Are NFTs Securities? with Securities Lawyer Brian Frye

David has been obsessed with this topic for the last couple weeks. It's time to get to the bottom of this: Are NFTs securities? On the way down this rabbit hole, we found lawyer Brian Frye, who has some fascinating and novel takes on this very issue. Brian is a law professor at the University of Kentucky, and recently wrote an article in Coindesk titled “NFTs Are Securities and It’s Great.” ------ Osmosis | Your Gateway into the Cosmos Ecosystem www.osmosis.zone/bankless http://www.osmosis.zone/bankless ------ SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/?utm_source=banklessshowsyt ️ SUBSCRIBE TO PODCAST: https://availableon.com/bankless ------ BANKLESS SPONSOR TOOLS: KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://bankless.cc/kraken UNISWAP | ON-CHAIN MARKETPLACE https://bankless.cc/uniswap ️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum EARNIFI | CLAIM YOUR UNCLAIMED AIRDROPS https://bankless.cc/earnifi ------ Topics Covered: 0:00 Intro 7:30 Are All NFTs Securities? 14:00 Triggered by the Word 19:30 Trolling the SEC 29:20 A Really Good Tool 36:00 New Securities 44:55 Use a Different Term 53:30 Creative Assets 1:01:00 Copyright Law and Clout Sales 1:09:30 A Medium of Value Capture 1:14:00 Public Goods 1:19:00 Closing ------ Recources: Brian Frye https://twitter.com/brianlfrye After Copyright: Pwning NFTs in a Clout Economy https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3971240 Securities Spectrum: https://imgur.com/8jt6OZ1 NFTs are Securities and It's Great https://www.coindesk.com/consensus-magazine/2022/12/28/nfts-are-securities-and-its-great/ ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Ryan Sean Adams?

  Bankless Nation, another state of the nation for you. The first one of the year, our first livestream of the year as well. Our NFT securities. David, you have been obsessed with this topic for the last couple of weeks and wanted to do a show on it. I was a little hesitant at first, maybe we'll get into a little bit why. But what are we going to cover today and what's the topic?

• 0:22David Hoffman?

  Yeah, I've been going down the securities law rabbit hole, which is actually a place where I started my crypto journey. A lot of people don't really know this, Ryan, but my first foray into crypto was first with an ICO advisory company and that company ground to a halt because we realized that everything we were doing was a security. And so the way I got through the 2018 bear market was working inside of the world of security tokens. And so going back down the security token rabbit hole has been extremely interesting. And I think that there are a ton of lessons that we as an industry need to learn about. Why do securities law exist? What is this word, security? Why do we have the SEC? And why does our guest, Brian, think that all NFTs are securities?

• 1:04David Hoffman?

  And also, why might that not be that be such a bad thing? These are all fantastic questions.

• 1:09Ryan Sean Adams?

  Yeah, I'm actually super bullish on this episode because I think we we get to kind of the base principles of why securities laws exist in the first place. And that's really where we're going to start the conversation and build up. Also, David, want to tell our bankless listeners about our friends and sponsors at Osmosis. So I know you're familiar with Osmosis, what it is. It's been a long time. One of my New Year's resolutions, David, was to try new things in 2023. One of those new things is to give more time to the Cosmos ecosystem, in particular Cosmos DeFi. I feel like after the dust has settled from 2022, there are kind of two ecosystems that are really still thriving and still building. I mean, there are some others, so forgive me if I ignore you, but one is Ethereum, of

• 1:54Ryan Sean Adams?

  course, which we talk about a lot. The other is Cosmos. Osmosis is kind of a DeFi hub for Cosmos. It's sort of a little bit of Uniswap, it's a little bit of DEX, a little bit of exchange. There's also the ability to stake, do some other things on here. So David, when I went And did was I spun up a Kepler wallet. It's kind of the metamask of Cosmos. And I went and I played around on Osmosis, transferred some Adams tokens over to the Cosmos to the Osmosis chain and I did some swapping. And I gotta tell you, the UX is pretty awesome and pretty interesting. So this is the invitation to you, Bankless listener, to go try some new things in 2023 and go give the Osmosis ecosystem, AppChain ecosystem a whirl. If you know what DeFi

• 2:39Ryan Sean Adams?

  looks like on Ethereum, you should also know what it looks like in other ecosystems too. And this is a great way to go test that and do that. I think, David, we got a link in the show notes to that. So people can click that link, spin up a wallet and get started, right?

• 2:52David Hoffman?

  Yeah, I believe we all have extra time this bear market to do some. If you want to, something to explore, definitely explore the Cosmos ecosystem. And the place to get that started, that start that exploration is of course going to be Osmosis. It's like the Uniswap of Cosmos and liquidity is where all journeys begin in the world of crypto.

• 3:11Ryan Sean Adams?

  So David, why are you taking us down the securities rabbit hole today? All right. Because I'll tell you, I have some reservations about it, which is even just the word, the title of this episode, our NFT security. I find myself getting a little, little triggered by that.

• 3:26David Hoffman?

  Yeah, the securities word is triggering for many, many people out there, isn't it?

• 3:29Ryan Sean Adams?

  Yeah. Why is that? And why, why did you want to cover it with, with our guest here today?

• 3:34David Hoffman?

  Sure. Yeah. I think the reason why the word securities triggers people is because it invokes feelings of the SEC and Gary Gensler. And obviously it kind of should because that's what the SEC is. They, that what is the SEC? It regulates securities. But securities, Ryan, were a thing before the SEC was. Before we had the federal SEC, we had these things called blue sky laws, which are state, state laws around securities. But the concept of a security exists outside of the SEC. And we often talk about speedrunning the history of money and finance on Bankless. Sometimes we expand that to speedrunning human coordination. And the story of securities and security regulation is a part of the story of human coordination.

• 4:16David Hoffman?

  Humans coordinate better when we can collectively manage our own human greed when it comes to our financial assets. And so this is where securities comes from. And so, understanding the spirit of securities laws is something that we definitely need to do in order to be informed about how to build crypto. And so Brian, our guest, is bringing a unique perspective about the world of NFTs and securities. And if you think he is a Gary Gensler shill who wants to openly invite the SEC into all of our crypto assets, you would be egregiously missing the important lesson that we are going to talk to today. And so that, Ryan, is my preamble to the rest of this show.

• 4:51Ryan Sean Adams?

  And that, by the way, guys, is what made me very excited about this episode, including some white papers that Brian created. I read one of those papers coming into this. Definitely a first principles thinker. So you want to stay tuned for this episode. Also, we're going to get right to the sponsors. But before we do, want to give a special shout out to our strategic sponsor, which is Kraken. Kraken is here for the same reason that we are, to accelerate crypto adoption for the world. And they know what we know, which is when you adopt crypto protocols, you adopt crypto values. Stay tuned for that. We'll be right back with Brian.

• 5:23David Hoffman?

  Kraken has been a leader in the crypto industry for the last 12 years. Dedicated to accelerating the global adoption of crypto, Kraken puts an emphasis on security, transparency, and client support, which is why over 9 million clients have come to love Kraken's products. Whether you're a beginner or a pro, the Kraken UX is simple, intuitive, and frictionless, making the Kraken app a great place for all to get involved and learn about crypto. For those with experience, the redesigned Kraken Pro app and web experience is completely customizable to your trading needs, integrating key trading features into one seamless interface. Kraken has a 24/7/365 client support team that is globally recognized. Kraken support is available wherever, whenever you need them, by phone, chat, or email. And for all of you NFTers

• 6:06David Hoffman?

  out there, the brand new Kraken NFT beta platform gives you the best NFT trading experience possible. Rarity rankings, no gas fees, and the ability to buy an NFT straight with cash. Does your crypto exchange prioritize its customers the way that Kraken does? And if not, sign up with Kraken at kraken.com/bankless. Hey, Bankless Nation. If you're listening To this, it's because you're on the free Bankless RSS feed. Did you know that there's an ad-free version of Bankless that comes with a Bankless Premium subscription? No ads, just straight to the content. But that's just one of many things that a Premium subscription gets you. There's also the Token Report, a monthly bullish, bearish, neutral report on the hottest tokens of the month. And the regular updates from the Token Report go into the Token Bible,

• 6:48David Hoffman?

  your first-stop shop for every token worth investigating in crypto. Bankless Premium also gets you a 30% discount to the Permissionless Conference, which means it basically just pays for itself. There's also the Airdrop Guide to make sure you don't miss a drop in 2023. But really, the best part about Bankless Premium is hanging out with me, Ryan, and the rest of the Bankless team in the Inner Circle Discord only for Premium members. Want the alpha? Check out Ben the Analyst's DGEN pit, where you can ask him questions about the Token Report. Got a question? I've got my own Q&A room for any questions that you might have. At Bankless, we have huge things planned for 2023, including a new website with login with your Ethereum address capabilities. And we're super excited to ship what we are calling Bankless 2.0 Soon TM.

• 7:31David Hoffman?

