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Blockchain: Current and Evolving Applications and the Developing Regulatory Landscape

Feb 19, 2020

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Dara Albright (EisnerAmper), is joined by Andrew Hinkes (Attorney, Carlton Fields) and Kerem Kolcuoglu (Partner, Penrose Partners). They discuss valuable information relating to blockchain technology, the range of its applications, and the laws influencing its course.


Kerem Kolcuoglu:My name is Kerem Kolocuoglu. I am a parnter at a consulting firm called Penrose Partners. We help Blockchain tax startup scale, and we also advice governments, investors and enterprises on understanding the technology and strategically navigating the space. This is my second company. Previously, I was working with NICO Advisory Firm. So I've also had experience on the more crypto fundraising side of the industry and before that, I was PricewaterhouseCooper Canada's first Blockchain consultant, and also Canada's first academic researcher in Blockchain technology.
Andrew Hinkes:Wonderful. Good morning everyone, my name is Andrew Hinkes. I'm an attorney for the law firm of Carlton Fields. I'm an adjunct professor at the NYU Stern School of Business and at the NYU School of Law. I'm also the general counsel of a financial services advisory firm called Athena Blockchain. So a pleasure to be here Dara, Kerem.
Dara Albright:Thank you. Thank you again. So Kerem, let's kick it off with you and let's start off talking about, if you could, make it an intro to Blockchain 101. Why are people looking at this technology? How has it impacted finance and how is it going to impact industries across the planet?

KK:Yeah. So one interesting story I like to talk about in the history of how we got here is it's really similar to when the internet came about. Before that, when you had content of anything of value, it was distributed out of brick and mortar, and was DVD's, VHS's whatever it was and being able to create fraud, or duplicate, or actually be able to distribute or have significant impact in that market was difficult. But when he internet came about, being able to distribute content blew the door off things, right?

People were sharing music, videos, movies, everything and ultimately devaluing that asset. So what happened? The FCC had to step in and the regulators had to play catch up and say, "No, you can't be distributing someone's content or something that someone owns." What happened after that was you had music sharing, movie sharing, but you actually didn't have proper money digitally. Across the internet, no one was really properly spending money with one another, because they're actually without... or at least peer to peer there wasn't, because what we couldn't do was if you think about a song, you could copy that song, paste, paste, paste and send it to 20 people. But if you do that with a dollar online, you copy and send that to 20 people, you've now devalue that dollar.

But what Bitcoin did and Bitcoin being the first Blockchain that was ever created. It actually solved something called the double spend problem. With Blockchain, we were able to validate that once value was sent, we could confirm that it was no longer in the hands of the sender, and now in the hands of the recipient. So what this did was it created a peer to peer network of transferring value, and when you think about how our financial system has been built with relying on intermediaries and third parties that we trust to transmit digital value.

Now that we can actually transfer value digitally peer to peer without the need of third parties, it's now really transforming the way business is done. The way the financial system is evolving, and from a financial standpoint, I think that's really the most important piece of this is that you or I can actually transmit value to one another. Whether it be money, whether it be my ownership in something, in real estate, my gold or whatever that is. To actually create transactional value of these assets digitally without even having to trust one another, or needing to trust a third party.
DA:That's actually a great setup, because so here we are talking about the... you mentioned going online and starting to transfer music and copying music, and then what happened? The regulators came in and said, "No, no. Can't happen." So that's a great segue into Drew, we can start talking about how are the regulators and legislators, what's happening from that perspective? How are they trying to catch up to this innovation and what are you seeing really across the country? In terms of regulation.
AH:So domestically, the regulators have been pretty busy. Starting in 2013, we got our first guidance addressing any of these assets and systems and that came from the Department of Treasury's Crime Enforcement Network and that was the first pronunciation that we were going to view these assets the way that we view other financial assets.

Shortly thereafter, the IRS got involved and said, "This is how we'd like to apply the tax code to these assets." We've subsequently seen 2019 guidance and a rev ruling as to forks. The IRS have advised is still thinking about things. They've actually announced an invite only program that they're having with industry in March of 2020. Hopefully, some of the decisions made and definitions used in their latest guidance will be clarified and updated, so it's more in accord with industry practices.

Selling tokens as a way to fundraise is obviously one of the reasons that many of us are here. Inevitably, when things are good, sometimes things go wrong and this one project called the DOW had a little bit of a hiccup, which resulting in some of its investors calling the FCC asking for help. Since mid-2017, we've seen an increasing level of activity out of the FCC. Unfortunately, it hasn't been through law or formal rule making, or even formal guidance. It's been through informal guidance, speeches by high ranking members and commissioners of the FCC. It's been settlements with private companies based on certain facts that are offered to the world as tea leaves to be read, in order to guide your future conduct.

So a lot of the attention our industry is how the FCC views these assets. What impediments to issuance and fundraising are created by the FCC's approach. But not all of these assets are actually considered securities. The SFTC has carved out its own little part of the industry. They have said that in their view, Bitcoin and Ethereum are commodities and so there's this turf war, proxy war going on between the two regulators trying to figure out who has domain and control over regulation of these assets. The most lucrative area of crypto has been fundraising and trading of these assets, and the trading of these assets occurs on spot markets.

