November 30, 2017
I’m reaching out to let you know that ConsenSys is launching “The Brooklyn Project,” a company and industry-wide initiative to help fulfill the promise of tokenization by addressing head-on and — we hope — solving the issues that some regulators and others have raised over the last year regarding token launches. This project will be our top priority, and we will accordingly shift resources to this project for at least the next month or two before resuming execution of token launches.
We are taking this action now, because we, as a company and an industry, have a unique opportunity to restore trust between people and institutions. By acting responsibly today, we can help make sure we are collectively able to reap the benefits of this powerful technology tomorrow.
Tokens are built on a next-generation globally-shared database infrastructure — the Ethereum blockchain — that facilitates trustworthy, fair, and frictionless operations. All actors on this system can be certain that the rules are being fairly applied and followed by all. No minority set of actors or special interests can improperly manipulate the data or business processes, because everyone can directly inspect both data and business logic.
This shared global computing infrastructure enables “tokenization” of nearly anything — e.g., from common stock in a company, to a person’s identity, to a software license, to a particular pair (not just model or brand) of shoes. At bottom, tokenization is the creation of a natively digital asset that is represented on the Ethereum blockchain and has both the scarcity and veracity that otherwise would be achieved only relying on so-called “trusted third parties,” such as Equifax or Bernard L. Madoff Investment Securities LLC.
Tokens, as natively digital assets on the Ethereum blockchain, allow trustworthy, fair, and frictionless creation, verification, and exchange of assets. This has profound implications.
In their current form, many foundational elements of our societies — e.g., identity, reputation, trust, legal agreements, access rights such as software licenses, property title, and money — possess weaknesses and frictions such as fraud, paperwork, lost documentation, reliance on an untrustworthy “trusted third party,” or simply transactional costs of back-and-forth approval processes. Tokenization of these elements could eliminate or minimize all of these weaknesses and frictions.
Tokenizing these foundational elements could shrink clearing and settlement related to these elements into the instant of a transaction. Processes that currently take hours to weeks and one or more “trusted third parties” could be instantaneous and automatic. In effect, society could execute frictionless value-creation events — literally at the speed of light.
When societies can execute frictionless value-creation events, it can compound value faster. Just like the power of compounding interest, compounding value-creation events with minimized delays can be a profound driver of exponential growth for an economy. Because the Ethereum blockchain has low barriers to entry and is inherently decentralized, global, and transparent, we can expect this growth to be distributed more evenly across society than the top-heavy economic growth to which we’ve unfortunately grown accustomed.
Token sales, or so-called “initial coin offerings” or “ICOs,” are merely an early use case of tokenization. Though still in their infancy, we already see evidence of the profound potential of token sales. In 2017, teams all around the world have completed successful token sales totaling more than $3.6 billion. More than ever before, entrepreneurs in the rust-belt have a similar opportunity to raise capital or generate global revenue as their peers in Silicon Valley.
As with any new technology, there have been problems. We have seen scammers, bad companies and bad token models. We have seen projects that designed and sold tokens that are ostensibly securities, but that did not actually follow applicable securities laws.
These types of problems are not unique to tokens or blockchain technology. Scammers have long exploited information asymmetries to victimize consumers and improperly evade regulation. With token sales, there is reason to believe that the combination of their global reach and low barriers to entry may exacerbate some problems.
Be that as it may, the unique characteristics of Ethereum blockchain technology also hold the key to new solutions. “Smart contracts” on the blockchain could automate refunds if a project fails to meet certain milestones. And we can leverage low barriers to entry and easy global reach to crowd source prudent analysis and make high-quality information available to all global consumers and regulators.
This is not just theory. These types of projects are already in the works — here are a few examples:
- Balanc3 — Provides real-time transparency into the financial holdings of projects.
- Frontier — Will deliver decentralized fundamental research analysis for tokens.
- Messari — Will be an open-sourced Edgar-style database for important financial information on tokens.
These projects are building tools that raise the prospects not only of meaningful and effective industry self-policing, but also of regulators transforming from mere ad- or post-hoc players to real-time participants in the industry.
This is not to say that securities laws do not or should not apply to token sales. Clearly they should and do. For tokens that qualify as securities, applicable securities laws should be followed, though we can and should explore adapting these laws to minimize friction and leverage the open and transparent nature of the technology underlying the industry. But it seems equally clear that not all tokens should be considered securities.
For example, many tokens are the equivalent of digital consumer goods, and it must be possible to sell them in some manner, like other consumer goods, that does not implicate the procedures and handling required by the securities laws. Some regulators, like the Monetary Authority of Singapore, have recognized as much. But there still remains much uncertainty around the globe about the precise boundaries between and best ways to sell security and consumer tokens.
Helping to reduce this uncertainty is central to The Brooklyn Project’s mission, as is providing market participants and regulators with powerful tools to protect consumers and enhance the integrity of token-based networks. Just as we have in the past with other industry-leading initiatives such as the Securities Law Framework and Not So Fast — Risks Related to the Use of a “SAFT” For Token Sales, we will and already have begun to work with academia, law firms, regulators, and commercial interests to achieve our goal of creating and promoting best practices and new solutions.
Please look out for more developments over the coming days and weeks. We are more confident than ever in the Ethereum ecosystem and token-based networks, and look forward to building it together with you.
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