  So if you want extra help exploring the frontier, subscribe to Bankless Premium. It's under 50 cents a day and provides a wealth of knowledge and support on your journey west. I'll see you in the Discord. Bankless Nation, we are here with our guest, Brian Fry. And Brian came onto my attention when William Peaster, who writes for the Metaverseal newsletter out of Bankless, forwarded me an article in CoinDesk that Brian wrote. And that article was titled, roughly titled, "All NFTs are Security", and that's great. That's a great thing. And a very thought-provoking article. Triggering, David. Very triggering, yes. And Brian is also a law professor at the University of Kentucky. And today, we are going to unpack that article, "Are All NFTs Securities",

• 8:16David Hoffman?

  and what does that really mean? And why does Brian think that we should be bullish on the fact that all NFTs are securities? Brian, welcome to the show.

• 8:24Speaker 02

  Hi. Nice to talk to all of you. Glad to be here. Big fan.

• 8:27David Hoffman?

  So Brian, you opened your CoinDesk article with this pretty spicy opener, and I'll read a quote here. "Everyone in the NFT market is terrified that the United States Securities and Exchange Commission, SEC, will decide that NFTs are securities and regulate them. They should get over it. Of course, NFTs are securities. That's what makes them so powerful and promising. Rather than avoid SEC regulation, the NFT industry should embrace this categorization. It's inevitable and desirable, especially once the SEC understands how the NFT markets work. It's likely to regulate it with a light touch." So that spawns, Brian, for me, three questions. First, I want to ask, why do you think NFTs are mostly securities? Second, I want to ask, why should we think that that's good?

• 9:09David Hoffman?

  And third, I want to ask, why do you think, well, the SEC will only regulate it with a light touch? But let's start with that very first question. What do you mean when you say, "Of course, NFTs are securities"? Why, of course?

• 9:20Speaker 02

  Yeah, yeah. Well, I think this is a really important ontological question, right? In the sense that when we ask the question, "Are NFTs securities?" Or "Is anything security?", I actually think that's the wrong framing. And it was something that struck me when I first became interested in the NFT market in 2021, right? Like, a lot of people, I saw the big people sale. I'd been interested in art and art law for a long time. And I was like, wow, something's happening, and I want to try to understand what it is. And one of the things I noticed immediately when I started engaging in the kind of NFT Web3 ecosystem

• 10:04Speaker 02

  is that everyone was kind of terrified of the idea that what they were doing was a security or might be perceived By the SEC as a form of securities trading. And a lot of the discourse was sort of around, well, how do we describe what we're doing? How do we characterize what we're doing? How do we structure what we're doing in such a way that it won't be a security? And therefore be regulated by SEC? And I hate to say it, for better for worse, I'm a former securities lawyer, right? I worked at Solomon and Cromwell, a Wall Street law firm from 2007 to 2010. You know, I worked for Goldman Sachs.

• 10:49Speaker 02

  I did securities law, you know, related litigation work primarily, but also some IPOs and that kind of stuff. And I was like, oh no, right? Like this entire discourse is so confused, right? Because the SEC isn't in the business of deciding really whether or not things are in our security, our securities in the way that I think a lot of the people kind of in the ecosystem think, think it is. The SEC is in the business of deciding what it thinks it needs to regulate and what it thinks it doesn't. Right? So we say that there's a test for whether or not something is a security, right? The, the, the Supreme Court in a very famous case called Howey, right?

• 11:34Speaker 02

  Established the criteria for what would constitute an investment contract. It's sort of the broadest definition of, of a security under the United States securities laws. But the reality is that the Howey test is so broad that, that any investment can be a security. If you just kind of look at it, right? Because all the Howey test says is that something is an investment contract. An investment is a security. If it constitutes an investment of money in a common enterprise with the expectation of profit to be devised, derived from the efforts of others, well, that's, that's any investment, right? That's literally any investment whatsoever, right? So when you ask this question, is it a security?

• 12:19Speaker 02

  That's the wrong question, right? The real question is always, is it the kind of thing the SEC thinks it should be regulating? Is it the kind of thing that the SEC thinks is within its wheelhouse? And is therefore the proper subject of of of federal regulation in the way that at the SEC does things, right? So what I want to try to convey to people really more than anything else is like, stop trying to use the laws magic words. The laws magic words is a crazy way to think about what's taking place, right? You need to think about what your goals are. What do you want? What do you want? The SEC to do? What do you want the regulatory environment to look like? What's going to be

• 12:59Speaker 02

  beneficial for the ecosystem? What's going to help it thrive as opposed to destroying it? And rather than be hostile to or try to avoid this regulatory atmosphere, how do you explain to the regulator what you're doing and how the regulator can add value to the ecosystem instead of destroying it? Because at the end of the day, that's at least theoretically what the SEC is for, right? The idea is that the purpose of securities regulation is to make the securities market work more efficiently, right? I mean, that's the that's the primary mandate of the SEC is to create and maintain healthy capital markets, right? They're supposed to be making the market better, right?

• 13:44Speaker 02

  So it seems to me the goal ought to be, how do we explain to the SEC what this market needs, if anything, and what kind of value it can add?

• 13:52Ryan Sean Adams?

  Okay, so I want to park on this, Brian. This is so interesting to me.

• 13:55David Hoffman?

  Brian's fired up. This is fired up.

• 13:57Ryan Sean Adams?

  I'm fired up. I'm I'm very excited, okay, like to have this discussion because I got to admit, at first, my first reading of the article, I was a little triggered. Our NFT securities, like this word is kind of a dirty word to me. It's my comment to David was like, stop using the word securities. That's their word. And what I meant was like, it's the nation state word, and it means a certain set of things. It means you have to file with Edgar, and you have to do 10 K filings, and you have to do all of these things with respect to structure. And it's more imposition. And it's about a group of regulators, unelected bureaucrats, telling us all these things we can't do with the technology they don't even understand. All right?

• 14:34David Hoffman?

  And by the way, Ryan, if I can quickly go down, why are we talking about this? It's because a couple of weeks ago, I talked, I said on the Bankless Weekly rollup that Bored Ape's our securities. And like, Ryan got a quizzical look on his face.

• 14:48Ryan Sean Adams?

  Can we bring up the quizzical?

• 14:51David Hoffman?

  I'll try and pull it up as once I'm done talking, but uh it's like Ryan got a quizzical look on his face and usually Ryan and I agree on almost everything. And so that was like, it's very rare for me and Ryan to have a disagreement. And then like, we sent out the weekly roll up onto uh in to send out on the podcast feed on the YouTube and then the Bored Apes got extremely triggered that like David Hoffmann from Bankless is saying bored apes are security and how dare he and what does that mean?

• 15:14Ryan Sean Adams?

  This is my face, David.

• 15:15David Hoffman?

  Yeah, this is this is Ryan's face. Here's Ryan's reaction to David saying bored apes are security.

• 15:19Ryan Sean Adams?

  Well, I didn't quite understand.

• 15:20David Hoffman?

  Right, because securities laws are confusing and part of it is exactly what Brian was just saying is like, the crypto world's reaction to the word security is that we all the fun gets sucked out of the room. Uh, we have to like, we can't trade our assets on Uniswap. We have to go on to a regulated exchange and like, all the fun leaves. But Brian here is saying that-

• 15:40Ryan Sean Adams?

  All the important stuff.

• 15:41David Hoffman?

  Exactly, yeah.

• 15:42Ryan Sean Adams?

  It's not just fun. It's just like, it's all the stuff that makes crypto crypto.

• 15:45David Hoffman?

  Right.

• 15:45Ryan Sean Adams?

  So that that that's my quizzical face, reading that article and also hearing what David said. By the way, then I then I read your longer kind of take on this, NFTs and the cloud economy, totally changed my mind. But also, um, I I want to get to the meat of that because this is the the conversation I've really wanted to have with any crypto lawyer or any SEC uh securities lawyer or god, anyone, any regulator, anybody would have this conversation is, I think the Howey test sucks.

• 16:11David Hoffman?

  Howey test sucks.

• 16:13Ryan Sean Adams?

  It sucks. It and no one says this. Everyone is, to your point, uh, everyone is trying, Brian, to say like, oh, here's how our particular token doesn't like the Howey test doesn't apply to it. It doesn't, it's only three out of the four prongs and all of this. But like, so here's why it sucks to me. Here's the definition of Howey test. You said it earlier, I'll repeat. An investment of money in a common enterprise with the expectation of profit to be derived from the efforts of others. I used to do POGs in grade school. POGs don't pass the Howey test. All right. We gambled those things for money. Magic the Gathering cards don't pass the Howey test. Uh, Pokemon cards don't pass the Howey test. But but the important thing to remember is-

• 16:53Speaker 02

  What's missing from the Howie test explicitly missing is the most important factor, the fifth shadow factor, as my good friend at UNLV, Ben Edwards, described it to me. Does it look like a security? Or rather, is it the kind of thing? Is it the kind of thing that the SEC wants to regulate? And the SEC doesn't want to regulate POGs. The SEC doesn't want to regulate Magic the Gathering cards. Are you sure? Are you sure about that, Ryan? I'm, I'm pretty confident, although you know, you never know. You never know with Gary, but, uh, but I'm pretty confident that, uh, POG regulation is. And, and, and I actually, I, and I, I can, I can verify that from personal experience. Right?

