#268 Andy Bromberg: CoinList – Capital Formation for the Crypto Industry

Transcript

[Music] this episode of epicenter is brought to you by Microsoft Azure configure and deploy a consortium blockchain network in just a few clicks with pre-built configurations and enterprise grade infrastructure spend less time on blockchain scaffolding and more time building your application to learn more visit AKA ms / epicenter hello and welcome to epicenter my name is fran carmen crane and my name is Prateek and yeah so we're gonna go to our

conversation with andy Bromberg in a minute he's the co-founder and president of coin list which has done you know massive amount of token sales and thinking about the forefront of regulated token projects in the US we will talk about the IC o---- is that they facilitated and what they've done for them as well as the regulatory environment and how has changed with the recent sec crackdown on several ICO projects and will also talk about where he sees tokens and token regulation go in the future but before we get to this conversation we do have a small announcement to make or a big announcement well small amounts so mayor had his first child just about a month

ago and so he's taking some time off from from hosting podcasts he's fully on the baby family as well as course one so he's going to be back a few months from now hosting episodes but if you miss him that's why and yeah so congratulations to May her and with that let's go to our conversation with Andy we heard today with Andy Bromberg Andy is the co-founder and president of coin list of course many people will have heard of coin list coin this is token platform or token sale platform in u.s. that took a very kind of approach focus on compliance and they were behind some massive token sales including the file

coin one step in very much on the forefront of figuring out okay what does it mean to do like a compliant token sale in the in the American framework so yeah thanks so much for joining us today on you thanks for having me so I guess to start off I saw that you were so you went to Stanford as an undergrad and then you started the Bitcoin Club there how did you originally become interested in crypto yeah yes it's an interesting story I was at Stanford studying math and computer science and took this class taught by professor named Balaji Srinivas on there's a name some people might recognize he's now the CTO of coinbase and and was the CEO of earned comm and before that a partner andreessen horowitz but before that he was teaching

at at Stanford and he taught this amazing class called startup engineering and a bunch of us took it there were these hackathons he built really cool things and then after the class a small group of us kept spending time together including with Balaji because we were just really interesting some of the topics that we were talking about and and he ended up saying to us bitcoin is going to be important you guys to be paying attention should buy one sadly not not enough but you should buy one and and we should get involved and so that that group of people spending time together after that class ended up becoming the Stanford Bitcoin group and there were there were seven of us students that started it in Balaji and Vijay Pandey who was another professor

and another partner conversin Horowitz and we spent a bunch of time over the next couple years doing research into Bitcoin it was really as you know this is around the same time epicenter started really around the around the time was only Bitcoin people weren't talking about blockchain technology or tokens or anything like that and so we spent a bunch of time to research on on Bitcoin its applications building a cool little toys you know doing some evangelism running around pitching people on the importance of crypto so that was a really fun experience back in yeah 2012 2013 2014 and then he went on to a found coin list with Graeme Jenkins right yes yes so there's there's five of us founders at

coin list and in the story with with coin list getting started is that protocol labs who builds file coin wanted to run the file coin token sale they knew was going to be big and important and a milestone for the space and so they started putting together this place to sell their token and in the process they realized they needed some help on compliance front so they brought an angel list you know prominent private fundraising platform here in the US and brought an angel list and they worked together to do the file coin token sale and midway through that process they step back and said wow this is really hard it's costing us a lot of money to develop the product to legal and and every single token sale is going to need

to do this exact same thing this should probably anew and accompany and so coinless ended up spinning out of Angelus as an independent company last year a little over a year ago to do exactly that to to be a platform for the best digital asset companies to manage their token sales and and you know the kind of five founders of coin list myself and then for folks Graham Paul Brian and Josh from from angel list came over and got this thing started but you mentioned you became interested in Bitcoin right very early on and had this involvement with in the Bitcoin Club but then you know coinless was pretty recent so how he decided at the time you

didn't want to go fully into space what was the reason for that no it's a it's a good question I left school in 2014 and started a company totally unrelated to crypto called side wire in the media space political media space and I maintain my obsession with crypto throughout that time but the reason I didn't go into crypto full time was that I felt like it was a coin flip at that point this is 2014 I felt like it was a coin flip whether or not there was going to be one cryptocurrency crypto asset cyber coin whatever we want to call it whether there was going to be only one you know Bitcoin was going to be it or if they're going to be a ton of tokens coins digital assets and at that point I

just couldn't tell I thought it was 5050 and I was looking at it and saying startups are already hard enough they have a massive failure rate I don't want to add an additional 50% attrition rate on to that because anything I could think of doing relied on one of those two outcomes relied on one of those two theses being true and and I just felt like I couldn't you know tell and I didn't want to add a 50 percent failure rate on to what is already a very hard thing to do and so I said you know what I'm gonna come back to the space when I feel like that question has been answered I now feel like that question has been answered there's going to be more than one cryptocurrency out there and you know obviously coin lista is predicated on that that assumption and

so that's what kind of emboldened me to come back into the space and you know work on it full time now that I feel like that that decision has been made so here whether CEO until earlier this year and then stepped down and became the president what's the story behind that yeah it's a great story um so an interesting thing about crypto that differentiates it from a lot of other industries is that because it's so early you guys know this well it's global and uh and the value of being out there publicly is really high because there's just a lot of uncertainty there's a lot of confusion out there and so having a message that's out there is way more important than in most startups where

you should go in and just focus on kind of building a compelling initial product and shipping that it's important that we spend time kind of out in the world and evangelizing where the space is going and so earlier this year I was spending all my time doing that I was you know working on sales working with issuers trying to guide people in the right direction I was traveling doing all this and and we were such an early stage company you know 10 or 15 people at that point that I just wasn't spending the time I needed to be spending back home at the company and so we said you know myself the board we said we should really bring someone into we're on this company so I could do what I do best which is getting out there and kind of interfacing with all these external

