xGov 183: Choice Coin Compliance

Overview

The purpose for this grant is building a platform for establishing a culture of compliance for projects on Algorand. The initial focus for this work will center around U.S. securities compliance, providing new resources for structuring Algorand Standard Assets (ASAs) to ensure regulatory compliance. We will build a platform for compliance, to allow Algorand projects to onboard and proceed through tasks to ensure regulatory compliance. Projects will pay a monthly subscription and have access to the platform, which will include updated data on regulatory changes in various jurisdictions over time.

Projects who onboard and complete required tasks will receive a compliance certification from a licensed attorney. This will create a one stop shop for projects to have their regulatory compliance needs met. Ultimately, this will improve the legitimacy of ASAs and help to improve relationships between centralized exchanges (CEX) and Algorand projects because compliance is the most important factor of review for most CEXs.

xGov Proposal 183: Choice Coin Compliance

your solution is not a solution at all, you will build an AI (based on which data? which model will you use?) that may suggest if something is a security or not but that won’t really help anyone in the end since not even the persons who make the laws have answers to this. also based on your prior “research” i am not confident that you can build anything good at all

The data will be from SEC case law, secondary sources, and regulations. The model will be built after the database is developed. Generally the data runs the operation with AI.

The idea is that it will help in the end. I don’t think it will be easy, or that work will stop at the end of the grant. But, one thing that will help any project is having a formal legal memorandum of compliance, as well as policies and procedures to guide compliance. In the event any agency brings an enforcement action against any company or project, they look to whether the company or project has an existing compliance program. If the answer is yes, then it is a mitigating factor.

So, building AI software in partnership with a human lawyer’s review and analysis will help projects to reduce risk. That is not to say that it can guarantee they won’t have legal problems or that they won’t have a compliance failure, but it does help to prevent both.

First, I agree with Lobo on this that until regulators provide actual clarity on this issue there simply will not be a way to check boxes and have any reliable output. I notice that none of your team members are a practicing securities lawyer and I doubt any lawyer worth their salt would say this is going to produce reliable outputs.

Secondly, to the extent this is providing any sort of individualized assessment of whether something is or is not a security, that is the practice of law without a license, unless this always involves subsequent attorney consultation and review before rendering anything even remotely resembling an opinion. But if that review is always required, then I don’t really see why this tool is needed in the first place. A project could just go to their lawyer of choice in the first place.

I’m also crazy skeptical about who and how this is going to be maintained with regards to regulatory updates, particularly on a global scale. I don’t think you quite comprehend the massive scope and cost of this. This could easily cost several hundreds of thousands of dollars per month, if not more. There is no possible way our ecosystem is going to pay the requisite fees for that, especially given that they will still need to pay for individualized assessments.

So, even if I thought this could produce reliable outputs (which I doubt) I cannot fathom this being a good spend for our ecosystem.

If you believe in the idea, I suggest you work to build a functioning version of it then take it to a company like WestLaw, LexisNexus, or Bloomberg Law, who provide legal tools to lawyers.

Thanks for the feedback. First, I do think we can develop a software that produces a reliable output. I believe there are many clear factors defined and considered by regulators regarding what constitutes a security, in addition to the statutory and case law. Second, my teammates are both extremely talented developers who I have worked with before and who have experience building on Algorand. My teammates will focus on technical development, I am a practicing securities lawyer and will manage the project development.

With respect to the unauthorized practice of law, that is not the case because I am supervising the technology and assessment. It is also important to understand there is a critical difference between compliance and law practice. Compliance is a process for following the law, where professionals do not need specialized degrees. The goal for this software is to serve the compliance function, not the law practice function, which requires a license.

For regulatory updates we will use legal informatics. This is an information technology based approach to law, which allows lawyers to specialize and optimize cost-efficiency through the efficient management of data. I have a lot of experience with multi-jurisdictional practice. I’m confident building this to scale will be difficult, but I am also confident our team can rise to the occasion and deliver a valuable and needed technology.

I think working toward bridging a partnership with WestLaw, LexisNexus, or Bloomberg is a great idea. Thanks again.

Apologies for not catching your background. I knew you only from ChoiceCoin work and I’ll be honest I only looked at the other team members as I figured that is where the requisite legal experience would be. What experience do you have in actual securities work?

I still maintain this far too unreliable of an area for producing meaningful results. The SEC has yet to put out any real guidance on when a token is or is not a security and, aside from Bitcoin, I have yet to hear them ever say any coin is not a security (not even ETH, despite what some say, ha actually gotten that blessing).

For example, I read your paper for a similar proposal on Solana and the metrics you use come from the Crypto Rating Council. Yet, CRC eventually took their coin ratings down and some of the coins they rated the lowest (ie least likely to be a security), such as Algo, ended up being labeled in multiple lawsuits.

There is not clear regulatory guidance here as the SEC refuses to provide it. And pretending that an AI is going to divine this guidance and spit out useful and reliable results is reckless in my opinion.

Thanks. I’m a securities lawyer. I have been practicing in the space for about 4 years and have 6 years experience more generally.

Great points regarding CRC. I think the SEC has put out a lot of guidance on this topic. At your election, you can learn more about digital asset compliance, with a lot of resources on the Choice Coin Compliance GitHub. I have been maintaining this repo for a couple years.

I am not saying AI is going to give us divine guidance, but I think it can be a great step in the right direction. Eventually, there needs to be methods for projects to be able to properly comply with the law.

Excited to provide the deliverables for this project!

Deliverables on GitHub