• 17:38Speaker 02

  So my entree into the NFT market was a little weird. Right? So at the end of 2019, I published an article, right? So I've been, I've been thinking about this problem for a long time. Right? I went to art school before I went to law school. Right? Then, as many artists do, I ended up becoming a securities lawyer. Cromwell and representing Goldman Sachs. Right? And the entire time I was so confused because the more I learned about securities, the more I kind of thought structurally about the securities law, the more I thought to myself, gee whiz, you know, conceptual art and conceptual art in particular sure looks a hell of a lot like a security, right? After all, when you're buying conceptual art, what do you end up buying?

• 18:23Speaker 02

  You, you, you got a certificate that says you own like. Like a Picasso or a Manet. That's what you mean by. You own it. You own an addition of a concept, right? It's, it's almost like you're, you're, you're just buying like a bearer bond of some kind or securities, a stock certificate, right? It always kind of bothered me. I was always really confused. I was kind of working through the problem and trying to think about how I would put this into kind of legal scholarship language, but it never kind of worked, right? Because artists were always like, why are you talking about securities? And securities lawyers, securities lawyers would look at me like, I try to explain conceptual art to them and they'd be like, why would anyone buy something like that? That's stupid. It doesn't have, yeah, cash flow.

• 19:05Speaker 02

  So there was this, there was a kind of disconnect and I realized that what I needed to do was to activate the project, right? So rather than just write an article about it, I had to make it real. Right? So what I did was I created a Law Review article in the form of a prospectus for the sale of a work conceptual art and the article was titled SEC No Action Letter Request and it proposed to sell a work of conceptual art titled SEC No Action Letter Request, which consisted of sending the SEC a no action letter request proposing to sell a work of conceptual art titled No Action Letter Request. In an addition of a hundred for $10,000 per edition, I would recruit

• 19:47Speaker 02

  other law professors to market the work conceptual art on my behalf and use proceeds from the sale to promote the virtue, you know, future sales. Wait, I found this thing. This is it, right? Of, of the working question. Exactly. So, so I, I did this as a Law Review article initially, and I actually sent the SEC a no action letter request, which they declined to respond to. I did, a friend of mine ultimately managed to send them, get them to respond to a FOIA request. So they did send me a PDF of like 40 pages of documents, all of which were entirely redacted. So I didn't get any actual information. But they saw it.

• 20:32Speaker 02

  But they saw it. They, they definitely were talking about this. But the, the point is, I explained to them why what I was doing. And so I sent them a no action letter request and in the national letter request, I explained to them why the article, or rather, why the work of conceptual art I was proposing to sell satisfied all the factors. This is hilarious. And therefore they should prohibit me from selling it to, to the public. A friend of mine actually described it as the first SEC action letter request he, he'd ever seen. So I was basically like, come at me, bro. Right. You are a troublemaker, sir. This is so funny. This is so funny. Trolling them over and over again. And it was hilarious because Matt Levine ended up picking

• 21:16Speaker 02

  up on it and running two separate discussions about the project in his Money Stuff column. And Levine's response, as well as the response from several other people was sort of like, I say everything's a security, but I'm not sure I really mean it. And this has to be wrong, but I don't know why. And essentially, they just said, well, it's not really a security because it's a joke and no one would really buy it. And I was like, well, that's a totally unsatisfying.

• 21:44Ryan Sean Adams?

  Right. That's not a real reason.

• 21:45Speaker 02

  Right. That's not a real reason. You don't have to want to buy it for it to be, I can be a scammer and a really bad scammer. But I'm still violating the securities laws if I try to sell people something that's a security, even if no one wants to buy it. So I was like, this is, this is a meaningless response, but whatever. Anyway, I then kind of set it aside for a little bit, but then when the NFT market blew up, I was like, holy crap. Holy crap. Like this is like.

• 22:11Ryan Sean Adams?

  Now it matters economically.

• 22:12Speaker 02

  Now it matters. So what did I do? The first thing I do, well, actually, you know, when I started fooling around with the NFT market, the first thing I did was create an NFT titled SEC No Action Letter Request. And I just put it on OpenSea and kind of left it there. And I was fooling around, just joking. I didn't really think that much of it. But then a, and a pretty prominent NFT collector named Sam Hart, out of the blue, one night made me an offer of half an ETH to buy the NFT from me. And I was like, I didn't even know how much an ETH was.

• 22:48Speaker 02

  So I looked up and I was like, holy crap, that's like $500. I was like, man, you can buy all the nothing you want from me. I will sell you more nothing than you could possibly imagine, right? But that was sort of my transition into kind of thinking about the dynamics and the economics of the NFT market. What I realized was all of a sudden I could take that SEC No Action Letter Request project, which had been kind of not fully realized because I couldn't actually, there wasn't a market for me to sell it in effectively. And I could put it on the NFT market and sell it. And all of a sudden I was like, oh yeah, you said this wasn't a security because no one was interested in buying it. Guess what? I just made $20,000 selling it.

• 23:32David Hoffman?

  Okay, Brian, can you just, for listeners that didn't follow that thought process and don't really understand the catch 22 that you're placing the SEC in, can you just like walk us through and explain like I'm five fashion what you just did with the no action letter NFT?

• 23:46Speaker 02

  Exactly, exactly, exactly. So basically, the way, the SEC is a very kind of unique federal agency. It's a really old agency, right? I mean, it was formed back in 1934, when federal agencies were actually kind of not that common and most of them were relatively small. So it has a lot of kind of its own unique history and structure. And the reality is that the primary way the SEC works is by having conversations with the people that regulate. It's a very kind of retail agency in a weird ways, which in a lot of ways, and Matt Levine, I think, really talks about this in a really kind of rich and deep and useful way.

• 24:29Speaker 02

  It's kind of a problem, I think, for the crypto industry because the SEC isn't in the business of and isn't used to making kind of generally applicable rules, right? It doesn't, it doesn't do things that way. It responds to specific questions from the people it's regulating. And so one of its primary ways of going about kind of securities law rulemaking is through the process of what's known as no action letter request. So if you want to issue a security, right, well, one thing you can do is just go through the entire registration process, but that's really burdensome and expensive, et cetera, et cetera. And it doesn't cover all securities offerings, right? Some kinds of investments you might offer are the kind of things the SEC has decided

• 25:10Speaker 02

  it doesn't want to be in the business of regulating, even though it could if it wanted to. It could if it wanted to, but it just doesn't want to. It doesn't want to regulate those kind of things. So what you do is you write up a letter to the SEC explaining what you're proposing to do and saying, hey, SEC, this is what I'd like, this is the, this is the investment opportunity that I'd like to provide. If I do this thing and don't regulate it, are you going to prosecute me? Right? And they read it, they think about it, they might have a conversation with you about it. And then ultimately, they either say, yeah, if you do this without registering, that's going to be a violation of securities laws and we're going to bring an action against you. Or they say, nope, that looks kosher. Go ahead, right? Go ahead and make that off.

• 25:55Ryan Sean Adams?

  But this is like a black box after, you know, months and years of like, it's very hard to get this, right?

• 26:02Speaker 02

  Well, I mean, they happen all the time. If you go on the SEC website, they're, they're, they're published, they're available, right? And there's a lot of caveats around it, right? They say, oh, well, you know, we're responding only to this particular proposal you're making. And future proposals might not be binding.

• 26:18Ryan Sean Adams?

  But are they mandated, Brian, to respond to every, every kind of request?

• 26:22Speaker 02

  No.

• 26:24Ryan Sean Adams?

  Okay. You've got any rules.

• 26:26Speaker 02

  But they, no, no, they, they don't have to do anything. They don't have to do anything if they want to. In fact, they don't even like, in my case, they didn't even have to explain to me why they refused to respond. In fact, the only, the only thing they didn't redact in the documents they produced in response to my FOIA request was somebody, some unidentified person from the SEC who I, with reasons, believed to be someone in like their general counsel's office, referring to my arguments as fanciful, which I.

• 27:01Ryan Sean Adams?

  So, so what you did was you basically created this request for, for no action from the SEC. And you wrote this whole entire article on, on like, why this actually isn't a security. And you got them to read it, you think.

• 27:15Speaker 02

  No, no, I, I, I wrote, I wrote an entire article explaining why what I was proposing to do by virtue of selling a conceptual art was in fact, the kind of thing the SEC said it was in the business of regulating. And essentially what I told them was, I want to engage in securities fraud by selling this work, a conceptual art, and I want you to tell me I'm not allowed to do it.

• 27:39Ryan Sean Adams?

  Right, right. So, so Brian was testing the limits of the black box here in a facetious joking fashion. And so he made this NFT.

• 27:47Speaker 02

  The entire project was trolling the SEC.

• 27:49Ryan Sean Adams?

  Yes, right. But, but to prove a point.