parties that are critical in the crypto ecosystem and we found the perfect person so Paul Davison now the CEO of coin list came over he he was running a big chunk of product at Pinterest he'd sold this be his last company to Pinterest he'd worked at Google on metaweb done a whole bunch of amazing things and it was just a perfect person to come in and really lead coinless the company which which freed me up to go and focus on all the external facing things that I think are really important in this industry among these external things what are the ones that you spent most time focusing on yeah it's a pretty wide variety but I think the highest leverage piece is sitting down with really high quality token issuers that maybe don't have it

all figured out so it's you know it's interesting when you start a start-up there now years decades of kind of case studies built up on how to start a startup what you should be doing what the best practices are how you should structure things what is a seed fund race look like what does a serious a fundraise look like in the crypto space we're so early and especially within tokens in particular we're so early that there's just not a lot of data points and so these amazing teams are coming in and saying well we know how to do our thing which is you know building this product building this platform you know supporting this this token network but we don't really know how to structure our sale we don't know how to you know market it we don't know how to build a

community we don't know how to do all these extra pieces and and it's something that we're in a unique position we've seen now you know thousands of these token sales and and can figure out how to help them so that I think the highest leverage thing I do is sitting down with high quality teams distance isn't something that we charge for it's not a service of ours but if we think it's a really high potential project and we might want to work with them in the future I'll spend hours sitting down with them going through how should you structure your sale how should you think about strategy going forward how should you think about you know the the different dynamics in this network building a community and and helping them make sure that they have the best chance of being successful and that then is what leads to really

successful token sales really successful airdrops really successful you know community building efforts and so that that time that we spend with those issuers trying to get them on the right path I think is probably the most valuable thing that we do so once you've unbought at these projects what kind of services do you offer to them yes a coin list today offers for services and I'll sprint through them the first is the service that we're kind of most known for which is the the full sale product this is what we did for file coin block stack props origin trust token but only those five and and I say that just to note that it's it's a really high we worked at five in the last year or so out of about 2,500 that have approached us and so super selective on that when

we do that we host the sale on our platform so we handle the compliance kyc AML accreditation if that's relevant the transaction process of the document signing the token distribution really the whole nine yards of you know logistically running the sale and then we market the sale to our community of investors and we've got many many accredited investors in the platform ranging from you know your average accredit investor all the way up to institutions funds endowments you know family offices and so we work on both logistics of the sale and also potentially helping to bring capital in so that's one service the second one is coin lists token sale manager which is effectively the same but just without the marketing and endorsement so it's just the infrastructure to run the

tokens sail again compliance transaction processing documents on token distribution but without us kind of endorsing the project or we're pushing it to our investor base accepts the coin list token sale manager product our third product is the coinless airdrops product where we help issuers give away tokens we've built a structure that's compliant in the US and internationally to give away tokens even if they might be securities and we have a big community to to send those to the the first one we ran was the Definity airdrop which is really exciting they gave away thirty five million dollars worth of tokens to tens of thousands of users and we have some more exciting ones coming up soon on that and that airdrops product will also include things like developer bounties and kind of proof of care systems we can talk

more about the future of that but we're really focused on effective targeting there and then the last product who actually just announced yesterday is that is coinless build which is our product to help token networks host online hackathons to build their developer communities with to online hackathons or an amazing concept really fit in with the crypto ethos of being global and distributed and open democratic where people can go and build on top of these these platforms our first hackathon we're hosting for 0x which is really exciting awesome team that will happen in January and every participant that submits a project gets $100 and 0x tokens there awesome Grand Prizes that Xerox has donated $10,000 in Xerox tokens for the

winner and it's focused around bringing decentralized markets to the masses and you know how can you build compliance something's decentralized markets how can you do interesting things with NF TS and gaming on these decentralized markets how can you you build an ecosystem of decentralized finance and so we're really excited about that hackathon and then we have a bunch of other ones in the pipeline to keep keep the support going and keep building these developer communities so those are the kind of four coinless products full sale token sale manager air drops and coin was billed and of course more in the pipeline as well I'm curious regarding the full sales versus the you know the the token sale manager why didn't you guys just choose to have you know an open platform where

you have like a wide variety of projects that can do token sales through that yeah I think a big piece of it for us is that the space is so filled with noise right it's really hard to separate the signal from the noise and because it's so young most investors don't have an ability to really effectively do diligence on these projects and it's getting better every day but especially if you look last year investments just didn't know how to determine if a project was good or not and we said well we think we have that competency in-house let's make this a little bit easier for them we're not gonna say that every one of our you know coinless full sales is going to be massively successful but we've at least done our diligence and gotten comfortable with the idea of the token occurring value in

the long term it being useful the team being good the product being good the market being big and and I just think that's a really useful service in the space we of course want anyone to be able to run token sale and that's what I took it still managed our product is for being able to separate out the signal from the noise little bit so that investors can come and say okay I have confidence that at least a minimum bar of diligence has been done here now I can do my own diligence make my own decisions but I can feel comfortable with the projects listed on this platform I think it's a really valuable service we've providing to the space and and just you know having that aura of high quality projects especially in a time when there are so many low quality ones I think it's really important for

for us and building the company of the future interesting so when you say you do you do J due diligence on these projects do you mean in a legal sense in the in the sense that you determined that they're not scammy and not a security and so on or do you mean that you also look at their token model and see whether you think that's going to work in the future yeah and whether it makes sense from a from a crypto economic point of view yeah all of the above so it's generally kind of six things that we look at when we dig into one of these projects the first four are things that I would say you should do for any startup you're investing whether it's a token or not look at the team the product the market

and the deal terms right so is it a strong team do they have a compelling product is it a big market they're going after and did the deal terms make sense there are the terms terms that you should think about investing at so we do that and then once we get past that there's two things that are kind of unique to token diligence instead of startup diligence one is what you were saying the legal diligence now if you're investing in a normal startup at their seed round no one's really innovating on the legal structure they're the financing of the company and so you don't really need to do that much legal diligence but in the token world obviously people are innovating left and right on legal structures and so we we have to get comfortable with how they're operating from a legal perspective and the last piece is the token economic

