Robinhood Stock Tokens Are Just The Beginning (Our Pro-Innovation Mindset)

Transcript

prescriptive regulation can get really um out of date very quick and it can become really problematic. [music] It can bring a lot of value. It can bring a lot of uh transparency into the market. Blockchains really work best when they are neutral infrastructure. [music] It's one of the things that makes them really special. They have the ability to level playing fields. You end up in a world where interpretation can get harder and harder without touching grass so to speak on like the reality of the situation. Just like the streets of Manhattan. I'm going to keep this quick. Over 70% of our viewers are [music] not subscribers.

Yes, you. Every week, we interview some of the best entrepreneurs and investors in the financial industry. The easiest way to support our channel is to hit the like and smash the [music] subscribe button. Now, sit back, relax, and enjoy today's show. Welcome to the rollup. Taylor Lynman. It's a pleasure to host you. Uh chief uh council of the crypto task force within the SEC. very very excited to have this conversation because tokenized equities are at the for forefront of pretty much everyone's mind. Feels like the onchain economy is back and tokenized equities are leading the way. Um it's a pleasure to have you on the show. Thanks for coming today.

>> Very happy to be here and thank you very much. Uh so before I get started just quick uh disclaimer that we have to always give. I'm here uh in my capacity as chief counsel of the crypto task force the SEC. These are uh my views. These views don't necessarily reflect the views of the staff or the commission. >> Got it. Okay. Um, and so let's get into it. I think you know the first thing on everyone's mind is like what is happening out there specifically on Robin Hood chain and generally with tokenized equities. >> Okay, we'll go there first. I I think that the topic of tokenization is is is one that like is going in every possible direction right now. We've got uh at the SEC at least we've got a new transfer agent rule out there which is really focused on this concept of issuer

sponsored tokens at least as it relates to you know how it touches on on tokenization in crypto and that's like one flavor of what we're seeing in tokenization. And then what we're also seeing is we're seeing a ton of use of of synthetics and debt instruments specifically stuff that's offshore. These are like structured products like equity linked notes. uh they look a lot like those types of products and those seem to be getting a lot of uptake um in you know in the market uh in in recent times. Uh and that's you know another one of these flavors of of ways in which people are tokenizing. And then the third is you know the the the the various uh uh ways in which uh the conventional broker dealers and others are thinking about the use of uh security entitlements which are another complicated area of tokenization. Uh but

happy to go in any direction you want. I I want to get into all of it, but I really want to ask you now about the second one because I think that is what just over the last couple of days and you know this is being recorded a couple days prior to being posted, but today you know there was a public company that saw that their stock had been tokenized. I think this stock ended up going up 15% uh when you know the markets were closed and this CEO came out and was very against uh the tokenized version of his stock uh called out Vlad the CEO of Robin Hood and they had a little bit of a back and forth. Uh the CEO of the company was you know stating that there was some consumer protection issues.

Vlad said, "Hey, what's your concern? Let's talk about it." And so this is getting to the second point of your answer there, which is around equities or tokenized equities that are doiciled offshore but seemingly being sold to US customers if I understand it correctly. Maybe you can walk us through the >> the you know is that what is happening? Kind of educate us on you know the current regulation as it stands today. >> I don't want to speak to any one specific product but I want to just talk kind of like in the big picture here of of what what what I've been seeing. And so I think the first place to start with is that these are securities uh but they may not be equity right they may actually be debt securities or debt instruments and a lot of times that's what they are they're structuring them

as as debt securities and they're being offered offshore they're being offered pursuant to you know various different um you know arrangements with the the firms that are offering them the issuers. Uh there's a few pieces here that I think are important for for folks to pick up. one is while this feels very new. I think it feels very new uh in crypto uh this is actually a existing major market uh this is the structured products market and and specifically equity link notes is kind of one of the areas that this is in and that's a pretty huge market. It's a multi-t trillion dollar market and there's a meaningful percentage of that that's that's in the United States today. Uh and so that's part one is that there's there's kind of a an existing um mental model here with what some of these instruments are. And then there's

