there are going to be regulations coming and frankly there probably should be. Uh, I know there are some Libertarians among us who disagree with that, but you know, we probably want our bankers to be regulated, and we probably want people that are handling exchanges, that transfer significant worth from one party to another, we want them to be regulated. We want them to be licensed in some way. Uh, and that’s going to happen. The question is when. The US is different from most jurisdictions or from some jurisdictions where blockchain technology is developing rapidly because in the United States we don’t have just one authoritarian body that dict… that governs all areas of blockchain regulation. Uh, in Singapore, and in Gibraltar, they do. They have one regulatory body and they’ve set it up that way because they’re trying to attract blockchain investment. They’re trying to attract the banking dollars that come with it. And the technology jobs that come with it. Just like we’re trying to do here in Nashville. But in the US those uh, the whole lot of different agencies and regulatory bodies that have their finger in the pie, uh, for justifiable reasons, our system wasn’t created for blockchain, it was created for, you know, uh, the government that we have now.

[00:03:50] And eventually though it’s going to expand and it’s going to cover us. Um, because it’s timely tonight that we’re discussing regulation, because we have, uh, Frost Brown Todd, along with some of our other partners here, Hashed Health, and Koala, and BTC media is launching a Tennessee blockchain alliance.

[00:04:09] Uh, but for now, I’m going introduce Gray Sasser, and Josh Rosenblatt. Gray is particularly familiar with the securities regulation. He’s going to kickoff, and then Josh is going to go off on other, uh, banking regulation and many other things.

[00:04:21] Yeah.

[00:04:21] She, she’s a scholar.

[00:04:24] Thanks. Thanks John. My name is Gray Sasser, I’m a lawyer at Frost Brown Todd, and, my practice recently specialized on that strange intersection between the securities laws and, uh, cryptographic tokens. You know, what are these things and, the way that regulators are trying to take this really square peg, that’s been invented here in the last, what, two or three years, and put it into the round hole of securities regulations that were born out of the Great Depression. So one thing to keep in mind though that when these securities regulations were were promulgated for the first time it was to prevent fraud and abuse and people going out and raising money with, uh, uh, without any sort of, uh, without any sort of disclosure. Query if what we’re seeing now, and Josh and I and John joke about it all the time where you can take a white paper which might be almost two blank pieces the white papers put the word blockchain on it, maybe stick in the word health, uh, let’s see, uh, import export, uh, what, what are some of the other magic words out there and raise five million dollars on it? Syntec, ICO?

[00:05:31] So that’s what, that’s what an ICO is, right. Right.

[00:05:35] That that you’re seeing a lot of people raising a lot of money without a lot of disclosure there and where are these dollars going. So the SEC, uh, just last week in fact, finally published, uh, you know, uh, I think a lot of us have been with our heads in the sand thinking that the SEC maybe had other things to worry about.

[00:05:54] Yeah, and as a quick check in the room how many of you are familiar with the SEC’s, sort of decision, or guidance that came out last week. That’s pretty good. That’s more than half the room. That’s…

[00:06:04] Yeah, I mean I…

[00:06:04] That’s pretty good.

[00:06:06] I, I, I don’t… can’t remember the last time anybody’s read, the SEC’s guidance manual.

[00:06:13] Uh. Uh, and that’s from an SEC attorney.

[00:06:16] Now I’m getting nervous that it was… they know more than I do when they talk about it. But, uh, so the guidance came out and, uh, I hate the phrase nothing burger. I hate the phrase, but then in some ways after reading through all that, we were kind of joking about it. We’re almost right back where we started, because there’s this very famous test called the Howie test. Which I always have to write it down, it’s in four parts, and if you’ll bear with me I’m going to read you the four parts. So it’s an investment of money. This is what is the security according to US law. An investment of money, and a common enterprise with a reasonable expectation of profits, derived from the managerial efforts of others. So think about when you buy a token. Is that an investment of money. Well somebody smart in the room will say well I might pay an Ether or I might pay an BTC or something like that and that might not be money. Well wrong, the SEC said that’s money.

