Blockchain is an Opportunity for Forward-Looking Law Firms – Eamon Walsh Of Tokeny

In Depth Interviews Regulations Security Tokens
Maciek Klimowicz
Written by Maciek Klimowicz

We talk to Eamon Walsh, the head of compliance at Tokeny – a Luxemburg based fintech company in the security tokens space – about the legal aspects of Security Tokens and what it means for lawyers.

Main outtakes:

  • The word is out there – security tokens are securities. Whether you call it a digital asset or a security token you’re going to have to deal with securities laws, and in most jurisdictions, sanctions can be extremely strong.
  • As blockchain technology is further embraced and used more widely, some of this legislation is going to line up more seamlessly.
  • Regulators are always going to need some form of oversight. The biggest thing for them is to have a responsible party, so if a blockchain fails, they will have someone for the ax to fall on.
  • The programmability is the real big benefit of security tokens, because it allows us to code in the compliance rules straight into the token and therefore it creates a much easier transferability.
  • Tokens are securities and issuing a security is a complex activity that involves many duties, both to your investors and to the regulators. Founders shouldn’t expect this to be just a simple, easy way to raise funds.
  • When doing any kind of security offering, whether its digital or paper, a solid legal partner is always going to be high on the founder’s list.
  • The whole ICO scare put a lot of people off. But I think that institutional finance is now starting to understand that it’s not necessarily how it has to be, and that an STO can be very buttoned-up and follow all the rules pretty easily.
  • Lawyers need to see blockchain as an opportunity. They need to look at the bigger picture – this is a huge new emerging technology, and market, and it’s going to provide a lot of opportunities for navigating new legal waters.

 Would you like to give a brief intro into what Tokeny does?

Tokeny is a software company that provides white-label platforms for companies that want to issue security tokens. We also provide management tools for the secondary market – management of the tokens, managing the investors’ rights and things like that. We are an all-in-one software solution.

Why is compliance important in the security tokens world? From what we hear from the people we speak to, it largely aligns with the existing regulations, are there any differences to consider when issuing a token? 

What you’re seeing is correct, a lot of the rules are going to align with what already exists, and compliance is a big issue in security tokens, because the word is out there – security tokens are securities; whether you call is a digital asset or a security token you’re going to have to deal with securities laws, and in most jurisdictions, sanctions can be extremely strong, so it’s important to be aware of all the compliance issues.

One big difference in deploying a security token is that you’re really deploying a digital token that represents a share, and it’s on a more decentralized infrastructure. Some countries already recognize blockchain as a legitimate infrastructure, so this isn’t an issue, but there are some regions and jurisdictions where they don’t yet officially recognize this, and so there may be a process where you have to mirror that deployment off-chain, in a paper way. But generally, security tokens are designed to comply with all the existing legislation and we try to build the compliance into the product to make it easier to deploy.

What do you think the most complex digital asset is and will we ever be able to automate everything?

When it comes to the assets, each financial product is going to have its specificities, but the asset itself is not what is going to make the transaction difficult, I think the biggest difficulty is that, for example, one state might have their own little rules that other states don’t have, and that’s where the complexities will come in. When you’re looking at where the token will be distributed, to what type of investors, and what kind of investor rights you want to put in and associate with that token, each type of asset and country is going to bring about unique compliance hurdles.

But as the technology gets more embraced and more widely used, some of this legislation is going to line up more seamlessly. The tech can always be put in there so that we can make each offering compliant. Wherever the client wants to do it, they just need to lay out exactly where they want their assets sold, so both ourselves and their attorneys can make sure that they are following the rules in whatever jurisdictions it’s going to be available in.

Do you think this is a dream come true for regulators and governments, the way everything is tracked and they have complete visibility of everything that’s happening? Will they embrace it?

I think they will, eventually, and I think they are already very keen to accept blockchain technology because the records and history are there for them to see. For issuers, it’s really easy to pull records of who bought their tokens, where they are based, whom they’ve sold to. There is also the very simple thing of just a lot less paperwork for the regulators, which I’m sure they will always enjoy. And in the long term, I think they will embrace it because of the ease it has on their job.

But they are always going to need some oversight in some form, the biggest thing for them is that they always need a responsible party, so even if it’s a blockchain, they need to have someone responsible, so if that blockchain fails, they will have someone to have the ax fall on. I think it will likely take a while for the tech to be fully embraced by the regulators, just because it is complicated technology, they probably don’t fully understand each aspect of it yet. Regulators also like to see a lot of use cases that show the benefits and that it’s working without failure. But I think, in the long term, it’s definitely something that is going to be embraced.

What are the main advantages for someone interested in issuing a security token?

The programmability is the real big benefit because it allows us to code in the compliance rules straight into the security token and therefore it creates a much easier transferability. And that easier transferability is going to bring about liquidity. And then, because each transfer is tracked on the blockchain, it’s always known to the investor what’s happening with their token, and it’s easy for the investor to keep records, and therefore, the operational costs are going to decrease significantly for the issuer. So, you’re going to see a lot of liquidity come in, because of the ease of that and the ease of cost.

What advice would you have, from a legal compliance standpoint, for someone interested in issuing a security token?

Tokens are securities and issuing a security is a complex activity that involves many duties, both to your investors and to the regulators. Founders shouldn’t expect this to be just a simple, easy way to raise funds, they shouldn’t expect it to be like the ICO days when you really didn’t have any compliance consideration or any consideration for your investors. So, it’s important that they know that it is a very different thing to do an STO than an ICO. And when doing any kind of security offering, whether its digital or paper, a solid legal partner is always going to be high on the founder’s list, in my opinion.

They should also be aware that while there are a lot of technical solutions out there that apply compliance, they don’t all do it in the right way, and not all tech solutions have the ability to comply with each region that the issuer might want to sell in. So it’s important to make sure that your tech solution lines up with what your legal partner needs to have done.