another piece of that too which is like and and this is often forgotten is that there's there's this concept of of like an issuer here in these contexts which is is can be lost which is a lot of these debt instruments are being issued by somebody as a separate security and when you issue a separate security this is kind of a security law 101 type situation you're going to need to either register that security or it's going to need to be exempt if you're going to offer it in the US. So what we see in this traditional market like the structured products market is you see shelf registrations for these things S3 they go and register and they're you know primarily issued by banks and you know they file their base prospectuses and have these pricing supplements that they put out there that are designed to

to provide a lot of disclosure to the market and market participants about what they are and that's what the existing kind of traditional market looks like and there's a lot of coral areas with some of these off and by the way those structured products exist offshore as well. There's tons of them and not all of them are registered. Uh but the point is is that there's touch points there that I think are very relevant for this current moment. But also because it helps kind of orient it in space with within where the securities laws typically apply, but it also highlights one of the most important pieces of it, which is about disclosure, about making sure that purchasers know what they're getting.

And if US purchasers are in the mix, the way that a lot of people do that is they do it through registration and those prospectuses. >> Yeah. Yeah, sounds a lot but like again >> well that no that's a great overview and and it's also helpful to understand that there is an existing mental model and framework for these debt instruments that are equities issued by someone other than the >> not equities they're securities >> excuse me securities that are issued other than the uh by someone other than the company itself um and so with that being said you know these things as far as I understand them are unregistered in some cases in one of the more popular cases But that what I'm hearing is that doesn't necessarily make them illegal.

>> Well, it it just entirely depends. I mean, and I also, you know, I don't want to prejudge any of these products here. So, like one thing I would say is it really depends on who's who's the purchaser of it. You know, whether or not it's, you know, that that offer and sale was done pursuant to some effective, you know, registration or or exemption. It's just like all the other securities law like uh things that apply in in US markets. Those are here too. Um, I'd also note that there's, you know, enhanced disclosure requirements for these types of instruments in the US. Uh, FINRA has got special rules for that. FINRA is a a regulatory body that, uh, helps, uh, uh, uh, brokers in particular know how to to to provide these types of disclosures in the market. Uh, so there's a lot of, uh,

existing market infrastructure and regul that applies to to our securities markets and this is the type of instrument that has a place in our securities market, but they have to follow the rules. >> Okay. Got it. And so following the rules in this case is making the proper disclosures so that there's no false advertising going on. The buyers of these stock tokens or tokenized equities, whatever you want to call them, uh ultimately know what they're purchasing based on the disclosures that the issuer is disclosing. That is how they communicate uh the the framework or the uh the structure of the instrument that they're buying. And I think we've seen a couple different structures start to find product market fit within

tokenized equities on chain. One of them is sort of the uh native issuance model. And we've seen a little bit more of that more recently hasn't really caught on as hot, but we've seen the native issuance where there's full governance rights, voting shares, and and you know, more akin to the to the equity structure. Whereas the tokenized stock token and may maybe that's actually a very important distinction. They're not called tokenized equities for a reason. They're called tok stock tokens because they more closely resemble debt instruments or tokens that are linked to stocks but aren't don't carry all of the

same consumer protections and shareholder rights that an equity does. There's a lot of terminology here and and and and the naming and I think this creates drives a lot of the confusion again which is part of the reason why I think like the disclosure regimes that exist in our markets in the US are really important when they're applied here because you want to know whether you're buying the underlying equity or if you're buying the debt security um or some other you know synthetic instrument of some kind. I did want to double click on the other models that are out there because I do think these are really important and they're ones that are often called like issuer sponsored tokens or ISTs is a term that I've seen thrown around a bit and a lot of times especially when they're when they're related to like public equities like uh