[00:07:09] Ah man.

[00:07:10] So, in a common enterprise. Well you get two or three people together. I passed number one to two, with a reasonable expectation of profits. This is where it gets a little bit more interesting. So, uh, everybody familiar, if you read the report you’re familiar with the Dow, and how they were marketing themselves, uh, they, they pulled some quotes out where they were talking about dividends in payments and if that token has got a dividend stream off of it. We’re working on one now that’s got a reward stream off of it. We’re working. We’ve seen them, uh, we’ve seen some creative names for that, what that payment stream might be, but if it’s got something that be the equivalent of a dividend or somewhere that you’re just taking some cash back out of it rather than some actual application, it’s going to start looking like a security, derived from the managerial efforts of others. So if you’re going to be safe, if you think about it, um, a security… uh, if I don’t share what the, the couple of shares of IBM that I own, I have the right to vote for the board. Theoretically I have, since I can vote for the board I, theo… have a theoretical right to replace the CEO of IBM. But that’s definitely security because that’s, um, all the gains are going to be dir… that is not a direct enough link.

[00:08:31] So Gray can we step back. To view from 50,000 feet, why does it matter if it’s a security. What’s the difference then?

[00:08:36] Good question. Because then you can’t sell it, without registering. There, or being an exemption. So, if, you can either regis…

[00:08:44] So if you say you can’t sell it, you mean it’s illegal to sell it, and that’s…

[00:08:47] That’s pretty, like, a good way phrase it. Uh, if you violate Section 5 of the, uh, Securities Exchange Act of 1933 it subjects you to civil and criminal penalties. For a more lawyerly way of saying it. But you could either sell it. You can either register it, like a traditional IPO where you can sell it via an exemption, uh, which I think everybody in the tech community is familiar with, the usual private placement of securities to accredited investors. So at the end of the day what all this means is that I think you’re going to be seeing it, you’re going to be seeing two things, you’re going be seeing, uh, everybody going through this four step analysis again, to see what their offering is going to be. If it’s security, or if it’s not a security. If it’s not a security I think you’re going to be… see… have US people be able to participate in the ICO. That’s a very tough standard to meet. Alternatively you’re going to see a bifurcated ICO structure I think. Where do you see a large offering come up out of Singapore, Gibraltar, Switzerland, whatever the offshore location du jour is. You’ll see a limitation on the number of US investors who can participate in those US investors probably being limited to accredited investors.

[00:09:59] So the question then, the question is, how do you differentiate between the kinds of profits you get among those the types that might be regulated by the FCC, and those that might not be.

[00:10:08] So the reasonable expectation of profits not going to be your scrape, it’s not.. uh, excuse me, it’s going to be your scrape, it’s going to be a dividend, it’s going to be your distribution, it’s going to be something where you have it, uh, because I own, 1 percent of Hash…

[00:10:23] Not the underlying value.

[00:10:24] Not the underlying value going up and down.

[00:10:25] Yeah and I think that’s one of the things that was interesting about what was said and what was not said in the SEC report. Um, the SEC by focusing on the Dow, um, and a lot of cases I think went for an ease… one of the easier cases to look at, right. The Dow very clearly had a dividend stream, very clearly had some aspects of a security that a lot of tokens right now don’t have as a way to get out of the security regime. And so, I wouldn’t end great pushback. I don’t know that the answer is no. If you buy it for value, um, if you buy or the anticipation that the token will be worth more in the future, um, does that make it a security or not a security I think we’re still in the gray area there.

[00:11:10] Which is an area I’d like to be in, a Gray area obviously. But I think the other thing to, think about what the, uh, why the SEC picked on the Dow because, it, there’s a little known exemption to securities law which is not written in any statute but it’s the good deal exemption.