We don't really have developed high frequency spot markets for traditional commodities. You don't high frequency trade coffee for instance, or pork bellies, or what is it? Unfrozen orange juice concentrate, right? So this new model and these new assets have brought a bunch of new challenges. So while we've got state regulators and federal regulators of a wide variety that have taken an interest and started to use their power, there are still really important parts of our industry that are under regulated.
DA:And you brought up a good point, because regulators are still trying to figure out, or still trying to define or classify what these are. So let's talk a little bit about what are digital assets. Let's talk about the differences between digital assets, cryptocurrencies, so at least people can have an understanding of how these are being viewed.
KK:Yeah. Do you mind if I start?

Andrew Hinkes: Have at it.
KK:So one interesting thing I'd like to describe is simply what an ICO process looks like. Think of it this way, you're going to do a public offering. You want to do let's say traditioning IPO, or reverse takeover, it's not cheap. It's not cheap. It's not quick. It's a complicated process that requires a lot of hands and heads to pull it off. What the ICO was able to do was revolutionize the way we could fundraise from public investor, from the public and investors, especially retail investors. What an ICO is, is that a company will actually mint a unique native token, or build it on an existing infrastructure and they just mint it. Out of literally thin air, they say, "This is the currency that we've created, and on my network or on my platform," let's say I have a shopping app. On my shopping app, this token that I'm selling you, you can buy clothing with it, okay?

But today, I'm selling it at 50 cents on the dollar. So if you buy it today, eventually, you can pretty much buy all the clothing on my website for half off, okay? Now they've showed you that they're giving you discount to buy into something that's going to have utility, or true use of that currency. What they do is... what they did was they said, "Okay, now send me Bitcoin or Ethereum and I'm going to send you back this currency." Okay? So what people would do is transfer their US dollars to Bitcoin and as simple as just pressing a button on your cell phone, could instantly send money to someone that they had no clue who they were. They weren't sending money to a registered company, or anyone with a full legal team, or corporate leadership team even. It was an address online, you would send our Bitcoin there and you would give them an address to send back that currency and they would sent that currency back to you. That was it.

So what started happening was because it was so quick and easy, and there was no minimum threshold of what you could be investing, people can invest a dollar instantly off their smartphone on their way to Starbucks into a project in China. When you think about the process of an IPO versus this, it was like night and day. So this is where we started getting into this paradox of is someone buying this currency for the utility of it? Is that person actually going to stay on that network and use it to buy clothing? Or are they just speculating on the value of this new asset that was minted, that it's going to appreciate I value over time and they're going to make a return on this.

So this is where I'll pass it off to Drew where you start getting this, is it a utility? Or is it a security? And are... how are the investors perceiving and who should be regulating it?
AH:Sure. Another way of thinking about the whole ICO phenomenon that was popular in 16 through 18 essentially. It's the idea that the Wright Brothers were selling tickets to fly to Miami before they built their first plane. Think about it that they were offering a service or a product that was to exist in the future, and this digital asset that you were to buy from them was your access credential that allowed you to get that product or service. But it doesn't exist yet. They're going to take the funding that they raise by selling you these assets, and they're going to then build the project that would enable that asset that you purchased to have its use. To have its utility. To have its consumptive purpose.

So as many of us who are sophisticated financial services professionals can probably understand, this became very popular very quickly because of the exceptionally low barriers to entry. There's this platform called Ethereum which basically allows you to transact value from party to party and to automate that based on logic, if then. If candidate A wins the presidency, send value to person X. Candidate B wins, sell value to person Y and you can build increasingly complicated software this way. In fact, a lot of people are trying to build software that emulates most of what you see going on up and down the streets in Manhattan using these new models.

But a funny thing happened on the way to the forum, a lot of people were building really interesting technology and then a whole bunch of people said, "Let's just rip people off." So they created websites where they use clip art photos to describe founders that didn't exist. They never had any intention of actually building out the platform. They maybe did have an intention at some point, but then they got an outrageous amount of money and found that their incentives were changed a little bit by the fact that they had already realized fabulous wealth, perhaps they weren't as motivated.

So incredibly long story short, you now are living in a world where the FCC believes that selling an instrument that's going to fund the creation of a system where that system's going to have value in the future usually falls into the ambit of the securities laws, and would require the issuer to either register as a public reporting company, with all the attendant paperwork, overhead and expense like Kerem alluded to. Or proceed under a private placement exemption, which allows you to do a more limited distribution of your assets under very different terms that allow you to sell to a much smaller group of people with an impaired amount of liquidity compared to otherwise.

Of course, the US is one of 214 countries. Although we believe we're the center of the world, it's not actually the case. The ICO phenomenon, the crypto phenomenon has been wildly successful in other countries; South Korea, China, Japan, throughout Europe, Latin American. There are tremendous amounts of crypto activity and many jurisdictions have taken a different view than the United States has. So this creates additional complexity. When there's an instrument you can sell in Switzerland with certain sorts of compliance without registration that may not be available to buy in the United States without formal registration.

