Creating an New Capital Market Structure

Requests for Comment
1

I have spent 23 years in the financial industry, with the last 18 years at the U.S. Securities and Exchange Commission, Division of Examinations conducting hundreds of examinations of broker-dealers, transfer agents, and investment advisers. I joined the Division of Examinations Office of Risk and Strategy in early 2018 to study digital assets/crypto and its impact on broker-dealers, transfer agents, and investment advisers. To assess the impact of digital assets/crypto on SEC regulated firms, I conducted or participated in 30 examinations of broker-dealers, transfer agents, and investment advisers. During my time at the SEC, I became well-versed in not only broker-dealer custody requirements but also decentralized finance.

I left the SEC to start TP4 Digital Assets to disrupt the legacy capital market using blockchain technology. To achieve my goal I would like to license Uniswap V3 to use in my start-up to disrupt the legacy settlement network and legacy securities exchanges.
This will be the first post in a string of post to discuss how to obtain a Uniswap V3 business license.

Any guidance along the way will be very helpful.

2

I understand this a DeFi protocol, so let me share some Securities and Exchange Commission regulatory requirements to custody digital asset securities. In addition, I will share how I solved SEC custody and what that means for digital asset security market. At a high level the SEC requires digital asset broker-dealers to have a “good control location” and have “possession or control” over a digital asset security. You can find more information here https://www.sec.gov/rules/policy/2020/34-90788.pdf. How the current tokenized security market is structured the SEC has concerns regarding theft of private keys either through internal theft or hacking theft. And for this reason the SEC requires a third-party bridge for the custody of digital asset securities.

My firm, TP4 Digital Assets (“TP4” or the “Firm”) SEC broker-dealer custody solution will require a new security token standard for digital asset securities. Our custody/security token standard will free market participants from the walled garden of the current capital market structure and broker-dealer ATS platforms. To achieve this goal, TP4 will be forming a new capital market structure for the trading, settlement, and custody of digital asset securities. The Firm’s capital market structure will work by networking the custody/security token with our National Securities Token Exchange (not an ATS), Token Clearing Agency (defi terms-an oracle), and our Special Purpose Broker-Dealer. It is important to note that SEC custody cannot happen without networking the entire capital market structure with our custody/security token.
Having a solution to SEC broker-dealer custody opens up opportunities to disrupt the legacy capital market structure. We can offer a fully decentralized national securities token exchange, peer to peer trading, direct access to the exchange, the elimination of T+2 settlement restrictions and daily capital requirement of broker dealers, due to the outdated T+2 settlement. Issuers can directly list their Regulation D, Regulation S, Regulation A and S-1 digital asset securities to the exchange.

Please note this Uniswap V3 business license will only be used for the trading, settlement and custody of regulated digital asset securities. This license is needed to achieve my goal of disrupting the legacy capital market structure.

Please let me know what additional steps are needed to obtain this business license.

3

Uniswap V3 Business License Proposal

Project Overview:

TP4 Digital Assets (“TP4” or the “Firm”) will be forming a new capital market structure for the trading, settlement, and custody of digital asset securities. This is a new capital market structure and not a pretty wrapper of the legacy settlement network or legacy securities exchanges. The Firm’s capital market structure will work by networking our custody/security token standard with the national securities token exchange, token clearing agency, and special purpose broker-dealer. SEC regulatory custody cannot happen without linking the entire network to our new security token standard.

TP4’s solution to regulatory custody of digital asset securities radically improves how capital markets trade for the first time since the Wall Street Paperwork Crisis.

The problem-Obstacles in the Current Capital Market Structure:

The discussion below addresses a few legacy capital market issues and the current regulatory custody issue for digital asset securities.

Legacy Settlement Network

The legacy settlement network generally works in two ways. First, an issuer must be eligible to be custodied within the legacy settlement network and pay a fee. Second, broker-dealers, banks and other market participants must be a member of the legacy settlement network and pay the required fee to participate in the legacy settlement network. In the US, equity, listed corporation and municipal bond trade through the legacy settlement network. Each trade, for the most part, takes T+2 days to settle, which drives unnecessary risk in the financial system. This longer settlement time requires a vast amount of capital, which is estimated to be around $13 billion daily. This capital is a requirement imposed on broker-dealers (such as Charles Schwab and Robinhood) for the risk of default or failure to deliver assets.

Legacy Securities Exchanges

The legacy exchanges charge various fees, such as transaction fees to market participants and listing fees to companies wanting to list their equity shares on the exchange. All trades occur through registered market participants, including brokerage firms, trading houses, and asset management companies. In addition to the transaction fee, these market participants also pay a one-time registration fee and a recurring annual membership fee to the legacy exchanges.

Just from two legacy securities exchanges, total combined annual fees paid by companies just to be listed are in the hundreds of millions of dollars.

Alternative Trading System (“ATS”)

Current trading of digital asset securities is limited to few broker-dealer ATS platforms. The limiting factors regarding ATS platforms are they operate independently causing a fragmented market, and they are required by SEC no-action letter dated September 2020 to operate as a noncustodial platform. There are no known SEC broker-dealer custody solutions that do not use a third-party bridge for custody.

