Why Domingo Says Wall Street's Copycat Stock Tokens Break the Rules

Transcript

Obviously, there's been a lot of discussion about what it is exactly that investors own when they buy a tokenized stock. So, go ahead and explain kind of like the different variations on, you know, what the rights are that different investors have and sort of like what the spectrum is that is available now. >> Yeah. So largely there's kind of like three models if you want uh the the one we use the one that uh figure is using the one that bullish is using super state etc which is basically you go through the transfer agent and then you're basically getting an entry on the transfer agent cap table and the transfer agent happens to use a blockchain as their underlying ledger and therefore you get a token as the

entry on that ledger right which is what what a blockchain is. A blockchain is a ledger where the entry of what you own on that ledger is represented by a token that you can hold on a wallet, right? Uh so so in that case you're buying the same instrument is the same QIP, the same rights. You get access to dividends, you get access to voting rights, splits are done, etc. So you're basically buying essentially the same security. Okay. And that's what most people refer at uh IST or issuer uh sponsored uh you know tokenization where the issuer basically works alongside their transfer agent to make sure that uh you know there's some shares that are tokenized uh properly. So the transfer agents are computer shared um you know equinity computer has partnered with us

equinity has is in the process of being acquired by bullies as you know continental is also partner with us which is the one we use for our own uh equity and there's like a lot of other small ones uh out there but those three represent like the large majority for publicly trade uh equities in the US and then you have to go through the transfer agent uh to make this uh this happen. Now the second model is kind of like the the the DTCC model which is you tokenize the entitlement. Um what does that mean? It's so as I mentioned when you have shares on Robin Hood you actually don't have the shares on under your name. What Robin Hood has is a claim under your name towards shares that sit on DTCC which is the central securities depository. So DTC hels trillions of

dollars in shares and those shares are under DTCC. So the transfer general sees it's called CDN co which is a company that DTC owns as the kind of like the beneficiary owner but those shares in reality belong to the actual investor that has bought them through a property dealer. So what you have there it's an entitlement it's called and those shares are you know you have the same rights you don't have the shares but you have the same rights. So that's the the DTCC model uh where they are tokenizing their entitlements etc. Now the the disadvantage of that model is not you're not getting the same rights you are getting the same rights is that you're still sitting within the DTCC infrastructure right so you cannot take the shares on your self-custody wallet I

cannot move them outside to trade them somewhere else I cannot go and post them as collateral for DeFi et so the shares have the tokenized shares have or tokenized entitlements have less utility is more like an efficiency for the existing kind of market participants does not allow to create a new ecosystem as we're trying to create that is fully on chain. Okay. And then the other model are these derivatives that are offshore where you're not getting the shares, right? You're getting and it's kind of funny because a lot of people claim oh one to one back or is regulated blah blah blah but the first if you wanted to do one to one then there's a way to do it natively in the US and regulated. So those are I think most of the structures are structures as a debt. So where you know you are somebody is you know buying

shares on the open market is holding them somewhere at an SPV or a broker dealer and you get like a debt instrument against that uh you know SPV and that's how most of these uh offshore derivatives work where you're not getting the shares you're not on the cap table in some cases you don't have access to the same rights um because they also offering them permissionless so for instance if there's a dividend payout and you're on your wallet, you've never done KYC, you're never going to receive your dividends. Um, they're misled because the they are showing this as tokenized equities, but it's not a tokenized equity. You're getting a debt instrument, right? So, you're getting a different instrument that has, you know, a price structure against the the shares that sit somewhere else. So, those

models obviously in some cases the way they are structured, they are not legal in the US. That's why they block the US. They also issue them as permissionless tokens which has all sort of regulatory issues and offag issues because they can go into sanction wallets. Uh they're being distributed by unlicensed exchanges that do you have no protection as an investor when you're buying because you're not buying from a from a regulated broker dealer. Um uh they I remember one of the issuers without mentioning anybody uh but they actually issued this tokenized uh equity for I I believe it was for Netflix and then Netflix did an split and then the the the onchain version did not do the split and they were trading at five times different

price because the token does not really does not really represent the shares, right? So there's nobody that actually took care of uh doing the the split. So these are the kind of problems you're going to be facing when you buy this uh this these derivatives that you might run into issues when a dividend is paid and you don't receive it or you're not part of a proxy vote or they split and you're not affected or one of these companies might actually go out of business and then you lose your shares because they're held under their their SPVS and some cases not bankrupy remote etc.