[00:11:26] That as long as everybody is doing well in in the transaction you know you’re not going to face securities fraud claim where investors are going to come back at you. The deal’s gone south. The SEC’s a le… uh, less likely to pay attention if everybody’s making money and nobody’s raising their hands unless it’s true Ponzi scheme or something like that. The Dow you saw the theft you saw the whole thing kind of blow up. And so I think that was another as Josh says that was an easy one to pay attention to.

[00:11:52] Josh you want to talk about the ramifications. What’s the SEC really saying about reaching out to the Dow which is a non non-US base transaction.

[00:12:00] Yeah. One of the… the way I like to look at what the SEC said last Tuesday, and then what FinCEN said last Thursday, um, I kind of like to look at them together as one thing, um. Whether the government actually coordinates among itself that well or not I don’t know. Um. But let’s assume they do. Um.

[00:12:21] So can you tell us… remind us what FinCEN is?

[00:12:24] I will. So that, um, FinCEN is the Financial Crimes Enforcement Network, um, and they regulate among other things, money transmitters. So if you’re responsible for taking money from Party A and giving it to Party B, um, effectively you’re a money transmitter. Um. And that’s cool for things like Uber, and that’s less cool if you’re a drug dealer, or trying to finance terrorism, or, uh, whatever. Um. And so. Previously the general thinking had been, ah, US la… if, if I’m watching an ICO, um, US laws are confusing, there’s a lot of organizations they have to deal with, a lot of different regulatory bodies. Uh, a lot of murky gray area. There are jurisdictions abroad that have that have put out great guidance and regulatory sandboxes and what have you. Um, I’m going to go register abroad and the fact that I’m abroad, that gives me one layer of buffer between, our, you know, personal liability or, or entity liability and the US government. Right. I’m a Singapore company US government. You don’t have anything to do with me. Thank you very much have a nice day.

[00:13:35] So with the SEC decision on Tuesday and FinCEN decision on Thursday, um, they said, very clearly, if you deal with US, if you sell to US investors or if US customers hold your tokens, you are regulated by US laws. Hard stop. And, um, in the FinCEN instance, that was the BTCE exchange, of… another raise of hands. How many are familiar with this decision that came out Thursday? You know that’s interesting, it’s a lot less. It’s probably less… it’s really a quarter of the room. Um.

[00:14:08] Yeah, and I would say that if if you look at over the last eight to 10 years about what areas the US Justice Department especially wants to think about enforcing, in which would inform maybe what the Department of Treasury does, where FinCEN is located, and the SEC has an enforcement arm, one of the things they want to think most about is this might transfer issue, because that money transfer issue is how that terrorism gets their funding, and how drug dealers get their funding. And you see them constantly wanting to… any way that they can snuff out that money that’s one of the ways they want to do it. So I think there’s some additional policy reasons why I think this FinCEN thing is, is really important.

[00:14:48] And the FinCEN piece was particularly interesting. They took down an exchange called BTCE, um, and the, BTCE was doing a lot of allegedly very bad things, um.

[00:14:59] With very bad people.

[00:15:00] Like financing terrorism and, uh, ransomware attacks and all kinds of stuff. Um, so the fine was 110 million dollars, uh, which is just, it’s…

[00:15:12] Which is a lot.

[00:15:12] Staggering. Um. E… even in the ICO world that’s a lot of money.

[00:15:15] Even for John Wagster that’s a lot of money.

[00:15:18] And they arrested the guy. He was in Cyprus and they threw him in jail in Cyprus. And so, um, the argument that, if I form abroad the US government isn’t going to come after me, holds a lot less water now. And so, what, what the conversations we’ve been having, and I think what the industry is trying to figure out is, okay well what does that mean for the next ICO? You know. Who… are we going to start forming in the US, are we not?

