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NYDFS Chief Defends State Regulator's Crypto Approach

New York Department of Financial Services superintendent Maria Vullo defended her office’s approach to regulating cryptocurrencies on Thursday.

Speaking at the Center for Foreign Relation’s “Legal Tender? The Regulation of Cryptocurrencies” panel in New York on Wednesday, Vullo said that her view is “regulation in this space, just like any space where you have money transmission, [is necessary],” making a point she often revisited during the discussion.

While some state and federal regulars are taking time to create rules for the industry, “it certainly hasn’t taken New York long to establish a framework” for regulating cryptocurrencies, Vullo said in her opening statement, referring to the state’s controversial BitLicense.

The role of regulation in the cryptocurrency space was a contentious topic, with Blockchain president and chief legal officer Marco Santori claiming regulators should ease up on the over-regulation.

That said, he did acknowledge that “a lot of token sales run afoul of the spirit of the law, if not the letter of the law. But we have to be careful not to lump them all together.”

In particular, he argued that New York’s laws “have been an abject failure.”

However, Vullo derided developers who claim that their work should allow them to launch token sales free of disclosure or other requirements, saying:

“I think regulators absolutely need to be in the space, I know they’re saying ‘we’re innovative, we’re startups, we need to be left alone and put in a sandbox.’ Toddlers play in the sandbox. Adults play by the rules.”

In another rapid exchange, CNN investigative journalist and panelist Jose Pagliery expressed concern about the idea that “code is law,” saying that while this may be true, coders can modify certain protocols:

“If you’re the executive at a bank, you have people to answer to … if you’re one of a dozen coders around the world whose name no one knows and you’re the one at the controls changing how this cryptocurrency works … we have to figure out how these people are held accountable.”

Santori disagreed with this premise, saying “that is not only a bad question, you should feel bad for asking it.”

In turn, Vullo said: “I didn’t know this was about feelings.”

Seema Mody, Jose Pagliery, Marco Santori and Maria Vullo image by Nikhilesh De for CoinDesk

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The 'Dean of Blockchain Lawyers' Just Got a New Job

One of the first and most influential lawyers to represent blockchain and cryptocurrency businesses is joining one of the industry’s oldest startups in an executive role.

Announced today, Marco Santori is leaving Cooley LLP, where he’s been a partner since November 2016, to become the president and chief legal officer of Blockchain, a longtime client and one of the industry’s best-known wallet startups.

The move is a return to roots for Santori, who started out advising early bitcoin startups on legal and policy matters but over the years shifted to working on enterprise blockchains and, most recently, initial coin offerings.

But he said his heart was always in bitcoin’s potential to empower individuals.

“I didn’t get into this to do ICOs,” Santori told CoinDesk. “It’s a fascinating area of the law, but that’s not the train that I’m on.”

Likewise, he said:

“I’m not trying to rebuild Wall Street on top of a blockchain. I’m trying to give ordinary people a better option for finance, a better option for storing their funds and using their funds.”

Blockchain is the best place for him to fulfill that vision, Santori said. The company, which has offices in New York and London, allows users to store and send bitcoin through their web browsers without downloading any software.

It’s raised a total of $70 million to date. According to co-founder and CEO Peter Smith, the company has more than 20 million users.

Strategic role

Smith said Santori will play a strategic role, helping Blockchain meet the demand that exploded last year by scaling up not only the legal and regulatory functions but also corporate development, including acquisitions and partnerships.

“In our space, it’s so special: go-to-market strategies and acquisition strategies are all reliant on the regulatory and legal side,” Smith told CoinDesk. “Having someone come out of that vertical who understands how to run deals is very key.”

Santori is uniquely suited for such a role, having been on “at least one side of every major transaction in the digital currency space over the last four years,” Smith said.

The chief legal officer position is newly created. The president’s title previously belonged to Blockchain co-founder Nic Cary, who will maintain an active role as vice chairman, focusing on public affairs and external relations as Santori takes over the policy and expansion duties, a company spokeswoman said.

Cary said in a press release that he will be “dedicating more of my time [to] building our brand in key regions like India, hiring the brightest talent, and educating more people on the benefits of digital assets.”

A long, strange trip

In many ways, Santori’s career has mirrored the blockchain industry’s evolution.

He first made a name for himself as a bitcoin-savvy lawyer while working at Nesenoff & Miltenberg LLP. In 2013, he became the chairman of regulatory affairs committee at the Bitcoin Foundation and the following year represented the trade group during the New York State Department of Financial Services’ BitLicense hearings, watched across the globe.

