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At the SALT conference on May 8th, 2019, our co-founder Jor Law participated in a panel exploring digital assets and blockchain technology. In a wide-ranging discussion featuring several important leaders in the blockchain and cryptocurrency space, the panel discussed topics including decentralization, liquidity, a recent SEC no action letter, and initial exchange offerings (IEOs). The moderator’s questions and Jor Law’s responses are transcribed here.
Moderator: “What happens when somebody like Mark Zuckerberg declares that he's getting involved and wants to use a digital asset for payments, processing, and all the rest, on Facebook - the largest platform in the world? Whether it's WhatApp, Facebook, Instagram - when you've got something that large embracing digital assets, it's about jobs and creation of ecosystems and everything else that builds around that, can you speak to that a little bit?”
JL: “I think it's important just because it shows that serious companies are looking at the space. And that isn't something that just happened recently. For the last couple years you've actually had serious companies looking and researching in the space; even though they hadn't pulled the trigger yet, it's always been there in R&D. If you look at a company like Overstock - and tZERO is one manifestation of their blockchain portfolio - Overstock and its subsidiary, Medici, are actually invested heavily in many areas within blockchain. So I think it's good to get real companies that are recognizing how blockchain could help their business. It won't be every business that needs it and that's going to utilize it, but it certainly will be something that impacts pretty much everybody in the space in one way or another.”
Mod: “Would you say that a [centralized exchange] should prosper, because of the relative advantages of centralization over decentralization?”
JL: “You know, there's always this debate of centralized and decentralized. And I think it's a little bit unfortunate because there's the concept of decentralization as a technology and decentralization as an ideology, and I think sometimes people have conflated the two of them.
You look at someone like tZERO, and they've developed the technology to run a secondary exchange that is centralized, and they've also developed the technology to run a secondary exchange that is decentralized, to some degree. A lot of people talk about decentralized exchanges, but in most cases they're decentralized parties participating in a centralized exchange (today). So tZERO has that technology, but for better or worse, a few things: one is that it's easier for regulators to control a centralized party. It's easier for technology to get lifted off the ground with centralized parties, shepherding it forward and things like that.
So there are certain advantages of centralization that are probably necessary today before we can get to a decentralized future, which might be better and good, but it might not be. Society, before it became centralized... We tried decentralized, right? We were all humans, we were probably all decentralized, and someone at some point said "let's band together and let's form a tribe" or something, and you had someone to lead and preside over them. And even today, most of us will [accept] loss of some control in exchange for convenience. I don't think you'll ever see a world where everything is decentralized because I don't think that's actually what humans really want.”
Mod: “Once you get rid of a lot of these peripheral exchanges, do you concentrate and get more liquidity in the survivors? It seems logical to me that it would.”
JL: “When you look at who trades now, it's largely specialty funds and wealthy individuals that are trading. But when you're institutional and you have fiduciary duties and make big bets, you need to be able to trust the infrastructure that you're trading on. These random exchanges that are offshore, unregulated, undercapitalized - you don't know how they have their operations, they're just not trustworthy enough for institutions to depend on.
The second thing you need, also... it's great to have this system but if you don't have product that's interesting, there is probably not going to be much investment or reinvestment in liquidity as well. So what we also need to see is that institutions bring quality products that other institutions are interested in trading. Because a lot of the crypto assets that are available for investment or trading are not of institutional grade investment quality.”
Mod: “Thoughts on the recent SEC no action letter to Turnkey Jet, which is a utility token? That's a pretty big deal when the SEC issues that first statement on something that they've pushed back hard [against] with ICOs and those sorts of things.”
JL: “I'm a corporate securities attorney and I was very excited to read the no action letter until I read it. And after I read it I realized I didn't really care to reread it or memorize it. There were so few takeaways from it, and it largely wasn't very helpful. The framework I think was more helpful simply because it did memorialize concepts that they had talked about in speeches and things like that. It gave questions for, I think, lay people who are not as sophisticated in securities laws, they can read the framework and see many more questions to help them think about how decentralized they are or not. But the framework created as many questions as it gave answers.”
Mod: “What do you think about IEO's replacing STOs and ICOs? Do you think that's going to be something that will be a replacement for those types of offerings?”
JL: “I have somewhat controversial views on this. A lot of my peers are corporate securities attorneys, and they're very anti-IEO because I think they see it as a continuation of the unregulated ICO space. As a conceptual matter, if you have someone that effectively is conducting an initial public offering through an IEO process, through an exchange that is not participating as an underwriter...then it's just a funding vehicle that exists today in a non-blockchain space as well. That, I think, should be fine.
It's a matter of having a good underwriter with the proper licenses, doing this initial public offering (effectively, it just happens to be listed on an exchange), is no different than if you took a security today, IPO'd it, and it went out on Nasdaq. So if you have these similar concepts done in a correct way, then I think IEOs should be fine. What you are seeing with a lot of IEOs today is a continuation of ICOs, and that is not okay.”
Mod: “What would you say is going to be a catalyst for a market uplift or collapse in terms of blockchain right now?”
JL: “Greater adoption by the masses, the technology becoming more pervasive and people accepting and understanding it more. This is true of many things - this was true of the internet and computers, you had a period of years where you had some speciality people who knew how to do it, and over a period of time the masses came on and the space really lifted, and I think it'll be the same for blockchain.”