[00:15:43] So, let’s, let’s back up again, the view from 50,000 feet. For those of you who aren’t really in the ICO world now, ICO was an initial coin offering which is what a lot of companies do when they’re offering their tokens and foreign tokens are a form of cryptocurrency. And in the ICO world, people are wondering… ICO’s are raising a lot of money, for a lot of companies, really fast, and a lot of people argue that it’s irresponsible money, while at the same time acknowledging that the biggest and brightest companies of tomorrow are being launched right now. So there’s this dichotomy, you want these companies to innovate and grow fast. But at the same time, wow, there’s a lot of fluff out there and it’s really dangerous. So the ICOs, the people who are doing ICOs right now are wondering where do we do them. And they’ve been going overseas, a lot of them, because they think it’s a safer regulatory environment. So the SEC ruling that we’ve been discussing last week is really important because it says even if you’re overseas, if you’re selling to US investors you’re still within the reach of the Securities and Exchange Commission. And that means, money, and that means potential jail, uh, as demonstrated by the DOW case.

[00:16:47] Got a, couple of questions.

[00:16:56] Yeah. Well. Remember Bitcoin will be more of a commodity…

[00:17:03] Repeat the question.

[00:17:04] Right.

[00:17:04] Oh, sorry. Yeah. Wh… Why… I’m sorry. To repeat the question. Why hasn’t the SEC ruled on Bitcoin, um, Ethereum, and some of the other tokens that have been around a lot longer. Um. Number one I would say that you know, Bitcoin has been kind of declared, looking to Josh to confirm it, that Bitcoin is a commodity. Right. So that, or at least until, uh, so the deriv… if you’re trading a derivative of Bitcoin, this is what the commodity futures trading commission has said. CFTC is an alphabet soup of federal agencies. Uh, the CFTC said that Bitcoin is a commodity, and so that if you trade a derivative, that you’re trading it, a derivative, and so you have to register, uh, go through certain protocols with the CFTC. I think the reason they didn’t, uh, frankly go with, uh, go at Ethereum is because in some ways the Dow was an easier case. As I said the Dow had had, had the loss, it had that hack. Um. They had all the marketing materials. You have to remember that regulators moved it sometimes at a glacial pace because one of the goals is they don’t want to stifle this but they want to, they want to, keep their arms, or they want to, keep the bad actors out but they don’t want to stifle the growth that’s going on. So I think there is a real understanding by the by the folks in the federal government is that there’s something exciting going on here.

[00:18:29] So the question was, “Is Ethereum a security, why or why not?” Ultimately that’s the call of the SEC. And what was really interesting, in some respects and not at all interesting in other respects, about the report is that, when the SEC was talking about Ethereum, they called it a virtual currency.

[00:18:46] Right.

[00:18:46] So they, they, potentially had the opportunity to weigh in on Ethereum, and they opted not to. Now. Does that mean they’re not going to opt to in the future? I don’t know. Um. I wouldn’t. I think some people think that Ethereum is now in the clear, and I think some people say it’s still a gray area. But right now that’s kind of a… the… at least in the short term I feel like that’s the current idea.

[00:19:11] To answer your question is somebody who’s got about, I think maybe one Ethereum in my coinbase wallet, to, in the spirit of full disclosure, but hold a gun to my head I’d say it’d probably pass, it probably meets the Howie test and it’s security. But, until if, until the SEC is going to regulate it like that, um. You know if they came to me right now I’d say let’s let’s try to sell to accredited investors only probably because I’m a lawyer and I want to be risk averse and I want to keep my clients out of trouble.

[00:19:40] Another question. Yeah.

