Clear design should…

Above all, be useful. Get the user's job done and get out of the way as fast as possible. But also while at it, it should…

Only one possible interpretation should exist for every design element.

Design elements should help people accurately and consistently predict what happens when they interact with your product.

Design should help people answer all these questions:

• Where am I?

• How did I get here?

• What can I do here and how do I do it?

• Where can I go from here?

Design elements should adhere to AAA or AA accessibility standards because it makes design better overall for everyone

As a whole, the functionality of the product should be well executed. After that's achieved, there's no excuse to not make the product aesthetically beautiful

As a whole, the product should be free of jargon and should only promise what what it can achieve for the end user. No less, no more.

I think of these every now and again. Not too hard, and not too often.

TLDR: Real world assets (or, how crypto calls them RWAs) are essentially shares of existing assets that are tokenized 1-to-1. At the time of this writing, yield bearing assets like U.S. Treasury Bills, gold, green energy, private debt and emerging market credit, money market funds, hedge funds and various equities are being tokenized and brought onchain. So far, only private tech exists that lets issuers do that. We're proposing and releasing an initial version of a fully open source stack to do the same, better, faster, cheaper.

Open access to the walled gardens of the financial world has always been one of the most talked about topics in crypto.

Recent news and pundits paint a future where people invest in assets they’ve never had access to - from solar fields and startups, to money market funds and tokenized T-Bills. Despite all the think pieces, compliant infrastructure to fully realize this is lacking. We do have more walled gardens though.

We thought that needs remedying, so we’re uniting founders working in the tokenized asset space to create public-good infrastructure. We're focusing on the challenges of permissionless RWA tokenization (spoiler: it’s all about cap tables), and introducing our proposed Transfer Agent Protocol (working title).

Why not restricted token standards?

Existing restricted token standards like 1404, 1400 are incomplete solutions that are not yet fit for institutional use cases under the US and global regulation. When used, they create primitive cap tables without fully representing the assets they tokenize. 3643, in contrast, leads the way in the EU jurisdictions with $26B tokenized using the standard. It would need to be extended to represent ownership records on the asset issuer's cap table for most use cases in the US.

Simply, to own any real world asset is to be recorded on its cap table as a stakeholder (i.e. investor). So tokenization isn't just minting tokens; there's still the cap table to consider. The cap table tracks share ownership for all parties involved, simplifies transactions, and ensures regulatory compliance. In crypto, a well-designed cap table negates the need for restricted tokens, serving as the final arbiter of the truth.

We’re releasing the initial version of the protocol stack in the fall of 2023. At first, targeting tokenization platforms that bring real-world assets (RWAs) onchain under Reg A and Reg D. If you’re building one, we’d love your help, collaboration and feedback. We’re also looking for community leaders and crypto native RWA-focused startups to join our next founding partners cohort.

Tokenization of real world assets

Crypto is leading the wave of real world assets appearing onchain. Tokenization involves:

1. Converting a registered security, always reflected as a class of stock, into a token

2. Ensuring that only KYCd/KYBd investors can buy it

Investors can buy tokenized shares of anything (for example, the upcoming short-term government bond Superstate built by the founders of Compound). By investing, they gain direct economic benefits (like revenue sharing) based on their ownership. As these shares are traded, the cap table which records ownership stakes gets updated.

In traditional finance, cap tables for certain assets are managed by transfer agents (TAs). They're essentially managers of cap tables that are licensed with the SEC. TAs provide foundational structure we aim to integrate into the crypto world as well. For example, ALPS Fund Services is the transfer agent for Superstate.

You can read this on Superstate's SEC offering document:

In the future, the Fund's shares may also be available for purchase, sale, or transfer from one shareholder to another "peer-to-peer" on a blockchain by utilizing Secondary Blockchain Records. The Transfer Agent's Official Record would be reconciled and matched routinely with the Secondary Blockchain Records to effect any peer-to-peer transfers of shares. However, peer-to-peer transfers are not currently, and may never be, available to investors, and would be subject to then-existing regulations and regulatory interpretations.

Also notice their mention of using the blockchain to maintain secondary records.