I hope this is helping to tease out a bit of the complexity in all of this, but the folks that relied upon the idea that these tokes were utility relied on a Supreme Court case from the 1970s called a foreman. Where a co-op in New York was selling shares that were only allowed to be bought and sold among people that lived in the co-op. The economic value of the contribution through purchasing these shares was used to lower the overall mortgage on the co-op. It couldn't be sold for any more than it was purchased for. It could only be sold to somebody buying the co-op from you, or the co-op management company.

So people sued. The co-op owner said this is an illegal and registered security. It went up and down all the way to the US Supreme Court and the US Supreme Court said, "Just because you call something share, doesn't mean that it's actually equity if it doesn't have equity like features." Even though this instrument did have some equity like features, it's primary purpose was a way of controlling who would live in a co-op and contributing to the overall paying down the expense of running the co-op. So folks who were interested in this utility concept said, "Great. We've got a Supreme Court case that backs up our interpretation."

But pretty early on in the FCC guidance through enforcement, they said point blank that they don't agree with that concept and we still see this argument being litigated. In fact, in about an hour and a half, right down the street we're going to hear the SEC and Telegram, one of the larger issuers arguing these exact issues on summary judgment. It's an exciting time to be in this industry given how many things are still up in the air.
DA:Well let's unwrap that a little because what it really boils down to is first, we're trying to determine and classify is this a security... like a stock or something that appreciates? Or is this a utility? Something that you can use to purchase goods and services, and it's really a combination of both. It's not something that you put in your pocket. It's actually something that lives online, so it's virtual. So we're still trying to wrap our minds around all of these different things, and you pointed out the SEC has come out with conflicting statements. But one thing we can just be sure of is that hey, yes, we are viewing these as securities, so if you want to raise capital, do an ICO. Which is called an initial client offering, then we want you to do it under our guidelines.
AH:So the SEC isn't telling anybody to do an ICO. What they're saying is if you want to offer investment products and unless they fall into a few very, very exceptionally narrow categories, all off the enforcement and guidance we've seen in the market says you have to be a public company. You have to register under the securities laws, or you have to offer pursuant to a private placement exemption from registration. The ones that are used mostly are the Reg D and Reg S. Reg D allows you to sell to accredited investors. Allows you to market, but it limits to whom you can sell. It limits how much you can sell, to how many investors you can sell. Reg S allows you to sell in compliance with the laws of foreign countries to foreigners, but if you're doing D and S together, you have to make sure that your peanut butter doesn't mix with your chocolate. They have to be separated.

There's also an exemption called Reg A plus, which is most promising. This allows for capped raises, depending on which version you do, either 20 or 50 million every 18 months, but these instruments are allowed to be traded freely and you can sell to retail investors. Not just accredited investors who tend to be higher net worth and more sophisticated, maybe a smaller group of people. Unfortunately, Reg A plus has to actually be qualified by the SEC, which means that the SEC has to actually let it through. So far, they've let two out of what's expected to be hundreds that are waiting through. So right now, if you're an issuer, you're looking at some sort of perhaps not great fits for your product.
DA:Do we have a question?
Moderator:There's a question from somebody online that's asking, "Is it primarily the transferability of the tokens that got the SEC involved?"
AH:My view? I'm not with the SEC. I don't have insight as to why they do what they do, but my inferences is follows, retail investors were losing money and eventually complaining to the SEC. The classic I bought something I didn't understand and why didn't you protect me from myself? Unfortunately, this is the way of the world and when the SEC gets involved, it's hard to get them uninvolved.
DA:Let's talk about the retail investment, because really when you think about this market that emerged, it emerged through retail investors or individual invest... just regular individuals. It didn't emerge from Wall Street. It wasn't a Wall Street created product. So what's interesting about that is that if you look at the key characteristics of cryptocurrencies and what made them so attractive to retail investors and individuals were number one, they were liquid, highly liquid. There was a liquid market for it and number two, everyone was available to everyone.

So when the regulators came in, they said, "If you're going to do it under our existing framework, we have some problems with that." "Because some of our rules say it could only be available to accredited investors. Now you mentioned Reg A plus, and we did see... which I thought was pretty big news when the SEC a couple months ago came out and qualified the first two Reg A plus token offerings, which is significant. Which is great, because okay now we're moving a step in the right direction. The problem is maybe who weigh in on this is that we got that one piece, okay we could offer that to retail investors. The problem is that we don't have a qualified trading platform for digital assets now. So the SEC needs to step up and qualify a crypto ATS let's call it. Where are we with that?
AH:Sure, so what Dara was alluding is if you're trading securities in the United States, you generally have to do them on a national stock exchange, or on an ATS, or alternative trading system. These are highly regulated trading venues and they require a tremendous amount of compliance. You have to first be a broker dealer, then apply for additional qualification. You have to also work with the SRO FINRA and they are also a gate keeper of tremendous power in this industry. So ATS's do exist right now. They are waiting to be approved and green lit by FINRA.

We don't have the infrastructure right now that handles trades in tokens. We do paper shares and we do securities entitlements under the UCC very well. Everybody who's got an E-Trade or a Schwab account, you might think you own a share of Apple, but really you have something defined in the UCC as a securities entitlement that tells your broker to make an entry on their ledger that says, "Hinkes has one Apple." These are very different products. They work differently. They are custodied and handled differently. They exist in intangible format.