piece and that means you know us getting confident that the token needs to exist that the token will accrue value in the long term that all the parties in the network are properly incentivized or disincentivize to behave in the way that's desired by the network and I'm really knowing that it took an economic model I think is that's a place where a lot of teams we talk to fall short there's obviously a massive class of scammy low quality projects that we see and we can you know kind of throw away out of hand but the hardest conversations are ones where we sit down across from a really good team with a compelling product and a big market they're going after and we look at them and say listen we just we we don't think and we could be wrong but we don't think

your token needs to exist or we don't think it's going to accrue value in the long run or we think that there's some flaw in the token economic model that will cause you know an incentive for the network to be attacked or you know a disincentive for key party to act in the right way and and a lot of projects because this kind of field of token economics is so new don't you know don't really have the ability to put that together and that's where they fall short so you mentioned the five token sales I said which tended to be you know large and well-known projects but I think those were all last year now have you guys done token sales this year yeah or is it in trust token word this year but they you know I think few and far between so one thing that our token sale

manager product is use for the white label one is private sales and some of those are really high quality projects that would absolutely pass our diligence for the first category but they don't need the marketing because they're choosing to run a private sale and and do they just want the infrastructure so what we saw was a lot of the high quality projects in 2018 decided to run private sales instead of public sales and so we we still helped them of course but just not in that public manner because they that wasn't the service that they were they were looking for there was a recent post announcing that Cronus is now 100% free for investors and all the money raised goes to the project itself so how does kindness make money yes we moved it pretty simply from

charging investors to charging projects and I think what we're seeing was that you know investors don't want to pay they're already paying for their investment and and projects don't really want their investors pay they'd much rather pay themselves out of their own kind of treasury management to financial budgeting then making their investors pay and so we just changed kind of flipped our model around and and we've you know we think it's gonna result in dramatically happier investors and and issuers so pretty simple change to be totally honest but I think the optics of that matter a lot to investors in that and we want to make sure we're serving everyone in the best way possible and can you speak about you know what if he that Utah you know that charge both

through the token sale platform and and the manager yeah so it really varies depending on the deal I think for the full sale product it tends to be a percentage of the funds raised because we're actively participating in you know kind of pushing the deal out there and getting capital into the deal so we we take some percent percentage of the funds raised on the token sale manager product that's price was kind of a flat fee very low tens of thousands of dollars and the name above a certain number of regressors a per investor fee of processing costs the gana varies on the exact details of the sale but that one's more of kind of like a SAS model while the full sale business has a percentage based model if you've listened to previous episodes with Marley Grey and

Matt Turner you know that Microsoft is committed to providing enterprise-grade tools and infrastructure for blockchain developers well the azure blockchain workbench is perfect for organizations building consortium networks take the etherium proof of authority template for example it's ideal for permission networks where consensus participants are known and reputable if the area manager has on chain network governance that leverages parodies extensible proof Authority client each consortium member has the power to govern the network or delegate their consensus participants to a trusted operator and parodies webassembly support allows developers to write smart contracts in familiar languages like C C++ and rust as your blockchain workbench was created on the same principles that drive all production services in Azure so you know

you're relying on secure redundant infrastructure that can scale and with built-in services like authenticating api's off chain databases and secure key management services you can scaffold your infrastructure in just a few hours to learn more about Azure blockchain workbench and how Microsoft is advancing blockchain usability and enterprise check out a kms slash epicenter and start building today we'd like to thank Microsoft Azure for their support of epicenter so you can't really talk about token sales without talking about regulation and so what's the regulatory framework which coinless has used sofa yeah so our view is that and you know we're generally focused on people that touch the u.s. in some way

so whether it's a u.s. issuer or it's an international issue but they're hitting US investors that's the place where it makes kind of the most sense to start when you talk about international pieces as well but from the US perspective SEC chairman Jay Clayton has said a number of times he hasn't yet seen an IC o---- that wasn't an offering of securities so we take that same stance we think it's possible and there's actually some coming up next year that were excited about potentially being non securities offerings but thus far we think that functionally every ICO has been or token offering has been an offering of securities now very important there is that that does not imply that the tokens will always be securities it just means that at the time of the initial offering

when the issuer is selling them to a first set of investors the SEC thinks that those have been securities so most often projects that work with coin list use something like these saft framework and now there's a bunch of different names for different documents but they all are kind of get back to the same core idea which is we're going to sell you a piece of paper it's called the shaft simple agreement future tokens and this piece of paper is a security so you're participating in a regulated securities offering and asked to be registered or exempted appropriately and we can talk about the different options there at some point we think that the underlying token will no longer be a security and at that point this piece of paper will turn into or output those non

security tokens and then you'll have this wonderful non security token in your hands as a result and so that kind of is the overall framework that most issuances that have worked with coinless have used and and it's something we still believe in at a high level that that concept of we're gonna sell you a a piece of paper a security and eventually it's going to turn to something else I think the big open question is where's that line how do you draw that line how do you decide when something is no longer a security we've lots of thoughts on that but but that's kind of a big outstanding question I think people have for the SEC it's become clear that it is possible to have that line and now it's just a matter of drawing it and where exactly

it falls and you know one note on that I think the clearest encapsulation of why that transition is possible comes when you put two senior SEC official statements together SEC chairman Jay Clayton saying I haven't yet seen an IC o---- that there wasn't offering of securities and then SEC director of corporation finance bill Hinman saying he doesn't think aetherium is a security and so you put those two together J Clayton certainly seen the etherium I see oh it would be kind of absurd for him to have missed that one and so if those two officials statements represent the final position of the SEC which of course is in question but that we think is likely then you you hear you know effectively the etherium ico is an offering of

