This Is Why Digital Currencies Need A Self-Regulating Organization

08/15/2017 08:23 pm ET Updated Aug 17, 2017

Co-Authored by: John Gotts, Founder, and CEO – Stokens.com

The dominoes have started falling, and they are falling fast.

On July 25th the SEC let the world know they think some tokens are securities and specifically the DAO token. India, China, Japan, Singapore…announced they are going to regulate some tokens as securities and will likely decide which tokens are, or are not, securities. The SEC could begin investigating individual tokens, creating great inconvenience, cost and damage to the value of that token with the potential years of uncertainty about the outcome weighing on the minds of that specific token’s owners.

There is also uncertainty for centralized exchanges, and perhaps even decentralized exchanges, who allowed the DAO token to trade; or how about all of the tokens that will/may be deemed securities trading on those exchanges now.

Sisters & Brothers, let me please suggest something that you may already know:

  • NOT ALL TOKENS ARE SECURITIES - and who can define this better than us?
  • WE ARE LEGALLY ALLOWED TO REGULATE OURSELVES

Did you know that participants within an industry may create a self-regulating body that self-governs and polices themselves? The SEC is not a government agency, rather they are a self-regulating body that was created by the member exchanges to protect and educate the public about securities. Similar agencies exist around the world providing the same service to their own citizens as the SEC does in the United States.

We, the Crypto Community (the Community), have a right to do this for ourselves and do it globally. We have a right to define this new industry we created and govern that industry to protect and serve individuals and/or organizations that participate in all things crypto.

BOOM!!! Think about that. We can be regulated OR we can regulate ourselves, and the only thing to decide this fate is whether we choose to organize and take action.

Some Background On John Gotts And Why Deciding Self-Regulation Is The Key

In mid-2014 John realized that smart contracts could provide a means for the digital trading of equity. In November 2014 he visited his friend, David Blumberg, at Blumberg Capital in San Francisco and drew a sketch on the whiteboard of how one could trade private company equity utilizing the blockchain and smart contracts.

Unfortunately, at that time the necessary components weren’t in place and it seemed that legally they would not be able to pursue the crowd (at least in the US) because non-accredited investors cannot easily participate in early-stage funding. Simply calling a security a “coin” or “token” and basing it in a pro-crypto country does not negate the fact it’s still a security and cannot be marketed, sold or traded amongst non-accredited investors in the US or other countries with private company equity restrictions.

Over the next 2½ years John learned laws pertaining to broker/dealers and worked with the attorneys representing AngelList (Pillsbury and K&L Gates), learning to operate a website like angel.co but focused on family office and institutional investors. Then in May of 2017 he had his light bulb moment and contacted a top law firm in the space, representing groups doing ICOs from Mastercoin to Bancor. This particular US firm has around fifty lawyers dedicated to crypto. They told him, “they’d been waiting for me to come along with this legal way of doing things for 2 ½ years.”

Here’s the idea in a nutshell:

If you can do something with paper documents, lawyers, notaries and banks then you can legally add efficiency with smart contracts on the blockchain, eliminating paper documents, lawyers, notaries and banks, saving both time and money.

How do you enforce it all?

Companies like Trulioo allow for rapid KYC/AML and when married with global laws, rules & regulations regarding securities baked into the blockchain or smart contracts we can ensure each owner of a security token complies with the laws where they’re domiciled.

KYC is Know Your Customer, and a requirement in the fight against money laundering.
KYC is Know Your Customer, and a requirement in the fight against money laundering.

Hence, you can legally trade private company equity amongst accredited investors globally more efficiently utilizing smart contracts on the blockchain and be more compliant legally than with a typical venture or brokerage firm.

John then held many meetings in the middle of May 2017 with the founders of the top altcoins in the world so he could discuss his ideas and hear their opinion, knowing they’d spent exhaustive hours and money on lawyers navigating these legal landmines.

John was introduced to one of the Ethereum founders, Amir, and had a terrific two hour-long conversation, concluding that the idea had the potential of a financial tsunami. He later told me that the “hair on my neck stood on end hearing that from such a true altcoin pioneer”, and they agreed to meet in person when he arrived in New York for Consensus.

