Bearer Assets on the Blockchain

Blockchain sans bitcoin has been a recent slogan among those advocating the potential benefits of “the blockchain” while trying to avoid the perceived Silk Road aroma of Bitcoin. Without going into great detail about this debate, and based on what has been delivered to the market thus far, I will say that I do not support the argument that private blockchains can offer the same benefits the bitcoin blockchain provides without the use of Bitcoin as an underlying token. So when I refer to “the blockchain”, you can assume that I am speaking of the Bitcoin blockchain. I use the term bearer instrument (or bearer asset) and not bearer security in order to avoid the assumption that my definition of a crypto bearer instrument satisfies the definition of a security found under the Uniform Securities Act and the U.S. Supreme Court case SEC vs. W. J. Howey Co.

Quite simply, bearer instruments are types of investments that exist without the official recording of the instruments’ owner. When it comes to bonds, we should compare bearer bonds to book entry bonds for a better understanding. With book entry bonds (mostly used today), ownership is documented and maintained by an official record. The owner of a book entry bond cannot trade his/her bond without passing title. In contrast, bearer bond owners can trade their bonds without having to worry about documented ownership because whomever maintains the physical bearer bond will have claim on future interest payments. There are also bearer shares that act in a similar manner. When it comes to bearer instruments, the term bearer indicates that an instrument is not centrally registered for the purposes of recording title and ownership. From the perspective of Bitcoin, the exchange of crypto bearer instruments would be as simple as scanning a QR code and waiting for six confirmations.

A crypto bearer instrument, by itself, would reflect the decentralized nature of the Bitcoin network and wouldn’t be much different than any other type of bearer investment when it comes to the tracking of ownership. However, if such assets were traded on the decentralized Bitcoin network, the issuance of the asset would be far from decentralized. You can expect that a company, project, municipality, or fundraiser that issues a bearer asset on the blockchain will be keeping tabs not on those who have the asset in their possession at any given time, but of the very existence of those securities. Unfortunately, such book-keeping would come short of meeting the demands of the regulatory oversight investment professionals and institutions face today.

I had recently come across an email from a group claiming to be Pantera Capital (it was not actually Pantera Capital; the email turned out to be a hoax). The email contained three qr codes with a description for each. Essentially the email sender stated that by sending bitcoin to any of those QR codes, one would be investing in a fund that would yield a certain return over a particular time period. No personal information would be required! Just scan the qr code, select a Bitcoin amount, press send, and then you’re done. For a few seconds, I thought I had just witnessed Bitcoin’s new killer app. And then those six letters popped into my head: AML/KYC. But for those few seconds, I encountered a completely different method of investing than what I had been taught at business school.

One great benefit of having this as a potential investment option is the ease of use it brings to the investor. Recordkeeping would be seamless with minimal effort. The benefits attached to the crypto bearer asset (i.e. interest, public recognition, dividends, free t-shirts, etc.) would always be attached to the investment, assuming that the asset benefits from the network effect of the blockchain and the investor has sole possession of the private keys. I see no reason why governments could not effectively build tax collecting applications on top of this publicly audited ledger. Crypto bearer assets could also be a boon for cross-border, grassroots political fundraising.

At this time there seems to be little room for this kind of financial innovation when it comes to Dodd-Frank legislation. The record-collection requirements being placed on financial institutions seems to becoming increasing rigorous, and this rigor doesn’t appear to be tapering off any time soon. The government expects you to (1) know what you’re selling/issuing, (2) pay your annual compliance dues, but more importantly, (3) who you are selling to. I am a firm believer in the power of a vote here in the United States, and government policies will more often than not reflect the people’s general attitude and position on a matter. This leads me to believe that most people are not yet comfortable treating their money like email.

A world where money moves at email speed will require us to review our approach to the transfer of value and the degree to which this value can represent a voice (i.e. money = speech). Bitcoin, as a form of value, exceeds the definition of money. In order to benefit from the technological innovation it seems to provide, I think it would be ideal to test the crypto bearer asset idea in a small and relatively controlled environment. This might help uncover regulatory bugs within the system. Looking at the speed at which information travels throughout the world today, there’s an increasing need of having to attach value to that information.

The internal combustion engine does not come with wheels. How on Earth could it compete with the horse and buggy?