securities and then you hear aetherium is not a security and and that means that that line is possible to cross at some point and it's just a matter of when and how and those are questions that we are actively trying to get good answers to so what are your fault so far what do you think are I guess on the one hand likely stance that you'll see there's take on this question and what do you think would be a good way to to actually answer that yeah the the two clearest paths I have seen so far four criteria that would mean something is not a security one is a pretty simple one which is that you hear a lot about

the Howey test which is this this test of whether or not something in the US and investment contract which would mean it's it's a security and you know it satisfies these these four prongs of the Howey test so that there's an investment of capital and a common enterprise you know made by the efforts of others and with an expectation of profits and and that last prong is an interesting one because we have this wave of stable coins they feel like the last six months have been the the the half year of stable coins everyone's talking about them but an interesting kind of foot-in-the-door strategy here is that stable coins by definition if you sell the stable coin itself not some

associated token that changes in value based on the success the stable come up with a stable coin itself by definition doesn't have an expectation of profits if we have a stable coin that tracks the US dollar and someone invests with US dollars I can pretty definitionally say that they are not expecting profits from buying that stable coin and so that would be a really interesting thing to go and say we're selling the stable coin we think it you know is a good one because it fails the how we test it's not an investment contract because there's no expectation of profits and so then all of a sudden we would touken out in the world where it's not a security and that I think is a really effective foot-in-the-door strategy it doesn't help most tokens that do kind of have

floating prices and very but it would be a way to get a token out there that's it's not a security so that's one I think the more interesting one and that's still a little bit up in the air is what Bill Hinman again the the director of corporation finance who talked about theory of not being a security said which is that it's sufficiently decentralized you'll hear this phrase tossed around a lot sufficiently decentralized what does that mean great question we have no idea but that that concept he is kind of implied would mean that something is no longer security because it's a it's kind of not dependent on the efforts of others not depend on the efforts of this this kind of issue in party and so I think a lot of attention is gonna be focused around what does it

mean to be sufficiently decentralized how do we kind of set some sort of quantitative or semi-quantitative criteria for that and then how can token networks fight to get there and I think that's the really interesting next frontier in terms of Security's regularly from the US on these on these assets and that's very interesting that you say it can depend on the efforts of others as long as the others are not centralized I think that's that's a super interesting point people have also been giving out a lot of what's been called utility tokens right so that in principle should are designed not to be securities in a way but you think they're being perceived as security so how what what kind of uses what these

utility tokens actually have to have in order to not be as security yeah so that's it's an interesting point again I'm speaking largely from kind of a u.s. perspective here so you know obviously laws are different in every country every state province everywhere has a different set of criteria I don't like the term utility token and the reason I don't like it is because it carries with this implication that if your token can be used for something it's not a security that is not our belief there are many securities that can be used for for things and just calling something utility token and saying you can use it to us does not mean that the asset is not a security and so we we don't like that term I prefer the kind of convoluted and painful to say but you know slightly

more clear term non-security stokin right so you've got security tokens and things that are non securities and it's a matter of figuring out a way to to get them there and so I I believe in the concept of non security tokens utility tokens you know it turns out that according to Bill him and the etherium is one of those but the question is kind of how do you get there and what is that criteria and and so I don't think that I think people have kind of had a reductive approach to that and said if you can use it for something it's fine and I don't think that is true at least in the US but I also think more broadly the utility tokens security token or security soak and non-security soak and divide is actually not a terribly helpful divide because it's

purely a regulatory classification it's a little bit to me like saying you know dividing all websites in the world into regulated and non-regulated websites that's not a helpful division of websites you know regulated websites could say could sell tokens or guns or alcohol or any you know thing and those are all wildly different businesses that don't have a lot in common with each other other than the fact they happen to be regulated in the same way securities tokens can represent a whole bunch of different things and have wildly different characteristics and and not have a lot of similarities and non securities tokens can look totally different from each other in the same way that you know Facebook and Google and Amazon are very different businesses

these non securities tokens are gonna be very different too so I think it's kind of the next conceptual step for the industry is going to be giving more critical thought to what are the actual categories of tokens how do you you know in the same way we divide websites into social media networks and search engines and e-commerce sites and you know have this kind of taxonomy of of types of websites I think we need that same thing for tokens and I think so far we've taken this this kind of simplistic approach of saying utilities over the Securities token and that and I don't think that gives us enough detail to to really you know classify these assets I wanted to ask another question on on your point regarding you know tokens

being you know the thing around being sufficiently decentralized you know let's say you have something like a maker where it I mean I think originally it was called shares right in any way you have this token which is this kind of governance token and you have a revenue from the success of the system so if I'm just going out and I'm buying this hook and I mean in some way I am you know doing it probably with the expectation of profit and and probably from the effort of others yet at some level it's decentralized right there's no like central foundation necessary that has the decision-making power so do you think in general this is going to be an approach that you know that works and

that you have like corporation like things and I guess you could even think over here iam in some way as like it you know there's some similarity or even Bitcoin right you could say hey there is this decentralized organization corporation like thing but you don't have to central party so you think like removing the central party is gonna be the key factor yeah it's an interesting question so first of all I think just to inject the necessary legalese here first of all I'm not a lawyer and second of all you know determining whether or not something is a security is in the US was called the facts and circumstances based analysis which means it's it you have to look at the facts the situation the

circumstances under which you're evaluating it and and so it's a really nuanced thing and reasonable people will disagree on whether or not something's of security over and over there are not really lots of bright lines about whether or not something fits into that category so it's tough to say I do think that go into the sufficiently decentralized point even just thinking about that phrase colloquially I think that it implies two things one it implies a lack of a central party right so if something sufficiently decentralized almost definitionally that means there is no central party that can control the system so to that part of your question yes I think

the central party is part of a strategy that people will use but I also think that even beyond that it implies a certain degree of decentralization and again defining that phrase is really hard and I don't think we have clarity on what that means yet but if you remove the central party but it's now a duopoly and you know let's imagine a system that's governed you know proof of stake governed and there are two parties that each have 45% of the network right and then a variety of people have the the remaining 10% and and those two parties are effectively governing is that sufficiently decentralized it is kind of