public stock. These these instruments are being issued with the blessing of of of an issuer they're being offered you know pursuant to you know a very similar model to what exists with direct registration of any security today. Um, and they they are here in the US today, but they have rules that are quite old. And in fact, the transfer agent rules haven't been updated for I believe it maybe close to like 30 years. So, it's been a really long time since someone's looked at the rules that relate to the the entities that do that type of issuance on behalf of issuers. They're they're called transfer agents. It's kind of like this uh narrow area of the securities laws, but they uh that the rules that apply to these transfer

agents hadn't been updated for a long time and that made it very challenging for some transfer agents to think about how does this relate to these new onchain contexts? >> And is the SEC working on upgrading the regulatory infrastructure for transfer agents specifically to support issuer sponsored tokens? It's not just a support issue or sponsor tokens, but yes. So, transfer agent rules are there's a proposal that just came out earlier this week. It's a really I think a foundational proposal for those that are thinking about tokenization, but it's also just a modernization effort for the transfer agent rules. And what this does is it provides, you know, it

cuts down on some of the uh the things that were really important to to these transfer agents back in the day, which was a lot of paper certificates, uh a concept of microfich, which is a thing that I imagine very few of your listeners even know what it is. But to move those things away from uh meat space and the physical kind of delivery of of mail and other things towards the electronic ways in which people are communicating and the ways that they're uh you know handling their uh you know the the various formalities that are evolved in involved in in in managing security whether that's like dividend payments etc and bringing those into the 21st century allowing for e delivery allowing for email communication giving the ability for security issuers to like pay electronically instead of by check.

Like there's a lot of things here that like is just it's low hanging fruit, but it also it opens these rules up to be used for innovation. >> Yeah, it it sounds like there's kind of a couple of concentric circles here. You know, a lot of people kind of look at tokenization and all the work that the SEC is doing around tokenization, but a lot of it the lowerhanging fruit is just digitization. Like you're saying, bring this into the 21st century. Make a lot of the paper records and meat space digital. That seems obvious at this point, right? We're 35 years into the internet. Let's make that upgrade.

Tokenization is a little bit more on the frontier. And so it sounds like the modernization of the SEC's regulation is a lot about digitization and also a bit about tokenization, but we kind of get fixated on the tokenization part. Well, I mean there's a lot of people who are really interested in the tokenization part of it and you know your listeners a lot of but there's yeah it touches all points like it's this is about how do we enable our rules to work better for the current moment. Uh and on the tokenization point it's not to say that this rule doesn't have things in it that are designed to kind of help meet these tokenizers where they're at. There's a lot of uh there there's information that contemplates tokenization. So uh for a

long time there was an element of the rules related to uh where your records were being stored. So those records were being stored primarily offchain. The use of the blockchain for purposes of a record not really something that was ever envisioned. So providing that clarification is useful. So now you can treat the token as you know the authoritative security and not need to refer to some off-chain record. It's simple. It's simplification too. It's streamlining you know having 15 different um you know disclosure timelines or or or uh periods with which you have to to to make some delivery and simplifying them to a single one uh so that the people who are following these rules can do it more predictably and they can understand you know in the days of e delivery you know now sending an email you don't necessarily need to wait

like you know for a week before something gets turned around for instance. Yeah. And and I think that helps people broadly whether they're thinking about crypto or thinking about equities in the traditional sense. A lot of this, like you said, is just kind of obvious and low lowhanging fruit. Um, and so, you know, that kind of brings me to my next question, which is I I think, you know, there is a a segment of, you know, the the SEC that's probably thinking a lot about tokenization, a lot about crypto, and our listeners in particular are very interested in hearing about this. But I take it, you know, the SEC's been around a long time. you're not just catering to the crypto industry. Like there is a broader shift in finance and technology that the SEC is thinking about. And so maybe you can

help us understand the bigger picture because on one hand we've got the the reggg crypto piece and then on the other hand we've got the DTCC coming out with their tokenized pilot in October. We've got the New York Stock Exchange and the NASDAQ coming out with 247 blockchains. We've got, you know, chartered banks thinking about stable coins. So maybe you can help us think about the convergence. How do you think about the convergence of the traditional financial world and the onchain financial tokenized world and and how these two are converging at the SEC?