[00:19:41] So the question is whether if you form abroad and limit US investors, is that a good model. So the issue is if you… if your company is selling securities, and let’s say your token is a security, um, to US investors without meeting an exemption, then that’s a violation of the Exchange Act. And so one of the common models we’re seeing, and this is what we’re advising our clients, if they have something that is very clearly a security, is to prohibit sales to US investors, um, to, to geofence them out with their IP, um, to have them self-certify that they’re not US investors, and then go the further step and, and, that’ll will be interesting to see if we start seeing this more. Because I haven’t… in my personal experience seen much of this yet but, take their address and verify the address. I mean usually, oh, uh, prior to now you’ve seen a lot of, um, ICOs simply do one of the first two steps, um. Tezos for example, I think you just had to say I’m not American, um, which I… I guess I shouldn’t comment on that on a podcast, but whatever. Um. There. I guess the point is there…

[00:20:55] No Tezos holders in this room.

[00:20:57] Where, uh, there are more…

[00:20:58] Particularly at this day.

[00:20:59] It was all for research purposes, and, uh, and non-billable at that. So. Um. So. Um. Yeah. That’s, that’s going to be some of the advice going forward is, as an American investor it’s going to be harder to get in some of these things I think.

[00:21:14] And I think you know, we can’t have it both ways in the tech world but if we start talking about how great our technology is and about how, great, how easy it is to do a, b or c off the blockchain or, to ring fence to block certain ISP addresses. That sounds, starts to sound like a really reasonable way to restrict the sale. Right. And so, if you get it, geofencing to me sounds reasonable. Whereas just getting somebody to sign a, um, you know to self-certify that they don’t live within the continental US, it might not pass the reasonableness test, if we’re really talking about advanced technology.

[00:21:50] So. So we, we as a firm, we actually take, because, there’s, there’s not many bright lines in this discussion, so we as a firm take the position that, is are these things subject to regulation. A lot of them eventually will be and we know that. Are they right now. No a lot of them are not right now. So if you’re getting in right now what direction you want to go. Do you want to go in for right now and get in quick while you can. Or do you want to prepare for the future if you have a successful company that’s going to grow do you want that to be prepared for the eventual regulation that’s probably going to come. And we think that the government’s not going to all of a sudden one day, the government doesn’t have the wherewithal to one day say, okay, you’re now regulated and here’s what we’re going to do. It’s too spread out. There are too many agencies involved. But the government does have the ability to go after really bad actors, and we call it widows and orphans. If you’re going after widows with retirement funds they’re investing in your HD and it goes bust. You’re probably going to be getting trouble. If you go after, uh, you know, orphans, that really don’t have any way to protect some people unsophisticated investors then you’re probably get it and get in trouble. But if you’re operating in the gray area be smart take precautions. We advise clients often to prepare as if you’re going for an SEC exemption, whether you go for it or not, because it shows that you know what you’re doing.

[00:23:07] It shows that you’ve retained people on your team. They can advise you properly and if they say, “Well you should have done it.”, and you can say, “Well great, we did it anyway.”, we set our, we set our interest up that way.

[00:23:16] Yes. And how many people have read kind of some white papers that may have come out three months ago versus the white papers that are coming out now. If you’re starting to know that the boilerplate’s started to get attached to the back of them. You’re starting to see the risk factors. You’re starting to see, um, all the stuff that you would see in a private place with security. And I think one of the reasons you’re seeing that is that because I was a little shocked at the SEC announcement I think came up, prior to when I was expecting, when I was… thought was going to happen, one of these things is going to go bust. Somebody is going to sue for securities fraud, under a state law, state securities fraud claim. Somebo… and then a judge is going to, a judge sitting somewhere in Tennessee or Delaware or Texas or wherever is going to decide if this thing’s a security or not, and in the SEC’s going follow along behind it. So just because, you, you know the SEC doesn’t say it’s a security, one thing to keep in mind is under state law it still could be a security if you get it, if you get a judge to say that.

[00:24:12] It would be.

[00:24:14] Yeah.

[00:24:14] So the question, the question is. “How do you know to sue, who are you going after?”, the Dow is, uh, registered in Switzerland. But…

[00:24:22] Yeah I mean. Well I’m not a plaintiff’s attorney but my colleagues who are would throw every single name on that, you know, and we’ll see who shakes out at the end.