…Fund shares purchased by a shareholder will always be recorded in the records of the Fund's transfer agent, ALPS Fund Services, Inc. ("ALPS" or the "Transfer Agent"). Shares owned by the client which are associated with Secondary Blockchain Records will be publicly viewable as being owned by that blockchain wallet address, e.g. in a "blockchain explorer."

From the moment shares are first created, and allocated to their owners (called primary issuance), to trading (called secondaries), a transfer agent records everything that happens to each share. They store data about how many shares there are, how much they cost, who bought and sold them, and at what price.

Why is this noteworthy? Because it demonstrates how tradfi and blockchain complement each other, especially in recording and updating ownership stakes in real-time. You might be familiar with the Mirror Table concept outlined by Balaji, which sets the same stage as here.

So what's the problem?

Plenty of tools exist for creating and managing cap tables in web2, but none of them support the onchain issuance of tokenized securities. Why does this matter? Because bringing real-world assets (RWAs) onchain seamlessly involves minting a cap table for that particular asset. Once it's onchain, enabling peer-to-peer (P2P) transfers becomes feasible.

Let’s revisit that superstate filing:

…peer-to-peer transfers are not currently, and may never be, available to investors…

This quote underscores the void we aim to fill. To make P2P transfers possible, several critical components need to be in place:

• Cap table records stored in a distributed database

• Comprehensive recording of all stakeholders and their respective ownership stakes in that database

• Mechanisms to prevent stakeholders without shares from making unauthorized transfers

What we've described here essentially outlines the requirements for an onchain cap table manager. But building such a manager is complex and demands:

• A full and complete data model that governs a cap table. Thankfully, one already exists - Open Cap Table Format.

• Sophisticated knowledge of Uniform Commercial code (articles 8 & 9), which governs investment securities and transactions

• A skilled team proficient in both traditional web technologies and crypto

Understanding these challenges sets the stage for the transformative impact an onchain cap table manager could have, especially in enabling real-time updates and P2P transfers of ownership stakes.

Transfer agent protocol

So we have assembled all the necessary components. We aim to provide not just a product but a protocol stack. Our goal is to give the crypto community compliant infra to build our own tools capable of minting in-demand RWAs: https://transferagentprotocol.xyz/

Crypto deserves compliant infrastructure for tokenized capital markets. We believe it must be truly open, free, and user-centric. We're not convinced that ex-Wall St. types are capable of materializing our shared vision, and fear they might get it wrong. We're working to get it right.

We're using the Open Cap Table format as the foundational data model for our protocol. and run schema validation on every cap table mint. Our legal team help us ensure that the entire stack is regulatory compliant. We're building this onchain-first, under the MIT license. Initially, we're deploying on Optimism, Base, and Plume, with a roadmap to extend support for additional chains.

Our first stable release is anticipated in Q1 2024.

TLDR: The purpose behind the instrument determines the type of security it is. 1933 Securities Act outlines every type of security in the first paragraph. We provide concise descriptions for each term that means "a security".

Eventually, everyone gets to the point where they want to protect their investments. The purpose of registering an investment as a security is to provide the purchaser with an assurance that they're not being defrauded. Also that the instrument being sold does not misrepresent the facts, and to help the purchaser and the government make an informed decision.

On the first page of the 1933 Securities Act, every type of security is outlined.

The term security means…

• A "note", which is a debt security with a specified repayment period, usually short-term.

• A "stock", which represents partial ownership in a corporation, allowing shareholders to claim a portion of its assets and earnings.

• A "treasury stock", which is a company's own stock that has been repurchased and held in the company's treasury.

• A "security future", which is a standardized contract to buy or sell a specific security at a predetermined price on a specified future date.

• A "security-based swap", which is a financial contract where two parties exchange cash flows based on underlying securities or indices.

• A "bond", which is a long-term debt security issued by governments or corporations that pays periodic interest and returns the principal (i.e. amount borrowed) at maturity (i.e. when it's due).

• A "debenture", which is an unsecured debt instrument backed by the issuer's creditworthiness rather than physical assets.

• "Evidence of indebtedness", which is any document that indicates a borrower's obligation to repay a debt.

• A "certificate of interest or participation in any profit-sharing agreement", which represents an investor's ownership stake in a profit-sharing arrangement with a company or venture.