>> Sure. Um, I think like there's a couple ways I could take this. I think the one that I I I think is most valuable for just specifically as it relates to what's happening at the SEC is there are a lot of these intermediaries that were designed for very particular you know and often very rigid purposes like you know CSDs like DTC they're there to custody securities they're there to help uh you know simplify the process of clearing and settlement uh and provide you know really important like kind of you know the cyber security infrastructure of their time which was you know managing a lot the uh uh the the um debits and credits of of the various security holders. And that process as it's moved towards digitization, as it's moved towards, you know, um you know, trading

electronically has been updated, you know, progressively. And now there's another jump. There's another jump where the clearing and settlement rails are moving away from the centralized clearing and settlement rails towards these, you know, often onchain settlement rails. and those onchain settlement rails, this use of post trade infrastructure that's different than how everything's been done for the last 50 years requires a lot of deep thinking for each of these intermediaries. You've got the CSDs, you've got the transfer agents, you've got brokers, you've got the national securities exchanges and each of these places uh there's there's a a bit of this modernization that needs to happen to accommodate you know the use of new tech and then another part of it which is like policy like how do we want the system to work when you have

another venue available you have another place where securities can go and clear and settle and these pieces need to work holistically and so I think about it like um kind of building the foundations right now we're building a lot of foundations with these rules that are designed to provide market participants with a lot of confidence that they're going to understand how the rules apply to them and how they can leverage these technologies safely and then over time innovation will be supported by that that that bull work that that foundation. >> It may not happen overnight though >> although it seems like it's happening overnight. It feels like everything happens all at once but uh maybe this is uh just you know how progress happens.

>> Absolutely. And I think these things you're you're right that these things are happening at once and they're happening in parallel. And I think it it it's important because it allows us to sort of test things in the market, see how the different components of the entire supply chain are going to interact and and uh be impacted by a subtle tweak in another part of the supply chain. So rather than you know making a gigantic move in one of those components all at once, we're kind of doing these things in parallel. Um, you know, you're you're looking at transfer agents, you're looking at settlement and clearing and custody. Is it fair to say that this is the most ambitious SEC regime of all time?

>> It's a pretty it's a pretty big agenda. Um, the fact that we've been able to get as done as much as we have already is, I think, a testament to like just the amount of work that the staff have been putting in on these topics, thinking about them. I will also say that there was like it's kind of a coiled spring effect. There's a ton of thinking that's happened at the SEC on these topics for years and that thinking hasn't been able to have um an outlet. There wasn't a moment where people were willing to listen on how to to think about these policy issues and that moment has been provided and now we're able to get this stuff out and and explain it to the market and ideally get feedback from the market which is another reason for why I'm here. I want to you know tell people

who your listeners that we're looking for feedback on these rules. These rules are in proposal stage which means we have comments that we're looking to get and those comments will help inform what the final rules look like and these may be it for a long time. That's another thing worth thinking about. These rules don't change a lot. We don't get big securities law rules like again these transferentation rules haven't been touched in 30 plus years. The we talk we should talk a little bit about reg crypto as well which is you know these are some of the first new offering exemptions that have been available since the jobs act. Happy to go into a little bit of detail on red crypto too. I think it could be useful.

>> Absolutely. And and guys, if you're watching this on YouTube, you're watching this on Twitter, SEC's Taylor Limon is literally asking you for your comments. He will take them, internalize them, and you might see your comment uh in some uh you know, industry regulation. So, let's let's talk about red crypto. Um, you know, I think uh broadly people are curious about a couple of highle things like 247 markets and and like accredited investor laws, but more specifically there's been some red crypto exemptions that have been floated and now you're asking for comments. And specifically, this is uh kind of the fundraising exemption.