There is no last resort. There is nobody of any type of last resort, but your comment was "Do we need an organized training venue for these?" So peer to peer, you can trade that no problem. There are not organized markets that facilitate these trades. So if you want to see high velocity trading akin to what we have had for crypto assets in the past. We argued a need to organize some sort of formally acceptable trading venue.

Dean Kristen Johnson out of Tulane wrote a really interesting paper talking about how you could retrofit an ATS to work for crypto assets. Former commissioner Timothy Massad of the CFTC came out with a wonderful paper with the Brookings Institution August of last year talking about prudential guidelines as to how these crypto asset markets could be properly governed, but right now, we have spot trading markets for things that are not obviously securities. They're tremendously under regulated. The CFTC basically has the ability to police for fraud that would impact the margins in futures markets that it has primary responsibility for.

Then you've got MLKYC and federal money transmission and that's basically it. So somebody, whether it's the SEC or CFTC really needs to step into the void and come up with a little bit more nuanced regulation.
KK:Can I jump into this story a little bit there? So you first had the ICO, okay? So now everyone has all these currencies that are easily attainable, easy access, everyone's included into this market and now, you have a creation of these exchanges out of Malta, Seychelles and all these off shore jurisdictions that have said, "Okay, there's a thousand currencies out there. Go ahead, trade them. Trade them with one another, with someone across the world and there's no rules to this, you can trade as much as you want and now, you have a interoperable, fully liquid market of unknown currencies that people are just buying and selling, and there's now a market created for this.

Now people can now speculate on this market, because these assets that were supposed to be for only utility purposes actually have now had an organic called secondary market created by the industry itself. So all these... imagine you just raised a bunch of money for your business, okay? So you have cash money in the bank now, and now you're saying, "Well I want to raise the value of my actual network now." So what I'm going to do, I'm going to make it so that my currency is exchangeable with everyone's currency. So a peer Binance, a peer Coinbase, a peer BitMax and all these are structured out of different jurisdictions, and it's not like the SEC here and having all these securities laws.
KK:I work a lot in Bermuda, there's no securities laws in Bermuda. That's not a thing, okay? Think about that, right? Who's governing and regulating digital assets, right? So they actually put in legislation specifically for digital assets before even FATF's guidelines came out. So this is where things started getting really interesting where the US was building out the structure and the framework to do this compliantly, but what that was also doing was pushing companies to other jurisdictions and setting up very lucrative profitable businesses exchanges, which are essentially new third parties that conduct trades and made themselves quite the honey pot of vulnerability and value.
DA:But are US investors able to transact on these-
KK:Legally? I don't know. But do they? Yes.
AH:Most countries require AMLKYC, which is anti-money laundering and know your customer compliance, which means you need to show a government issued ID and then depending on their locale of incorporation, they've got a list of people that can and can't trade. Doesn't mean that everybody is a good actor. It doesn't meant that people don't circumvent IP blocks that are supposed to wall off certain people from certain jurisdictions. One other note on something that Kerem said, when you think about these exchanges, think about the wild, wild west where there is no law. There's a sheriff with a gun and that's the law. You issued the tokens, you've got your treasury reserves of tokens that weren't distributed. You want to sell them all tomorrow? Go for it. You work for the exchange, you want to front run? You want to see the trades coming in and trade ahead of that? Go for it. There are no rules.

So you can imagine with these highly dynamic markets, some of which disclose all the different trade types available. Some of which have secret trade types for certain people and not for others. You want to do whatever you want? This is the place, and you can imagine the abuses that follow.
KK:Yeah, there's a lot of skepticism around the exchanges internally actually trading against the market, because they see the order books. So it gets really interesting when you have... this is the other interesting differentiation between traditional exchanges. A stock market closes.
DA:It's 24/7.
KK:This is a 24/7 market that doesn't sleep in any... my friends that are day traders would set alarms at 2 AM, 4 AM, 5 AM just because the market's in Asia were picking up and they wanted to get ahead, get on top of that. So there was just so much more opportunity that if someone else was sleeping and you're awake, you can take advantage of that. I think Stacy has a-
Moderator:We have a few more questions coming in online. One of them was asking if we're going to cover the uses of Blockchain besides cryptocurrency, which I believe we are. But while we're still on this, one of the questions that came in was, "Do you think the SEC's actions against Kick, Veritaseum, am I pronouncing that correctly?
AH:Close enough.
Moderator:Veritaseum and Telegram is giving legitimacy to digital currencies as a future financial instrument, or as a replacement to Fiat currencies. Or are these actions harming adoption by keeping them at arm’s length?
AH:I'm not sure that these... the particular projects that were mentioned all fall into the same bucket. I think that the SEC being litigated matters gives the entire industry as well as the SEC, a chance to vet all of the positions that they've taken. It gives private parties an opportunity to try out arguments in opposition to the guidance, and it gives the courts an opportunity to do what they were told they could do in Marbury versus Madison, which is tell us what the law is.

