Just as Switzerland has its Crypto Valley, a center of blockchain innovation, so Wyoming might become an epicenter of the new token economy if Caitlin Long has her way.
Long, a 22-year veteran of Wall Street who recently stepped down as president and chairman of blockchain startup Symbiont, is a key figure in an effort to introduce a clutch of bills to make the state, currently one of the least friendly for digital-asset businesses, into an ideal environment for them.
A former managing director at Morgan Stanley, Long has experience in the legislative arena. Last year, she was a key player in the Delaware Blockchain Initiative, a successful effort to amend Delaware law to allow corporations registered in the state to issues shares of stock on a blockchain. Long and her partners have now introduced five bills in Wyoming, the latest to make sure that cryptocurrency holdings remain exempt from state property taxes.
Three have now passed. One bill exempts cryptocurrencies from state money-transmission laws, while the other exempts so-called "utility tokens," blockchain assets that aren't designed to be either currencies or investments, from both securities and money-transmission laws. The governor of Wyoming, she says, is likely to sign them into law this month.
Such efforts contribute to the trend of crypto firms laying the groundwork for larger participation in the market. Some firms are now actively making overtures to institutional investors and regulators while banks and investment firms cautiously explore digital assets.
For crypto advocates, there are concerns about greater institutional involvement, Long told American Banker. She also discussed why Wall Street is so excited about bitcoin and how her efforts in Wyoming could shape the future of the industry. What follows is our interview, which has been edited for length and clarity.
It took longer than some bitcoin pioneers expected, but in recent months Wall Street and various mainstream institutions have finally shown a lot of interest in bitcoin. Why now? Is it just about the radical price growth in these assets that we saw in 2017? Or are there other, more fundamental reasons?
CAITLIN LONG: It's the price run-up as well as the price volatility. Hedge funds were the first institutional investors to get in — it's clear that they're in this sector in a very big way. Some of them have been in stealth since 2014, but a lot more have come in since then. They were looking for asset classes that had volatility, because until [recently] we didn't have volatility in the stock market. It was almost as though the Federal Reserve eradicated it. Of course that never happened, but literally there were people in the stock market asking, "Is volatility dead?" Hedge funds do better in highly volatile markets, if they can trade them well. And "highly volatile markets" describes the crypto-asset markets. Many of [these funds] have gotten in — and I don't think they'll be leaving.
More than 100 hedge funds launched last year with a focus on cryptocurrencies. Are you talking just about them, or are you saying even traditional, existing hedge funds are now into crypto?
It's both. DRW came out and revealed a few months ago that they have been actively trading this market for quite a while. DRW was one of the biggest and earliest backers of Digital Asset Holdings, so we knew they were in the sector, but what they hadn't disclosed until more recently is that they have actually been trading the underlying crypto-assets. They're a classic Wall Street trading firm, and I suspect they were not alone. They were just the first to come out and reveal it.
What do you mean when you talk about the potential, or the risk, that bitcoin could become financialized?
"Financialization" is not a well-defined term. A lot of folks think it just means liquidity — that institutional investors can enter into the market. But it's more specific than that. What I define financialization as is a certain type of debt. An asset is not financialized if a margin lender requires 100% margin for the asset, because you haven't actually put any leverage into the market. There's a real asset backing every dollar of debt in that asset class.
But when you start to get margin loans that are 90%, or 80%, or even 50% margin-required, that's when you start to get debt into the market. And that can really push the price of an asset up in the short term, but if there's ever a real correction in the market, it's like musical chairs: Everybody scrambles for a chair and you realize there were more claims to the assets than there are actual assets. And then you can get a real correction in the market price.
That seems like a strange concept when it comes to bitcoin, because there are a finite number of bitcoins. Everybody knows that's one of its attributes. But if we're creating claims to bitcoin that aren't backed by real bitcoin, that's what I mean by financialization. That's when you can get into real trouble. But so far I have not seen that type of financialization happen. I think it's a good thing [that Goldman Sachs and others are requiring 100% collateral for bitcoin futures]. We really haven't financialized bitcoin yet, even though institutions are in the asset class.
Like many crypto advocates, you'd like to see institutions get and stay involved in the sector, but is it inevitable that if they continue to take an interest in digital assets, they're going to find ways to financialize them?
The speculators who have come into bitcoin in more recent months are definitely going to be interested in the financialization of bitcoin— being able to have margin lending with 50% collateral requirement instead of 100% collateral requirement. But the traditional bitcoin owners — we call ourselves 'HODLers" — don't want that. Yes, I absolutely want and welcome and am working for institutional adoption of bitcoin. But I recognize that certain institutions are not working for the greater good of bitcoin; they're working for short-term gain. The type of institutions that I would like to see using bitcoin are corporations using it for cross-border payments. That's the good type of financialization — that's bringing new users into the market to create true liquidity rather than financialized liquidity.