• 27:52Speaker 02

  Yes. And so then, and so then when I did it with the NFT, so initially it was like a, a kind of analog, a conceptual art project. And incidentally, I'm still, I, I diluted the offering as much as possible.

• 28:06Speaker 02

  So the the work of concept, actually, I think I initially sold it in an edition of 50, but I ended up selling 200 or selling, giving away 200 additions because I wanted to engage in, I wanted to do as much fraud, I wanted to do as much crime as I as I possibly could. Um, I still, I think I saw some floating around that if anyone wants one, they can just drop me an e, drop me an email or note or something else.

• 28:31Ryan Sean Adams?

  You are the issuer of?

• 28:33Speaker 02

  Yeah, I'm the, I'm the.

• 28:34Ryan Sean Adams?

  Security, question mark?

• 28:35Speaker 02

  Yeah.

• 28:36Ryan Sean Adams?

  Okay, okay.

• 28:36Speaker 02

  But so when I did the, when I did the NFT, I sent the SEC a second no action letter request, explaining why the NFT project was also the sale of an unregistered security. But I explained to them that I had sent them a previous no action letter request to which they had declined to respond. And I just was gonna, I was gonna take their refusal to respond as acknowledgement that it was fine for me to do what I was doing, even though I strongly disagree with them and believed myself to be engaging in securities fraud.

• 29:06Ryan Sean Adams?

  Okay, so, so that is, by the way, uh. Awesome. That's awesome. That's a, that's a, that is the right way to troll, uh, ladies and gentlemen. Um, so we established that the Howey test, it just is a bad fit for this design. And you said the fifth prong of the Howey test is actually, does the SEC want to regulate it or not? And that's the hidden thing that I feel like no one ever talks about, but that is the truth of what's going on here, which is interesting. But, but let me still, um, talk about the other, the other part that still sticks in my mind. So then, Brian, why call them securities? Right? So like the title of your article was why NFTs are securities and that's a good thing,

• 29:47Ryan Sean Adams?

  that sort of thing. Back to my, my, you know, crypto brain, I'm trying to, I'm trying to understand then why are we using their word? Isn't there a better word for this? Isn't it like assets? Sure, that's a word, but like, isn't securities, isn't it?

• 30:00Speaker 02

  The reason, the reason.

• 30:01Ryan Sean Adams?

  Yeah, tell us.

• 30:02Speaker 02

  The reason I like it is that. We invented securities because they were a really good tool for maximizing the value of capital or maximizing people's ability to use capital to productive ends, or rather, maybe you can just think of it like a way of ensuring that capital flowed more efficiently.

• 30:24Ryan Sean Adams?

  Okay, now that's a story. I don't think

• 30:25Speaker 02

  Securities are an innovation.

• 30:27Ryan Sean Adams?

  Crypto people haven't heard that story, Brian, which is why I think we just, I don't, I don't know much about securities law before the birth of the SEC or even the concept of securities and why it's important. Can you, can you tell that story? Because like to me, SEC securities, they're one in the same, but there is a deeper purpose for these assets and this, this class of assets. Can you tell us what that is?

• 30:49Speaker 02

  Yeah. So securities long predated the SEC. I mean, as you mentioned before, right? There was securities regulation on the state level via Blue Sky laws before the SEC was created in 1934. But securities predated Blue Sky laws as well, right? Securities were an innovation, a financial innovation that people invented in order to facilitate the investment and distribution of capital, right? I mean, securities are just a fancy way of saying, how do we figure out how to enable people to invest in something that they believe is going to be more valuable in the future? In other words, how can they

• 31:31Speaker 02

  use their money in, in productive ways? How can they, how can they facilitate an investment? And I think the, the problem is that we always thought too narrow about it, right? We, we thought about securities only as a way of investing in companies, investing in businesses, owning, owning a piece of the capital flows, for example, of, of a business. But I think that our market has developed in a much broader, richer and, and deeper way where we, I think, can think about it more, more comprehensively, right? So the project I'm working

• 32:13Speaker 02

  On right now is kind of thinking about what, if anything, the NFT market shows us about the nature of the markets and specifically a particular market in creativity, right? So the kind of the big picture point is we've had a innovation securities market for a long time. We just couldn't see it, right? The art market has always been a securities market, right? When you invest in a work of art, what you're really investing in is the belief that a particular artist, that their brand is going to be more valuable in the future than it is than it is now, right? You're investing in your belief in the future commercial goodwill associated with an artist

• 32:58Speaker 02

  or like you're investing in their clout, right? You're investing in the belief that this that this brand is going to have more clout in the future than it does now. The problem is, we couldn't see it as a securities market because the objects got away, right? It was the dirty canvas and the lumpy rock, right? That we thought people were investing money in when they bought something in the art market, but that was always false, right? What they were always really investing in was just a catalog raisin entry.

• 33:27Ryan Sean Adams?

  You're saying, you're saying, if somebody buys a Picasso, right? Early stages of Picasso's career, they're not, it's not actually about the art. The true value becomes with everything that Picasso paints post that time.

• 33:40Speaker 02

  You're investing in Picasso TM. What you're buying is a security interest in Picasso's fame, right? The object, right? The dirty piece of cloth or the lumpy rock is just a physical token that represents ownership of a ledger entry on Picasso's.

• 33:57Ryan Sean Adams?

  And clearly that does, selling a Picasso doesn't have to happen in a SEC-regulated exchange. Picasso does not need to file 10K reports and quarterly earnings reports, does not have to, you know, show fully audited financials. Clearly, everyone would say, of course, Brian, a Picasso is not a quote unquote "security TM" of the type that the SEC.

• 34:21Speaker 02

  Because, because, fifth factor, the SEC has never been regulating the art market. Why is that? Because that's not what the SEC was created for, right? The SEC was created for a purpose, which was to make the financial markets work in a more regular, more predictable and like less vulnerable to fraud.

• 34:42Speaker 02

  Fashion, the SEC was not designed to regulate the art market, right? Which is again, why I think it's so important to realize that when we say, is it a security? We're asking the wrong question. The question is, is it the kind of thing that the SEC believes it has the expertise to regulate?

• 35:03Ryan Sean Adams?

  But that hurts too, because now we need to get into Gary Gensler's brain. I want to come back to that, but I know David is itching to show a diagram he put together.

• 35:11David Hoffman?

  Yeah, and this conversation really kind of goes to the heart of what I really want to impress upon the NFT industry. But really, the whole entire industry of people, cohort of people who invest in assets. You want your asset to have security-like properties because that is bullish. If you take away the security-like properties away from your asset, it is not bullish. That like, there is a fundamental like association with security-like properties and being a bullish investable asset that has growth potential. And so whether I'm investing in Tesla, because I think the Tesla supercar network and sales is going to grow. Or I'm investing in my favorite NFT artist Nate Moeller.

• 35:55David Hoffman?

  It's because I both believe those things are going to grow.

• 35:59Ryan Sean Adams?

  You're bullish on it.

• 35:59David Hoffman?

  I'm bullish on it and I'm bullish on the security-like properties. And so Ryan, like you say, and many of the board apes, when I accidentally triggered the board ape community, that got triggered by this like capital S securities TM word. But what Brian's saying and what we're talking about is that securities as a concept predated the SEC. And I'm saying, we need to plant our flag in the ground and take back that word. And so I've created this word called sparkly securities or securities that have a cute cat associated with them. And so I was working this morning on this graphic that we are showing on screen, which shows some various spectrums that I think are all more or less the same spectrum.

• 36:42David Hoffman?

  And so working from top to bottom, you see on the left side, the CFTC logo. And on the right side, you see the SEC logo. The CFTC is responsible for regulating commodities. The SEC is responsible for regulating securities TM. Or what Brian is saying, securities that it thinks that it should have jurisdiction over. And then in the middle, we have. Securities, which are like cute cat JPEGs and bored apes and CryptoPunks and Pokemon cards. And I also want to keep on, and I'm claiming that these are actually on the same spectrum. Commodities on the very far left and securities on the very far right. And then I also want to-

• 37:19Ryan Sean Adams?

  They're on the spectrum of assets that you want to invest in because you're bullish on them.

• 37:23David Hoffman?

  Yes, exactly. Right. And not to say that being commodities not as bullish, but what I will say is that being, having a higher threshold for bullishness probably means you have security-like properties. Now, there's this very important aspect which we haven't talked about yet, which is called material non-public information. And this is a spectrum that I will put on the decentralization to centralization spectrum. And so like things like gold, coffee, wheat, Bitcoin are very, very, very commodity-like, or perhaps 100% commodities. There is zero material non-public information about these things, as in there are zero privileged parties.

• 38:05David Hoffman?

  There are zero coordinated centralized entities that know something about gold that the generalized public does not know because everyone knows everything about gold and Bitcoin and coffee. Now, that is not true for highly regulated securities TM, things like Tesla, Amazon, Apple, registered compliance securities. There are a centralized coordinated team that does have material non-public information that the public does not know, and that is what makes the SEC say, "Hey, perhaps we should regulate that." And this is the same spectrum as the decentralization to centralization spectrum, where on the left side, on the commodity side, I have assets produced by nature, and on the right side, the centralized side, I have assets produced by humans.

