Commissioner Peirce’s Safe Harbor Proposal Could Create Path for Digital Token Innovators

February 6, 2020

Today, SEC Commissioner Hester Peirce announced a proposed safe harbor for certain tokens under the federal securities laws. The Chamber of Digital Commerce encourages efforts to create a path for innovators to create and circulate digital tokens as they develop their networks toward a decentralized or functional technology platform.

The proposal exempts transactions involving digital tokens from the Securities Act of 1933 if the token is intended to be decentralized or functional within 3 years, and also contains additional disclosure requirements for the digital token developers. The safe harbor would allow token developers to begin their projects with clear parameters and disclosure requirements as they ideate, define, and begin to develop their solutions.

We look forward to working with Commissioner Peirce and her team to develop this proposed Rule, which has the potential to provide a clear path forward for those creating new innovations and solutions leveraging digital tokens.

Tokenizing Professional Sports Franchises

By David M. Otto, CounterPointe Sports Group, Inc.

The National Basketball Association (“NBA”) is currently considering a proposal that could provide liquidity to minority owners in the league and enable a broader range of investors to secure an ownership interest in a professional sports team. This proposal, scheduled for discussion at the NBA’s upcoming board of governors meeting in April 2020, represents a timely and unique opportunity to design and implement a model for tokenizing economic interests in professional teams.

The concept of tokenization is simple: it is the process of creating a digital version of your interest in an asset such as a professional sports team. In other words, tokenization allows a traditional asset—such as commercial real estate, works of art, or rights held in a sports team—to be transformed into a liquid, tradable digital contract. These digital contracts are referred to as tokens, and are kept and transferred from user to user on a designated blockchain platform.

Creating a digital version of an interest in an asset effectively ‘pegs’ the value of the tokens to the value of the underlying asset—for example, a particular percentage of an NBA franchise. By ‘pegging’ the token value, the token becomes both a mechanism for securing liquidity and a ‘currency’ that enables the buyer/holder of the token to realize that value in actual currency at the buyer/holder’s discretion.

This approach addresses the concerns of many NBA minority owners regarding the illiquidity of their ownership. Currently, the team ownership model in many professional sports franchises is highly centralized, illiquid, and the province of a select few with the capital and net worth necessary to acquire some or all of a team. This model—as the NBA is currently experiencing—is inefficient, cost-prohibitive, and economically punitive to sellers, particularly with respect to the sale of minority interests.

Tokenization enables fans, sponsors, communities, and other interested parties to participate in the growth, development, and value derived from professional sports franchises. As the tokenization process gains mainstream acceptance, and interests in professional sports franchises become increasingly tokenized, both access to these tokenized assets and the liquidity associated with them will create new economic opportunities, re-write valuation models, and activate an increase in global wealth creation and distribution for all participants.

Tokenizing professional sports franchises, however, does more than enable a team’s fan base to participate in the economic benefits of their favorite sports team. Tokenizing team ownership democratizes access to economic benefits associated with alternative asset classes, and creates liquidity for both minority and majority owners by allowing market participants to buy and sell team tokens. From the franchise’s perspective, tokenization provides teams with a mechanism to reward a loyal local fan base by programming bonus features into their team tokens. These ‘reward tokens’ enable teams to extend their brand globally, as token buyers/holders in countries on the opposite side of the world will be able to participate in team activities, both economically and with regard to team governance.

Tokenization also represents a sustainable model for broadening economic access to and increasing levels of fan engagement in professional sports franchises. Given the economic concerns and realities the NBA seeks to address, the growing global interest in this asset class, and the technological capabilities available today, it is time that the ownership of, and economic benefits associated with, professional sports franchises become more readily accessible, affordable, and transferrable. The current exclusive ownership model and the corresponding illiquid asset is outdated. Professional sports franchises, starting with the NBA, can lead the way in decentralizing ownership and transferring over value to those who generate it, thereby enabling them to participate in its appreciation.

About the Author.

David M. Otto is the Co-Founder, President, and General Counsel of CounterPointe Sports Group, Inc. Mr. Otto has 33 years of experience in finance and corporate law, mergers & acquisitions, securities, and corporate governance.  He is currently the Founder and Managing Partner of the law firm Martin Davis, PLLC, the private equity firm Otto Capital, LLC, and the venture capital firm CounterPointe Ventures, LLC, and a thought leader on decentralized business models, token economics and, capital markets and securities regulatory compliance.  Mr. Otto holds a B.A. from Harvard University and a J.D. from Fordham University School of Law.

The Road to Implementing Blockchain for Recordkeeping Might Just Start with Vehicle Titling

By Shane McRann Bigelow, CEO, Ownum

Vehicle ownership is a massive market. Every vehicle sale requires a change of title — a record of ownership maintained by local government — and more than 272,480,000 vehicles were registered to their owners in the U.S. in 2017 alone using manual, paper-based records. This manual process is not only inefficient but costs between $50 and $90 on average to title and re-title vehicles. The status quo is an expensive, slow, and worse, a fraud-prone paper-based system.

Recognizing this issue, states have embraced efforts to migrate the vehicle titling process from paper to online computer systems. Storing information related to car titles in centralized databases allows for increased efficiency by reducing the time required to mail or hand-deliver documents.

However, this type of centralized, cloud-hosted database does not solve all of the issues. Firstly, it duplicates the information contained on paper titles. Secondly, a centralized database can still only be updated by the owner, meaning the same linear information-flow between stakeholders, which is a cause of inefficiency today. If law enforcement, car purchasers, and state governments long for a system in which real-time updates can inform all users of an unpaid tax, undisclosed lien, or lapsed insurance, there’s another technology that’s better placed to help.

