 to the next speaker, who is Coincenters Peter van Valkenburg. And I will speak for a few minutes first, because as executive director of the foundation, I am also the main point person for compliance and regulatory and legal issues. And we pay a lot of attention to these things because it does make a difference. We live in a real world where there are real concerns for any type of blockchain company startup organization. And every jurisdiction is different. We operate in a number of them. So something that I strongly believe people should take seriously for your own benefit, for your own protection, and to be able to further the innovation technology that we all do here, that we all support. We are not that organization that is more like a 501C4. We are truly a, you know, we're Swiss, Stiftung, which is closer to a 501C3, and we support research and development and the education and outreach that surrounds it. However, we still have to deal with regulatory considerations. And I've personally invited CoinCenter to come and make this presentation. So that we can address it and get it out of the way and enjoy the rest of the technical presentations that we have lined up for the next three days. So, Peter. Thank you so much, Ming. Thank you. So it is a tremendous honor to be sharing the stage with all of you. I didn't know you'd still be here. But honestly, the work you all do is incredibly inspiring to me, a humble, regretting liberal arts graduate who foolishly went to law school. But thank you. So thank you, Ming, and thank you to the Ethereum Foundation for inviting me. My name is Peter. I come from CoinCenter. I come from the government, but I'm here to help. Unfortunately, I have to do something super lame and give a disclaimer, because I'm a lawyer. I am a lawyer, but I'm not your lawyer. The following talk is for educational purposes. Sorry. If you need a lawyer, you should hire a lawyer. Does this clicker work? It does. Oh, okay. So what the hell is CoinCenter? CoinCenter is a nonprofit that's based in Washington, D.C., and I'm gonna put our mission up here, but it's probably better if I just talk about a little bit of my background. So I, as I said, decided to go the liberal arts route, went to law school. While I was in law school, I started becoming very interested in Bitcoin. This was around 2012. I got very close to setting up a pretty powerful mining rig, and then there were exams and other things, and I got distracted, and it's one of my big regrets in my life. But nonetheless, learning about the technology, while also learning about the law, gave me a unique perspective. I thought I always wanted to work in copyright law or digital privacy, because those are areas where the internet has already disrupted a lot of expectations as to what is possible to enforce from a government policy perspective and what is not. But Bitcoin came around and gave me an opportunity to work in a very new area that's being disrupted, which is financial services regulation, which is the internet as far as truly decentralizing it and building it the way it should have been built from the beginning. So, I got a Google Fellowship to go work in Washington, D.C. in policy. I worked first for a think tank that was doing copyright and surveillance. This was around the time of the Snowden Lynx, and then a guy named Jerry Brito, who I share a number of mutual friends with, came up to me and said, hey Peter, do you want to be the director of research at a Bitcoin think tank? And I laughed at that, and I said, that's ridiculous, nobody would do that and no such thing exists. But then I said yes, and we've been around now for two years. So, our passion is defending these open networks. So, in a nutshell, mission aside, we want to be to decentralize computing networks with open consensus mechanisms, to cryptocurrencies in general, what the EFF was to the developers of the early internet. A point where you can find a go-between with policy makers in D.C., where we can communicate the value of the technology, where we can set an anchor bias in some policy makers so that they don't see this as just another way to sell drugs or subvert authorities. We have a full-time professional staff with three attorneys on staff. We have support from a number of key businesses in the space, some of the big Bitcoin startups among them, but also some of the venture capital firms that are financing a lot of the work in this space. But actually over half of our support comes from individuals who are passionate about this technology and want to see it flourish. Additionally, I should point out that like the EFF, we're not a trade association. We set our own agenda, we don't represent specifically any of these companies. As I said, we want to help smooth the path to decentralizing all the things. And so if people want to support us in our mission and believe in the work we do, we take their support. Now what do we do? We do education, policy research and advocacy. Education is sort of the big part of this because especially when we started two years ago, the amount of knowledge on the ground in Washington, D.C. and in policy circles globally was very poor when it comes to what a cryptocurrency is and how it works and what it can do. We also do policy research where there is a existing law that potentially applies to something you're doing using the technology and there is an open question as to how that existing law should be enforced because the existing law is drafted in a vague or a broad way. We develop policy research that advocates for a way to enforce that law that allows regulators to still meet their statutory obligations because that's what Congress put them there to do. That's what their legislatures and their respective states put them there to do but still provides the freedom to innovate as much as is possible. So we're trying to find a peaceful way forward basically. We have a series of plain language explainers of discrete topics in this space. We have a fantastic backgrounder by Vitalik explaining Bitcoin in a way, I mean, whoa. Explaining Ethereum in a way that will make sense to policy makers. We deal with a number of different topics also at the legal intersection of these technologies. Some of these are also useful resources for developers aside from policy makers because they explain a difficult legal construct like OFAC which is US sanctions law. We develop policy reports that deal with bigger topics like securities regulation, access to banking for companies and consumer protection laws particularly difficult in the United States with the state by state money transmission licensing setup. And periodically, most of our advocacy is done face to face