decentralized that there is no central single central party but now all of a sudden there's two kind of poles in that system and you know where's the where's the Lapp you know so that then becomes a question of again facts and circumstances and where you fall on that spectrum so I I guess I would say removing the central party seems necessary but not sufficient to reach that level of sufficient decentralization it's hard for me to imagine a system with a central party that is sufficiently decentralized but it's easy for me to imagine a system without a central party that still doesn't feel like it would be sufficiently decentralized does that make sense yeah absolutely of course the tricky thing comes in you know a while ago we did this podcast with Angela Walsh I

feel familiar but she's been you know writing she I guess yes it's like you know extremists position in some way and that she's been arguing that you know the responsibility is somewhere and you should think of even like Bitcoin core developers as this sort of centralizing element that has this responsibility again it's it's one of these things works so hard because because of the the nature of these determinations there's no objective truth here you know part of what is appealing to me about a Bitcoin esque system is sure most people rely on kind of this core developer said but not necessarily right the miners have to

adopt these changes and so is a system of checks and balances there where it's not like that code is just pushed out to everyone and they don't have control over it so that that would that's I think the obvious counterpoint had a position that she's heard that a million times well incorporated into her arguments but my position is I feel comfortable with that one because it feels kind of sufficiently without a central party that you know each there's other all checked and balanced across the board and and there's no kind of entity that's that's you know driving it forward solo and so that I think is kind of the interesting nuance there but again facts of circumstance it's really hard to come to a hard determination on that do you think it makes sense to

actually have this provision about the issue and not being a centralized party so basically that if you turn it around that basically says if you're Dow you can't issue a security right so anything that a Dow issues can't be a security by definition is is that correct and do you think that makes sense no I think that I think that goes back to the no central party being necessary but not sufficient for sufficient decentralization they could issue something that is still a security if it is not sufficiently decentralized but you know just a lack of a central party does not imply that it is does not directly imply that it is not able to issue a security so I think a doubt is way further along the road to

having a non security token then a central party is that's issuing a token but I don't think it's it's definitionally not a security of a doubt what she said and in fact in fact you know of course the famous the DAO opinion the sec said those tokens were securities and so that's that's obviously a factor that we have to consider in that in that evaluation we mentioned now you know tokens being securities and then also there's security tokens so let's speak a bit about security tokens first of all what's what are security tokens and what's interesting about that no I think sir I questioned him and it goes back to what we were saying earlier that I think

it's a a pretty silly term that people have gotten very attached to because it just it's a regulatory classification there's a million things that our securities that are totally dissimilar to each other and you never really talk about them in the same breath right like in the real world you know people don't talk about investing in you know some sort of debt security like some municipal debt security and startup equity as the same thing right those are both securities and totally different very few entities would invest in both of those two things and the same way talking about investing in securities tokens feels a little silly because you know the security surfing's can

represent very different things so I think again important to start to break down kind of what are these assets and and what are kind of the better sub categories and so if you don't mind maybe a brief I wish I had like a diagram here but a very beginning taxonomy of tokens that I've started to use that I think breaks it down a little bit more and tell us a little story about the space I think there will be way more categories than this but I have kind of a two-by-two matrix in mind that yields for token categories that are a little bit more defined than securities token and utility token and if you see you think about these two axes and I've been meaning to write this up so maybe this is the the impetus I need to go and

do that where one axis is the intended regulatory status of the token which is either security or non securities that roughly corresponds to utility token and security token right tokens can fall into one of those two categories then on the other axis you have the source of value for that token which is either real world value or token network value so you put those two axes together and you get four tokens in those boxes security that gets its value from real world security gets its value from token network non security that gets this value from real world non security that gets its value from a token network so let's talk about each of those four and I think it tells a story about how this

space could develop we started in the space with non security's tokens that got their value from the real world so I would call those store of value tokens right Bitcoin which I consider to be a stroller value token is value based on real world in flows and trust in the system it's not value based on the level of activity on the Bitcoin network it's not valued based on any actual thing happening on Bitcoin its value based on the value that people imbue it with and that's where this whole space started was in that store of value token categories so non-security getting its value from the real world where I think we went next and this is kind of the story of the last couple years is still non-security but getting its value from token network

activity and that's what a lot of is called network tokens or protocol tokens and do file coin would be an example of this when it when it launches where it is intended to be a non security when it's when it's kind of in its ultimate state but it gets its value from the work being done on the network not from just being a real world store value and so that's kind of the second category that we have gone to is from still in the non securities category becoming up to the token network providing the value rather than the real world I think what's next is the adjacency to that which is getting its value for token network just like those protocol and network tokens but instead being a

security so I call these prophet tokens and these are tokens that represent some sort of on chain cash flow I think the the most common example that we have seen of this so far is the tokens associated with stable coins so whether it's something like trust token or the you know kind of recently wound down to the basis shares token things like that where the the token is intended to be a security and it gets its value from what's happening on chain right it gets its value from the token networks activity and the value being put into those stable coins so that is an interesting transition that I think we're gonna go to next and it when we transition between these categories it's not like the old ones died I think it's

just adding on it a new set so I'm gonna go from just having these protocol tokens which are intended to be non securities to having these prophet tokens where they get their value from a token network but they're intended to be securities are intended to be investments and so that's gonna be the next category in my eyes and that will encourage a lot of the infrastructure around securities tokens because that is a securities token it is a token that is always in Ted to be a security that infrastructure will get built out and only once that's been developed will we go to the last category which is a securities token that gets its value from the real world which is the asset back token category so that's when people talk about equity back tokens or real estate back tokens or these kind of tokens that have an

asset behind them I don't think those are going to emerge in force until we've had a bunch of infrastructure built to support the profit token category and so that's kind of a four-part taxonomy store value token protocol token profit token asset back token that breaks down a little bit more than the utility token securities token those last two categories are both securities tokens but clearly very different trust tokens token versus a token backed by a building really could not look more different they just happen to share this securities token regulatory classification and so I think that they'll need to be infrastructure built out to support that but that's the sort of thing that I think you know whether or not that taxonomy is right I think we need to start thinking a little bit