Guidance in the form of speeches by senior level directors of regulators and private settlements aren't actually enforceable law. What they are is they're signals to the market about how the regulator is looking at the law. When a judge rules on a contested matter, and then it goes up on an appeal and eventually appellate court rules. Now you have binding law at least in the courts under that appellate court. So I look at these lawsuits as important to the development to the ecosystem, because we have a chance to concretize some of this guidance into law.

It doesn't mean that anything that happens in these cases is necessarily going to be dispositive in what the law is long term, but these are important steps along the way.
DA:Well I think that was a good also opportunity to jump into some of the other industries that Blockchain is impacting, because this really technology that is changing the world. I mean, it's changing commerce. It's effecting businesses and industries all across the world. You want to... maybe Kerem, talk a little bit about some of the other industries outside this world of finance that we're seeing some of the impact.
KK:So before we move from crypto, I want you guys to remember one high level view of it and I can share a slide that'll help. So you have utility tokens, okay? That are to have use on the network itself. You have security tokens, which are just securities that are digitized, okay? Security token, digital security whatever you want to call it, then you start having digital versions of commodities, okay? So like golds or oil, or all these are being digitized and then you actually have stable coins. Stable coin is something... keep in mind, we can talk another time, but it's just a stable currency that's either backed or pegged by an existing currency, or some sort of economic design to make sure it stays stable.

So these are just the main types of digital assets that are... call it overlapping with one another and the confusion and these SEC litigations and all this going on, is just a process of creating the lines between all of these. What is a currency? What is a commodity? What is a security and what is a utility, right?
AH:Friendly amendment, the US doesn't really use the utility token nomenclature anymore, because all of the regulators have essentially said, "We don't believe in it and we don't recognize it here." The things that look like utilities are generally said to be either commodities or currencies. Utility is just not favored anymore in the US.
DA:And just wait till everybody, all individuals are starting to tokenize all of their existing assets, their home, their car and anything that they own.
AH:I hope they don't. They will.
DA:The whole world changes, so we won't even go there yet.
Attendee:When you said digital commodities, did you mean tokenized assets?
KK:Yeah, so technically, any physical asset can be tokenized. Whether it be a building that can be represented as a security, or a brick of gold, which is a commodity. So when you think about what a digital commodity is, it's a brick of gold that someone's holding in a vault, but now we can actually fractionalize that brick. I'm not going to hand Drew a brick of gold.
KK:I could, but one, it's dangerous, okay? Someone could interject and steal it, mug you later and what if I want to give you a quarter of my gold, right? But I only have a brick, I can't just melt it down right now. So what you start creating is this digital equivalent that is backed by the gold, so the gold actually stays in a vault, or in a reserve in bullion somewhere. You can now actually fractionalize something you own and start transacting with the value of something you actually own. So let's say I transact with one eighth of my brick of gold, then I can actually now start utilizing something I own. But, Drew says, "Well actually want to claim this gold." Then there has to be that backend traditional exchange that does the delivery and settlement of all that. So that's just the next wave of things, but that does segue into the other use cases and adoption of Blockchain.

One really big one is anything really inventory management and supply chain related. When you start thinking about we've now solved the double spend problem of digital value, now we started thinking about what else has digital value? You start thinking about any product moving through a supply chain actually has value to it, right? What Blockchain was able to do was create a network where... and Drew talked about what Ethereum created was ability to use logic, to create unique environments. So Wal-Mart actually did a very interesting case, and this is one of the early supply chain use cases.

In US, they tracked mangoes and in China, they tracked pork. What they said was throughout the supply chain process, if there's an outbreak, to actually identify where that outbreak occurred in that supply chain and to quarantine it, it takes a lot of time. We end up throwing out a lot of food that actually wasn't infected and ultimately, what they found was it took them six and a half days to solve the problem. What IBM and Wal-Mart did was they created a network where all the third parties in a supply chain had access to a same ledger, okay? Whenever an asset moved between parties, every person in that supply chain could have full vision upstream or downstream to where those assets were at.

The other interesting thing about this was this process was automated. So when someone moved a shipment of mangoes from the... let's say the warehouse, the distribution center, when that shipment was scanned, immediately money was released as a transaction. So the mangoes were received, the money was distributed with no bank or middle man or anyone involved in that process. Making it more efficient and quicker and cheaper too. So what ultimately happened was after this study, what they found that it went... the time it took to identify this outbreak and quarantine it went from six and a half days to 2.2 seconds, and they were actually able to identify to the mango of what was a part of that batch.

So imagine, just the little bar codes on each mango, but they're actually creating a digital equivalent, a digital identity unique for each mango. So you start thinking of the micro level that we can get to is now, I can just not have to throw out all this food and waste all this food that's in this global supply chain network, and that's one of the big ones. So now, you think about mangoes, okay that's... who really cares about mangoes? But now you start thinking about diamonds. You start thinking about all their precious metals. You think about blood diamonds, right? Or you think about the fish you eat, right? Do you want it to be caught sustainably? Do you want your diamonds... be sure that they're not related to any blood diamond activity, right?

So now when you start being able to create provenance and authentication of products and be able to track that whole history of who handled it, who distributed it, who touched this thing. It starts really differentiating the... call it the luxury, or the authentic products in the market opposed to all the counterfeit, or all the products that might be dirty on the way they get to you.
DA:It was actually very interesting. I had heard from... it was actually from IBM working within their Blockchain group and they were talking about... someone said the quote that there's more organic products that are sold than are actually produced. Which horrified me as a mother, but if you think about it, there is a lot of fraud.

