PUBLICATION
January 5, 2019

Digital (securities) tokens based on share of 10 Nasdaq-listed companies.

#securities
#SEC
#compliance
Liza Aizupiete

The following is an opinion piece about a set of statements put forward in a Bloomberg article, dated 3 Jan 2019.

The authors (@AlastairJMarsh with assistance by @benbain) write on an allegedly soon-to-be launched digital exchange. They depict it as a harbinger of where the crypto market is moving. While I cannot but agree with the premise that tokenisation is part of our future. And trading of securities will with time and entrepreneurial effort move to Blockchain. I am concerned about the reported facts on the legal framework associated with the company.

It is a great idea to tokenise existing securities. It is also great to wish to offer the resulting blockchain tokens for trading to the general public. This would create a globalised access to indiscriminate offer. Yet, to offer trading of securities, one would need to be a regulated securities trading venue. Moreover, tokenising existing securities means creating their derivatives. Trading of the underlying securities as much as their derivatives is a regulated activity.

The article adds that the holders of the “digital tokens based on share of 10 Nasdaq-listed companies” will be eligible to “the same cash dividends, even though the companies themselves aren’t involved”. This further confirms the regulated activity of the purported digital exchange.

The company is not a regulated securities trading venue. But it is a proud owner of the Estonian Financial Intelligence Unit (FIU) issued license(s). And so are over a thousand of other companies. In no way a small feat, it demonstrates a proven willingness to be in compliance with the EU AML laws. But this alone, cannot be the basis for securities trading offer to the general public. The article mentions the legal custodian would be a Cyprus based broker. Although, this broker would be holding the underlying assets on behalf of the token holders. It in no way justifies the public securities trading offer of the unrelated company.

Another claim is attributed to the company CEO Daniel Skowronski. He “doesn’t need permission from the Americans to offer this service because DX doesn’t operate there.” Although, I would wholly welcome the day when regulation can be diminished to the size of regulatory frameworks. Avoiding hefty legal verbose, fathomable only to the initiated lawyers. Alas, there may be lacking a deeper understanding of the securities regulation.

The Bloomberg research team does offer one fact-checking instance. It is an attempt to have contacted the U.S. Securities and Exchange Commission, which declined to comment.

I agree on the authors philosophical note.

While security tokens have been discussed for a few years, they could be a key area of growth in 2019 as entrepreneurs seek to tokenise everything from fine art and real estate to stocks and bonds.

Indeed, our present venture Fintelum.com is dedicated to doing exactly that.

This article on the whole is striking for a respectable financial editorial piece. I may be mistaken. But, the experience in establishing and running a regulated cryptocurrency exchange has taught me a few lessons.

If the authors are reading this, do not hesitate to get in touch with me. I would welcome to walk you through our experience. What it takes to set up a business on a solid legal ground. Examine the current regulatory environment, and how securities tokens may fit therein.

Liza Aizupiete (a.k.a. Liza A). Twitter and Telegram @Licere