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Q&A with Lawson Baker, Founder at Relayzero

Lawson Baker will be answering questions on Wednesday, August 1st at 10:30AM PST. Lawson is focused on security tokens and mechanisms to allocate capital on-chain to a demonstrable cash-flow on-chain or secured by protocol.

Bio: Founder of Relayzero.com | Head of Project Zero at Tokensoft.io | Chairman of ManosUnidasPeru.org | Prior lives at SynapseFI.com and CrewsFS.com as an attorney and investment banker. | I am not your attorney or advisor. Token Daily Q&A is not legal or financial advice.

posted 9 months ago

with or if you'd like to join the discussion.
Brian Kim
Any other countries we should pay attention to in terms of security tokens and regulatory frameworks?
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lawson baker : 88发 babafa
@brianjckim, great. question. I am not as up-to-date on every country's laws relating to tokens sales (aka ICOs) and security tokens. However, I want to make two points.

(1) Playing regulatory arbitrage is a hard game when you understand that regulation occurs at the on and off-boarding ramps. What I mean by that, is regulation occurs where money, people, entities move. Stated differently, regulation will occur at central points of contact (e.g. banks, exchanges, border crossings, and internet access points). This regulation can arguably be for good (e.g. protecting investors from fraud) or bad (e.g. capital controls). The Venezuelan government blocking the IP address to AirTM and other cryptocurrency providers is a good example of this. Ideally, the infrastructure for our money and our internet is ideal agnostic. Our internet and money infrastructure should be ideal agnostic because truths for me are not truths for you. [begin dry sarcasm voice] Internet humans just like real humans have different ideals and grew up in different environments.

(2) There are a number of interesting token sale infrastructures that attempt to avoid regulation. Using foundations or proving you are using the token comes to mind. These do not work during presale of a token and likely do not withstand the test of time for centralized authorities in most cases (stressing "in most cases"). The point of what we are building is to enable decentralized, censorship-resistant tools. If you take money to build a protocol and create a token (i.e. pre-mainnet), then call it what it is. It's an investment. Then, do everything in your power to launch that bad boy (or girl) and trend toward decentralization. That's the dream and that's what we want.
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Lawrence Hecht
When allocating capital to demonstrable cash-flow, does that money have to be deliverable via crypto? In other words, if a private loan backs the derivative product, does the underlying asset have to be eventually converted?
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Richard Burton
Do you have token insecurity? 😂 Seriously though, what do you want to secure on-chain?
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lawson baker : 88发 babafa
@ricburton, this question actually made me salivate a little. Anyone who did not see Ric's recent post on Hashflow and Cashflows (disclaimer: I contributed to piece before publication) check it out now (https://medium.com/balance-io/hashflow-cashflow-7058fb60ddc5). These ideas are just scratching the surface of what is possible. Tokenizing work ends up tokenizing an investment and in the aggregate that creates a security token. Any time you have the opportunity to perform protocol-level work or perform work securing a layer 2/3 protocol or tool, then you also have the opportunity to secure an on-chain cash-flow and create a security token.
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Matt Hamilton
What are your views on the tokenisation of securities (or real world assets) on Proof of Work blockchains and other technologies in which the chain can be forked? e.g. When Bitcoin Cash forked from Bitcoin, every holder of BTC was awarded some 'free' BCH. How do you see that event happening with securities, or precious metals or whatever? ie. you can't just replicate the same security twice and have it on both chains.
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Erik Torenberg
What do you think is the biggest misconception people have around security tokens?
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lawson baker : 88发 babafa
@eriktorenberg, lots to dig into on this question. Follow the rabbit. :)

The biggest misconception of security tokens is that every traditional security needs to be tokenized. I do not believe in a world in the future where we will use blockchain-like technology to tokenize every off-chain assets (businesses, vegetables, kitchen tables, and your summer ham). Frankly, I think it's not a good use of the technology. I think tokenizing $FB stock is essentially like PDF the New York Times in the '90's to get it on the internet. This put the news on the internet but it was the incorrect use of the technology that likely only provides a 1.25-2x improvement over the alternative. And, frankly, it's unimaginative. The 10x or 100x improvements take a little more work.