So this year's technology to not only create... it's creating making it more efficient and expeditious, but it's also mitigating fraud.
KK:Yeah, right. The interesting example with that is consumer trust. So right now, for organic food, you're really just trusting a sticker.
KK:Right? Is there really anything more than that? By some body that says, "Sure, that's organic." With this, you can actually trace back to the farm that your products came from. So there's some restaurants now, mostly in China that you'll go to a sushi restaurant, they'll actually come with an iPad and show you the full journey that tuna took to the actual fishing boat it was caught on, the name of the fisherman that caught it and actual dates and time that that fish was caught. With all the temperature records through the whole logistics of that tuna going from the catch to your plate.

So now think about how much more as a restaurant owner you can charge by saying, "Hey, those guys down the street, you don't even know where their fish is coming from. Mine is clearly authenticated by the history I'm showing you."
DA:Even healthcare.
KK:Vaccines. It's a huge one. Being able to see that the vaccine that you're distributing, that you're administering is actually coming from an authentic source, that's a massive problem that's being solved by Blockchain. Then you want to talk about the fun stuff? The wine industry, the market for fraudulent wine, learning is in the billions, right? So being to actually time stamp the barrels and be able to create that transparent supply chain for that product distribution, it starts really differentiating the true winemaker. Then you start going into all the futures that you can do with all the wines and all this, and I'll stop there before we get too deep. But the markets are compounding on one another, right?

You have all these exchanges popping up and all this liquidity being created of these tokens, but now this token represents gold. This token represents a fish. This token represents a bottle of wine. This took represents my house and so you start seeing this value of everything being put on these exchanges where they're interoperable with one another, I don't know how it's going to play out, but good luck SEC.
AH:So there are few other areas of interest that are not necessarily financial in nature. Some of which skew a little bit more humanitarian if you will. The idea of self-sovereign identity is a very important one, and the idea here is that we know our name is and it was written down on a document that's usually in the US called your birth certificate. Then all other things that you do throughout the rest of your life is keyed on that one piece of information. From your birth certificate, you get a social security card. With those two documents, you get everything else. Driver's license? Sure. Marriage license? Sure. Real property records? Absolutely.

But this all relies on somebody telling the truth once and a set of government records that are then used to spawn other government records. What if we didn't have to trust the government? What is... say a person four, five years ago a doctor in Aleppo woke up one day and realized that their city was being shelled out of existence. They run. They get their family out of there, but all of their documents are lost. Everybody knows that the Syrian government for instance, has lost control of their identification creating machinery and fake IDs are being used with impunity. What do you do? How can you prove that you are who you are? How can you revitalize your economic world when you leave, if you have no way of evidencing your identity?

It means you can't access credit. It means you functionally can't rebuild an economic life. The idea of being able to decouple your identity from some government's records and come up with other ways of proving who you are. Using this technology to me, is incredibly important and very, very powerful.
KK:Visual identity is the foundation of this industry, because now you start thinking if you... we're already moving into a digital world, right? Everyone has social media accounts. You have online finance tools and everything, but you're technically a different person. You can be a different person using... all you do is create an account, an identity for yourself. So imagine if you had one identity that you could be using for all of these digital services and opportunities. So now, you can start carrying your identity wherever the internet goes, right?

If I go to another country, I can carry on my financial records, or my health records, or anything that makes me, me. Whereas, in another country, if I... even here, I come here and I show my Canadian driver's license, they go, "No. You're not of age now, because your license is not from here." How does that make any sense? Clearly, this is a real license from a real country that's just next door, but because I don't exist in the systems here, then I'm now excluded. These are two developed countries we're talking about, right? So now you start thinking about these refugees, or people from developing countries coming to new countries, they can't bring their career with them. They can't bring their identities with them, so yes.
Attendee:How are you creating the nightmare scenario, China with its social credits? You've given them the opportunity to view everyone's background and everything, so now, if you say... if you're a plumber in Cincinnati, Ohio and you say something negative about the Chinese government, all of a sudden, you're unable to get replacement parts so that you can't do your job, because they were either manufactured or the supply chain was controlled by the Chinese government. So what you're suggesting is... I guess Star Trek did this with the borg. We laugh, but it's true. The United States, in my mind at least, was the country of the second chance. Your fore bearers came over from Europe, or Asia, or wherever and they put their old life behind and they forgot about it, and they started with a job in New York. You know what? That didn't work out so well, so they create a new identity for themselves and they move to Texas and started a ranch. Then they were successful and then they had children who were successful, but now that's not possible based on the technology you're creating, because somebody in China says, "Wait a minute, you're not doing what we want you to do." Maybe one day it's not China that's controlling things, maybe it's someone else. So how do we protect ourselves?
AH:So all these systems rely on trust. In the mango sorting system, you trust that the mangoes actually exist. You trust that each person scanning the box of mangoes actually scanned the box of mangoes-
Attendee:But if they didn't, how do you know?
AH:You could easily lie, cheat and steal and record it in a Blockchain, and guess what? That Blockchain is going to record and crystallize the lying and cheating and stealing. These are garbage in, garbage out systems. Just because a piece of data is in a Blockchain, it doesn't mean it's right or wrong, it just means it was actually in that Blockchain in the condition in which it exists on the time and date in which it was entered. It doesn't make the data right or wrong, it just makes the data accurate at the time it was put in there.