Regulatory Framework for Security Token Custody

The SEC has provided regulatory guidance regarding the trading and custody digital asset/tokenized securities. In September 2020, the SEC issued a no-action-letter to FINRA regarding “ATS Role in the Settlement of Digital Asset Security Trades.” In December 2020, with an April 2021 effective date the SEC issued a “Statement Regarding the Custody of Digital Asset Securities by Special Purpose Broker-Dealers”.

These two steps are needed for the current tokenization market to operate; however, under TP4’s proposed capital market structure only the special purpose broker-dealer is needed.

The Solution: TP4 Digital Assets

I have spent 23 years in the financial industry, with the last 18 years at the U.S. Securities and Exchange Commission, Division of Examinations conducting hundreds of examinations of broker-dealers, transfer agents, and investment advisers. I joined the Division of Examinations Office of Risk and Strategy in early 2018 to study digital assets/crypto and its impact on broker-dealers, transfer agents, and investment advisers. To assess the impact of digital assets/crypto on SEC regulated firms, I conducted or participated in 30 examinations of broker-dealers, transfer agents, and investment advisers. During my time at the SEC, I became well-versed in not only broker-dealer custody requirements but also decentralized finance. While conducting market research in February/March 2021 on the NFT craze, I discovered a solution to the SEC Rule 15c3-3 broker-dealer custody issue.

TP4’s custody solution will require a new industry standard for security tokens. We will build a new capital market structure, around our custody/security token standard, to disrupt the legacy settlement network, legacy securities exchanges, and broker-dealer ATS platforms. To achieve this goal, TP4 will be implementing a new security token standard, forming a national securities token exchange (not an ATS), a token clearing agency (defi terms-an oracle), and a special purpose broker-dealer for custody. Our new capital market structure will have many benefits over the legacy systems:

• Creation of a Decentralized National Securities Token Exchange

• Peer-to-peer trading of security tokens

• T+0 finality settlement

• Elimination of T+2 and capital requirements

• Issuer access to global liquidity

• Greater access to investment options

• Investors ability to trade without settlement restrictions

• Direct list [for?] all tokenized securities to the exchange

• Reduction of issuer expenses

• Reduction of market participant expenses

About TP4 Digital Assets:

Currently TP4 is a pre-seed start-up with an SEC regulatory custody solution to Customer Protection Rule, SEC 15c3-3 that will allow for trading, settlement and custody of digital asset securities using blockchain. We will be forming a national securities token exchange (not an ATS), a token clearing agency (defi terms-an oracle), and a special purpose broker-dealer for custody.

TP4 Digital Assets Proposal:

TP4 is seeking a business license for the Uniswap V3 core contracts on which to build an AMM/DEX platform on our “National Securities Token Exchange”. Due to regulatory requirements and our custody/token standard we will need to modify the AMM/DEX to fit these needs. Our exchange will be registered with U.S. Securities and Exchange Commission for the trading of regulated digital asset securities.

TP4 exchange will note on the website and phone application that the exchange is powered by Uniswap V3. This will give Uniswap a much bigger audience, outside of decentralized finance, since TP4 will only trade regulated digital asset securities. To give perspective in 2020, $2.3 quadrillion worth of transactions in the U.S. equities markets were processed through the legacy settlement network. This business license agreement will benefit both TP4 and Uniswap. However, I believe a partnership to create a new capital market structure to disrupt the legacy capital market structure, benefits both.

The Ask-Conclusion:

TP4 Digital Assets will form a new capital market structure using blockchain technology to disrupt and improve how capital markets trade. There are no other projects attempting to create a new structure, because this is difficult, requires a vast amount of capital and talent. My goal is achievable and my solutions work.

I ask for yes votes to change how it all works! Thank you for your time and consideration.

TP4 Digital Assets

@tp4digitalasset (Twitter)

4

I’m not sure this is the best case for granting a business license.

  1. Uniswap’s only benefit from this license being publicity/exposure does not seem like an adequate incentive.

  2. It’s unclear that TP4 would constitute a non-competitive enterprise giving its nascent stage of development.

  3. Uniswap is a DEX that deals with digital assets that aren’t securities, and is very conscious about the legal status that comes with supporting the exchange of securities, even if that might just be from the usage of V3’s underlying technology. Being that this license and/or partnership would be directly in support of exchanging securities, it seems like it’s not worth the relatively small incentive of increased exposure.

(A meta note for those from the community who might be trying to weigh this request relative to the purview/capabilities of governance)

We at Other Internet think that there should be better guidelines for governance to determine the eligibility of a given to business licenses request such as this one. We’ve started the work of drafting what this policy could look like. As with all our governance initiatives we’re working on, if this is something that’s interesting to you, please reach out to us on twitter @otherinternet__

5

Thank you for your comment. My proposal is to use the underlying technology to power TP4 Digital Assets “National Securities Token Exchange”. Yes, all digital asset securities will “in fact” be securities or exempt from SEC registration. To adhere to SEC and FINRA rules there will be no unregistered securities/tokens traded or custodied at TP4. I am creating a new capital market structure “not a wrapper” to compete with the current legacy capital market structure. I believe, TP4 is in the best position to compete with Wall Street and a Uniswap V3 business/partnership will add value to my project.

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