The real value of Security Tokens will be in creating mechanisms to allocate capital on-chain to a demonstratable cash-flow on-chain or secured by protocol (i.e. layer 2/3/4). In this future, I think we will see the rise of new types of organizations (or even organisms - but that's another story for another time) that will not need a legal entity recognized by the state (e.g. Delaware C Corp). We will not need these entity types because we no longer need their social benefits (i.e. limitation of personal liability and mechanism to aggregate money or work/human resources). Arguably, at some point, these entities do not meet the definition of an investment contract, and, thus, not a security but that's not the point. The point is new technology enables new actions and the new actions will create new value not previously known.

There are lots of names for these types of entities from as simple as tokenized smart contract to decentralized autonomous organization ("DAO"). However, the DAOs that interest me the most are the ones where the Users are the Users, the Users are the workers, and the Users are the shareholders. This is about to take us down an incredible rabbit hole but, in short, this is using the tools of capitalism to de-captilize the ism. The desire to profit by a non-user (i.e. passive investor) is no longer competitive or relevant at some point. Decentralized Autonomous Co-operatives > bonded curves > :rabbit_emoji: > :hole_emoj: > we start to fall way deeper than this question asked. I helped write a piece about this last week and have been tweeting a lot about this the past few months. Feel free to mine that feed and stake a question.

Reading List:
https://medium.com/coinmonks/decentralised-autonomous-co-operatives-dac-and-the-rise-of-the-new-commons-721f5e1a7d3

https://twitter.com/lwsnbaker/status/1016717948986089472
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Adam Breckler
What do you see as the biggest challenges to adoption and use of security tokens today backed by on-chain “cash-flows”?
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lawson baker : 88发 babafa
@adambreckler @adambreckler, as for challenges to legal problems, we really just need clarity. This needs to be cross-jurisdictional clarity. Wyoming gave some intra-state clarity via their legislator. SEC gave interstate clarity via a speech and written statements. Still not clarity from actual federal legislatures.

But, what about the rest of the f*in world? Internet money and internet securities live on the...internet. We need clarity throughout the world or technology that does not lend itself to regulation. Given the track record of speed of adopting and enforcing laws of most governments, my bet is on technology winning this race.
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lawson baker : 88发 babafa
@adambreckler, the biggest challenges to adoption and use of Security Tokens are not challenges that live only in the Security Token world. The biggest challenges to adoption are delivery private keys to users in a UI/UX that makes sense so they do not lose the Security Tokens. I generally believe an E2E messaging app is likely the correct location to solve this problem but time will tell.

Other general issues with Security Token are as follows:
1 - Creating security token standards (e.g. EIP) rather than 10 different proprietary standards.
2 - Restricting the attack surface area and having standardized, tested implementation to avoid loss of funds.
3 - Oh, yea Security Tokens that solve a problem. That's important. No one will adopt the use of any token (security token, use token or whatever) if it's useless and does not solve a problem in the long run. Investment alone is not a problem (exception: bitcoin).
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Lawrence Hecht
@adambreckler challenges for investors, vendors, or just overall adoption?
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Adam Breckler
@adambreckler @LawrenceHecht challenges to overall adoption (could be technical, UX, or custody/legal etc)
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Jack Bright
Does the world truly need security tokens? What are the main advantages?
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lawson baker : 88发 babafa
@Jack-Bright, if you want your money to be free, then your putting your money to work needs to be free, too.

If you are using the technology properly, the main advantage of security tokens is performing trust-minimized work and being paid for such work without risk of failure relating to human behavior (e.g. censorship, irrational "economic" decisions, etc.).