Blockchain offers a far better solution.

The unique qualities of blockchain  — including distribution of data, implicit security, and the ability to encode updates to database record details automatically — can be applied to enhance numerous types of records such as liens, insurance, ownership transfers, tax payments, and of course the titling of vehicles. A true digital title in a transparent blockchain environment would dramatically increase the security and efficiency of processing the record while greatly reducing opportunities for fraud and mistakes, which can be made along the way.

At Ownum, for example, we’ve set forth to accomplish a new CHAMPtitles solution by utilizing a Blockchain Encrypted Ledger That’s Executable and Distributed, a BELTED system. Our aim is to create a trusted marketplace whereby all disparate parties are linked together in a secure and immutable way. This allows for the electronic verification of each party’s relevance and stake in the vehicle transaction.

In evaluating the goals of business, government, and consumers, a digital titling system on the blockchain could deliver many desired benefits. For a start, digital titles stored on the blockchain could cut total processing time from days or weeks to minutes or seconds. Indeed, consumer testing undertaken to date shows us that such a system has the capability of slashing total time spent at every stage of the titling process, including data entry, review, and approval, for every participant in the process.

States spend tens of millions of dollars per year on the current auto title process, a cost borne by taxpayers. A true digital title system will make our roads safer, reduce costs, and benefit business, government, and consumers.

Now just imagine the benefits applied to other industries and inefficiencies. The possibilities are endless.

U.S. Members of Congress Urge IRS to Further Clarify Virtual Currency Tax Policy

December 23, 2019

On Friday, a bipartisan group of Members of Congress sent a letter to IRS Commissioner Charles Rettig requesting that the agency further clarify its tax policy as it relates to virtual currencies, hard forks, and air drops. The letter is a follow-up to a letter sent by 21 Members of Congress, led by Congressman Emmer, requesting guidance on how to report virtual currency in tax filings.

The Chamber supports these Members in their efforts to create a predictable legal environment in the United States by requesting that the IRS clarify its guidance related to virtual currencies issued in October. As noted by Congressman Tom Emmer (R-MN), “Taxpayers deserve the certainty of clear rules of the road so that every American can use this transformative technology, and rest assured they are complying with their tax obligations.” We appreciate the work of Rep. Emmer and the Congressional Blockchain Caucus and its leadership in its pursuit of these important goals.

Specifically, the letter states that the guidance, as written, must be updated to accurately capture the issues virtual currency users face. To remedy this, the letter asks the IRS:

• • How it intends to update its hypothetical cases to more accurately reflect scenarios virtual currency users are currently facing;
  • Whether it will clarify the determination of exercising “dominion and control” over forked assets using recognized standards; and
  • That until clear guidance that is prospective in nature is issued, the agency will not use its authority to bring enforcement actions against taxpayers who are making a good-faith effort to comply.

The Chamber, through its Tax Task Force and Digital Assets Accounting Consortium, has coordinated industry stakeholders to engage with relevant policy makers to identifying areas within the tax code and U.S. GAAP that require further education and clarification to promote the development and use of digital assets.

New Report Card 

Measures State Legislatures’ Support for

Blockchain Tech

Exponential Increase in State Blockchain Legislation

State legislators started recognizing the economic and consumer opportunities that blockchain technology can bring as early as 2014 and began to introduce legislation supporting its growth. Recognizing this upward trend, we published our Legislator’s Toolkit for Blockchain Technology prior to the start of the January 2019 state legislative sessions. State legislators want to promote blockchain technology in their states.  Our goal was to arm policy makers with ideas for legislation that would benefit the growth of blockchain technology.

So how are the states stacking up? Nearly six months later, our State Working Group is taking a closer look through the introduction of a new State Blockchain Report Card. The results:  The introduction of state blockchain legislation has exploded. In fact, we’ve seen an increase from 64 bills introduced among the state legislatures in 2018 to 237 and counting as of May 16, 2019. Of these bills, 55 support the concepts in our Toolkit.

One of the key suggestions in the Legislator’s Toolkit for Blockchain Technology, and one of our primary principles in our National Action Plan for Blockchain, is the development of an office to coordinate resources and information to support blockchain technology.  The following states have created working groups or task forces specific to blockchain technology: California, Delaware, Illinois, New York, Vermont, and Wyoming; while 11 states have introduced legislation to create a government office or group that focuses on promoting blockchain technology: Connecticut, Florida, Kentucky, Maine, Massachusetts, Nevada, New York, Oregon, Texas, Utah, and Virginia.

We look forward to seeing even more support for blockchain technology in state legislation throughout the year and in the next legislative sessions.

A Patchwork of State Smart Contract Legislation

The federal Electronic Signatures in Global and National Commerce Act (E-SIGN Act) and the state Uniform Electronic Transactions Act (UETA) are technology neutral and thus already address the enforceability of signatures and records using blockchain technology and smart contracts.  Nevertheless, in an attempt to support the technology, Arizona, Arkansas, Nevada, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, and Washington have all enacted disparate amendments to their electronic transactions laws. And four states – Connecticut, Illinois, Iowa, and New York – still have legislation pending to do the same.

While there is no doubt that these laws share a common goal – to encourage and support blockchain development in their respective jurisdictions – these state laws are independent of one another, are inconsistently drafted, and create a patchwork of inconsistent laws from state to state.  This makes it difficult for global digital businesses to comply with laws in the United States and is a barrier to entry to the market.  As noted by the Uniform Law Commission, “… the UETA already adequately encompasses blockchain and smart contracts, and changes to specifically address these technologies are not only unnecessary but also detrimental.”