Now, all systems ultimately come down to governance. Who controls the system? Who has the right to change the functionality of the system? Who has super user powers? Who can look at the data? Right now, data about me is probably being looked at by I don't know, 50 government agencies, 50 private companies. My economic data, my travel information, where I eat, where I sleep, all of these things are already being looked at by probably a variety of different commercial and government entities. These same systems that can provide tremendous amounts of power can also be used in all the dystopian scenarios that you describe.

What I would suggest is just because we're talking about them now doesn't mean that these potential negative uses are somehow new. They're probably already happening behind the scenes now.
KK:Yeah. So what I'd like to add to that is that nightmare scenario described, that's the now.
KK:That's what happening now is that everyone has access to your data. They can steal data, transfer data, sell data, duplicate data and ultimately, your information is probably in the hands of the Chinese if that's your true concern.
AH:Well given that they... four Chinese military officials were indicted in the Equifax hack. So if you're a United States person with a credit score, odds are they already have a little bit of a dossier on you.
KK:Yeah. So now, think about-
AH:Assuming those allegations were true.
KK:Now think about a network that is actually the governance is decentralized, or the governance power is here and everything is encrypted, permissioned and there's only one single source of truth of this information. So you can actually completely block out any let's say Chinese IP addresses, or any other jurisdiction that your jurisdiction might have any conflict of sharing data with, and what you can do from this is now you can actually share insights, okay? So rather than sharing data and replicating data and creating two points of vulnerability, we can actually just keep all the data in a distributed ledger, and only pull insights out of it. No pulling of data, no replicating of data. Just the information that you need, so when you go in through the customs in China, rather than them seeing your... think about it this way.

If I go to a bar and they say, "Are you of age?" I hand over my ID. What am I handing over? I'm handing over my full name, my address, my date of birth, my identifier. Do they really need to know this ID? Think about customs. Do they really need to see everything on my passport. All they need to see is a green check mark that says I'm a trusted citizen of this world and that's it. For your, the last point, I think this technology is making it more inclusive and more collaborative.

For example, I'm... I grew up with a Muslim background and my co-founder is a Jewish guy and we work together, and we work in jurisdictions around the work talking about how this technology brings people together. How it creates access and inclusion and equality. So I would very much encourage you to think about this very differently, as an opportunity for us to come together and not so much segregate, because this country was built on second chances. This country was built on allowing people to work with one another that couldn't work with one another back home. So to me, I'm truly blessed that this technology has come and it's opened amazing opportunities for me, and it's created connections and friends for me that I probably would have never even allowed me to walk in the room.

Now, I get to call people from all over the world, all different religions, all different backgrounds, my friends and colleagues.
DA:I would add also, what's interesting is because there is no centralized controller of our data, we're moving more towards an environment where we're going to be able own our own data. So even in the healthcare industry, we're owning our health records. So if we go to a doctor, we could only show... they'll be able to see our health background, but someone else won't have the access to see that. So it's very interesting that I think you can argue both sides, but I think moving more towards a decentralized planet, if you will, where people actually own their own data would eliminate a lot of those fears.

Attendee:I'm wondering if you can envision the possibility of digitizing earnings so that... let us say one buys... I don't know, 10% of the earnings power of this year’s MIT graduates for example.
DA:Yeah, yeah. That's a great question.
KK:So that's where things do get really interesting, because due to the programmability of these assets, you can start actually programming that into what you hold. So if I... let's say hold now a digital share of a company that says I'm entitled to these dividends of the earning of that company, what actually starts happening is that that is programmed into the quarterly distribution of those profits, right? Of those dividends and now, not only are you mitigating the risk of collusion, or any sort of sketchy behavior, but you're automating the process and removing even the founders having to distribute it, the lawyers, the bankers.

So on let's say March 31st, the earnings are whatever they are. Every single shareholder automatically gets that distributed into their wallets immediately with no third parties. It's completely logic based and we can stop a lot of collusion from happening in this process.
AH:So to address your question, if you can get those graduates to sign that contract and if you can get around the legal issues involved when a third party is telling a person which job they can or can't get. When a third party is pressuring someone to try to get a raise, even though they might want to start a family instead. There are a bunch of moral, ethical and legal issues around that, and just shot chaser, you don't need a Blockchain to do any of that.
KK:Yeah, a couple questions? I guess good time for questions.
Attendee:They're already doing that with minor league baseball players.
Attendee:There's a firm in Connecticut doing that. So it's already happening.
AH:Right. So in the sporting world, we've seen that over time there was a publicly traded company called Fantex at one point, that allowed you to invest in and receive a share of earnings. There was a very public athlete that recently sold a bond, which was supposed to be related to the earnings of that athlete. We've seen this with bowie bonds. We've seen this with artists, with their social property portfolios. This is of the same genre.
KK:Yeah. Sure.
Attendee:How about in real estate where you have a property and you tokenize it or whatever, have you seen... the issue obviously is information, right? Someone knows what's going on with the property and someone doesn't. Presumably, you're wanting all these people who don't know what's going on with the property to trade it or whatever, so you have to somehow disseminate appropriate information so that there's somewhat of a level playing field for the basis of the trading. Have you seen that issue being reconciled?
AH:So there was a big push into tokenize REITs, which are equities, and the idea was that the tokenized format would provide greater liquidity and make it easier to trade. I think if we had some of the infrastructure better developed, those assets would probably have done better in the market. I think it's one of the areas that people are looking at with the most promise, because the idea of these assets is as follows. If I can tokenize 1% of every high rise in New York, I can then put together a fund that holds a really unique portfolio of assets, and then I can subdivide that. I can have between 23rd and 46th portfolio, and I want only B office. Or I want only condo, and then if you are able to get the securities laws to work in the way you might want them to, all of a sudden you have this product that's sort of unique that's available to different markets than you ever could.