[00:24:34] I’m pretty sure the guy who started it, he’s been fined 110 million dollars, and he’s in jail, understands, you know, that he was one of them, and I bet you all the people around him are running like rats.

[00:24:48] But I mean I think if if you were… If, if somebody who was going to do a token sale, usually you would see the first line of defense would be that you’ve seen a foundation be it in Singapore or Gibraltar or somewhere like that. The foundation is, is the quote unquote issue or you’d sue them. You would then move up the chain to see who the directors of that foundation are. And that’s where you start to see the overlap oftentimes between the US company and the foreign entity.

[00:25:15] And I would be going after those directors as well.

[00:25:18] And not coincidentally, the uniform laws commission that’s just recommended this legislation to be adopted by all states. Hasn’t gone anywhere, but it’s been recommended to all states. That’s exactly the criteria that they would require of entities that want to work in, cryptocurrencies, except, receive, or exchange cryptocurrencies would be required to get a license, and to get a license you have to list where your money is from. How much it is? Who are your investors? Do you have loans? How much are they? And when you have transactions who are those transactions on behalf of? How much are they? Where do those individuals live? So the laws that the bank security act requires, they know your customer laws. Uh. So you make sure you’re not transacting on behalf of terrorists. And the anti-money laundering laws that require you to support certain transactions larger than certain amounts. Eventually those will all likely apply to, cryptocurrency exchanges wherever they are.

[00:26:15] The, the comment is that, countries treat cryptocurrency differently, and the laws around cryptocurrencies in different countries are different, and the US a lot of times is seen as moralistic by other countries that are not as, uh, wound up in our regulatory regiments as we are. And it’s a point well taken. But, as the SEC’s ruling last week showed, if you are selling to US investors, the reach of the US government is long, and there are going to come after you no matter where you are registering. So while I agree with your point, we have to bear in mind that just because you’re in another country doesn’t put you out from under the reach of our our government.

[00:26:55] So the question is whether, “Is this a one off activity you have SEC, or is this something that we’re likely to see a progression of.

[00:27:02] The, the, what I’ve been telling potential clients and clients this week is that I interpret this is the SEC saying we’re at the two minute warning. You know they’re starting to look. They’ve been looking and now they’re starting to make some pronouncements, and we don’t have, none of us have, that I know of, any inside knowledge but, um, my gut.

[00:27:22] We have knowledge, we just don’t have any…

[00:27:25] The inside kno… Yeah. Heh, and even that’s questionable. Uh. They’re, they’re going to start picking at the edges more, um, and, and…

[00:27:34] And that’s our advice, and honestly, is there really a difference? Because if you’re out there. If you’re a bad actor out there and you’re operating on the fringes and they come after you. It’s not going to matter whether it’s the start, the tip of the spear, or just a rock. You know. They’re, they’re coming. I mean what we’re saying is, you know, in this administration, there are so many holes in, uh, in regulatory enforcement, and positions that have been unfilled, it’s unlikely that there’s going to be a very broad coordinated effort to come after this sector. Having said that. When they see something really bad going on, that everybody knows is bad and they have a way to stop it. They’re going to stop it. So is it a progression. Yeah it might be a long progression, but you know it’s the start of what eventually is going to happen. The other comment is, the comment is, that’s, that’s what investors should be looking at. Yes.

[00:28:22] It was interesting to me that you saw that the big pronouncement came out from SEC’s Enforcement Division. Which is the people you don’t want to mess with is the SEC’s Enforcement Division, because they’re the ones who get to actually assess the fines and criminal penalties. Now that it’s simultaneously they issued an investor bulletin which I found interesting reading because, if you read through that there were, as a lawyer and a practitioner, there were some stuff in there that almost looked like somebody at the SEC was telling me what I should have in my documents. Um. And that investor bulletin also says very clearly, you know, the buyer beware, the buyer beware, the buyer beware. So there’s at least two branches of that same agency coordinating on getting something out which says something to me, and I think it’s no coincidence that FinCEN dropped on the same week. I, like John, I’m not optimistic about everybody coordinating across all those that alphabet soup of agencies, but there’s some people up there definitely paying attention.