See my answer above relating to government censorship and DAO/DAC rabbit for more thoughts on these ideas.
See also - https://twitter.com/lwsnbaker/status/1019642250706366464
And, this - https://twitter.com/lwsnbaker/status/1019642237053878272
Finally - https://unenumerated.blogspot.com/search?q=smart+contract
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Ben Floyd
What assets do you feel lend themselves best to becoming security tokens and will see the earliest adoption?
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lawson baker : 88发 babafa
@Benfloyduk, thanks for your question. Assets that should be tokenized should be live on-chain or be secured by tools of the protocol / chain. If the P&L of a company live off-chain, then the security does not really need to be tokenized. See also - https://twitter.com/lwsnbaker/status/1020177049674059776
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lawson baker : 88发 babafa
Excited to start the Q&A soon! I will prioritize questions relating to tech over legal questions but I hope to get to them all.
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Kacper Wikieł
Are security tokens platform vapourware? There is large amount of hype there but is there any tradeable equity token?
Why those platform are issuing their own utility tokens instead of dogfooding
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lawson baker : 88发 babafa
@kacperwikiel @LawrenceHecht, most ICO sales for tokens are vaporware. In some cases, they are vaporware because the technology is not built or will never be built to spec. In other cases, they are just not interesting use cases. I harped on tokenizing Facebook stock because it's not a good use of the technology. That being said, $FB stock has a liquidation value and potentially rights to future cash-flows. Read: Tokenized $FB may be a good investment but it does not need a blockchain strapped on it.
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Lawrence Hecht
+1 -- would upvote, but that function doesn't work for me.
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Soona
From a regulatory perspective, what were the most impactful decisions made re: crypto in the US this year
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lawson baker : 88发 babafa
@soonaorlater @LawrenceHecht, State level laws relating to cap tables and securities is moderately intersting but not super useful for businesses that live entirely on-line and eventually on-chain. However, check out the mutual company laws. Then, read the Decentralized Autonomous Co-operative piece. These are stepping stones to something a lot bigger.
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lawson baker : 88发 babafa
@soonaorlater, great question, too! This one is pretty important so I took some time to draft something in advance.

Without question, the SEC signaling that ether is no longer a security was the most impactful decision of 2018. This is a great example of regulators beginning to understand that cryptocurrencies, if decentralized enough, do not fit into the box of normal securities.

Stated differently, the security analysis of a supposed decentralized cryptocurrency needs to be reviewed at least two times: (1) at the time of sale; and (2) at mainnet launch (and potentially as the network evolves).

Decentralized cryptocurrencies do not fit into the box of securities because at some point you can no longer point to a common enterprise or administrator controlling the success of the project. Many people like to point to Vitalik as the central point of control but the existence of Ethereum Classic suggest otherwise. Arguably, ETC is what initial contributors purchased during the presale. Code is law.

That being said, I think its very important to note that the SEC did not say. They did not say what ether was when pre-sold to purchasers prior to the Ethereum mainnet launch. This most likely was an unregistered security sale which the SEC will either exercise regulator discretion and not prosecute or enter into a settlement with the Ethereum Foundation to signal how presales of tokens (aka ICOs) should be done in the future. Maybe, even stick some funds in a separate entity to educate token developers on how to sell tokens to the public without breaking securities laws.

Finally, the SEC's remarks also did a good job of describing the factors they think are relevant when assessing whether the sale of a supposed decentralized cryptocurrency is an investment contract and, as a result, a security. Here are is the link to the remarks so you can see the list of factors and the SEC's reasoning.

SEC Remarks: https://www.sec.gov/news/speech/speech-hinman-061418

Also, I wrote about why Ether was likely not going to be classified as a security here (https://twitter.com/lwsnbaker/status/982036940512874496) and here (https://medium.com/coinmonks/ether-is-it-a-security-ec91ce01755f).
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Lawrence Hecht
@soonaorlater @lwsnbaker so nothing about state-level regulation? Especially regarding tokenizing securities, Delaware keeps on popping up.
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nic carter
Subjectively, how would you assign the respective odds of:

