Confucius on the rectification of names and securities tokens

Confucius had some thoughts on precision of language:

Tsze-lu said, “The ruler of Wei has been waiting for you, in order with you to administer the government. What will you consider the first thing to be done?”

The Master replied, “What is necessary is to rectify names.” “So! Indeed!” said Tsze-lu. “You are wide of the mark! Why must there be such rectification?”

The Master said, “How uncultivated you are, Yu! A superior man, in regard to what he does not know, shows a cautious reserve.

“If names be not correct, language is not in accordance with the truth of things. If language be not in accordance with the truth of things, affairs cannot be carried on to success.

“When affairs cannot be carried on to success, proprieties and music do not flourish. When proprieties and music do not flourish, punishments will not be properly awarded. When punishments are not properly awarded, the people do not know how to move hand or foot.

“Therefore a superior man considers it necessary that the names he uses may be spoken appropriately, and also that what he speaks may be carried out appropriately. What the superior man requires is just that in his words there may be nothing incorrect.”

From The Analects of Confucius, Book 13, Verse 3 (James R. Ware, translated in 1980):

What the Master is getting at here is that taxonomy is important. If you are a ruler (or a securities regulator) and your subjects (or securities lawyers) do not understand what you want them to do because they understand your words in a different way than you meant them, then, indeed, “affairs cannot be carried on to success.”

We saw an example of this recently when we got SEC comments to a filing, asking us to explain the difference between the digital manifestation or record of a securities token from the token itself. There’s clearly a lot of confusion in the industry in general, and in fact the philosophical question of “what is the actual instrument here?” is not limited to the STO world. It’s just made a lot more complicated when there is a security which may be delivered in direct or token form, reflected in a smart contract and the ownership of which is displayed on a blockchain or blockchain-like database but determined by the records of the transfer agent. And most of the words in the preceding sentence, including “reflected,” “determined,” and “displayed,” are clearly capable of many different meanings.

We badly need a common language for the inchoate bundle of rights that constitute a security when that security wanders onto a blockchain.

So kudos to Linda Lerner, who is driving the ABA Task Force on Offering and Trading of Tokenized Securities. The Task Force is establishing several subgroups, including one whose mandate is “Developing a Common Vocabulary,” which CrowdCheck is honored to be part of.

We look forward to the rectification of names.

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