[00:29:17] Let the record show that Gray thinks it’s interesting to read, uh, read an SEC investor bulletin. That may be a first in the history of the world. Question.

[00:29:28] So the comment is that there are some parallels between what we’re seeing now and what we saw in the dot com bubble when there was a lot of money going into an area, the Internet, which at that time in the early to mid 90s was really an unknown space, and the government did step in and they made sure the internet protocols were free and it took a number of steps that really helped the industry forward. I would like to think that that’s happening here but I don’t see it anywhere in the governmental sphere, and that’s one of the reasons that we’re forming a Tennessee Blockchain Alliance, and there are other groups. Hashed Health has its own consortium that works for, with health care companies. There’s a digital Chamber of Commerce of which our firm is a member that is inviting rights, amicus briefs to every relevant case in the United States to which we contribute. Um. And there are a lot of outside players that are really hoping to fill that void. Because it is a void right now. There’s not a lot of… uh, there are certainly every government agency has somebody looking at this, but I’m not overly optimistic that they’re going to, that’s going to result in anything that’s meaningful to people who were in this room right now who are ready to launch ICOs or launch blockchain based applications, they wanna know how laws affect them. So I think the private sector needs to step up, and that’s what we’re trying to do, in meetings like this.

[00:30:43] It’s an opportunity for the state of Tennessee or, or whatever state, can start carving out the right legislative environment. Um. It’d be too long to go into what kind of legislation that might look at, but there’s enough… there’s, I think the, we’re really, uh, looking for… the states can be the laboratories, and which state and locality wants to take that leap.

[00:31:05] That a question back. Yes.

[00:31:08] So the comment is what can we do at the state local level given the absence of leadership at the federal level. And my response is we’re doing it, and we’re having meetings like this. Uh. There are not a lot of new technologies that inspire meetings of 400 people to, to show up, uh, granted they’re free beer, but just to show up and discuss arcane topics like this. But this, there are various consortia, Hashed Health is doing a great job in the healthcare industry of lea, you know, providing leadership in the blockchain space. Uh. And, there are. I’m not saying that just because we’re in Nashville. Nashville is really a hub of blockchain activity. Now we have a strong, Ethereum coding community. Our coding schools are starting to teach this stuff. We have law firms that are centering practices on it. So this is a real opportunity for the state of Tennessee to step up and say we’re open for blockchain business. Uh. The things that they can do, range from the very small saying smart blockchain based contracts are recognized as legal in our state. It’s a very simple step. You know they can do that. Or they can get into the weeds and talk about you know anti-money laundering laws or know your customer laws and how they’re going to be applied with regard to exchanges in Tennessee. So there are you know there are a lot of things we can do.

[00:32:27] Uh. You know. Isn’t the SEC’s ruling in the conversations we’re having, aren’t they really a marker that, ICO activity in the fundraising that’s going on the blockchain space is legitimate and we agree that it absolutely is. Our phone is ringing off the hook this week. As much as it ever has. Probably more. Uh. And you’re exactly right. This is a marker that, yes it’s going to be recognized and we’re going to keep our eye on it. And we’re going to take measured steps to make sure that people are protected in it.

[00:32:56] So as I said in the beginning you know we’re taking this this, this square peg of new technology and fitting it into the holes we’ve been using to analyze securities for quite some time. And you’re right if, if, if I think if it’s a good deal it’s going to be a good deal regardless of how you’re you’re, you’re doing your capital raise.

