Matthew Sullivan is the CEO and Founder of QuantmRE. A seasoned entrepreneur, Matthew has a proven track record in real estate innovation through his experiences as Co-Founder of the $50M Secured Real Estate Income Strategies Fund, and as Founder and President of Crowdventure.com, a real estate crowdfunding company.
AT: QuantmRE invests in single family owner-occupied real estate via an equity share. Can you share with us how this works?
MS: QuantmRE’s EQRE Agreements allow the owners of single-family detached properties and condominiums the ability to grant an economic right to some portion of the future appreciation of the property in exchange for a fee or other consideration.
An EQRE Agreement is not a loan or credit-based transaction, but rather is an equity-based consumer finance instrument designed as an alternative to traditional mortgage debt.
The proceeds paid to the homeowner may be used for supplementing retirement income and funds, improving the property, reducing debt, investment diversification and other financial purposes.
AT: Is there a transfer of title on the property?
MS: No – the homeowner remains listed as owner on title. QuantmRE will record with the county recorder’s office a Performance Deed of Trust on your property. This is a lien on the property that protects our interests, but is not a loan, security or swap instrument. Our agreement with the homeowner is simply a consumer contract that memorializes our investment in the property.
AT: Could you share with us your underwriting criteria when it comes to entering into these equity agreements?
MS: We use a three-tier underwriting standard based on the equity position in the home. Each tier takes into account initial LTV, origination combined LTV, and depending on tier, some level of FICO and mortgage performance history. Post-transaction, maximum CLTV is 90%.
AT: You’ve stated that you are focusing on California property. Are there specific regions or cities in California that you either avoid or target?
MS: As returns on the EQRE Fund are determined by the increase in value of the underlying assets, we intend to target the areas in California that are likely to see healthy asset price appreciation.
AT: What happens to the equity once a homeowner sells their home or if the homeowner wants to repay QuantmRE before they sell their home?
MS: The homeowner sells a percentage of the equity in their home to QuantmRE. In exchange we pay the homeowner with US$. This real estate asset that we have purchased from the homeowner, a percentage of the equity in their home, goes into a pool with other equity from other homeowners. Our investment tokens are irrevocably tied to these pools of assets. Proceeds received from the sale of our investment tokens will be used to fund the purchase of additional fractional equity interests in single family residences.
When a homeowner sells their home, they pay QuantmRE the value of the percentage of equity that we originally bought, plus any agreed appreciation / depreciation associated with our equity portion.
If the homeowner wants to repay QuantmRE and not sell their home, the repayment amount will be based on the value of the home at the time of the proposed repayment, within certain provisions in our agreement to ensure that QuantmRE does not unnecessarily take a loss on equity in the event that market conditions are not favorable at that time.
AT: You often mention the term “equity freedom.” What does this mean and how does it benefit the homeowner?
MS: We describe our service as ‘Equity Freedom’ as there is no loan, interest charges or monthly payments associated with the arrangement. Our Shared Equity program is designed to enable homeowners to release the so-called ‘dead money’ that is locked up in the equity in their homes without taking on more debt. That means owner-occupiers, owners of second homes, vacation properties and income/rental homes could get access to significant amounts of capital with no interest to pay, no monthly payments, and no restrictions on how they might spend the money.
AT: What happens if the homeowner stops paying the property tax or mortgage payments?
MS: The property owner has responsibility to properly maintain the property, pay all property taxes on time and make sure that the property is properly insured in accordance with the provisions of the shared equity agreement with QuantmRE. If the homeowner is unable to make these payments, QuantmRE may step in and assist the homeowner in order to protect our asset, however payment of the home mortgage and all taxes is an important and key term of our agreement.
AT: You chose to partner with Securrency for investor onboarding and token minting. Can you tell us more about this partnership?
MS: Securrency provides a critical technology piece on QuantmRE’s offering, which is to provide an off-chain validation service that enables us to control the distribution of our asset-backed tokens. With Securrency’s technology, we are able to ascertain the KYC and AML status of a prospective investor, issue securities tokens and track the change of ownership down to a fractional level. The ability to maintain an updated cap table is a critical securities law requirement, as is the ability to distribute dividends and replace lost or stolen tokens. Most important, Securrency enables us to reliably control how, where and when our tokens move from wallet to wallet. This means that we are able to meet the most stringent BSA, AML and KYC requirements for our offerings, both to national and international investors.
AT: You’ve partnered with Prime Trust, could you tell us more about this partnership?
MS: QuantmRE’s partnership with Prime Trust enables investors to buy EQRE securities tokens without the need for their own digital wallet – Prime Trust acts as the regulated and insured custodian for these digital assets and is able to hold digital assets such as EQRE on behalf of the investor.
AT: Can you let us know when you expect to launch the STO for the EQRE token?
MS: Accredited investors are able to invest in EQRE tokens today by visiting www.QuantmRE.com.
AT: Is there anything else that you would like to share about QuantmRE?