In the JPMorgan report on cryptocurrencies that was released recently, the analysts said that if past returns and volatility are maintained, then these assets could be a good thing to have in one's portfolio. That was a striking admission from a big bank. But they said, "That's a big if." Do you think institutions and high-net-worth individuals will want to have these assets in their portfolios for years to come?
I think the regulatory issues are going to continue to keep the volatility a constant companion of these markets. I take JPMorgan's point — the volatility has been extreme — but if you go back and look at the first bitcoin correction, which was 2011, on a logarithmic scale, that whole run-up was even more extreme than any we've seen since.
I don't want to give investment advice, but yes, I believe that more adoption of crypto-assets will take place, that network effects will grow, and as a result, in general prices will trend up. AllianceBernstein had an event [recently] for their private wealth investors, and I think that's the next market — I heard at the Satoshi Roundtable that private wealth money, family office money, is starting to come in, in pretty large amounts. Given what the JPMorgan report said, and given that AllianceBernstein had an invite-only breakfast with its sell-side payments analysts, and there were 400 clients that showed up, that tells you that the wealth-management firms are now on this. They're all reacting to demand from their customer base. And you're seeing it in the volumes — the daily trading volumes are holding at quite high levels, which I love, because that's going to attract more institutions to start using bitcoin for payments.
For the past couple of years you've been working publicly with blockchain technology at Symbiont but not with cryptocurrency per se. But you're privately a bitcoin "HODLer." Can you talk a bit about the bitcoin doldrums of 2015-2016 — when everyone was saying it's not about the coin, it's about the blockchain — as opposed to industry sentiment today?
Both of the verticals within the sector are growing at breakneck speed. Right now the coins are getting all of the attention because that's where the breaking news is happening, but you're going to see a lot of announcements coming out of the enterprise blockchain part of the world. It's perceived as slower-moving and less sexy, but that's where a lot of real progress is being made. It's just that enterprise software is inherently slow. It's not something that gives you new daily talking points, and you don't have a daily scorecard. But the perception that enterprise is less interesting is not the reality. I think a resurgence of enterprise being on the tip of industry analysts' tongues is coming. [This year] is going to have a lot of announcements of real production deployments by big institutions.
Are the coin-based projects seen as sexier and more exciting because they allow a larger base of people to get involved and potentially profit from them?
Yeah, it was interesting when [initial coin offerings] surpassed the amount of money raised by venture capital in the third quarter of 2017. This market is huge. Retail investors can't invest in what IBM is doing, but they can get in on these ICO projects. And I very much hope that the regulators recognize that and don't completely shut that down, because to me it's a recognition that the JOBS Act really failed to solve the issue of crowdfunding. Most of the enterprise blockchains are funded using classic venture-capital funding structures under Reg D, which allow only institutional investors to buy and have a one-year lockup. So it's not a very democratic market, unfortunately. But the ICO market has proven that you can create a lot of value — [despite the] fraud and fluff in that market — for real business opportunities that Mom and Pop can participate in.
Tell me about the Wyoming Blockchain Initiative. It's just you and two friends volunteering your time, right? How did it get started, and what are you trying to achieve?
It's purely volunteer. There are three of us, ragtag — funding all of it on our own. The way it started is that I tried to donate appreciated bitcoins to the University of Wyoming Foundation last summer, and discovered that Wyoming is one of three states where [cryptocurrency] exchanges can't do business because of the state's money transmitter act. Coinbase and the other exchanges pulled out in 2015. The law requires money transmitters to have a dollar-for-dollar cash reserve equal to the amount of the crypto that's being transmitted. So it makes it unfeasible for businesses like Coinbase to be in Wyoming, because they'd have to have essentially a redundant reserve equal to the value of the crypto that they were handling for their clients.
So I got together with somebody I went to college with, as well as a local accountant and registered agent who lives in Cheyenne. I grew up in Wyoming and have stayed very active in the state. The three of us locked arms and found friendly legislators. We announced this in November, and it is stunning the amount of momentum that we have now. We have four bills, [editor's note: five bills now] all of which were introduced [on Feb. 13]. The first one fixes the issue with the money transmitter act; the second one exempts utility tokens from the money transmitter and securities laws, provided they are exchangeable for goods and services and not marketed as investments. Wyoming's would be the first government in the world to [give regulatory clarity for utility tokens], if this bill passes. The third bill replicates the Delaware Blockchain Initiative, [allowing businesses incorporated in Wyoming to issue shares of stock on a blockchain]. And the fourth one is "the series LLC bill."
