Security Tokens, Guidance from the SEC & Reviving an Intellectual Property Market
“The crypto world has been a nice fit for the derivatives industry,” said Jim Falvey. “When there were trading pits, it was largely a family business and the industry grew by locals bringing in their family members. However, as technology evolved, we’ve needed to look at new ways to expand and find the next generation of traders. Crypto traders are a group that could fill that void. They are interested in trading. Folks in the derivatives business believe that crypto traders can also trade other, more traditional, asset classes.”
A long-time industry lawyer, Falvey has held positions at CME Group, the U.S. Futures Exchange and R.J O’Brien. He most recently ventured into the cryptocurrency space, specifically with tokens. He sat down with Hehmeyer Trading + Investments to talk about how he has gotten valuable guidance from the Securities and Exchange Commission (SEC) as he navigates this growing asset class, why he believes security tokens can launch great business ideas and how he is helping revive an intellectual property market.
Introduction to Crypto via Blockchain
“In 2014, I was working with an entity called Clearable,” said Falvey. “They had the idea to be a derivatives clearing organization leveraging blockchain for the FX markets.”
Falvey explained that bitcoin blockchain technology updates every 10 minutes so Clearbable would essentially be able to offer real-time risk management and clearing capabilities.
While the concept received positive feedback from the Commodity Futures Trading Commission (CFTC), the problem became a fundraising issue.
“Clearinghouses that offer trading on margin need to have a guarantee fund of at least $50 million and that is a lot of money to raise for a start up before we took into consideration the operating costs,” said Falvey.
Falvey says that the idea was not all-together abandoned but clearing for FX markets is not top of mind for the industry at the moment.
“My introduction to cryptocurrencies was by way of blockchain,” said Falvey.
“From there it seemed the entire industry was taken over by the crypto buzz. I have seen a handful of senior derivative executives tapped by Silicon Valley or New York to sit on Boards working with blockchain. At the same time, I’ve seen the younger generation also recruited to bring their technology expertise to the crypto world.”
Initial Coin Offerings (ICO)
Currently, Falvey is General Counsel to two emerging companies looking to launch ICOs.
The first company, Big Data Block, is looking to democratize big data projects for small and mid-sized companies.
“Big data is such an important aspect for finance, medicine and law. There is so much information available and analytics really provide insight into what that data is telling us,” said Falvey. “However, most big data products are geared toward large companies.”
By leveraging blockchain, Big Data Block will outsource data analytics projects to third parties and help smaller firms identify findings in their data.
The company plans to issue a coin later this year and companies interested in using Big Data Block will use the coin to pay for the service.
Another company planning an ICO that Falvey is working on is Ocean Tomo’s Intellectual Property Coin Group (IPCG).
“Many readers may remember Ocean Tomo’s first attempt to create a market for trading patent licenses through the Intellectual Property Exchange (IPXI),” said Falvey. “This current project with IPCG leverages blockchain and the IP Coin, a coin they plan to issue and which they believe solves many challenges that existed with IPXI. For example, many CFO’s encourage their Chief IP Officer to create, buy and license patents. But, the IP Officers are not given any funds to do so. This issue is solved with IPCG because IP Coins will be loaned to companies (with some portion of their patent portfolio put up as collateral) to buy or license patents.”
Falvey explained that the first attempt to create a vibrant patent market had many sellers, but very few buyers because, among other things, the buyers did not have funds to buy or license patents.
IPCG’s current strategy is to loan IP Coins based on the collateral of a company’s patent portfolio. The coins can then be used to buy existing patents, obtain a license and/or trade the IP Coins for other coins (as they are ERC20 compliant). After a certain amount of time, the company will have to pay the coins back or IPCG will take the collateral, which is the patent portfolio that the company put up, and sell it.
“Think about how much time, money and legal work goes into the licensing or selling of just one patent,” said Falvey. “Creating a market for the buying, selling and licensing of patents leveraging blockchain will be more efficient and effective than the system that exists today.”
Falvey explained that another aspect of the IPCG strategy is to use blockchain to keep record of who has bought and sold licenses.
“Market participants can use IPCG to keep track of those transactions via the blockchain, which IPCG calls Unit License Rights (ULRs).”
Falvey explained that companies like Ford, for example, have patents for something related to the automobile, say a widget. Ford knows that GM needs a million of these widgets and will offer to sell GM a million ULRs of the widget, which can be tracked on the blockchain.
With an impending ICO launch, Falvey is working closely with regulators.
“We are working closely with the SEC who has told us they would rather people come in and seek guidance, rather than ask for forgiveness after an ICO is done the wrong way,” said Falvey. “They have been very helpful to us.”
A Good Investment
While there have been some bumps in the road, Falvey believes that cryptocurrencies are here to stay and will help the economy.
“Security coins are regulated coins that help companies bring ideas to life and give people the confidence to launch great businesses,” said Falvey. “The trick is to figure out which companies will be successful but you have to do that with the traditional equity markets as well. This is just a new way for start-ups to raise funding and bring a product to market.”
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