deeper about what are these actual types of tokens rather than just dividing it as utility token and security token but so they say you have one of these profit tokens right where the token derives its value from some on chain tap or protocol or something like that then and you know you mentioned base going and and the shares the basis shares as an example and they now shut down their project right because they basically said okay this looks like the security but the whole protocol is sort of you know not feasible if it is a security so like now let's say you have these things that are securities what does that that mean I mean it doesn't mean you'll have to

restrict transfer between just like white listed addresses that are like only accredited investors or what are the implications of that yeah I think it you know it really varies based on how they decide to treat it but there you know securities trade very liquidly in markets all across the world equities obviously the equities markets are massive and liquid not and so it's just a matter of figuring out the right kind of structure and the work that you have to put in to make it happen I don't think that it I think it makes it harder to have the liquid markets and if something's in non-security but not impossible and and so I think whether it means people registering publicly like effectively having an IPO for a token or trading among or credit investors or

trading in certain international markets I think there's a lot of ways to handle it but yeah I took at the end of the day those profit tokens by definition and kind of the taxonomy I outlined our securities and need to be treated as such and traded in a regulatory way so where does that leave retail investors yes first of all I think at some point we'll be in a world where retail investors access those tokens the retail investor certainly access public equities in in you know every stock market around the world and so that that's I think a natural ending point a lot of issuers are exploring reggae plus in the u.s. which is a way to sell to unaccredited investors lots of issuers use reg CF equity crowdfunding so I

don't think this means you know those those investors will be left in the lurch I just think it means there's a bunch of infrastructure that needs to be built out to support them and and best practices that need to be developed and I think that's all happening so you mentioned the exemption here now what are the different types of exemptions and and I guess coin list so far is mostly used to one where basically if you sell to accredited investor you can sell a security and and you're basically fine you know but can you talk about like the different types of exemptions yeah there's a lot of them I'll run through I guess the four that are most commonly used in the u.s. to sell securities are to sell tokens there are more this is not an exhaustive list

but the for the most commonly used our reg D which is what you mentioned which is involving selling to accredited investors there's a couple kind of sub a specific versions this 506 B 506 C but effectively it means you're selling to accredited investors you can sell this security under 506 C you can also solicit it publicly under 506 B you can't but it means you're only selling to accredited investors that's one the second one that's used often is reg s so reg s the way for a u.s. issuer to sell a security to non-us investors I think there's a common misconception in the crypto space that it means reg S means don't worry about securities laws which

is not what it means what it means is what it says is don't worry about the US securities laws because you're not selling to US investors but do worry about the securities laws of the jurisdictions you're selling to so if you're selling to a German investor or Singaporean investor or South African investor follow that country securities laws and and so that's kind of the second exemption that people use coinless is built out support for you know dozens of these countries local securities laws so you can run over I guess offering and follow those country's laws instead of the us's laws which are often more more stringent the third is reg CF just crowdfunding regulation and this is a way to sell securities to unaccredited investors

there's a bunch of work you have to do to do it filing a form with the SEC doing a whole bunch of things and there's a cap of 1.07 million dollars you can fundraise but a bunch of issuers have have done this very successfully and then the last which has not yet been really effectively done but I think will happen next year is a reg a plus offering just kind of called the mini IPO and this is a way to sell to accredited or non-accredited investors up to a certain amount but the the maximum was way higher fifty or seventy five million dollars depending on the type of offering you're doing with a bunch of requirements around ongoing reporting and and forms you need to file but can effectively serve as kind of a mini IPO so those are the four most common that

we hear talk about reg D reg S reg C F and reg a plus so if you look at icos that have taken part in the last couple of years most of them went in compliance with these regulations and given that many of them would be seen as a securities of offering that they are in breach of many loss and the SEC until earlier this year it seems the SEC was going mostly after projects that were scammy and we're obviously scammy this changed in November when the SEC made it public that they were going after arefox in Paragon for issuing and wrecked unregistered securities what's your take

on this recent development yeah I think it's kind of a it's a natural evolution of the space nothing in terms of what the SEC was saying they had a right to were they had a right to do changed when they did that it was all consistent with what they've been saying for the last year but what did change for the first time which you pointed out accurately is that they pursued what seems to be a non fraud case for the first time right they they pursued kind of someone that they didn't accuse a fraud they just accused of selling unregistered securities that was that that was the change that happened but they've maintained that they have been allowed to do that for the past year so they just hadn't really exercised that authority yet and and so I think that you know what they're now

saying is okay we now understand this face a little bit better and I think part of it is you have to consider their position which is the SE C's job is to protect investors and they want they capital formation to happen they want fundraising to happen in the US so not trying to kill the industry by any stretch of the imagination but they do want to make sure that things happen legally and that investors are protected and and so what they did initially was while they were getting to understand the space they just knocked out a bunch of really bad obvious fraudsters and people that were putting investor money at risk and then once they understood the space better they were able to evaluate and say okay now we want to go after a few people that aren't

fraudsters but are not following the laws and and start to go after them and I think that's just a kind of natural progression and that'll you know force more and more issuers to to operate compliantly now they realize that it's not just the fraudsters that the SEC is going after I think that was a big part of their objective there was to kind of put a flag in the ground and say we're now enforcing against non fraudsters you got to make sure you're doing stuff under relevant securities laws and regulations yeah I mean on this topic so we did do an episode a while ago if somebody who used to be at the SEC and do cases like that and at the point he made also that's what the SEC does is they tend to go after cases that are you

know very clear right that they're gonna win and where they also have other things like fraud that they can accuse people off so then when they're in so much trouble they don't really mind a fight you know they won't really fight yeah the accusation of having done an unlicensed securities offering and they can build like precedent with that and then they can go to to bigger projects that you know maybe haven't done such all these things illegally and then have these cases to rely on yeah yeah exactly I think that's that's the typical pattern for them is kind of starting at the bottom end and then going right to the middle of the spectrum of legality and planting a flag there and starting