meetings with policy makers but we do periodically file and regulatory proceedings. So just recently for example, we filed with the European Securities and Markets Authority. I didn't know if any of you have seen the paper they put out, they basically said something like we're really excited about blockchain for securities but we understand that it will only ever be closed or permissioned ledgers that will be used in these systems. Personally, I think there is value in permissioned ledgers. I think there is low hanging fruit in reconciling siloed data structures even if it's through a consortium consensus mechanism but I think that the conclusion that only a closed consensus mechanism is suitable for high grade financial services is premature. So we filed a comment in this explaining how so many of the advances that are essential to financial services are being developed in the open space. The pioneers here are the people working on Ethereum are the people working on Zcash for example with zero knowledge proofs. You mentioned ring signatures earlier. The only way that they'll be privacy for financial services data is through the things that are being developed in large part on these open networks. We testify, we've briefed members of the European Parliament. We've had several different engagements in our two years and we love Ethereum. We really do. So in the early days we focused mostly on Bitcoin and there's a reason for that. This was about two years ago. It was hard enough to get a meeting with someone in Washington DC to discuss Bitcoin but at least Bitcoin was something they already knew about and they already wanted some answers about. That is beginning to change now and we start to talk more about just open consensus mechanism driven networks and what they can do. And the idea I think of having a general purpose decentralized computing system is incredibly exciting. So again, thank you for all the work that you do and explaining that to policy makers is one of the most worthy things I think I can do with my time in DC. So with that, I'm going to turn to the less happy side of the talk and talk about some regulatory considerations for people who are developing decentralized applications. And that means this talk is going to be about securities laws. So why securities laws? First because they're heavy duty regulation. These are laws that say seek permission, do not seek forgiveness and if you didn't seek permission there will be strict penalties. Additionally, a lot of crowdsales and presales may subject developers of these technologies to securities regulation. Several scams over the years have drawn attention to this area already. And several vocal pundits, many of them from the closed or consortium consensus mechanism side of the technology will freely tell you that they think that all at-point or crypto crowd sales qualify as unregistered securities issuance. And I think that's wrong. And I think we need to correct those misunderstandings. Now why US securities laws? There's a couple things here. If you have any purchasers for say an app token in the US, any of them, you are potentially subject to US securities regulations. And if you're in a country, if you're based in a country that has friendly relationships with the US, extradition could be possible. So this is some serious stuff. The US securities laws are by far the most broadly applied of all securities laws and there's a couple reason for that. So in other jurisdictions there's generally a statute, a piece of legislation that enumerates specifically which financial products are regulated as securities and then usually which are not, what are excluded. In the US there is no such enumerated list in the statute. There's an undefined term that says investment contracts. And the federal courts have interpreted that term and continue to interpret that term to apply to various different schemes. Additionally, the US Securities and Exchange Commission is already investigating the scammy cryptocurrency pay coin, pay coin fans, and the Dow I can say has gotten the attention of staff at the SEC and they are actually surprisingly well informed. We've tried to help correct some misapprehensions they had about it and generally flesh out their information but they are surprisingly well informed. So why are US security laws broadly applied? The definition of security includes an undefined term and as I said the term has been defined by federal courts. Courts have sought to ensure that the definition is inclusive in order to reach and this is a quote from a case the countless and variable schemes devised by those who seek the use of the money of others for the purpose, the promise of profits. And that language comes from a case called the SEC versus Howie and it's from that case that we get the Howie test for what is a security or not. So in order to really understand these issues we need to quickly actually look at the Howie case I think. Like a lot of strange and vaguely alarming stories it begins in Florida. Howie was a, he owned an orange grove in a hotel and he would invite rich New Englanders down to Florida, is my mic, this mic's working now, right? This is working now. And he would invite rich New Englanders down to his hotel in Florida and give them a tour of the orange groves and he'd say look behold the beauty of Florida's orange fields. And then inevitably the New Englander would say something along the lines of oh the orange groves they're so beautiful and Howie would say well it's funny you asked that the orange groves are for sale and then he'd proceed to sell him one acre of the many acre orange groves that he owned. Basically he was partitioning his property into a number of parcels. We're doing time keeping back there. Into a number of parcels. And selling them as property. Now when you bought this property you'd also be pressured into signing a contract and that contract would say howie, we'll just go with this. So you'd be signing a, you'd be signing a contract that says you look to Howie in order to maintain the fields, the soil, to pick the oranges to sell them at market for a profit. Just working now. Okay good. Louder, okay good. So you look to Howie to maintain the soil, the trees, pick the oranges, sell them for a profit. And he will give you the profits from the land that you bought. So it needless to say the orange grove turned out to be less profitable than many might have expected. There was a lawsuit. It went all the way up to the Supreme Court. And the Supreme Court says this is the exact kind of thing that we want the Securities and Exchange Commission to have jurisdiction over. So that's why this is the formative case. And from that they