Okay. >> So, yeah, this touches on a wider debate that's happening right now where the Securities Transfer Association, which is an industry group for transfer agents, >> is um you know saying to the SEC that they think that um tokenized securities should be authorized by the underlying issuer. >> Correct. >> And um it sounds like you're on that side. on the board of the on association. >> Well, we are very well aligned with that view.

>> Can you um just give a sense of why the other side wants to, you know, not have them be issued by the underlying um or yeah, not be authorized by the underlying issuer. >> Well, it's it's very simple because it's easier if you don't have to ask permission but forgiveness, right? So, and this is why you end up having, you know, Coinbase has not tokenized their equity, right? Or Robin Hood, but there is five different versions of derivatives of Robin Hood equity or or Coinbase equity that have been issued completely without Coinbase permission, completely with a Robin Hood permission.

Then those things are actually different because they're you're taking they're not the same instrument. They're all different derivatives issued by different companies. They're uh they're using the name of the company without their permission. In some cases, they list the QIP like if this was like a real security. QIP is this legal number that every security has. Um they they're offering them as tokenized stocks even though they're not stocks and they're tokenized something else. So if I was an issuer, I would not want that to happen. Also, it's a kind of worms, right? So I think uh Tom Farley, the CEO of Bullish posted the other day something very interesting. He said, "Look, I'm I'm the CEO of bullish and then there's somebody that has created a derivative of bullish equity that trades offshore in, you know, without KYC in a permissionless

environment. So, as a CEO, I can actually my CFO, let's say, can go there and buy or sell those those derivatives completely anonymously the day before the earning announcements." And this is obviously breaks a million different rules as you can imagine because you you're an insider and you're not allowed to trade before earning announcements because you know what's going to happen or you you can know whether the results are good or bad and how the stock is going to is going to move. So so as an issuer you just opening up for a lot of issues internally. Your own employees can get in trouble like some uh affiliates etc.

Not to mention that also your securities might actually be held or derivatives of your securities might be held by sanctioned people in sanctioned countries and uh you know opening to off rules etc. So I think that the reason they doing it is obviously because it's it's easier to do that. They can create 100 different derivatives of 100 different names without talking to anybody. So obviously you know that's there's a lot of there's less friction to do that then you have to go to every issuer and convince them to do it and work with a transfer agent uh etc. But the transfer agent association rightly so is saying this is not the model because issuers need to be able to control what happens with their securities with their company name with their QIPS and they need to authorize

what you do. The same way that I authorized that our shares trade on New York Stock Exchange and it's not that NASA can go and pick my shares and trade them there right has to be done with my authorization. So, so it's the same situation here, which by the way, it just feels to me like a very normal, fair ask, right? Because they're your securities and it's your company name and and your company reputation that is going to be exposed to all these potential problems happening there. >> Okay. Yeah. I mean, I think um you know, it's it seems like I I understand and that makes a lot of sense and yet at the same time there's something about it like just um coming from the crypto perspective where there's you know this notion of

permissionlessness and censorship resistance. Um but I agree maybe >> by the way the the this notion of permissionless and censorship resistant this these things are issued through centralized offshore exchanges there's nothing decentralized there so don't want to mention the names but everybody knows who they are and uh and they're also allowing Chinese people through VPNs to connect there to trade use derivatives or US stocks etc. So I I don't think it's because of the ethos of the industry is to be permissionless and decentralized. I think it's because you know playing regulatory arbitrage simplifies your business model. There's less friction, there's less cost, there's you know wider distribution because of course you can use unlicensed

venues to distribute etc. So I don't think that this is a you know you know crypto has moved. I think I don't think a lot of people uh that are doing these things are because they are you know really believing on on a permissionless decentralized world. It's just because you know they can make more money easier without less problems. Yeah. Yeah. No, I I um I see what you're saying and it makes a lot of sense, I guess. Um just one question. So, if people were still to try to pursue the uh derivatives in other jurisdictions, uh you know, so let's say that happened to Securize, like could you go after them in some other jurisdiction or like

how would that work? >> That's a good question. So since we printed the problem because we issue our own equity uh we don't have that problem as other companies uh have it. Um so I I don't know what kind of recourse I have if that happens to be honest with you because this is done in in in offshore jurisdiction sometimes in places like Jersey or places like that that are are hard to to reach. Um I guess we you can always ask them not to use your company name without your permission. I guess >> you just caught a piece of Unchained. I'm host Laura Shin and the full conversation is in the description below. We go live every Monday and Thursday. Subscribe so you never miss it.

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