By bringing Blockchain technologies to the real-estate sector in a regulated and compliant way, QuantmRE is re-imagining the way houses are financed. At the same time we are solving a number of problems relating to the intrinsic value of tokens which we believe will generate new levels of trust for asset-backed tokens and provide the launchpad for the mass adoption of crypto security token offerings.
Thank you for the interview, this sounds like one of the more unique real estate projects out there. For those who wish to learn more visit the QuantmRE STO website or view the QuantmRE token listing details page.
Commissioner Hester Peirce, SEC – Interview Series
I recently had the pleasure to sit down and talk with SEC Commissioner Hester Peirce about the current landscape of digital assets, and how the SEC is working on making a clearer path for people in the space. See our discussion below for some valuable information and direction for anyone involved or interested in digital assets, security tokens, and digital securities.
Commissioner Peirce is known affectionately in the crypto community as “Crypto Mom” for her progressive outlook and push for sensible solutions that still allow for growth in the community. She recently released her Token Safe Harbor Proposal (Proposed Securities Act Rule 195) which is a very well thought out proposal to bridge the gap between regulation and decentralization.
The views expressed by Commissioner Peirce are her own and do not necessarily represent those of the Securities and Exchange Commission or her fellow Commissioners.
This interview has been edited for clarity.
RS: For someone trying to determine if the business model is a utility or a security, what would you say are the three most important elements to consider?
HP: Well I think that what I would suggest is that you take a look at the Howey test and determine where you fit in terms of whether you are selling the token to folks wrapped with a promise that you as a promoter are going to do something to make that token increase in value. If that is how you are promoting it, then I would say you need to study Howey carefully and determine which side of the line you fall on.
You can read more from the SEC about the Howey test below:
- Digital Asset Transactions: When Howey Met Gary (Plastic), Speech by William Hinman, Director of Division of Corporation Finance
- How we Howey, Speech by Commissioner Hester Peirce
- Framework for “Investment Contract” Analysis of Digital Assets
RS: If a business model is a security, what are the first steps the business should take with the SEC?
HP: I would absolutely encourage everyone working on something to come into the SEC as soon as possible in the process and specifically reach out to the FinHub, which you can find on the SEC website. You can meet with us in person or you can meet with us by phone. For people interested in keeping me in the loop, And just get a sense from our staff what types of things to think about, like the first question you raised in terms of where you fall, security or non-security. They will not give you legal advice but they will give you things that you really ought to think about as you are trying to figure out which side of that line you are on and therefore how you can go about doing your token offering.
HP: I look at each offering on a case by case basis, so it’s really difficult to make blanket statements like that. I think people need to be looking at where things fall, if it is a security, figure out whether you want to do it as a registered offering or whether you want to use an exemption, and figure out where it falls best in terms of which exemption to use. It’s hard for me to say categorically that STOs are better than ICOs or vice a versa, again we take a facts and circumstances based approach; we see every offering to be dealt with on its own merits.
RS: Should investors be equally cautious with STOs as they are with ICOs?
HP: In this situation as in every other situation, I tell people who are buying things to ask the right questions, if you’re putting a lot of your money at stake in something you better ask a lot of questions, no matter whether it is a new car, or buying a token, or buying a stock or bond, you need to ask questions. If you can’t get the answer that you think you should get, and if you are not getting answers to questions that are reasonable questions to ask then you probably do not want to invest. There are some basic red flags that apply across any purchase or investment no matter whether it is a digital asset or a traditional security.
RS: Right around this time last year you said “we might be able to draw clearer lines once we see more blockchain projects mature”. How do you think blockchain projects have matured in the past year? Is this more/less maturity than you expected?
HP: I think there has definitely been a maturing, it is encouraging, and I like to see that people are becoming more discerning. People are asking more questions than they were a year or two years ago. I think that holding projects to a higher standard has been good for everyone. I do think that we would see more maturity if the securities law framework were more clear than it is. It’s a bit of a chicken and egg problem, you can’t see as much development without regulatory clarity, and you can’t see the regulatory clarity without knowing what it is you’re providing clarity for. I am hopeful that we will see some more development in the coming year, maybe a lot of that will happen outside the USA, but it may help us think about what the regulatory framework should look like.
RS: I know Malta is doing a lot of progressive regulation for blockchain and digital assets, I think that that is helping guide people in a better direction.
HP: We see other jurisdictions, Malta, Switzerland, and some other jurisdictions that are taking a forward-thinking approach. I think we can learn from what they are doing. I would like for us to be more on the forefront, but it is not bad that other people are thinking about this and we can learn from them – regulators can crowdsource too!
RS: You have been pretty vocal about the SEC taking a watch-and-see approach with ICOs and digital assets. Many people in the ICO/digital asset industry wish that the SEC would regulate quickly so they do not need to operate in a grey zone. What would you tell those people?
