Bruce Fenton Profile picture
Sep 23, 2018 35 tweets 12 min read Twitter logo Read on Twitter
1/ Here are the slides from my talk at #BH2018 Baltic Honey Badger by Hodl Hodl

My goal is to explain:
- why stocks/ securities are a foundation of global commerce
- how ledgers work now
- why Cypherpunks, Bitcoiners & free market economists should care

Past, Present & Future
2/ Understanding the problems and how ledgers currently work is key to addressing some major points people often ask about:

- the value of a blockchain or token
- why a database can’t be used
3/ Securities tokens will include many scams & many low quality offerings - if a securities token revolution occurs it may bring with it a large number of fraudulent & low quality offerings just like the ICO wave

However legit securities themselves are a key part of economics
4/ I think Cypherpunks should care about this for a lot of reasons

Anyone who cares about commerce, the economy or Austrian economics should care a lot about the capital markets

Why do I care? It starts with my mom, a former waitress who became a stockbroker in 1977
5/ I pretty much grew up in a brokerage firm - I played with the Quotron computer, read the pink sheets after school

Got my first job at 14 at Dean Witter, became a broker at 19 or so and eventually ran my own firm — then an RIA then I got into crypto
6/ if secutities is in your DNA you might think about things differently than if currency is your main focus

Most important is that current and secutities are VERY different

Features which make Bitcoin good money are irrelevant or counterproductive for securities
7/ Trust and trust assumptions are very important in evaluating money

Scarcity, limited supply etc are also key for currency...but not for securities

All that matters for a security is what the terms of the agreement are and how it can be enforced
8/ When evaluating digital assets there are many layers: first you should categorize if it’s a stock or other security, an illegal security, utility, collectible, protocol etc.

Then you can evaluate chain strength, security etc. then you eval other items

Here’s a cheat sheet
9/ This is called Spacesuitx @spacesuit_x and is Free and Open Source

It’s yours! Use it, copy, make it into an analysis business, fund, issue reports etc.

Hopefully the tool gives some ideas to think about when you evaluate digital assets
10/ Let’s get back to one key type of digital asset: securities

The first publicly tradable company was the Dutch East India Company, aka VOC

Prior to this, shipping expeditions were funded one by one - if your ship sunk you lost

This invention spread risks in a better way
11/ From a financial perspective, the results were interesting

1100+ people contributed about $300k each in today’s dollars

This spread risk in a way which had never been done before
VOC used this capital to do things no one had done

This caused rapid growth
12/ Eventually VOC became larger (in today’s value) than several of the world’s largest companies combined

A new form of sharing risk and trading that risk / agreement forever changed the way capital and business worked
13/ The idea of spreading risk among more than one investor was revolutionary

Thousands of companies followed the model of VOC

It seems normal now, but it was an amazing innovation and remains a fundamental part of global economics
14/ with a proliferation of stocks and other securities came markets - many are still in existence today
15/ these markets have used whatever tech has been available

Generally when better tech comes along capacity and volume increases
16/ for most of their history, markets have been run by pen and paper

Inventions like the ticker tape increased efficiency
17/ Here are traders at the Baghdad stock exchange after the US invasion

If you are a stockbroker and have customers and stocks and your whole world is on fire - what do you do?

You make trades & discover prices - even by whiteboard

Markets don’t stop for anyone

18/ Pen & paper isn’t scalable in global markets

Understanding the problem means understanding how the ledgers work today

Contrary to what many think it’s NOT your issuer (like Apple) who keeps track of the ledger of who owns shares

That’s done by a complex settlement system
19/ the volume is very large today

If you own Apple do you know you really own it?

You trust a custodian of a broker...but how do you know they have the stock?

Brokers don’t share ledgers with each other OR the securities issuer

They trust 3rd parties like DTCC & Euroclear
21/ Since brokers don’t trust each other with their ledger and the issuer doesn’t have the ledger, who does?

It used to be handled by a combo of bearer assets and internal ledgers

In the late 1960s it became consolidated with trusted 3rd parties

The settlement of securities caused scaling issues: it used to be settled by messengers delivering physical shares

The system could not track real ownership by 1996 so Wall St put all ownership of stocks in one name: Cede & Co then set up ways to claim this
23/ it’s complex
24/ There are only a handful of trusted 3rd parties who handle all the public secutities on earth
25/ there are drawbacks of this system

For example when Dole Foods was acquired, the company thought they had 36 million shares outstanding but 49 million shares worth of claims came in
26/ Bloomberg explains it well here:

You don’t own your shares
You own a claim on a claim to these shares
27/ There are other issues with trust of a centralized third party

Millions of shares were nearly destroyed by Hurricane Sandy for example
28/ It took a year and a half of specialists in secure rooms with water vacuums & dryers to recover the shares