- Ripple gets off scot free
- Ripple gets a slap on the wrist and continues unabated
- Ripple faces a serious enforcement action leading to the delisting of XRP at US exchanges
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Lawrence Hecht
What advisory firms or consultants are you keeping your eye on re: security tokens?
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lawson baker : 88发 babafa
advisory / consultant firms for running a security token sale? If yes, I'm biased but Tokensoft.io is the best I have seen. I watched a lot of ICO token sale platforms rise and fall over the past year. I saw even more failed platforms during the post-kickstarter crowdfunding days (See - https://twitter.com/lwsnbaker/status/1007310081434648576). Tokensoft stood out to be the best in class because they had an attitude of doing what is right for the customer from the beginning. This included the times when they had to tell a potential customer something is a bad idea or even rejecting business. This is a level of maturity that stands out in the way they run their business and build their tech.
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Lawrence Hecht
@LawrenceHecht @lwsnbaker thanks. Good stuff. I retweeted a few from the thread.
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Jean-Malo Le Dreff
What's the best stack for crypto storage and management for a company ? Maximizing security and usability.
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lawson baker : 88发 babafa
@jeanmalold, are you asking about storage of cryptocurrencies or security tokens by a legal entity? I recommend multi-signature setup with and off-line first and always approach. We have a mult-sig wallet at Tokensoft.io called Knox that meets this criteria. I'm happy to explain more if you DM me on twitter (@lwsnbaker). I can tell you want you want to look for and you can make a decision for what stack and provider works best for you.
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Patrick Mrozowski
Do you see Security Token Offerrings taking over as a fundraising tool?
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lawson baker : 88发 babafa
@patrickmro_ , they already have. Traditional finance is coming in at a very quick pace to create security tokens for businesses and assets commonly securitized by Investment Banks and Wall Street players. Real estate projects always enjoy very large demand (not because they are great projects but because of capital controls but that's anther discussion). Arguably, the biggest advantage of security tokens for off-chain assets is opening up US investments to non-US investors. That being said, securities laws exist everywhere and traditional players will compete for this business (https://twitter.com/lwsnbaker/status/1007114764189773824). From my stance, Angelist was likely the biggest improvement to private sales of startup equity. They opened the door to international investors and standardized the investment process. The 1.5x-2x improvements in equity based security tokens will be found by providers that embrace the payment rails found in cryptocurrencies. However, the actual security token does not really need a blockchain because, at the end of the day, the company controls the cap table and can issue more stock per the governance documents that live off-chain. Ditto the rest of the business assets which the equity holders have rights to...this is not enforceable on-chain. Thus, it does not need a blockchain.
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Brett Richey
What are your thoughts on tokenizing cap tables of existing businesses?
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lawson baker : 88发 babafa
@Brett-Richey See cap table discussion above answering Patrick M's question.
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Nathaniel Whittemore
Hey Lawson! I’m interested in the perspective you’ve been sharing recently about tokenized securities that suggests that the use cases we’ve been focused on - putting stocks on the blockchain for example - are actually sort of boring and certainly not the real exciting stuff. Can you share what type of use cases are more interesting and any examples of representative projects you’ve seen?
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lawson baker : 88发 babafa
@nlw, yes! Binance's token ($BNB) is quarter step in the right direction. When users can share in the cash-flow they produce via work (trading, advertising/referrals, pull request contribution, etc.), then you start see some incredible incentives. At some point, the cap table of the business is irrelevant and the users are in control. These are the types of tokens in the future that will have the most intersting rights to cash-flow. Separately, staking / baking-as-a-service or protocol level ways to create security tokens with a little ingenuity. And, the list goes on for this question. Lots of fun opportunities!
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Nathaniel Whittemore
@nlw @lwsnbaker little follow up - do you think we’ll see different types of fund structures to accommodate these different types of return? Anyone who is doing this yet? Thanks for your insight!
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Tomorrows Gone
@nlw @lwsnbaker Does a tokenised venture fund, with a buy-back and burn model replacing dividends fall into this category of next gen tokenized securities?

https://cdn.invictuscapital.com/whitepapers/hyperion.pdf

I'd also appreciate other examples.
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Katherine Wu
Thanks for answering our questions, Lawson!

Wanted to get your take on the regulatory narratives around crypto. For example, it seems that between the CFTC/ SEC, the former seem to be much more open to embracing the tech, while the latter takes on a more conservative tone (though we may be seeing a shift between the latest Hinman speech and Peirce's dissent).

The OCC's fintech announcement yesterday signaled that they are open to embracing a regulatory sandbox for fintech firms (which of course would include crypto payment firms).

Do you see other U.S. regulators following suit to allow for tech innovations in a sandbox environment?
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lawson baker : 88发 babafa
@katherineykwu, the US financial and banking system is a mess in one sense and in order in another sense. The fact that regulators are internally disagreeing and willing to disagree publicly is actually an incredible investment hypothesis for the entire class of assets. The OCC's fintech charter is welcome but is not actually new news. It's a reframing of the same statements they have made in the past. I think their internal discussions on who to regulate and how to regulate ended up with one answer: make it easier to regulate or more precisely be in compliance. The OCC announcement was a reminder and an opening of the door.

That being said, I think Fintech has largely been a failure due to regulation but I am 1min over so I'm out of time. See this for more - https://twitter.com/lwsnbaker/status/1022657028412518403.
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