Tim Draper is an American venture capital investor
Tim Draper is an American venture capital investor

The first morning in New York John called Tim Draper and expressed concerns that he, AngelList and others were calling coins investments when many are non-security tokens. It hurts crypto when people start calling every altcoin an investment. A coin might be a currency, game, charity, fat protocol, access or utility token, etc. He said his team had been trying to figure out how to do a token-based venture fund for the last three years and they both agreed to speak again soon.

“I like Tim. He’s a super smart guy who believed in BTC early and put non-trivial investment into blockchain companies along the way. Tim’s smart, pro-crypto and he seemed to appreciate the security token solution.”

After John hung up from the conversation with a firm belief that security tokens have tremendous importance not only as a process for legal tokenized investment, but they also serve as a clear differentiator between what are and what are absolutely not investments, they provide granular investment liquidity. Digitalized security tokens also provide liquidity for employees and founders. They provide the use of a liquid equity as a currency for acquisition of competitors, etc., as large companies often do.

That night an early BTC miner decreed over drinks that the “security token” should be called a “stoken” and it stuck; the Stoken was born.

John met coin founders during the day, who each pledged to serve, protect and grow the Community and join the cause. That night he reserved an area at the top of the hotel and invited Blumberg, Amir, Ryan from Dash, Sergei from Chronobank, and others for conversation about what he was then referring to as the Stoken Brotherhood, which later became the Token Exchange Self-Regulating Body; and just like that, the TXSRB was born.

John was later blessed to hang out with the likes of Jed from Ripple who later started Stellar, Ned from Steem and Steven Nerayoff, who’s an absolute giant in the altcoin space and structured the Ethereum ICO.

He met the legendary Charles Hoskinson, who shared late night pizza slices and stimulating, brilliant conversation. He’s pretty much the founder of the altcoin space, helping guide pro-altcoin Swiss law. Charles founded BitShares with Stan & Dan Larimer (Dan also founded Steem and most recently founded EOS) and later Charles was a founder at Ethereum and is currently the champion of Ethereum Classic.

John also spoke with both David and Dominik, the founders of IOTA, who were immediately supporters of the TXSRB, as they are very proactive protecting owners of IOTA tokens. John also spoke by phone with Sergey Sholom from MobileGo, Travin Keith of Ardor/Nxt, the MaidSafe founders, Iconomi, Synereo and Wings…all of whom said they supported a legal way to tokenize the purchase of securities and all are dedicated to strengthening and growing the Community while protecting owners of altcoins.

Wednesday and Thursday of this week, John worked with t0’s (t zero) team (thanks to Joe, Ralph, John & Max), who spent time and tens of millions of dollars building an exchange for digital assets. Attorneys were present and on the phone. I think it was John who was first to suggest that everyone can legally create a self-regulating body and we thank him for that. Steven and Charles stopped by as the final litmus testing experts and they all agreed that stokens provide a legal way to trade securities on the blockchain, and in fact are safer than traditional securities.

John painted this picture to show that he asked some of the smartest people in the crypto industry (if not the world) to try to break the Stokens model and they did not break it. Furthermore, they ALL agreed that they need education, rules & regulations for the Community to grow from $100 billion to $1 trillion over then next three years and beyond.

We Propose Creating A Self-Regulating Organization

A Self-Regulated Organization (SRO) is a non-governmental organization with power to create and enforce industry regulations and standards, with the greatest focus on the protection and education of investors. As such, the industry will accomplish this by establishing rules, which promote ethics and equality. To regulate ourselves we are creating internal mechanisms, controlling business operation flow for exchanges and token creators, and with external agreements between like businesses.

Financial Industry Regulatory Authority, Inc. is a private corporation that acts as a self-regulatory organization.
Financial Industry Regulatory Authority, Inc. is a private corporation that acts as a self-regulatory organization.

The Financial Industry Regulatory Authority (FINRA) governs from within while avoiding ties to a particular country's governance, which is useful when activities are global and the TXSRB will do the same.