The value: over $1 trillion

This may seem antiquated but DTCC is actually techncailly advanced - they do what is possible based on how the ledgers work
29/ We can do better

The ledger is already distributed - but we can eliminate the need for the trusted third parties and have tokens trade and settle just like Bitcoin or any other crypto
30/ You can use the power of a trustless distributed ledger whether the blockchain knows your token exists or not

On this video I created a real security using Bitcoin, Open Dime & a pen
31/ This has been done in larger scale as well
32/ This tech works
It has been employed, tested & proven
Securities tokens have been issued on Bitcoin & other chains
I believe this will continue & increase

Regulation is clear imho: (in the US that means following existing SEC regs)

issues will still need work:
33/ What could this mean for the future?

Unlocking trillions in capital and making a million businesses publicly traded

It will shake and transform the foundations for all we know about how capital formation and the global economy works

I think it will be massive
34/ Imho the best way to do this is with trustless, open source systems

If you want to work on this let’s do it

We are setting up a series of workshops in the NH countryside (or Seacoast) an hour from Boston is one conference coming up in a couple weeks
/ thanks for reading

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More from @brucefenton

Aug 14, 2018
1/ Some data points: major and well funded exchanges including Coinbase, tZero, Gemini and Circle have announced or taken steps to trade securities tokens
2/ Existing securities firms and exchanges such as ICE have announced and taken steps to list digital assets
3/ tokens (despite common issues with underlying economics) have shown to be tradable in active markets
Read 17 tweets
Aug 5, 2018
1/ Hey by the way, important point on securities tokens: While some people / companies talking about this topic think it’s about creating different blockchains for each security - I personally don’t think so & think that would be a bad idea
2/ securities tokens will almost almost be issued using another chain: Bitcoin (using tools like Omnilayer, Blockstream’s Liquid, or RSK which allows Solidty), Bitcoin Cash, Ethereum as ERC20 or with Polymath, Litecoin, Cardano, EOS, Ravencoin or another
3/ It doesn’t make sense for many tokens to have their own blockchain - they don’t need it. This is even more true for securities tokens - once one understands what a securities token is & how they will work when implemented properly this is more clear
Read 16 tweets
Jun 22, 2018
Problems with securities tokens:

- if value exceeds the value of the native asset on the chain it creates a security incentive change

- user controlled bearer assets will likely be lost or hacked more than current system

- ease of use could create boom of low quality projects
- while it will enable liquidity for small offerings, these thinly traded offerings will have some drawbacks for issuers due to low volume & difficultly communicating with shareholders

- tax and other legal implications will require investment

- For currently public companies we now rely on a 4th party to hold the ledger - this eliminates that

- for smaller companies it will be easier (in some ways) to raise money, move shares and transfer ownership

- liquidity increases - this is key for economic growth
Read 5 tweets
May 22, 2018
Things Americans are allowed to legally purchase:
- state sold lottery tickets
- diet pills
- timeshares
- casino gambling
- payday loans
- rent to own furniture

Hedge funds & venture capital funds which are reserved exclusively for Congress members & other rich people.
Sorry Joe Sixpack, no KKR, Apollo, Blackstone or a16z for you! Too risky! Now get down to the state lotto office.
... not to mention ...TAXES!

Taxation is obviously theft if you know how to use a dictionary.

These folks in Congress not only wont let working class Americans into their exclusive investment clubs... they have the nerve to steal wages from them for crony pork projects
Read 10 tweets
May 12, 2018
Trading is a difficult & specialized skill to learn.

I don’t get the logic of so many people choosing trading as a vocation within crypto: it adds a layer of risk to an already risky sector, takes time & skill and is very unlikely to generate Alpha over the broad sector or BTC.
In other words, unless you genuinely want to have a long term profession as a full time trader, don’t waste time following experts on charts, instead follow the best minds and create a thesis for where the overall industry is going, make long term investments, not trades.
If a crypto project works it will go up a lot. If it doesn’t it will go to zero — decisions about what to buy with a long term thesis are WAY more a factor to success than trying to put trade the other traders
Read 6 tweets
May 11, 2018
1/ Bitcoin maximalism in the sense of believing its the best or that it will be a global reserve currency makes a lot of sense. Maximalism in the sense of thinking that no other coin, token or project will EVER have value makes nearly zero sense. Here’s why:
2/ Science is meant to be moved forward by being built on: Satoshi built on ideas from Wei Dei, Nick Szabo, Adam Back and others - he or she chose an open source license, it’s meant to be copied and experimented with
3/ If a scientific idea is a good one it gets used and improved and inspires copies - even in the Bitcoin world where good ideas can be merged back in to the code it seems very likely that SOMETHING SOMEDAY created from this tech will have value
Read 27 tweets

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