Security Token news for Week ending 31 January 2020

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Here is our pick of the 3 most important Security Token news stories during the week:

One. Vertalo Chooses Tezos for Security Token.

The Austin, Texas-based transfer agent, Vertalo shocked investors after announcing it would transfer its tokens over to the Tezos blockchain. The decision to convert tokens over to the Tezos blockchain comes after Vertalo executives examined the benefits of such a transfer carefully  after it announced that its VToken smart contract securities would be produced on the Tezos blockchain, by default, for all new issuers.

Transfer Agent is one of those niche jobs that are a relic of legacy finance. So interesting to see them move into Security Tokens. Plus, it is interesting to see them move from Ethereum to Tezos.

Two. Swiss company Overfuture To Offer Tokenised Equity Crowdfunding (Security Token Offering).

Swiss company Overfuture has been approved to list the first articles of incorporation hosted on the blockchain in Switzerland. Overture will list class A shares hosted on blockchain as they tokenize their Initial Product Offering (ICO), and furthermore, onto secondary trading of the digital asset.

NYLON dominated Legacy Finance but Switzerlend maybe the place for Blockchain Finance. It is a crypto friendly jurisdiction with an open economy and great technology education. 

Three. Israel Promotes Development of Security Token Sector.

This week, Israeli officials raised eyebrows across the entire blockchain sector after the Israel Securities Authority (ISA) announced that the country would actively pursue the development of a security token trading platform. The decision to actively facilitate security token trading in its jurisdiction is far cry from the country’s neighbors, many of whom, banned crypto trading over the last year.

In Legacy Finance, ventures had to cluster in a few overcrowded expensive cities where the money was. In Blockchain Finance that becomes decentralized so you can build it in Tel Aviv and stay there. 

We have a self-imposed constraint of 3 news stories each week because we serve busy senior leaders in Fintech who need just enough information to get on with their job.

For context on Security Tokens please read the chapter on Security Tokens in our Blockchain Economy book and read articles tagged Security Tokens in our archives. 

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From Treaty of Westphalia (start of national sovereignty) to global Blockchain governance to a more practical outcome =  arbitration clauses

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People who geek out on code is law and law is code (I plead “guilty as charged your honour”), will love this. Busy entrepreneurs and executives may want to jump to the practical takeaway about international arbitration clauses.

The problem today is summed in the old schoolyard dialogue:

“I am right and you are wrong”

“Yea, who says?”

“I say”

“Yea, you and whose army?”

Law has to be backed up by credible force. Which is an issue when there are 195 countries, each claiming national sovereignty.

The Blockchain borderless alternative is not yet working, as we explore in the chapter of the Blockchain Economy book entitled why non state governance for bitcoin, ethereum and other cryptocurrencies is so hard. Irony aficionados enjoy the fact that about a year later after raising what at the time was record amount for an ICO to solve governance by code, Tezos collapsed into ye olde courtroom battles.

TL:DR. the legacy system is broken and the replacement system is not ready. Fortunately there is a practical hack which is international arbitration.

Treaty of Westphalia.

For historians and international jurisdiction lawyers, the Treaty of Westphalia in 1648 is the seminal event that led to the rise of the Nation State with the principle of Westphalian sovereignty. This is the principle in international law, enshrined in the United Nations Charter, that each nation state has exclusive sovereignty over its territory.

When I used to run an enterprise software company I recall the sometimes heated negotiation about which jurisdiction  was used in the contract. This was not an academic debate. In a dispute, you want to be on your home turf in a language and legal system that you are familiar with. That is a tough enough conversation  between two parties. What on earth do you do when the participants in a Blockchain contract maybe from hundreds of countries and the issuer maybe from an offshore jurisdiction (where there are simply not enough lawyers and judges to cope)?

Binding Arbitration

Our Advisory Services are known for their combination of big picture thinking with pragmatic execution. So, enough of the big picture thinking, lets move onto the pragmatic execution. If the legacy system is broken and the replacement system is not ready, what is the practical hack? The answer is a Binding Arbitration clause. 

Binding Arbitration is is a clause in a contract that requires the parties to resolve their disputes through an arbitration process, outside the courts.

It must be binding. All parties must accept the conclusion of the abitrators. If not, lawyers for one side will find a way to drive the dispute to the courts, making arbitration useless.

That means that the location for arbitration is critical.

Location for Arbitration

The location for Arbitration must meet these criteria:

  1. Big enough economy to have enough lawyers and expert witnesses. The disputes will be at the intersection of Blockchain technology and law and how many people understand enough of both to be part of a credible arbitration process?  Offshore jurisdictions usually fail on this score. The issuer jurisdiction does NOT need to be the same as the Arbitration Location.
  2. A rule of law that is globally respected.
  3. Good airports and plenty of flights (usually goes with 1).
  4. English language. It is the closest we have to a global language of business (much as we may not like the cultural erosion from less use of local languages).
  5. A time zone that works well globally.

Switzerland, where Tezos was adjudicated, met 1,2 & 3 bit not not 4 (although, as a Brit living in Switzerland, I can attest to the fact that English is widely used for global business done within Swiss borders). The Swiss brand around neutrality does help build confidence.

5 is where UK is better than USA, Canada or Australia, but it is a less critical criterium. I am seeing more arbitration clauses set in UK, which will be a boon for UK lawyers and expert witnesses (a smidgeon of good news among all the Brexit turmoil).

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Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is the author of The Blockchain Economy and CEO of Daily Fintech.

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