People are kind of calling this narrative like ICOs are back, right? Because they get 75 million of uh fundraising potential. maybe you can you can go into more detail about how this resembles previous eras of ICOs or doesn't and you know more specifically what is uh this exemption and broadly red crypto. >> Sure. So I I'll give you kind of like the overview of what it is. So red crypto is two exemptions, two offering exemptions and a safe harbor. And the way that it's set up is you have these two these two exemptions basically allowing you to fund raise. If you're going to go and do a token sale and you want to sell to the public, you now have kind of two avenues to do it with a lot of safety and a lot of confidence provided that you follow the the the requirements of these exemptions. Again,

still in proposal stage, so those requirements are changing, but for right now, like kind of the the broad strokes I'll give to your audience. So, the startup exemption, it's a $5 million uh fund raise, which is very small, but it has very few strings attached. It is relatively light in terms of the amount of information that needs to be collected and disclosed to the market. It looks a lot like some of like the early stage projects fundraising where you have you post, you know, some disclosures on your website and you do the raise. Uh it's limited though. You can do it once every four years. The fundraising exemption is the next step up and this one is much bigger. This one goes up to 75 million. And the fundraising exemption looks a lot like a like a mini IPO. It has a lot of the

same features, but it has also disclosures and a a framework for how the offering occurs that is much more tailored to these circumstances where you're you're you're engaging in a token sale. So, the big things to know kind of about the fundraising exemption, I would flag uh the concept of what you're selling in those situations are these things called kicks or covered investment contracts. This is the token when it's still connected to this investment contract. Basically, the promises that that issuer or that project is making. And then you're going to make really clear promises about what the what the the the project is going to get done. And those could be things like we're going to hit mainet. We're going to build this application. We're going to get to this minimum viable product.

And then we're going to make it available to customers for everyone to use. Whether that's an L1 or an application. Um it's very flexible on that front. And then whether you're a uh you know still working on on the the development of of of that project or those the the development is finished you can either live within kind of the kick framework of the fundraising exemption for a few years or you can go and try and avail yourself of the safe harbor. And the safe harbor right now as it's in envisioned is basically saying, "Hey, these promises that I made, the checklist is complete. I am no longer performing the essential managerial efforts involved in my investment contract and I'm going to file this form so the public knows and I am no longer

going to be subject to the securities laws. I'm now just this token is just the digital commodity. It's just, you know, your ether or your Salana." And that setup ideally is is like a uh a way for fundraising to occur on shore to happen with confidence and then also to have those disclosures in the market for that period of time where you are building and you're trying to set up the system and then at at a certain stage once the system is set up and built you can move on as uh you know a digital commodity outside of the uh the the exemption. Taylor, I I just got to say I I really appreciate the work that you and the task force and the broader SEC are doing because I can tell through the proposed regulation and exemptions that

you have actually listened to this industry. This is what you're describing is something called progressive decentralization. It's something that we've talked about for a long long time in the industry and it was for a long time very theoretical. There was no checklist. there was no pragmatic, fundamental or practical way to go about this progressive path towards removing yourself from the network, distancing yourself and handing it off to the network itself. And I think it's just an incredible it's a it's, you know, incredibly thoughtful the way that you've gone about this and it it is I think the right way to ultimately take industry feedback and then codify that into the regulation. So just yeah I I uh you know I a word of uh appreciation for

for you and the task force >> wasn't just me was mostly other people vast majority of it was the staff and and commissioner pur in particular and her thinking on these things and but also yes it is a tremendous amount of feedback we've had from the market and let me just say a few other points because there's there's things in the weeds here that are going to be important for people to be aware of but some things that we'd love to know more about is what do you think about those what do you think are the most important disclosures? We'd love to know what people think are the most important disclosures because in this onchain context, there's a lot of disclosures that are different than the types of disclosures that public companies typically make. And then the second one is what do we think secondary market