• A "collateral-trust certificate", which is a debt security backed by collateral, typically in the form of stocks or bonds held in trust.

• A "preorganization certificate or subscription", which is a commitment to purchase shares in a company prior to its formal organization.

• A "transferable share", which is a unit of ownership in a corporation that can be easily bought, sold, or transferred between parties.

• An "investment contract", which is a financial agreement between parties where one invests money with the expectation of profit from the efforts of others.

• A "voting-trust certificate", which represents the transfer of a shareholder's voting rights to a trustee.

• A "certificate of deposit for a security", which is a document indicating ownership of a security held by a financial institution.

• A "fractional undivided interest in oil, gas, or other mineral rights", which is a partial ownership stake in the rights to explore, extract, and sell natural resources.

• A "put", which is a financial contract that grants the owner the right, but not the obligation, to sell a security at a specific price before a certain date.

• A "call", which is a similar contract that grants the right to buy a security at a specific price before a certain date.

• A "straddle", which is an options strategy involving the simultaneous purchase of a put and a call option on the same security with the same expiration date and strike price.

• An "option", which is a financial contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date.

• A "privilege", which refers to a special right granted to a particular investor, such as preferred stockholders.

• A "group or index of securities", which represents a collection of securities, often used to track the performance of a specific market segment. When applied to foreign currency on a national securities exchange, the terms refer to financial contracts that grant rights or privileges to buy or sell foreign currency at specified prices or under specific conditions.

• A "warrant", which is a financial instrument that grants the holder the right, but not the obligation, to purchase a company's stock at a specific price before a certain date.

• A "right to subscribe to or purchase", which refers to an investor's entitlement to acquire additional securities, often at a predetermined price, within a specified period. Both terms relate to all securities and financial instruments written describe here.

TLDR: Token is less likely to be a security when: 1) it launches on a fully developed product/protocol/network, 2) token is meant for consumption and use within that product, 3) token value stays the same over time instead of appreciating.

One of the key things federal courts examine when deciding if a token is a security is whether there's a reasonable expectation of future profit to be derived from the efforts of others. Buying a token with the desire to sell it at a higher price later makes the token an investment. Which by default makes it a security.

The more evidence there is that the token is not an investment, the more likely it is to not be a security. Raising money through a token sale to build a product makes that token a security.

Characteristics of tokens that are not securities

While not definitive, all of these contribute to the token not being categorized as a security. The more of these are met, the stronger the evidence that the token is meant to provide utility or be a currency.

• Token launches on a fully built and functioning product/network/protocol, and can be used immediately for its intended purpose.

• Token usage (or consumption) is incentivized over holding it as an investment.

• Some built-in mechanism ensures that token value stays constant or degrades instead of appreciating.

• Token is designed with the purpose of being used on the network rather than held for speculative growth or further development of the product.

• Token acts as a currency in a sense that users can immediately pay for goods or services without having to convert it to another token.

• If it is a currency, token can be stored and exchanged for value at a later time.

• It's easier and more efficient to pay for the product/network/protocol with its native token than any other token.

• Token can be purchased in quantities that make sense when you intend to use it rather than invest in it.

• The value of the token goes up accidentally (either because of the demand for the token or the product on which it's used) and there is no built-in mechanism that contributes to that growth.

It doesn't matter if a token is called a "utility" or a "governance token" when it functions as an investment. Both are made up terms that have no basis in reality.

It is possible to design a token as a currency (when it pays for things), a commodity (when many produce it), or a utility (when it's the most efficient way to participate in a product).

TLDR: An investment contract is a type of security. Many securities exist, and they don’t have to be typical stocks and bonds. When selling an investment contract in the US, companies and DAOs are subject to federal securities laws. All they have to do is register their token with the SEC, and disclose complete and truthful information to the investors who buy that token.

Crypto companies and DAOs issuing tokens must determine if they are (or will become) subject to U.S. federal securities laws. Tokens that are sold as investment contracts are securities, which means the laws would apply. Many things can be categorized as securities — stocks, bonds, transferable shares, governance and utility tokens, income share agreements (which is what most “creator tokens” are) and more.

Any contract or agreement that is sold to investors with implied or promised expectation of future profit should be considered a security. Using the money raised from token sale to build the product offering classifies the token as an investment contract.