In late 2014, he joined the white-shoe firm of Pillsbury Winthrop Shaw Pittman LLP, and simultaneously was retained as global policy counsel for Blockchain. Santori made partner at Pillsbury two years later.

This period coincided with a long bear market for bitcoin. The industry’s focus turned to seeking ways corporations and governments could take advantage of the underlying technology without having to touch the currency.

During that era, Santori was a key figure in shaping the state of Delaware’s blockchain strategy. He helped to craft legislation that allowed firms incorporated in the First State to record their shares on a distributed ledger.

At Cooley, where Santori’s been a partner since November 2016, his work has centered around ICOs, which took off like a rocket last year, despite the legal uncertainties surrounding these token sales.

ICO controversies

Santori tried to bring some clarity to the market last year with the SAFT, or Simple Agreement for Future Tokens.

In this structure, a blockchain project raises money exclusively from accredited investors, thereby avoiding securities registration requirements; once a network or product is built, the tokens needed to use it are distributed to the investors, who can resell them to the public.

The SAFT idea has been controversial, with some legal scholars fearing it may have the opposite effect from its intent and increase the legal risk for token issues.

Meanwhile, the U.S. Securities and Exchange Commission and other regulators around the globe have begun cracking down on ICOs. And last month, without naming any names, SEC chairman Jay Clayton voiced disapproval of lawyers who have been advising ICOs that resemble securities offerings but don’t comply with the securities laws.

Santori said his move to Blockchain was in the works long before Clayton made those remarks. As for the remarks themselves, he gave a very lawyerly response.

“The SEC and the bar are in a learning process about how these things ought to be treated, about where the value is, where the risk is,” Santori said, adding:

“Regulators all around the world are responding primarily to headlines. There’s been a failure on the part of the industry and the bar to explain the value to regulators. We all have a lot of work to do together.”

Santori said his departure from Cooley is bittersweet, since he hasn’t finished building the firm’s fintech practice, but there aren’t enough hours in the day to do that and perform his new duties at Blockchain.

“I wish I could do both,” he said.

Image via Marco Santori

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SAFT Arrives: 'Simple' Investor Agreement Aims to Remove ICO Complexities

“Toxic”: that’s how veteran lawyer Marco Santori described the first “SAFT” he saw.

Created by an unidentified token seller as a way to solicit investment, Santori – the head of Cooley LLP’s fintech practice – went on to call the document a cheap knockoff of the “Simple Agreement for Future Equity” (SAFE) framework popularized by early stage investor Y Combinator.

In true startup fashion, the Cooley partner recalled that it was as if the author simply “held down control and hit ‘F'” as part of a misguided effort to replace the word “equity” with “tokens.”

But whether true or exaggerated, the story is successful in establishing two points – first, that so-called “Simple Agreements for Future Tokens” (SAFTs) are already in sporadic use, and second, that developers and entrepreneurs are badly in need of formal frameworks in their drive to sell tokens for fundraising.

It’s against this backdrop that Santori and Protocol Labs co-founders Juan Benet and Jesse Clayburgh are today introducing a formal white paper for the SAFT concept – an effort they hope will elevate the concept and help it realize its potential.

Far from a way to tame the creativity unleashed by a wave of initial coin offerings (ICOs), Santori framed the release as both a formalization of practices used during Protocol Labs’ recent $205 million token sale and a good faith effort to introduce a viable model designed with U.S. law in mind.

Santori told CoinDesk:

“The paper takes a time slice of what’s happening in the market today and it applies the prescriptive rules of at least the U.S. securities, money services and tax laws. Frankly, that’s one of the more powerful things about the framework – it doesn’t require too much deviation from what’s actually happening.”

And here, he notably argues that what’s happening in the ICO space isn’t the quick cash-grab that’s been advertised. While the blockchain token fundraising model has garnered a “millions in minutes” mystique in media coverage, Santori contends the description fails to portray the difficulty inherent in launches that must navigate international law to tap a global liquidity base.

“We have only analyzed three bodies of federal law,” he said. “There are also state laws, and there’s also the laws of every damn country in the world to analyze.”

Far from a polished market standard, Santori said he sees the SAFT paper as the start of a conversation between legal experts, developers and investors on how to best advance the concept in order that it can become broadly useful.

Unpacking SAFT

First and foremost to understanding SAFTs is exploring how they differ from tokens, and on this matter, the paper is clear: SAFTs are investment contracts.

As outlined in the paper, SAFTs are designed to be sold to accredited investors as a means of funding development in a way not dissimilar from the way equity changes hands in traditional venture capital. In a SAFT sale, no coins are ever offered, sold or exchanged. Rather, money is exchanged for traditional paper documents that promise access to future product.