created the Howie test. Which has a number of elements I won't go into specifically. But what's notable is that it is immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed by the enterprise. And sales of such nominal interests in physical assets have since that case been extended to all manner of things. Sales of beaver pelts, sales of condos, sales of minks, of gold bullion, of golf course memberships and condominiums. All of these have been interpreted as issuance of securities rather than just sales of a physical object or asset. And with the SEC's interest in pay coin it is not unreasonable to assume that cryptocurrencies or some cryptocurrencies may be added to that list of sales of nominal assets or transfers of nominal rights to assets that qualify as securities. And it's because of their interest in pay coin that we created a framework for securities regulation. So if you are interested in this area I highly recommend you go to our website coincenter.org and you look at the whole framework it's posted there and you read it. If you're a developer you will not need to read the first two sections which explain these technologies to policy makers. You can skip to the third which draws legal conclusions based on the applicable legal tests and the aspects of the technology that are sailing into that test. So I'm gonna skip through this. Here are the key findings for people who are developing app coins or DAP tokens. The following are less likely to be treated as securities. If the token was purchased for its use value rather than merely with the expectation of profits. So the line of cases here that build on the Howie test deal with condominiums actually. So in New York for example plenty of people will buy a share of a housing co-op. Now is the person issuing those shares issuing a security? The Supreme Court and some of the federal circuit courts have found no that is not the case because while people may expect the condominium that they buy to go up in value they also may be buying it to live in it, to rent it, it has utilitarian value and those are not the things we regulate as securities. Another factor, the token was purchased after, oh by the way on this previous one the utilitarian value. Ethereum or Ether is a very good example of this. So yes, lots of people speculate as to the price of Ether. Why isn't Ethereum a security? Well one reason is that Ether is essential to using the Ethereum virtual machine. You can't run contracts unless you fund them with gas basically. And there's this utilitarian core value proposition that saves it potentially among other factors from being a security. Token was purchased after application is already up and running. So in other words pre-sales are going to be more suspicious. And the line of cases here comes actually from golf courses and country club memberships. So basically if you were a developer and you were building a golf course and you wanted to sell memberships to the golf course but the golf course wasn't built yet, you were actually going to likely be found as an issuer of a security. On the other hand if the golf course is already built and you were selling memberships, in those cases courts have said that that is not a security. So I don't know if this is interesting to other people or if it's just my being a huge dork for the law. But these are two things that the community actually I think would agree on as far as ways to prevent scams or as ways to judge what is real and what is a scam. So if you haven't built anything, if you have no hope of necessarily proving anything but you're asking for money, more likely to be a scam. And if you are selling something that is purely speculative, that has no obvious use case, more likely to be a scam. So the law actually lines up pretty well. Finally, the token's value is dependent on the purchaser's own efforts or the efforts of a large number of other unaffiliated investors, users or developers. The intuition here is that if I buy gold bullion from an open market, I am not buying a share of the gold bullion industry or the gold industry. There's multiple people who make gold valuable, people who dig it out of the ground, people who find industrial uses for it, people who find jewelry type uses for it. So if there's really a widespread community that gives value to the thing, less likely to be a security. And then the last thing I wanna talk about is some things to avoid. So one big one is just using language that suggests that this is a securities issuance. This shouldn't ever happen, initial coin offering. That comes from initial public offering. It's almost like you're playing a joke on the SEC, which is funny to some people, I guess, but as a community, I think we should find it more frustrating or annoying. Profit sharing is another term that commonly comes up in securities issuance. So if you're using this language to describe your application and the tokens that you're going to be giving for that application or selling for that application, you're basically asking for scrutiny from the SEC. And that's fine. I think freedom is freedom. I love the open internet. I love the emergence of amazing things and technologies and I'm not here to tell you not to do things. I just wanna say you should consider the regulatory risks when you do them and not including language like that is one easy way to hedge some of your regulatory risk. And this is the big one. Endorsing risky ventures or claiming endorsements. So the securities laws penalize people who are promoters of unregistered securities just as much as they penalize issuers. So if you're thinking should I endorse, should I put my face on this particular decentralized application, think carefully. Consider your appetite for regulatory risk. And then more importantly, if you are building something and thinking of putting someone else's endorsement onto some public materials, think very carefully. Have a conversation with them, make sure they understand what they're potentially signing up for. It's sort of be a mensch because these have potentially dire consequences. And so an endorsement should only come when there's truly been an endorsement. So in conclusion, please, please, please, think about your regulatory risk appetite when you develop these things, when you contemplate having a crowd sale or a presale and please feel free to contact me personally at CoinCenter if you have questions related to this. We'd love to learn what you're building and talk about the path forward because there are definitely legal ways to go forward by structuring the way you actually develop your technology from an issuance point of view. Thank you very much, Peter VanValkenberg of CoinCenter.