When selling an investment contract or a security, certain information must be disclosed to investors. The purpose of disclosure is reduction of informational asymmetries that may exist between the builders and the investors. One important piece of disclosure covers how the builders (and their effort) will affect the success of the enterprise.

Framework for analyzing an investment contract

Because investment contracts fall under securities, the same reasoning as the Howey test applies. The SEC staff offers a framework for figuring out if a token is a security in their effort to help. The SEC itself neither approves nor disapproves its content.

1. The investment of money is satisfied when the token is purchased. It can be bought using fiat currency, another token, or other methods that exchange value for value. For example, giving tokens in exchange for services rendered to further the goals of the token issuer would qualify the sale as the investment of money.

2. In the common enterprise means pooling each individual investment with other investments into the same enterprise, where distribution of future profits is proportional to the amount invested.

3. Relying on the efforts of others whose expertise and decision-making impacts the success of the business that sells the token. This includes creating or supporting a market for the token and its price. One example of how price can be supported is by limiting token supply to ensure scarcity, and building-in burning mechanisms or buyback schemes.

4. With reasonable expectation of profits that range from capital appreciation to participation in income sharing. The first part is applicable when investors can sell their tokens on a secondary market to realize their gains. The second part applies when holding a token gives investors rights to dividends or distributions earnings.

When the token might not be considered an investment contract

When assessing if there might be a reasonable expectation of future profits, US federal courts look at whether the token is bought to be used or consumed. If people buy the token not as an investment, expecting it to become more valuable over time, a few characteristics of its use are considered.

• The network on which the token can be used is operational and holders are able and incentivized to use their tokens immediately

• Token is built to maintain constant value or degrade over time, making it unattractive as an investment

• If it’s meant to be used as currency, holders can use it without converting it to another token or fiat

• Token can be used to buy goods or services on the network it runs on, and is the easiest way to pay for them

• Increase in token price is incidental and corresponds with how much demand there is for it

• Token is marketed for use on the network and not as an investment

TLDR: If you sell someone an instrument or a contract that promises future returns because of the work you’ll do with their money, you are selling a security. An investment DAO’s “governance token” would be a security if the DAO promised or implied that the token’s price would increase because of that DAO’s investments. Majority of governance, utility, and membership tokens are securities.

The story to date

The first DAO on Ethereum was formed by a German company Slock.it to “build projects”. It sold tokens to investors to fund them, and promised to share future profits. Investors were allowed to and had ability to re-sell their tokens on trading platforms. Before the DAO could work on any projects, it was hacked, and 1/3 of its funds were stolen. The DAO found a way to get them back.

The SEC investigated the DAO to discern if its tokens were securities and found that they were, under both the 1933 Securities and 1934 Securities Exchange acts.

The definition of a security

A security includes an “investment contract”. That means an investment of money in a company, org, venture, or a project, with the expectation of profiting from the investment that you get because of work others perform through their entrepreneurial or managerial efforts. The definition is laid out in sections Section 2(a)(1) of the Securities Act and 3(a)(10) of the Exchange Act and is popularly known as the Howey test.

The definition is meant to be flexible rather than formulaic. How the token is used is more important than what it's called. A "utility token" is not exempt from being defined as a security because it has "utility" in the protocol, such as governance. If the company used it to raise money and gave investors expected of future profits, it's a security.

Where modern DAOs stand on the regulatory landscape

The act of “investing” in something can take on the form of “investing goods and services” and not money. When a group of people or firms jointly pursue shared (i.e. common) goals, they become responsible for success or failure of that enterprise. Any contract they sell and promise others future profits is a security.

Yes, a lot of DAO tokens are securities by definition.

What about DAOs that mint tokens but the members perform the work themselves?

The token would be a security if:

1. Members (who buy the token to get access to the DAO) own so few tokens that they can't influence its direction through a vote

2. Members are so inexperienced in the business operations that they are incapable of exercising their partnership powers

3. Members are dependent on unique entrepreneurial or managerial abilities of DAO's founders, leaders, and promoters that they cannot replace them or otherwise exercise meaningful partnership or membership powers.

Is it bad for the token to be called a security?

No, it just has to be registered to afford its issuers and investors adequate legal protection.