• 38:49David Hoffman?

  If a human produces an asset, likely it's probably starting off as a security, whether it's a sparkly security or a heavily compliant securities TM security, we'll have to go with facsimile circumstances. But I think this is the spectrum that I really want to drive the point home when I say bored apes are securities, or all DeFi tokens are securities, or apps are securities. I mean, they're sparkly securities, as in- And this is also where the role of DAOs come in, where decentralized autonomous organizations take what would have otherwise have been material, non-public information, and then they make them public. And all of a sudden, that moves Maker Token, UniToken, AVE Token

• 39:30David Hoffman?

  away from the securities TM end of the spectrum, closer to the middle to left side.

• 39:36Ryan Sean Adams?

  Well, because they have on-chain cash flows.

• 39:38David Hoffman?

  On-chain cash flows.

• 39:39Ryan Sean Adams?

  Right. So like, what is an audited report from, you know, one of the big four accounting firms when all of the cash flows are on-chain, right? It's already, it's already there for you. So it's already material publicly, materially public.

• 39:50David Hoffman?

  Exactly, exactly. And so, Brian, I want to pause and just kind of get your take on this graphic that we have on screen and my rant for the last five minutes.

• 39:58Speaker 02

  Yeah, I mean, I think there's a lot to that, right? I mean, I think it's, you know, it's a complicated

• 40:05Speaker 02

  ecosystem with a lot of moving parts. So I think this is one useful way or potentially useful way of thinking about how to kind of schematize it. I might also distinguish between like consumption goods and and investment goods in a way. I might also observe that in a lot of ways, part of the struggle that the SEC, I think, is, is really wrestling with is understanding what its real purpose and mission is in a world where most of the securities disclosures that they require are irrelevant to the overwhelming majority of investors. I mean, in a lot of ways, right?

• 40:48Speaker 02

  The existence of something like the fraud on the market concept is actually, I think, deeply corrosive to the mission of the SEC because it implies that invest, most investors, all investors, really, all retail investors aren't really paying attention to these disclosures anyway. They're just relying On on market prices and in reality, I think that the overwhelming majority of retail investment is driven by perception of brand equity rather than anything that has anything to do with the fundamentals of particular companies, right? People are investing in Tesla

• 41:29Speaker 02

  because they believe that, well, maybe they don't now, but I mean, people believe that believed that Tesla or Apple or Google or whatever was going to be cooler in the future than it was today. They weren't looking at the balance sheets, right? They weren't looking at the prospectus. They were thinking about the brand. They were thinking about brand equity and where it was going to go in in the future. And my sense is that in reality, the the people who are really investing on the basis of kind of information about this sort of the actual financials of different companies, they aren't doing it in the public markets. They're doing it. They're doing it privately, right? Private equity is where

• 42:10Speaker 02

  the real the real gains are when it comes to to investment, right? So I for me, in a lot of ways, it's almost like a kind of crisis of purpose or the SEC like what are they? What are they there for? What value is SEC regulation adding other than kind of keeping out players who insiders don't like anymore. But for me, they're really the important thing to realize. And I and I really like, you know, your kind of sparkly securities analogy in a lot of ways, because what I think this ought to drive home to

• 42:50Speaker 02

  people is to realize that the reason that we invented securities in the first place was in order to give businesses, companies, access to capital markets, right? The ability to, in effect, get money that they could use in order to run their business and generate more money. But historically,

• 43:14Speaker 02

  Authors, artists, anyone, you know, individuals didn't have that same kind of access to the capital markets. Because there wasn't a tool you could use to sell shares in your enterprise, as it were. Now, the art market was a very limited version of that, but the art market is largely controlled by insiders. Right? I mean, there's a word for people who invest money in the art market without being an insider. That word is sucker.

• 43:47Speaker 02

  Right? Because the only people who ever are going to make money in the conventional art market are the people who are running the market itself. The exciting thing about the NFT market and decentralization is that it took control away from the insiders and gave it to the kind of general public or anyone who was participating in the market. In other words, what became valuable and popular depended on what NFT investors in the aggregate actually liked, as opposed to what in-market insiders were deciding was going to be possible, was going to be, was going to be popular.

• 44:29Speaker 02

  And I think that like that for me is what's really cool, right? Is the idea that all of a sudden, individuals, authors, creators, innovators could have access to the capital markets in this new and totally previously kind of unavailable way.

• 44:48Ryan Sean Adams?

  Well, okay, that excites me too. And by the way, that was in your paper that I hope we come back to after copyright. Pwning NFTs in the cloud economy, which is absolutely marvelous. He came out with that a year ago and I just finally saw it this morning. But here's a question I have for both of you with respect to sparkly securities. We live in a meme world where words matter and we have narrative battles all the time. Why are you guys trying to fight the fight of securities? This word, okay, like call them capital assets. Another word for the sparkly securities is collectibles. Like, I understand the point that That you're making. In fact, I didn't earlier. That was the quizzical face that we saw earlier in the show. I didn't. Now I understand what you mean by this sparkly securities.

• 45:32Ryan Sean Adams?

  But is this the fight we want to have? Do we want to start claiming NFTs and crypto assets as securities? Because the minute you do, I'm just picturing Gary Gensler popping his head. Oh, did you call me? Because here I am. It's a security.

• 45:43David Hoffman?

  If you say securities three times, yeah.

• 45:45Ryan Sean Adams?

  Yeah, exactly. Like imagine, or take this, imagine somebody's sound clips, this conversation that we're having, David Hoffman. NFTs are securities. David Hoffman clip plays it in front of, you know, a meeting in Congress or something like this. Do you know what I mean? Like,

• 46:00David Hoffman?

  Right.

• 46:00Ryan Sean Adams?

  This is a hard narrative battle, guys. Like, I get the, I get the underlying point, but do we want to use this word? Or is there a better word out there?

• 46:07David Hoffman?

  And then this is exactly why I wanted, wanted to do this episode and this show and go down, Ryan, the securities rabbit hole. And this is why I've been like reading books about the 1929 stock market crash, which is where we got the SEC in the first place. Because understanding this battle, I think is crucial for the crypto industry to move forward in, to move forward at all. And so there, I'll, I'll make the claim that if we, we, like I said at the intro of the show, we often say on bankless that we are speedrunning the history of money and finance. And sometimes we extend that to the speedrunning the history of human coordination. And securities, and securities laws are a part of that story of human coordination. If you reroll the dice of humanity, we will come up with securities law 100% of the time somehow, some way.

• 46:52David Hoffman?

  And so there's this resistance to the SEC in the crypto world, perhaps rightfully so, because the Gary Genslers of the world have not done us a service at all. But there's, there's, there's two strategies that I see here, Ryan, where we fight the SEC in the courts and we move that line of what is a sparkly security to a security TM, closer and closer away to equities on the traditional stock market and further and further away from our NFTs and our sparkly securities. And we, that is a trench warfare, very costly lawyer versus lawyer fight. And but, and we just do our best to push that line. The strategy that Brian is doing with his, his no action NFT is the opposite, where they say,

• 47:36David Hoffman?

  Okay, Gary. Everything's a security.

• 47:39Ryan Sean Adams?

  It's like a jujitsu move, right?

• 47:40David Hoffman?

  Exactly. It's like, okay, come regulate my Pokemon cards, Gary. Do you really want to do that? And so it's a little bit like, yeah, Gary, everything's a, everything's a security. Now go fuck off. Right? And so-

• 47:51Ryan Sean Adams?

  By the way, Gary, come on the podcast.

• 47:52David Hoffman?

  Also come on the podcast. And so like, what do we want to do? And this is what I, why I wanted to make this show, Ryan, because I, that is the question that only the entire crypto industry can answer as a collective. But first, we actually need to be educated about securities in the first place.

• 48:08Ryan Sean Adams?

  Okay, I get it. I get it. So the play here is rather than saying, no SEC, these things, these crypto assets aren't securities. You guys are saying, hey, the definition that you're using the Howie test, everything's a freaking security.

• 48:20David Hoffman?

  Right.

• 48:20Ryan Sean Adams?

  And are you sure you want this?

• 48:22David Hoffman?

  Right.

• 48:22Ryan Sean Adams?

  My question to you, though, is, what if Gary, sorry, Gary, what if the SEC looks back at you, you know, eyes unblinking and says, yeah, that's what we want. We do want that thing. And you know why I didn't care about POGs if I'm the SEC or Magic the Gathering cards? It's because it's a tiny freaking market. It's a bunch of kids playing. This is not a tiny market. We're talking about billions of dollars in assets that now fall outside of my purview. I'm, your comment from earlier and in your post, Brian, was like, you know, is this a thing, the fifth prong? Is this a thing that the SEC wants to regulate? They want to regulate big things, big markets. They don't care necessarily about small markets and POGs and little collectibles. But if it's billions of dollars and it's

• 49:07Ryan Sean Adams?

  international, yeah, they're going to want a piece of that. And so my, my, my-

• 49:12Speaker 02

  I think that's right. But the thing is, the thing is, you can't scare off the SEC, right? You got to start the conversation with them. You got to help them understand what's going on and understand what they can and should be doing that's going to be productive instead of destructive. And I think the only way to start that conversation is to kind of provoke them into understanding the nature of what they're looking at. Because the problem is-

• 49:44David Hoffman?