to knock people down so once you're caught up in that as a project can you take us through what happens what you actually have to do do you have to give back investment so uh what's the process yeah it's a it's a good question I think a little bit unclear right now but you can read the arefox in paragon enforcement actions and settlements and and see what they have to do so one of the things they have to do is yeah offer rescission to investors they can get their money back they have to file disclosures on a regular basis about their token truth their token like a security and and so it's just kind of like a bunch of cleanup steps that you have to do if

that happens and I expect a lot of teams to start doing that proactively to to avoid this I think a scary thing for a lot of these projects is that you really have two risks you've got the risk the sec comes after you and does something like this and you know files an enforcement and you have to settle it and follow a bunch of things that they set out for you but you also are at risk of class-action lawsuit by the investors right and and actually once the SEC does one of these enforcement actions it sets up really nicely for investors to sue you who think that who are following on to what the SEC said and so I do think that there's kind of a dual risk here for these issuers that did things poorly and and they have to think about addressing both of those concerns

addressing the regulator's concerns but also making sure that they won't get in trouble with with investor lawsuits and in cleaning both sides of that up I think is critical if you want to make sure you're you know gonna have a smooth ride from from there on out so if you think these actions will kill many projects or do you think this is something that you know okay there's some cost there's some hassle but it's possible to actually you know come clean and comply with that it's a good question I think a lot of projects that could be subject to these to these types of actions their systems are actually predicated on it being a non security and if they have to treat it like a

security that the system might just not work and so it could kill a lot of projects but those are projects that you know we're doomed to fail from beginning if they were issuing something that was a security and treating it like a non security they were take on at some point someone was gonna file lawsuit the SC was gonna come after them and so I I think a lot of projects will struggle and fail in the next couple of years but I also you know again I think there's there's so many bad projects in the space and bad actors and people that you know didn't think these things through I think that's natural it's it's a kind of natural selection process that the projects that we're doing is the right way are gonna and you know some of these projects

their premises were just impossible from the beginning and and kind of fate is catching up to them at this point one of the consequences from this SEC crackdown is that a lot of people who've been in the space a long time uh proclaiming at least that the ICO is dead would you concur with that I I wouldn't I would not concur with that I think the kind of heyday of everyone saw a utility token you know send me some meat they'll send you some tokens my token does this that the other thing is over I think that people have to act compliantly and and there may be cases where you can sell a non-security where that the token you know is able to be sold as a non-security and that's awesome I think

a lot of we're gonna be securities offerings but at the end of the day I think maybe this kind of like casual understanding of what an ICO is which was that like heyday you know just unregulated sending money back and forth is over but the idea of a coin offering or a token sale that's not over that's sticking around forever and it's just that the the rules are being enforced a little bit more strongly now an issuer's have to follow that so I do not think the ICO is dead but I do think what a lot of people understood to be an ICO is perhaps dead and we got a shift our perspective a little bit on the one hand right certainly this unregulated I SEOs have disappeared to a

large extent or diminished greatly and I think the regulatory thing has a lot to do of it but even it seems more compliant offerings are you know I mean did the market overall seems to have deflated completely what do you think it will take for that to come back I think in the early days of any market its its cyclical I'm kind of a broken record on this but I mean even just look at Bitcoin right if you've been in the space for a while is now our fourth or fifth like eighty percent retracement up of bitcoins price and that's it's gonna happen you know I think there was this ICO boom and then the bottom kind of dropped out what we saw is that all

these bad projects stopped fund raising but the good ones are still going they're still raising money and running token sales public or private and and we expect that to continue so you know I think a lot of the numbers that we saw in the past year or so associated with the ICO market were inflated by the number of low quality projects that we're able to just drag capital in but the good projects are still going and I expect that to continue so you know I think I'm expecting 2019 to be a pretty calm year I think we have this every couple years in crypto where you know there's not a massive boom there's not a massive busts but people put their heads down and build and and that's what I'm expecting and hoping 2019 will be and then I think at some point we'll see

kind of the next run up when when something happens when there's a catalyst and and you know I I'm not expecting that in the next few months but but I certainly think it'll happen at some point and emit might be the rise these profit tokens might be something totally unrelated that we haven't talked about yet but there will be something that will will drive kind of another another hype cycle as we've seen over and over again in the in the crypto space at large I would love to ask you to speculate about that a little bit more so basically until now you've drawn the distinction between good icos and bad I SEOs and that's that's not super specific so are there certain areas in which you actually see the IC o---- coming back with much more force than another hair

yes yeah I you know there's a bunch of ways to draw that line a big one that I would draw is does the system need its own token or not and it feels like you know a massive percentage of the projects that we saw in the last couple of years just didn't eat their own token and so I would put that in the bad ico category where it just wasn't necessary for the system to be successful then in the good ICO category and this is really important to note just like startups most good icos in my opinion are still going to fail it's really hard to build these things successfully and it's not you know a sure thing that once you have kind of a good concept it's gonna be successful so

even within the good ICO category that's like a really hard market it's gonna be really challenging a lot of them are gonna fail you know some of them will be massively successful some will have middling success it look just like startups there are a lot of great start-up ideas that that fail for a variety of reasons that'll happen within a good IC o---- category but that bad IC of category I see them as just these two totally separate markets where the bad category was people saying I've got an opportunity to you know go and try and run away with some cash here let me make up a reason for it hoping to exist and sell it to people and move on with my life and that's the part that I think is really really disappeared and so how do you see coin lists role evolving in the

larger crypto space over the next you know decade yeah our our goal is to support this ecosystem we are picks and shovels for this ecosystem and so you can even see that with the products we have today that our first two products that full sail matte token sail manager product are about sales they're about capital formation whether that's for value tokens or protocol tokens or profit tokens or asset backed tokens we're gonna help these issuers run successful sales then our second two products coin list air drops of coinless build are about building communities either a kind of general communities with air drops or you know developer folks communities with coinless build and and that's kind of the natural progression for us once you've run a sale you need to build out your community and support your network and