“The developers use the funds to develop a genuinely functional network, with genuinely functional utility tokens, and then deliver those tokens to the investors once functional,” the paper reads.

By ensuring that no token sales take place prior to the funding, the authors of the SAFT paper argue a key hurdle is overcome: namely, that any resulting tokens created are less likely to meet the definition of a security as put forth under the Howey Test, the standard created by the U.S. Supreme Court to judge whether offerings are securities.

If executed as set forth in this white paper, a token sale can permit users to participate financially in that creation and growth without taking on significant enterprise risk,” the paper reads.

Still, the paper notes that it’s possible that the tokens created as a result of a SAFT still could be securities, meaning developers simply can’t use the model as a way to avoid legal counsel.

“Howey is not a black-and-white metric for security status. It is a highly variable facts-and-circumstances test,” the paper explains.

Investors pledge interest

The formalization of the document was a significant effort for more than the lawyers involved.

Also consulted over the course of its creation were investors who hope to use the tool to explore opportunities in the token market, as well as those seeking to build platforms to connect token issuers and buyers.

For example, Paul Veradittakit, a venture investor at Pantera Capital, said his firm has created its own version of a SAFT, and that it contributed findings to the white paper.

Describing the potential of the development, Veradittakit told CoinDesk:

“The SAFT is the first tremendous step to bringing a financing structure and standard for token financing that fits with the stage and intent of the companies.”

Still, the investor cautioned that SAFTs will be limited in their utility. For one, there’s the fact that the model is primarily aimed at projects wanting to raise money for tokens not intended to be securities.

Erik Syvertsen, general counsel at startup resource giant AngelList, was quick to note that SAFT in no way limits the kinds of tokens that could be eventually listed on CoinList – a new entity that the company is creating in partnership with Protocol Labs for hosting compliant ICOs.

“We’re open to working with all kinds of different projects, and that’s not dependant on using a SAFT,” he told CoinDesk. “If everyone can get comfortable with a token that has an existing network, and the developer work is complete, we would certainly be interested in that as well.”

Broad strokes

Santori sees SAFT as a framework that offers something for all parties that are involved with, or impacted by, the spread of token sales.

This also includes policymakers who have been eyeing the market with uncertainty. In recent months, the number of global regulators who have clarified rules (or have proclaimed an interest in doing so) has been noticeably on the rise. But not all regulators are waiting for possible signs that market conditions will improve.

Following China’s lead, South Korea, one of the more active regions for cryptocurrency trading closed its doors to ICOs last week. Still, Santori hopes to change more minds before such final decisions are made more widely.

“A good chunk of the white paper is spent on talking about why this harmonizes with policy goals and the principles that drive them,” he said.

Indeed, the SAFT paper warns against a “mass exodus” of U.S. talent and jobs to jurisdictions deemed more friendly to the funding model.

“In many cases, though, projects based originally and organically in the U.S. have made the difficult decision to relocate the project to non-U.S. jurisdictions like Switzerland. This seems to be due primarily to questions around the applicability of the U.S. securities, money services or tax laws,” the document reads.

The path ahead

As for what happens now, it seems that’s up to the community. After all, as noted by those involved, a framework is only as useful as its adoption.

And issues remain that might inhibit its use. Most notably, there’s the fact that SAFTs don’t follow through on the promise inherent in the ICO model, that it would “democratize” venture capital by opening up deals to retail investors across the globe.

Indeed, Santori went so far as to call this the “most powerful” criticism he has yet come across. However, he frames this notion as idealistic and out of touch with how the market is actually developing.

While more than $2 billion has now been raised through the token funding model, the paper argues that 60–80 percent of those funds have been from accredited investors.

Still, Santori stressed that the SAFT model is simply a way to work within existing laws, one that doesn’t assume legislative change to accommodate the technology could be possible. For its part, the white paper seeks to stress the benefits of the model, suggesting SAFTs can reduce risks for VCs, while democratizing access through a vibrant secondary market.

“The SAFT network may prevent someone from buying the next bitcoin at $0.30, but they’re still going to get in at $1 or $2,” Santori argued.

Likewise, Syvertsen suggested that simply exposing such issues to a wider audience was perhaps one of the chief gains to be had from the white paper release, concluding:

“The path we’d like to see the industry move towards is to one of transparency, and that’s the greatest value of the SAFT project, smart lawyers will have a way to improve it and the document can evolve.”

Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Protocol Labs and is an investor in filecoin.

Paper clips image via Shutterstock

The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Interested in offering your expertise or insights to our reporting? Contact us at [email protected].

Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.