  I volunteer.

• 49:46Speaker 02

  The SEC is a really old agency that's really used to doing things in its own way. And is really used to interacting only with its client companies, right? The SEC is used to dealing with Goldman Sachs and with JP Morgan and Chase Manhattan and whatever. It's not used to dealing with DeFi people and artists and crypto enthusiasts. It doesn't know what to do with them and it doesn't understand what they're doing or why they're doing it. And so I think that, you know, you have to, I mean, I agree, right? When the SEC sees a big market and people engaging in high value transactions,

• 50:30Speaker 02

  when it sees something like, you know, FTX collapsing, right? It says to itself, oh crap, we gotta do something about this, right? We don't really understand it, but it's gotta be in our wheelhouse because this is the kind of thing that looks like what we do.

• 50:45Ryan Sean Adams?

  And also let's remember the people ask them like legislators, where were you? Sleep at the wheel. Like this is when Hester Purce came on the, on our podcast, who I think is a good faith regulator, you know, commissioner of the SEC as well. Is she was just like, yeah, the problem is when things go wrong, they point to us to come take care of it. And so they're mad at us if NFT market goes up a bubble, a whole bunch of retail is hurt. And then they, people come back to the SEC and why, why weren't you there?

• 51:13Speaker 02

  Yeah, yeah, no, a hundred percent, a hundred percent. And this, you know, and honestly, I, I don't know that I necessarily went about it in the best or most productive way, necessarily, although I did find it very personally amusing, right? Right? But I mean, my whole point was to try to say to them, hey, you should be getting out ahead of this.

• 51:32Ryan Sean Adams?

  Yeah.

• 51:33Speaker 02

  Right? You should be thinking about what you're in the business of doing. As a regulator, you should be thinking harder about what you can do well, how you can use the regulatory powers you have in a way that's going to benefit the market and actually fulfill your regulatory mandate instead of just bullshitting all the time. And like, that's what I'm really disappointed about, right? Like, look, I'm not for or against regulation. I'm agnostic, right? I think good regulation is something that we should be happy about, right? I mean, the, the whole idea behind the SEC was to make the markets work better, right? And on some level, at least sometimes, the government can do that, right? I mean, it's

• 52:15Speaker 02

  in a position to create rules that ultimately can solve market failures and make things work more efficiently. But the regulators have to take their jobs seriously. They have to think about what they're doing. They have to understand the market they're regulating.

• 52:31David Hoffman?

  And also, Brian, they need to actually care. Because from our perspective, Gary Gensler is a Gary Gensler maximalist who wants to promote Gary Gensler to the top of the power hierarchy. So if we're going to ask this of our regulators, we need them to actually care about their jobs, which maybe is a hard thing to ask.

• 52:52Speaker 02

  I couldn't agree more. But I mean, like, look, this, this is the disappointment for me. Like, look, I, in like, I, on some level, I'm a troll. But on another level, like, look, I'm a law, I'm a fully promoted law professor at a state law school, right? Who's sending them law review articles, explaining things to them. And they just are like, blowing me off and pretending like I don't exist. I think that's really weird and kind of unfortunate. And I think it's sort of a shame that they don't take their job seriously enough to ask, like, what is this person telling us? And what are we missing?

• 53:26David Hoffman?

  What, why don't we call these things collectibles? Is that not encompassing enough? And the only reason I say that is that there's no, there's no CEC, there's no Collectibles Exchange Commission, right? And so that's uncharted territory. And so maybe we cut like,

• 53:42Speaker 02

  I mean, I think, I think there's a mix, right? And I think some, some NFT projects ultimately really are fundamentally collectibles on some level. I think you might also kind of think about the market for, for Veblen goods, like, like luxury goods, as sort of like sitting in between the, the two sort of poles as well. But it seems to me, right, that the really kind of promising, exciting aspect of the NFT, one, like, I think NFTs ultimately can be used for a lot of different things. I'm describing one market that I see as being like, promising and having. A lot of potential. And what I see the potential as being as is giving creators

• 54:26Speaker 02

  access to capital markets to enable people to invest in their project in the hope of making a profit. In other words, enabling speculation in their project. Because the reality is, most creators are risk averse and lacking in capital, right? So historically, historically, creators have had to sell, in effect, sell shares in their product at a huge discount to the value, because they had to sell to a publisher, right? And there's only a few publishers. The publisher has all the capital and the publishers can can buy it for next to nothing.

• 55:01Ryan Sean Adams?

  Publisher's bank.

• 55:03Speaker 02

  Yeah, well, most of them, but then like, but think about it, right? You're an author, you go to a publisher, they don't know in advance what's going to be popular. And honestly, they don't really care, right? It doesn't matter to them whether or not you're successful. All they care about is that they publish a bunch of stuff, some of it ends up being popular, and they make money by selling whatever it turns out people.

• 55:23Ryan Sean Adams?

  Yeah, you're saying the reason collectibles isn't a fit is because it's it's disingenuous. It's not actually true. It's some of these things aren't collectibles. They truly are like investments in they they they do the four prongs of the Howie test, just not the fifth. And that is that is the truth of the matter. And so you're kind of like, stop guessing. Call it what it is.

• 55:41Speaker 02

  That's exactly right. So like, and I think the art market is a great example of that, right? Because again, people think of the art market as a market for objects, but it's not, right? The object itself is not valuable. The only thing that's valuable in the art market as an investment market in art is the attribution, right? Because in the absence of the attribution, the art object, the physical token is worthless, right? As soon as that relationship to the artist is severed, as soon as you don't have the brand connection, the object is is just a consumption. It's just decoration. It's not it's not an investment good. So what you're buying is a share in the artist's career. That's what you've always been buying.

• 56:25Speaker 02

  And that's what's so cool about it. It's just we couldn't see it because the object got in the way. The cool thing about the NFT market is it got rid of the physical token. And all of a sudden, we could see how the market actually worked.

• 56:38David Hoffman?

  Right. Yeah. And some people are like, I'll right click, save that. And the NFT owners are like, please do.

• 56:44Speaker 02

  It would be better. The more you talk about me, the more you pump my project, the happier I am. Nothing could be better. Then you reproducing the work. And like for me, again, as a copyright scholar, this is really exciting. Right. Because the problem is we've sort of, we've internalized this artificial scarcity. Right. But we got to remember copyright was always just a tool for innovation policy. And the reason we invented copyright was to enable publishers to invest in the production and distribution of works of authorship. Copies of works of authorship with some degree of financial certainty, right? In other words, it reduced the risk for publishers. It was never about authors.

• 57:25Speaker 02

  Right. It was always about publishers producing copies. Well, copyright was a pretty decent. Solution, a pretty decent way of reducing transactions costs when publication and distribution were expensive. But guess what? Publication and distribution, the marginal cost is zero. Now get everything digital. The marginal cost is nothing. We don't need it anymore.

• 57:50David Hoffman?

  Right. This is getting into your article, which I definitely want to want to get into. And I think that'll be the theme for the second half of the show. We've gone a little bit over. But just to tease what we're going to talk about in the second half of the show is exactly what you're getting into. And there's something very deep that both Ryan and I really, really resonated with your article. And it was something very close to the metal of what crypto is here to do, which is replace. Ad hoc kind of patchwork laws that are doing something, but not really fulfilling their intended service. And then replacing them with a market. So I think that is going to be what we talk about in the second half of the show. But first we have to talk about some of these fantastic bankless tools from our sponsors.

• 58:31David Hoffman?

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• 59:12David Hoffman?

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• 59:29David Hoffman?

  Arbitrum One is pioneering the world of secure Ethereum scalability and is continuing to accelerate the Web 3 landscape. Hundreds of projects have already deployed on Arbitrum One, producing flourishing DeFi and NFT ecosystems. With the recent addition of Arbitrum Nova, gaming and social dApps like Reddit are also now calling Arbitrum home. Both Arbitrum One and Nova leverage the security and decentralization of Ethereum and provide a builder experience that's intuitive, familiar, and fully EVM-compatible. On Arbitrum, both builders and users will experience faster transaction speeds with significantly lower gas fees. With Arbitrum's recent migration to Arbitrum Nitro, it's also now 10 times faster than before. Visit arbitrum.io, where you can join the community, dive into the developer docs,

• 1:00:13David Hoffman?

  bridge your assets, and start building your first app. With Arbitrum, experience Web 3 development the way it was meant to be: secure, fast, cheap, and friction-free. How many total airdrops have you gotten? This last bull market had a ton of them. Did you get them all? Maybe you missed one. So here's what you should do. Go to Earnify and plug in your Ethereum wallet, and Earnify will tell you if you have any unclaimed airdrops that you can get. And it also does PoApps and mintable NFTs, any kind of money that your wallet can claim. Earnify will tell you about it. And you should probably do it now because some airdrops expire. And if you sign up for Ernify, they'll email you anytime one of your wallets has a new airdrop for it to make sure that you never lose an airdrop ever again. You can also upgrade to Ernify Premium to unlock access to airdrops that are beyond the basics and are able to set reminders for more wallets.