How do all of these bills fit together?
Wyoming invented LLCs in 1977, but hasn't yet adopted a series LLC law. A lot of open-source [software] projects are put into foundations. Ethereum was set up as a Swiss foundation, for example. The reason you'd want to put it in a series LLC is the open-source software goes into the parent LLC, and each project that is built using the open-source software can be a separate, bankruptcy-remote LLC. There's a parent and then an infinite number of children, or subsidiaries. It significantly eases the administrative burden for big, open-source software projects.
When it comes to states registering business entities, Delaware is by far No. 1, and Nevada and Wyoming are in a race for No. 2 and No. 3. So a big export of Wyoming already is business-entity registration; in fact, there's almost one LLC for every two citizens in the state. Two-thirds of new business formations in the last 20 years have been LLCs. And this feeds into why we've had fewer IPOs, because LLCs are pass-through entities for tax purposes, and to go public you have to convert to a C corporation, and then you get double taxation of corporate profits. So this is one of the reasons why, I suspect, the unicorns like Airbnb and Uber and the like, are staying private longer. They have access to institutional capital in secondary markets that companies didn't used to have. That's a difficult thing for the industry generally, because Mom and Pop are cut out of those institutional markets. It's a shame that this is happening.
Now you have this thing called a utility token that allows you to raise capital out in the democratic capital markets, and raise capital from Mom and Pop. You don't need to go public anymore in the traditional securities industry. Those three [trends] are really important to piece together. I think there's something really big happening: We've now created a way for a company to stay an LLC, so you don't have double taxation of profits, and still raise capital in capital markets.
If a company can't show that it has some software platform or service for which its token has a use, this new law wouldn't help, because they would be seen as issuing a security, right?
That's absolutely right, but I actually think that more businesses are going to be recognizing that tokens are useful to them in their core business. Airline miles, loyalty rewards points, prepaid gift cards — these things are not really securities. They exist in a gray area. They're not money, but they're valuable and they're trade on the secondary market. More companies will be looking for those angles, especially now that there's a way to raise capital with them. It's no longer a marketing program; it's now part of your finance strategy.
How much would changing the state securities laws help if the government securities laws are still unfavorable? Do you hope that by starting on the state level you'll create a precedent and momentum for changing the federal laws? Or will companies in Wyoming have to exist in a gray area, the way that marijuana companies are doing today?
Most large companies are not going to avail themselves of the utility token safe harbor in Wyoming — especially if they're publicly traded companies. They're just going to go ahead and issue security tokens and register them. That's what Overstock did with tZERO [and it's what Kodak is doing, too].
But I don't want to make it seem like [the Wyoming bill] isn't a big deal, because I think it is. The supremacy of federal securities laws is not well-established by litigation precedent, so I would not be surprised to see companies come in and challenge them using a state like Wyoming. It's just like what's happening in the marijuana industry: It has not really been litigated whether states have supremacy over that topic or whether the federal government does. It's just been presumed [that the feds do]. And it's an interesting question as to whether federal securities laws really do take precedent over state securities laws.
What's more, this will be the first time an elected body defines a utility token as being something other than a security. That will establish some precedent in the regulatory discussion. The [Securities and Exchange Commission] is not an elected body. But I think most businesses will still try to comply with SEC rules today. And that is my advice to everyone: Go get a qualified attorney who understands these issues, and don't try to set up a business in Wyoming presuming that you're exempt from federal securities laws. Because at the moment it's not likely that you are.
If these bills pass, what would you like to see happen next? Are they more of a conversation-starter for a bigger fight to come, or will they actually bring real results in the near term?
We've already had dozens of businesses reach out to us. A Canadian company called BlockCrushr already put out a press release saying they're moving to Wyoming because of the prospective legislation which hasn't even been passed yet. There's so much interest in the state. There's such a void for regulatory clarity. Just having a state where you know you're not going to have issues on the state level is very helpful to the industry. [The regulation in] New York, frankly, may be worse than the federal laws; same thing with California. Every business has to think about both state and federal regulations, so the last thing they want to do is pick a state where they're worse off than they are with the federal regulations.
So I'm not hanging my hat on the potential for litigation; it's pretty clear that Wyoming is going to attract a lot of businesses if this bill passes. Our main sponsor in the legislature is pretty optimistic that all [bills] are going to pass. The governor came out in his "state of the state" speech and announced his support for all of them. It's only a 20-day legislative session, and [Feb. 12] was the first day, so this will be done by no later than mid-March. We will know soon.