You might able to go to China or to India and start to sell really unique products that allow folks that normally wouldn't get to these assets. The chance to own fractional shares in New York real estate. So a lot of these ideas are out there. They're still trying to get to products that are popular in the market.
KK:It's a very interesting way things are playing out. We were working on a real estate offering, a security token offering and the physical building was a hotel was in Italy. The offering was being structured out of the US, and the main investment group was out of the UK. So this starts showing that this is one small project, but as an investor in the US, if you can start buying real estate all over the planet and people all over the planet can start buying real estate here and start trading amongst each other, you start creating this unseen market, right?
KK:So I don't know, and I don't think anyone really knows how the market's going to behave, but these new secondary markets that are... or new assets that are moving onto these secondary markets are... it's going to be an experiment that we're all going to see evolve together, and I think the best thing that we can do is... events like this that keep us all sharp and educated, and see what's happening allows us to all act accordingly and prepare accordingly.
DA:And to your point, it's not just real estate. We talked about wine and you talked about contracts, and... so all of these are creating what we're doing is creating new investment opportunities. So what we're actually doing is we're creating this endlessly proliferating universe of new investment opportunities, which what that's doing is creating the most enormous... you think of portfolio diversification has been really the only proven strategy throughout history to mitigate risk in your portfolio. Now, what we're doing is creating this endlessly proliferating universe of these investment opportunities, so our portfolios are going to be so much diversified. Asset classes are going to become less and less correlated with one another. It's just going... we're going to become so much more efficient.
Attendee:It sounds like there's a terrific future for synthesized tranches of whatever it is tokenized assets. So this sounds almost as though there's a proliferation that could also be used counter-productively, but maybe I'm wrong about that. I just wanted to check that with you. The other thing I wanted to clarify one thing. You mentioned that we have individualized access to our healthcare, but my understanding... and I'm just focusing on healthcare, just as an example. Is that that's not really accurate. We now have a federal database and we're basically at the mercy of a government that says that we can have individual access at the moment, but basically, it can't access whatever it wants.
DA:You’re exactly right. That's what we have now, because it's centralized and the government is controlling it. If it moves to the Blockchain, it's decentralized where we're not relying on any government.
Attendee:My question is how does Blockchain basically block out parties from viewing the transaction? And that's a strength and weakness, right?

So I want to take that from a regulatory standpoint. Many of the things that certain technology can or can't do, is not normatively good or bad. A data structure like a Blockchain I a tool. A screwdriver can be used to build a house or to stab somebody. It's not normatively good or bad. As to you question on healthcare records, there are technologies available to do all kinds of wonderful things to enable us to have access to our healthcare records and to voluntarily share and disclose only what we want to and to financialize them if we want to in certain ways.

But we're hamstrung right now by the regulatory environment. One of the most complicated regulatory environments that we have in the United States. So while I'm bullish on the technology globally, there's a lot of places where the potential uses of the technology and what's available and possible under the existing regulation don't quite line up yet. Health care's one of those places.
KK:Yeah. I mean, healthcare is a big topic in the US and coming from Canada, it's similar but different. But ultimately, it is... government has that ultimate access into everything, but what Blockchain is doing is actually making it so that this information doesn't just lie with the government. It's distributed to an open or closed network. How? That's the nature of the technology. So we could go into a really deep technical presentation, which I encourage you to reach out afterwards and we do workshops, and we do technical education, executive education, all that. So... do we have time for more questions?
Moderator:I would like to thank all of you. I know it's getting past the time we promised we'd get you out of here. I know it's been a really incredible discussion and I thank you, and I believe our presenters are available for a few more minutes. If you're here and you'd like to stick around and speak to them. If you're online, please feel free to email us and we'd be happy to put you in touch. So please don't hesitate to reach out. I request one thing from both our online and our in person audience, and that is please give us feedback. We'd like to make these sessions as valuable as possible.

I can tell by the group sitting here, there's a lot more questions to ask. So we'd like to continue this discussion with you in an informative way. So, as you receive our survey, please let us know what you'd like to hear more about. How you'd like that to happen and we look forward to more events like this, thank you again.
DA:Thank you.
KK:Thank you.

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