• 1:00:57David Hoffman?

  And for just under $21 a month, it probably pays for itself with just one airdrop. So plug in your wallets at Ernify and see what you get. That's E A R N I dot F I. And make sure you never lose another airdrop. And Bankless Nation, we are back to conclude this conversation of securities. Who knew securities were so much fun? But actually, we want to turn, it's just sparkly, they're so sparkly. But we want to turn the conversation actually to copyright law, which is similar but different. And Ryan, I passed you Brian's article about copyright law this morning. And you, like me, thought it was one of the more fantastic pieces of literature we've ever read in the crypto space. So Brian, I'm wondering if you can kind of summarize the nature of your article. We need to start with a primer about like, what is copyright law?

• 1:01:42David Hoffman?

  Why is it, why is the format of copyright law incomplete or could be better? Like, why is it broken? And then how do you think NFTs might actually fix this? Could you kind of just like summarize your article for us?

• 1:01:54Speaker 02

  For sure, for sure. So I think the big picture point to take away about copyright law is that copyright law was always a policy tool designed to solve certain kinds of market failures, right? So we created copyright because publishers needed to be able to invest with some kind of security or expectations about the future in the production and distribution of works, copies of works of authorship, because it was expensive, right? Printing copies was expensive, distributing copies was expensive. Knowing how many sales you'd have involved a lot of uncertainty.

• 1:02:33Speaker 02

  Copyright was a way of minimizing competition in the production and distribution of works of authorship in a way that made it more economically feasible for producers, for publishers to do that. And we use that tool because we value the production and distribution of work. We like to consume, consumers like works of authorship. We enjoy consuming them. And in the absence of copyright, Our presumption was we would get less of that than we expected.

• 1:03:05Ryan Sean Adams?

  And what we're doing here, Brian, is this is a nation-state enforced tool that we're doing in order to incent that outcome of authors producing more work.

• 1:03:16Speaker 02

  And of course, copyright didn't exist until the printing press did.

• 1:03:21Ryan Sean Adams?

  Didn't exist before the printing press. Okay, so new technology brought on the need for copyright, which was, you know, ultimately enshrined in kind of nation-state tools, which is the law.

• 1:03:32Speaker 02

  As the costs of reproducing works of authorship decreased, it became a viable business model. And copyright was developed, actually privately, right? I mean, copyright was created by the Stationers' Company in London. Initially, it was industry self-regulation, right? It wasn't enshrined into law until hundreds of years after the Stationers' Company. In effect, the Guild, kind of quasi-private, quasi-governmental agency, created it in the first place, its members effectively agreeing that that form of competition regulation would facilitate their ability to engage in their business practices.

• 1:04:14Speaker 02

  My point in the paper is that, look, copyright was a policy tool that fit the technology of the day and fit a lot of the technology, for better or for worse, for hundreds of years afterwards, right? But when the technology changed, it stopped being a valuable policy tool. Because copyright was designed for a world in which publication and distribution costs were high. But publication and distribution costs are now zero. The marginal cost of reproducing or distributing a work of authorship is nothing, right? We live in a digital world where we have abundance and we don't need that kind of artificial limitation on the distribution of copies anymore.

• 1:05:00Speaker 02

  What scares us, Clow.

• 1:05:03Speaker 02

  And so what we need to be thinking about is how do we manage the market in clout? Because that's where we're really leaving the money on the table, right? So like, I think one kind of really easy and approachable angle is to think about it this way, right? So everyone's heard of the Kardashians, right? But the Kardashians, as the Kardashian, Kim Kardashian, couldn't exist as a business proposition without social media, right? She needed social media in order to create her brand and sell the brand in the various ways that that she was able to sell it. The problem is, problem, I mean, Kim Kardashian is doing just fine, but you know what?

• 1:05:46Speaker 02

  Kim Kardashian is only internalizing a tiny fraction of the social value that she's generating, right? Think about how many people are talking about Kim Kardashian right now, right? She's generating massive, massive social value, but so much of it is just left on the table, right? She can't internalize it. She has no way of monetizing it. She has to do it by proxy, right? By doing endorsements, by selling products, by, you know, whatever, advertisements, you name it, right? What's exciting to me, right? Or potentially really exciting to me about the NFT marketplace is that it enables people with clout to sell the clout directly, right?

• 1:06:28Speaker 02

  To sell the social value to speculators who want to invest in their future social value. And it gives them a huge market that didn't exist before, right? But think about it, in a copyright market, when an author was selling works to publishers, there's only a limited number of publishers. The publishers don't want to buy that much stuff. The publishers don't necessarily like competing with each other that much. Authors are in a bad place, right? They don't have any market power, right? But in an NFT marketplace, right? Where you're selling to a broad Investment, a huge number of speculators, all of whom are competing for the ability to invest in, in your project. All of a sudden, the market power can shift, right?

• 1:07:12Speaker 02

  If you've got the clout, you can sell a lot more and make a lot, you can claim a much bigger percentage of the potential future value of whatever it is.

• 1:07:22Ryan Sean Adams?

  So this is back to first principles, which is why I really love the way you think is basically copyright was put together for a purpose, which was a public policy purpose to incent the production of art and artist material and, you know, written form in, in, in all sorts of different forms, right?

• 1:07:41David Hoffman?

  It's meant to incentivize human culture.

• 1:07:43Ryan Sean Adams?

  Yes, and human is a human, a public good, human coordination mechanism in order to do that. You make the proposition that because of NFTs and this kind of ownership economy, you call it kind of this clout economy, we may not even need copyright any longer because this is the scarce thing in its purest form in an internet way of native world. By the way, bankless listeners will know, we've already compared the birth of the internet to basically Gutenberg's printing press. It is that transformational of a technology. It's just happened within our lifetimes, within the last 30 years. So it's that big. I guess our laws are going to have to change. Obviously, they will have to change. Obviously, we'll have to coordinate differently. And what you're saying is you'd go as far as

• 1:08:26Ryan Sean Adams?

  to say is basically this is, um, this is another business model for artists to solve that coordination problem, to solve that tragedy of the commons. What if we lived in a world where no artist was incented in order to, to create their art? Wouldn't that be a?

• 1:08:41Speaker 02

  But what I think is especially crazy about it is that it's a business model that's been around for hundreds of years, right? It's just the art market.

• 1:08:51Speaker 02

  But applied to everything.

• 1:08:53David Hoffman?

  Right.

• 1:08:54Speaker 02

  It's just the art market, but applied to everything. And NFTs, what I think it's like, like, one thing I noticed when I first started getting really interested in the NFT web space is people constantly would say to me, oh, but it's no different. Like, you could do that without NFTs. You don't need it. I'm like, yeah, that's true. You can do a lot of things with a spreadsheet, right? The point is, the NFT marketplace, right? The NFT technology reduced the transactions costs just enough that all of a sudden that latent demand exploded.

• 1:09:24David Hoffman?

  Right. And so what I'm really seeing here, Brian, is and what and what you've like woken me up to is that we have two different technologies here. We have the proliferation of human culture technology. And you're making the point that as soon as we got to the internet, the pro the cost of proliferating arts dropped to zero, which is bullish. But then we needed some ad hoc kind of copyright law to really allow that to be expressed. And so we created that. But now what I'm seeing here is not now we have this printing press technology, which is the internet. But now we also have the printing press of assets, which is Ethereum NFTs tokens. And these two technologies really, really resonate.

• 1:10:06David Hoffman?

  And like they vibe with each other really, really well to the point where we can totally circumvent the whole like laws aspect of this and still get the original purpose done, which is to incentivize the creation of human art and culture because we have an equally proliferatable medium of value capture, which are NFTs.

• 1:10:27Speaker 02

  That's right. That's right. If you just think about the premise of copyright, the reason it's such a bad fit for our new technology becomes obvious because the premise of copyright is artificial scarcity.

• 1:10:41Speaker 02

  But we don't need artificial scarcity in the world of perfect abundance. Right? Works of authorship are natural public goods. They aren't diminished by consumption. You don't use them up. As many people can consume them as can get a copy. All copyright is doing is imposing artificial costs on consumption. And the only justification, kind of policy justification that still exists for copyright, is to encourage the production of the works in the first place. But copyright's always been a terrible way of encouraging the production of works. And it never really benefited artists all that much because the overwhelming majority of artists get no benefit from copyright whatsoever because no one's interested in consuming what they produce.

• 1:11:26Speaker 02

  Right? The only people who benefit from copyright are successful artists. Right? And you only get successful down the line when you're selling a lot, when you're selling a lot of stuff. The, the, the cool kind of concept for me is, is this idea that we can encourage people to consume as much as possible, right? And that's good for artists because the more people consume your work, the more your clout will grow, the more your fame will grow. And that clout, that's where the real value is.