Tokeny positions itself as a technology solution but the technology that you’re producing is driven by compliance frameworks. What happens if a client comes to you and says ‘We have this esoteric requirement’. How do you approach that?

We enforce our compliance by coding the rules into the actual offering, into the token. And our system is extremely flexible, for where the issuer wants to sell, and whom the issuer wants to choose to trust with those sales. So, for each offering, you’re going to see unique rules, such as an “X” number of investors, what authorized countries you want to have it in, who is allowed to buy, whether they are accredited investors.

There are some rules you’re going to see for the investors too – that they are going to need to do KYC/AML accreditation checks and things like that. For the most part, I believe we have the tech to implement whatever legal needs the client may have, that process really just involves discussing those needs with the client’s attorney or legal advisor to make sure we have everything in place that they need. The only thing that wouldn’t be automated, is if they are in a region where they would need something off-chain, on paper. But I believe we have the requirements to implement all the legal needs to follow all the compliance rules that may come up throughout the issuance.

Are STOs exposed to any particular risks and are there any frameworks out there to guide people through technical aspects of it?

Whether you’re doing an STO or not, every time you’re issuing a security token, you’re going to have a lot of things, like proper KYC, to do for the incoming investors, and there is always going to be harsh penalties for not doing these correctly – such as fines, obligation of refunds, even jail time, can be applied by regulators in some places if you’re lacking compliance. So, I don’t think an STO project necessarily exposes itself to more risks, but the fact that you’re exposing yourself to a much larger market could theoretically bring about a lot of risks.

But that exposure to risk can be greatly mitigated by using proper KYC/AML providers, and attorneys like this, because it takes the risk off their shoulders. As far as the basics that any issuer needs to follow, there is a lot of guides online, we provide some of these guides through our eBook and some of our services, so some of the basics are out there. And then, it’s just about finding good legal counsel who will navigate a lot of the small, technical issues that are going to come up.

At what point do you think STOs will become beneficial for institutional finance?

STOs mostly concern private markets at the moment, and that’s because these markets really don’t have much infrastructure or any infrastructure at all; the trust in those transactions usually falls upon a lawyer or a notary. I think there will be some real interest for institutional finance because it’s going to open new markets and allow for some smaller and mid-cap companies to grow at a faster rate.

Then there are also going to be compliance hurdles that the institutional finance is going to have to look at, though for the most part, I think those hurdles are kind of the same as they always have been. It just becomes a bigger market, because of the opportunity that the new tech is going to bring about. I’m not sure how soon institutional finance is going to embrace it, they have the infrastructure, but I think they are going to see that this technology is going to ease some of the things that they already do, so I think they will slowly adapt it into their marketplace.

Is Tokeny having conversations with governments and regulators and what repose do you get?

We are talking a lot with governments and regulators, and so far, we’ve had a ton of really positive feedback. We are a tech enabler, we are opening up opportunities, we are not pretending to try to just disrupt the whole market, we want to give tools to people who are already in the market and show them how they can benefit from the blockchain. And when governments and regulators see that we apply and automate compliance that brings a lot of innovation to the space and makes it easier on their job, it’s one of the reasons why we are being welcomed.

It’s also just opening that dialogue with governments and regulators and letting them know what we’re doing, asking for their guidance and asking them what they see is missing in this space. Also, now that institutional finance is starting to understand that you can do an STO without cryptocurrencies, they are getting a little more comfortable with it. I think the whole ICO scare put a lot of people off, and just the idea of cryptocurrencies might put them off. I think that they are now starting to understand that it’s not necessarily how it has to be, that an STO can be very buttoned-up and follow all the rules pretty easily, and I think they are going to be very comfortable with it and embrace the technology.

What milestones do you think need to be met by the industry?

For me, one of the big milestones is that we need quality security tokens and digital assets to be available – that people actually want to invest in. Early on we’ve seen some smaller, not necessarily great-looking companies trying to do an STO – because it just looks cool to have new technology. But turning a not very attractive company’s property into a digital asset doesn’t necessarily make it worth investing in, and so I think part of that liquidity is that we are going to have these good products out there for people to invest in.

We also need to have more investors that are properly identified on the blockchain, where they have an ID that’s identified, which is going to make it a lot easier for onboarding people, for trading, and for secondary exchanges. The third big milestone would be channels for the distribution of security tokens. We’ve heard a lot about these security token exchanges being built over the last couple of years, but we need to see those built out more and have higher volume and more quality assets traded there.

What opportunities do you see for the legal industry with security tokens? 

I think it’s going to be a huge opportunity. I know right away, at the surface, some attorneys might see it as a threat to their work, because automation can take away some of the things that attorneys do. But on the flipside, it takes a lot less time and repetitive tasks that I don’t think attorneys necessarily have a lot of fun doing. So, I think they just need to see it as an opportunity and look at the big picture – this is a huge new emerging technology and market and any time there is new tech and new markets, it’s going to provide a lot of opportunities of navigating new legal waters.

So, I think smart, forward-looking law firms are going to find a lot of opportunities in the emerging markets – anywhere you look you will see new places in the legal space, that weren’t there before. If I told you, three or four years ago, that there are going to be law firms that specialize in keeping ICO founders out of jail, you’d have no idea what we are really talking about. Looking forward there are things out there that we don’t even realize that attorneys are going to have to provide to the marketplace.

Listen to the full interview here 

About the author

Maciek Klimowicz

Maciek Klimowicz

A seasoned writer and editor with 10 years of experience in a variety of print and online media. Recognizing the transformative potential of the blockchain technology, Maciek has now put his pen to work to explore the key issues of this fast-evolving sector. Contact him on [email protected].

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