[00:33:19] I’ll tell you the one group I think it probably is a little scary for and those are the exchanges. We haven’t really touched on this, but one of the things that the guidance both from FinCEN and the SEC said was, okay industry, go forth, but exchanges, you’re the ones who are going to be liable if you’re trading what are securities and you shouldn’t be. Um. So I’m. I’m I personally was glad I wasn’t polling the Ex the next morning, um, but, um, so what, so what’s interesting then, the follow up is, well how does this exchange get comfortable with the fact that you’re token isn’t a security, and that we don’t have an answer to that yet. I know it’s not going to be a law firm giving a legal opinion that anyone can rely on.

[00:34:00] I was hoping it was going to be.

[00:34:01] I know it would cost about $5 million.

[00:34:04] And there’s also going to be a tremendous wave of people doing ICOs who are making sure they’re not an exchange, because some ICOs, depending on how you release, and what you do with your tokens could actually be construed as an exchange. And that’s going to be an issue that people are paying a lot of attention to. All right. Time for a couple more questions. John says.

[00:34:24] Yeah. Um. The question is, “Can you talk about the OCC fintech turf?” So. Um. The OCC, the Office of the Comptroller of the Currency, proposed maybe six months ago, give or take, um, a charter that would effectively get away with the 50 state patchwork that is money transmitter laws and allow a fintech company to apply for a charter with just the OCC. So it’d be a one stop shop for your regulation, and that personally, I think it’s a great move. I mean, right now if you want to register as a money transmitter, this, we have an ancillary service called black line and this is one of the things they do. The budget’s a million dollars. I mean just be prepared to go out and register.

[00:35:05] Can you tell us briefly what a money transmitter is and the significance of that.

[00:35:09] Sure. So the money transmitter, or more broadly a money service business, sends money from, from unrelated third parties. And so the OCC charter is a great path, if it gets approved. There’s lots of organizations that are fighting it, um, what the states particularly don’t want to lose the right to govern at their level and, oh, also the revenue that comes along with it. Um. So I, the, my problem is I either want it to die fast, or get approved fast. Because the companies that are launching right now are in limbo where if you want to go that… You can’t wait for the charter in case the charter never comes. But if you go through the process, if you go through the traditional process which can be up to 18 or 24 months and in your bigger states you’re halfway through. You spent half of that million dollars and now there’s, uh, you know, instead of taking back roads now there’s a freeway you could have taken. So I’m I’m excited to see how that develops. I’m not confident that it will get through, but I’m optimistic.

[00:36:11] Time for one more question. Yes sir.

[00:36:13] The question was, “Are there companies among those that we’re seeing now, doing ICOs that are not subject to securities laws?”

[00:36:22] Yeah. I think a good number aren’t. I mean anytime you see a utility token, um, so a token that does something, um, which is, not rare but rarer than you’d think.

[00:36:34] A loyalty program for example, if you issue a token to do a loyalty program it’s clearly not a security.

[00:36:40] So it’s, it’s, you will see that. Where you’re going to start seeing a lot more tokens trying to self-verify or convince you that they’re not securities. Um hm.

[00:36:50] Thanks everybody we appreciate it if you have questions after this, feel free to shoot us an email. And don’t forget that we are launching the Tennessee Blockchain Alliance. If you’re interested. Your company is interested. You want to be somebody who is shaping the future of what the state of Tennessee does in this area. Uh. Shoot us an e-mail and we’ll hook you up.

[00:37:16] Thanks guys. Thanks John, and Gray and Josh. Great job talking about an exciting topic. So thank you all for coming. This, uh, will be podcasted probably later this week. You can find that on Hashed Health’s web site. And thank you for all being here and have a great night.

[00:37:42] You’ve been listening to the Hashed Podcast presented by Hashed Health. Find more content like this at hashedhealth.com, or come to our next meet-up and join our growing community of blockchain professionals and enthusiasts. Learn more at hashedhealth.com. Thanks for listening. We’ll see you next time.

This podcast is for informational purposes only and does not constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

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