trading should look like, especially for the kicks, these covered investment contracts before they go and they they they uh transition out. We'd love to know more about what people think about that because this is, you know, this is a new uh a new exemption, a new offering, and a potentially, you know, a new class of these securities, these kicks that are going to be transacting and >> making that market work and be a uh a a you know, a successful fundraising vehicle here is is really a big part of our goal. And so hearing from the public on that is going to be, I think, key. I I'll tell you in just in a quick short breath that you know the these are two you know important topics to unpack. Uh the first is um you know the disclosures

like the validators are everything as it pertains to the network right who are the validators and where are they and particularly relevant today a chain that we've sort of nodded to a lot during the episode today went down and so I'm curious like why did it go down who are the validators if people have a large position and those positions are fluctuating you need the chain to operate in order to move in and out of those positions is extremely important who are they and where are they and people can make the determination for themselves about uh the lindiness or the resiliency of the network and then the other one the kick derivatives I don't have a great answer for you that's going to be you know this n this industry is very composable by nature and uh it's going to be difficult to really

understand how and and track uh kind of the rapper tokens or the derivatives of those kicks so yeah I I'm also looking for industry feedback on on that part as well um I and and Taylor I know we're very tight on time there's two things just kind of closing the loop here and getting back to what we tal started talking about initially. I just want your quick reaction. One of them is a little bit more legitimate. The other one's just a funny thing that has popped up. Uh the the first is kind of the dislocation between the the prices of these these stock tokens on chain especially during offmarket hours and then uh the prices on a traditional brokerage. You know, maybe just a word or reaction to how you know a regulator might think about that price

dislocation. And then the other one is, you know, there's this board seat thing going around. If a liquidity pool acquires enough of a tokenized equity and that equity does have governance power and voting rights, can the liquidity pool or community earn themselves a board seat on the cap table of the equity? Two very different questions, but just curious about your reaction to both. >> Uh not legal advice. Uh and I that second one is like yeah the idea of of what's happening with the collection of some of these uh uh to tokenized securities in LPS is like still like kind of something that I'm I'm cogitating on and thinking about. Uh but the the first question what was it again? I'm sorry.

>> Uh it was around dislocation that you know especially during off offmarket hours onchain and offchain. Well, I mean, unfortunately, this is a thing that happens in our traditional markets as well. And I think this is a symptom of like a really nent market and and I don't have like a necessary like a take on this other than to say that like these are the kinds of things that happen when these when new products come into the market that haven't figured out how their arbitrage mechanisms are going to work and and how uh market efficiency is going to be uh reinforced. And again, like in US markets in particular, like we have tools for these things. offshore markets. Uh, you know, it's there's there's a lot less that that that the SEC has uh at its disposal.

On the liquidity pool one, I don't I just can't it's too new of a concept to me. Uh especially the linkage with memecoins, the idea of the liquidity squeeze. Like a lot of this is still um you know, pretty new stuff. But it is interesting and I think uh you know there are a lot of disclosure obligations that people have when they hit certain um shareholder ownership thresholds and those are you know the obligations of of of the the class of people who are holding them in in this kind of quasi DAO context. It's something that yeah I can't say >> it. Yeah it is quasi DAO because the tokenized equities are held in a smart contract. So it isn't one central place, but of course the smart contract represents a a large group of people.

And so is it a single owner or is it a distributed set of owners, >> but they're owning the debt security and not necessarily the underlying security which is held by somebody else? Maybe >> right now being that this is primarily taking place on a chain that is issuing stock tokens and not tokenized equities with voting rights, I think that's right. But we could see voting right native tokenization, the actual equity onchain and uh held sign a significant portion of it held uh in a in a smart contract or liquidity pool by a memecoin community.

>> Well, >> Taylor Lynman, thank you so much. Really appreciate the time. Thanks for staying over a little bit. Um I hope to see you in New York in a couple weeks. [music]