• 1:11:59Ryan Sean Adams?

  So this is-

• 1:11:59Speaker 02

  Not limited copies.

• 1:12:01Ryan Sean Adams?

  This requires people to flip the model on their heads too, right? So like, so, okay, so in order for this to come to pass to artists, will have to take it upon themselves because I think artists mostly think in a copyright world still, the, the older school. And this might come about, this might take a generation to, to fully come about where you get a new generator of artists and the old generation kind of dies out. But like the model is flipped rather than like it's, um, don't download my song, um, you know, without paying me royalty. The model is flipped to download all my songs because I have an NFT and the more popular this thing becomes-

• 1:12:37Speaker 02

  But you know what? But you know what? Some artists get it, right? So I have a-

• 1:12:40Ryan Sean Adams?

  Some artists do.

• 1:12:41Speaker 02

  I have a friend in England. He's a musician, goes by the name Simon- Indelicate, he's been an indie rock musician for a long time, but always kind of, you know, struggling as any indie rock musician would to like make money selling copies of his works. When I got interested in NFTs, I proposed to him that we kind of rethink the model, right? So he created a, he wrote an album called Arcadia Park, which was a soundtrack for an imaginary theme park. And what he did was sell an NFT collection that were perpetual admission tickets to Arcadia Park. And he sold them, I think like point one ETH or something like that, like 50

• 1:13:22Speaker 02

  tickets, something like that. And his proposition was, as soon as I sell all 50 of these tickets, I'm going to put the album in the public domain because that's as much money as I need to make in order to make that project like viable for me as a creator. He sold the NFT collection in less than 15 minutes and he put the work in the public domain. And so now anyone can use it in any way they want to, and it's not controlled artificially limited by copyright at all. And I think that that's really the kind of future that I want to see for creative production because he made more money in 15 minutes with that album than he'd made in years and years and years on all of his previous albums combined.

• 1:14:05David Hoffman?

  And Brian, the reason why this like really resonates with with me and I'm sure Ryan too, is like, we're kind of public goods maxis. That's really what I see cryptos here to do is to help scale public goods. And I'm, and this is why I think this episode and this conversation is really, really resonating with me and I'm sure a bunch of the Bankless Nation is that this is now a conversation is we've figured out a technology to increase the supply of public domain culture, knowledge, and knowledge is a public good. Culture is a public good. It benefits all of us. And we've found a way to resonate to and to scale that out if we just can find a way for the nation state to understand this and to make their laws catch up to where we are with technology.

• 1:14:46Ryan Sean Adams?

  It's also, David, it's just, so we solved the public goods problem in a better way. So we get more public goods, right? We get more artists benefiting, we get more culture, we get more art, we get more of these things. It's also, now that you look at it like this, it is a native technology for the internet, isn't it? Like, the internet was missing this. Like, so, so go think of all the DMCA takedowns of things, right? Copyright infringement on YouTube, boom, it's gone. Or like, do you remember the, the earlier days of like, you know, Napster and all these file sharings of, you know, selling, uh, yeah, or not selling, but downloading MP3s?

• 1:15:23David Hoffman?

  Right.

• 1:15:23Ryan Sean Adams?

  And all of kind of the tech, like, no, information wants to be free on the internet, doesn't it?

• 1:15:27David Hoffman?

  Information wants to be free.

• 1:15:28Ryan Sean Adams?

  So why don't we just go with the gravity of the internet, free all of the information, and charge for the clout, charge for the authenticity? What is that clout charge? That's in the form of a token called an NFT, and that's the model for the internet, for artists, for art. That solves our, our coordination problem in a much more seamless internet native way.

• 1:15:47David Hoffman?

  And which is what Brian is saying, is actually resonant with what the investable case for these things are in the first place.

• 1:15:54Speaker 02

  And I think the secret sauce for me is speculation.

• 1:15:57Ryan Sean Adams?

  Yeah, 100%.

• 1:15:59Speaker 02

  Speculation is, is really, really important. People want to be able to speculate on what's going to be valuable in, in the future. And I, I think that introducing speculation to the creative economy, introducing speculation to the creative economy from the perspective of the consumer is actually, I think, an incredibly, like, monumental shift.

• 1:16:26Ryan Sean Adams?

  100%.

• 1:16:27Speaker 02

  You can speculate in the future fame of whatever you think is cool.

• 1:16:32Ryan Sean Adams?

  Can, can I just read a quote? Cause, so, we'll have to have you back on, Brian, because there's a whole nother conversation. People will doubt what you just said, which is that they'll be like, but no, Brian, speculation is bad. We've seen people get hurt, we've seen all sorts of things. That's a separate conversation, let's park that for now. I want to connect this copyright conversation to the securities conversation we were having earlier. There was a quote from your, um, your article. By the way, we'll share all of these links in The show notes, guys, so you have these. But you said this, "The NFT market is really a securities market with authors as the companies and works as particular categories of shares." Let me read that again, because I think it's really interesting. "The NFT market is really a securities market with authors as the companies

• 1:17:17Ryan Sean Adams?

  and works as as particular categories of shares." That is the connection point here between, you know, securities, sparkly securities, we talked about, and NFTs. And that, by the way, guys, is the justification for why Brian can write an article that says, "NFTs are securities, and that's a good thing." Okay, so you mean sparkly securities. That's the thing I didn't get, and you probably won't get until you read some of these things that we've been talking about, or listen to this episode in more detail. And that's what this is really all about. And you probably heard David and I get so excited about this, and like, talking over each other and that sort of thing, is because, guys, this is, look, we're starting 2023, it's like, why are we here? Crypto, why are we here? We forgot why we were here last year, didn't we?

• 1:18:01Ryan Sean Adams?

  We're in all these wild goose chases. Why we're here is to solve public goods problems, to solve court, human coordination problems, without necessarily using the non-internet native tools of the nation state. Right? These are opt-in tools. And so that's what the crypto technology is. It's a, it's a freedom technology, helping us coordinate better. And after all, isn't that what humans are here to do? Coordinate better. Isn't that what civilization is? It's better coordinate. This is a technology level up for all of us on the social layer, at a level that is so profound. And I think in, in the heat of 2022, and looking at SBF and, and 3R's capital, all these things,

• 1:18:42Ryan Sean Adams?

  people lose sight of that, because they're so distracted by the scammers and shenanigans going on, and they lose sight of why we're here. But this exactly is pinpoint why we're here, Brian. That's why we're so excited to have you on, and actually talk about securities. You know, not TM, but sparkly securities.

• 1:19:00Speaker 02

  Yeah, no, this is great. I really enjoyed it. I'd be delighted to come back anytime. And I got a bunch of NFT and Web3 related papers as well as copyrights.

• 1:19:09Ryan Sean Adams?

  What's your next prank, though?

• 1:19:13Speaker 02

  The next prank?

• 1:19:15Ryan Sean Adams?

  I love your trolls. This is great.

• 1:19:17Speaker 02

  I don't want to spoil it, but I do have a, I'm a big proponent of plagiarism. So I have, I have another, I have a NFT paper coming out.

• 1:19:30Ryan Sean Adams?

  That's awesome. We need more troublemakers in the crypto industry, of the good kind. That Brian is, not the SBF kind. Those are the bad troublemakers we want.

• 1:19:38Speaker 02

  Yeah, not only am I a plagiarist, but I'm also a plagiarism apologist. I created with the help of some people at Creative Commons, a plagiarism tool. So all of my, all the articles I write are available for anyone to appropriate as their own, if they want to be the author of them.

• 1:19:56Ryan Sean Adams?

  All right. Well, let me ask you this, because you're a law professor, right, Brian? So if I was in your class, is plagiarism legal for me? Can I turn in a paper that's plagiarized?

• 1:20:05Speaker 02

  I encourage my students to.

• 1:20:07Ryan Sean Adams?

  Okay, all right. I need to hear more about this.

• 1:20:10David Hoffman?

  This is cool.

• 1:20:11Ryan Sean Adams?

  Anyway, we should probably close it here, David.

• 1:20:13David Hoffman?

  Brian, thank you so much for coming on. This is exactly the show I wanted to produce. And so thank you for writing your article and thank you for coming on and talking about this. I think, I hope a lot of the Bankless Nation can walk away from this with a newfound appreciation for sparkly securities and also where that line is between securities TM and SEC nation state regulated securities. So Brian, thank you for coming on and helping us sell that story.

• 1:20:37Speaker 02

  My pleasure. Thanks for having me. It was a great pleasure.

• 1:20:39Ryan Sean Adams?

  Got to end it here, guys. Of course, David is very sorry to all the bored yacht club members. Hopefully clarified this episode what he actually meant. We'll include some links in the show notes, including an action item. Read the article after copyright, Pwning NFTs in the cloud economy that Brian wrote. I'm a little rusty here, but let me see if I can get out the risks and disclaimers, David. ETH is risky. All of crypto is risky. So is DeFi. You could definitely lose what you put in, but we're headed west. This is the frontier. It's not for everyone, but we're glad you're with us in 2023.