that's when we're gonna help with - and then we're building out a secondary trading venue where there'll be secondary liquidity and so we just want to be you know start to finish the place where issuers and investors go to do anything with a token network buying selling primary secondary building community participating community and and be the one-stop shop for all of that so whatever the space needs it feels like what it needed in the past year or so was help running effective compliant sales what it feels like it needs now is help building community whatever it needs in the next year is what we'll do but we are here to support the ecosystem so just one question on that you mentioned secondary markets I presume you don't mean like create a crypto exchange do you have in

mind creating markets for let's say shafts before like while there still is security and before the actual token is issued or like what kind of markets are you thinking of creating I effectively do actually mean a crypto exchange to support the projects that run primary offerings on our platforms that they can have secondary liquidity on em on a secondary marketplace on our platform supporting other tokens that one another compliant venue to trade on so we're working on building that out that'll launch next year I think staffs are an interesting case almost every saft if you you know really dig into it does not allow for secondary trading of the saft and you know there's lots of it kind of happening out there

but it's technically without permission of the company in almost every case and so I unless companies open up to that and are willing to have their staff to trade it on the secondary market I think that's something we're unlikely to support until those issuers are actually willing to open that up can I look back into one of the things you said earlier so you said you'll help projects build a community building community it's actually super hard and if you think about how many how many communities each of us are going to belong to in the future and how do you envisage that do you think we'll belong to a community more or less for every token we hold or where we had a lot of tokens that we'll use for interaction

with different apps but not really be an active member of the community do you think tokens are going to match with each other or take over do you many so basically in three years hire time how many tokens will I have in my Mehta mosque or you know browser extension for whatever usage with depth yeah that it's a very very interesting very hard question I'm gonna answer the simpler part of that first which is what communities will I belong to I think I will belong to deeply belong to a few communities for tokens I hold and then kind of incidentally be in communities for other tokens I hold so some of them you know albeit I'll want to be building you know reference applications on their

network and being really really involved and I'll you know commit to being involved in that and others I won't I think it's gonna be a lot in terms of the community side like products I own today you know I own this this microphone I'm speaking into right now but I'm not a big audio file I wouldn't consider myself to be in like the kind of like microphone and audio equipment community even though I do own this product but there are a bunch of other products I own you know a soccer ball where I'm definitely in the soccer community and I'm you know really committed to that so I think it's gonna be the same thing for tokens where I'll have tokens and some of them will be really committed to the community others of them I'll just happen to have because I want to have it or need to have it I

don't have a great answer for how many tokens we're going to hold I do think in the next few years it's likely that each person will be holding more tokens rather than less and it may be kind of abstracted away from me that I don't necessarily have to worry about having those tokens you know I think there's a bunch of interesting products that are doing things around to automatically exchanging tokens when I try and pay for something on a certain network and so that's interesting to me but I think many of the kind of cross chain or interoperability solutions won't have reached kind of massive adoption in the next few years and so it's it's more likely that we'll have a bunch of

individual tokens in our wallets to pay for things but some of that may be abstract away time may not need to think about keeping a supply of it it might be that you know for example I just need to have a bunch of eath and when I try and use a service then it automatically there's kind of a neat exchange rate that's displayed to me and it automatically swaps it out for that token and I pay with that and I'm not holding that token I think there's a bunch of different options for how that could play out but I think these interfaces and user experiences are wildly underdeveloped right now and I'm really really excited to see what that ends up looking like in the next couple years if you're saying that basically my my wallet is just going to exchange the eath I own automatically for whatever

token I need do you think in principle that token is there needed because if it is if it is easily abstracted away by just owning ether and paying in ether and what good is a token that only does that yeah well first of all I should say that is just one of many worlds that we could find ourselves in so so I'm not I don't have high conviction that that is the the right answer but I think it goes to different types of users on the system so when I'm talking about the automatic exchange I see that it's like a very casual user on the system there will be people in the system that want to be dealing with kind of the bare metal all the time and I would use maybe like a file storage analogy of you know I use Dropbox to store my files and

Dropbox using a nice interface and you know abstracts away a lot of the stuff that I have to deal with but Dropbox might use Amazon s3 on the back end or their own servers and just because I am using Dropbox as a user doesn't mean that Amazon s3 doesn't have to exist it doesn't have a purpose there are lots of people that have get value from using that really down to the metal or not quite metal at the s3 level but kind of more deeply valuable and what configurable service inserting in a lot of these cases for certain types of users the token might be abstracted away in a meaningful way but for a certain set of its power users or kind of industrial level users professional level users the token will be really

important for the functioning of the system so I think just because end users aren't using a token intentionally doesn't mean that that token doesn't have a value on the system cool well thanks so much for joining us today Andy it was great to catch up with you and hear about coin list so yeah thanks so much for joining us thanks for having me really appreciate it yes super interesting talk and yeah of course we'll have links to lots of the things we talked about there's also lots of interesting blog posts on the coin list blog and now unfortunately we didn't get to speak this time about you wrote some interesting post about you know hostile Network takeover which is pretty fun so hopefully we can get revisit that at some point in the future anytime thank

you for joining us on this week's episode we released new episodes every week you can find and subscribe to the show on iTunes Spotify YouTube SoundCloud or wherever your listen to podcasts and if you have a Google home or Alexa device you can tell it to listen to the latest episode of the epicentre podcast go to epicenter TV slash subscribe for a full list of places where you can watch and listen while you there be sure to sign up for the newsletter so you get new episodes in your inbox as they're released if you want to interact with us the guest or other podcast listeners you can follow us on twitter and please leave us a review on iTunes it helps people find the show and we're always happy to read them so thanks so much and we look forward to being back next week

[Music] [Music]