Once the TXSRB has set rules, regulations, and provisions guiding member activity, then those rules shall be considered binding and any failure to operate within the member rules & regulations will have consequences, which shall be spelled out clearly when an organization applies to be a member of the TXSRB.

The control and power given to FINRA shall be used as a guidance tool for the TXSRB to be granted the ability to audit exchanges and member firms, ensuring compliance with the TXSRB standards and rules. This shall be done to promote ethical practices and to improve member transparency within the industry. Further, the TXSRB shall oversee any arbitration between exchanges, companies, investors or other involved parties.

The TXSRB will make it a point of great emphasis to educate investors and owners of altcoins on proper business practices expected from all members. We shall create and make available information regarding fraud or other bad behavior within the Community or the crypto industry, which will help investors and owners of non-security tokens understand how their ownership works, how special-purpose vehicles function, how stokens and altcoins are valued and how they trade, all to diminish possible risks in the stokens and altcoin industry.

The TXSRB is a private organization but is subject to any government-imposed regulations to the extent an applicable governmental regulation or law applies, supplemented by the internal regulation put in place by the TXSRB.

We are asking everyone to come and register at the TXSRB.org and we want you to tell your friends and share this article.

If the industry does nothing you must not expect that nothing will be done; it will simply be done for/against us and certainly without our opinion. If you own an exchange and would like to join the TXSRB or if you’re the owner of a token please join and spread the word among your peers.

Bitshares is a pioneer in the Blockchain development industry.
Bitshares is a pioneer in the Blockchain development industry.

The Token Exchange Self-Regulating Body is pleased to say that we are endorsed by Cryptonomex, consisting of the founding members of BitShares, and who owns the MIT license for the Graphene blockchain which powers BitShares, Steem, Peerplays, Muse Blockchain, YowYow Social Media Platform, the BitShares Decentralized Exchange (DEX), Openledger Exchange and Bitshares Rudex Exchange. Their team has made a pledge to help build the TXSRB laws, rules & regulations, which will in short order make BitShares the safest, most-legitimate exchange in the world of crypto. The Token Exchange Self-Regulating Body gives thanks to Stan, Michael and the Cryptonomex team for making that pledge.

Going forward The Token Exchange Self-Regulating Body will build a wiki containing the Rules, Regulations & Laws. They will give everyone an opportunity to vote utilizing a free membership token. TXSRB is looking for moderators in each country to translate and to provide local security rules, regulations & laws. More important, TXSRB is looking for passionate volunteers who can work with local governments to teach them about the benefits of tokens.

There are thousands of different tokens or digital coins in use today.
There are thousands of different tokens or digital coins in use today.

One of the first things to discuss as an organization are the different types of altcoins.

Here Are Examples of Non-Security Altcoins:

  • Charity – Coins used to raise money for a cause
  • Games – In-game purchases for magic swords, gaming…
  • Reward for Work – Utility for getting someone to test, mine, refer…
  • Software/Site Access – Provides Access to something of value
  • Coupon – A digital coupon, redeemable for something of current value
  • Currency – A digital token tradable for goods or services
  • Network of Physical Access – Provide access to somewhere that is valued (i.e., an altcoin sale or nightclub)
  • Fat Protocol – The software becomes more valuable the more apps and businesses are built on top of it. Union Square Ventures posted a great article about fat protocols here.

Please join the Token Exchange Self-Regulating Body; EVERYONE is invited.

Together the Blockchain Community is unstoppable. Let’s all today commit to be Musketeers. Let’s make our Community mantra “one for all and all for one” and we can do anything.

About the Co-Author:

John Gotts is the founding visionary and CEO of Stokens.com, the first venture firm providing granularity and liquidity of funds and the first to truly understand and offer legally tradable security tokens.

John is also the founder of the non-profit Token Exchange Self-Regulating Body, where he's made it his mission to educate and protect investors and holders of security and non-security altcoins.

Since starting his first company at the age of seven, John has dedicated more than four decades to being an entrepreneur and is passionate about helping people succeed.

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