HP: I would tell them that I have an idea for a safe harbor. I would hope that people can take a look at that. There are many issues in the United States where there is lack of clarity, this only deals with one of those issues. I hope that people get back to me and give me feed back on that and we can develop something that is workable
Readers can see Commissioner Peirce’s Safe Harbor Speech and Proposal here. The Safe Harbor Proposal details five conditions that teams must satisfy to be able to take advantage of a time limited exemption from federal securities law provisions:
“First, the team must intend for the network on which the token functions to reach network maturity—defined as either decentralization or token functionality—within three years of the date of the first token sale and undertake good faith and reasonable efforts to achieve that goal. Second, the team would have to disclose key information on a freely accessible public website. Third, the token must be offered and sold for the purpose of facilitating access to, participation on, or the development of the network. Fourth, the team would have to undertake good faith and reasonable efforts to create liquidity for users. Finally, the team would have to file a notice of reliance.”
The Safe Harbor Proposal is a work in progress and Commissioner Peirce welcomes additional input.
RS: Last month, the SEC filed a proposed rule to amend the definition of “accredited investor”. Can you tell us a little bit more about these proposed changes and how you think they can benefit the digital asset and ICO industry?
HP: The changes really are focused on the institutional category rather than the individual accredited investor category. When we talk about accredited investors, I hear feedback about how frustrated people are that we are essentially judging financial sophistication by one metric, and that is by how wealthy you are. So there are a lot of people who have told me that they would like to see the individual class of what an accredited investor is expanded to people who have demonstrated their financial sophistication in other ways. It is open for comments and people can weigh in on that and if people do not weigh in on that, most on the proposed changes will be on the entity side.
RS: Can the general public weigh in on the proposed accredited investor changes?
HP: You can just send an email, it’s a relatively painless process. It does go up on the website so everyone will be able to see it. We certainly welcome feedback and it is especially nice to hear from people who might not have known that they could submit comments. We are always eager for our proposals to reach more and more people.
For more information about the proposed changes to amend the definition of “accredited investor” :
- Proposed Rule to Amend the “Accredited Investor” Definition
- Press Release – SEC Proposes to Update Accredited Investor Definition to Increase Access to Investments
The deadline for providing feedback to the proposed accredited investor definition is March 16, 2020. Feedback can be sent to email@example.com, noting File Number S7-25-19 in the subject line, or at the comment form here, and click on “Submit comments on S7-25-19” under release number 33-10734.
RS: Currently, companies can legally raise up to $1.07M through crowdfunding, in today’s environment this is not much start-up capital for industries like technology. Above $1.07M companies do not have many cost-conscious options for raising capital legally; the requirements for a company to have an IPO are enormous and bear an equally enormous cost. Some people have been using ICOs/STOs/IEOs as a bridge to solve this gap. What are your thoughts on this?
HP: I would agree that crowdfunding has not achieved the potential that it could achieve, and that’s something that now that it’s been in place for a little while we need to take a look at and see whether we need to adjust how it works and what those adjustments should be. One of the things that we have at the SEC that has been useful is a Small Business Capital Formation Advisory Committee that meets periodically, it’s a group of people outside of the SEC who are involved in capital raising for small businesses. They provide us input on existing rules and how they need to be modified so that they are more workable or on the need for potential new exemptions for people who are trying to raise money. Through that forum we have had some chances to think about crowdfunding and how we can make that work better. I do think people are trying to be creative in thinking about how they can raise money, so I suspect that you are right, some people are viewing token offerings as an alternative to something like crowdfunding. If they are doing that, they better seriously consider how the securities laws apply to what they are doing.
RS: There has been an uptick in IEOs (Initial Exchange Offerings) in the past six months or so; I noticed that the SEC issued an Investor Alert about IEOs recently which is helpful for investors who might not quite realize what is going on with some IEOs. I know some IEOs are trying to make the projects sound more official than they are.
HP: Yes, people like to do that. One of my constant mantras is that I want the SEC to be more open to letting people raise money and invest in projects. But I also want people to know, as a counterpart to that, the SEC does not sign off on investments. So, when you invest in something it is on you, the investor, to make a decision whether that is a good investment at all, and whether it is a good investment for you specifically. Do not assume that things have been pre-cleared or signed off on by the SEC no matter how official something looks.
RS: This is great advice for a lot of new investors that this industry has attracted.
RS: The New York Stock Exchange existed and operated for over 100 years before the Securities and Exchange Commission was established. If the public was able to successfully trade stocks on unregulated exchanges for such a long time, do you think that it is possible that people can self-regulate the ICO industry successfully until there is proper regulation from the SEC?
HP: There are lots of different ways to regulate. We in the US have chosen to regulate our securities market with a mix of self-regulation, government regulation, and quasi-government regulation. One point that I have made in this space, that sometimes gets lost on government regulators like me is that some regulation occurs naturally: markets regulate and discipline themselves. I think the securities industry is one in which we have seen that some versions of self-regulation that can be quite effective. That said, we have a framework that does involve a government regulator (SEC), to the extent that people are engaging in activity that falls within our purview we are the regulator that writes the rules so there should be interaction between what’s going on in that space and us. You can’t just do things that fall within our jurisdiction and say “well I am self-regulating so that’s an acceptable alternative”.
RS: And it comes back around to you saying earlier, contact the SEC, and the SEC can help guide people where to look.
RS: I’ve noticed over the past couple of years a pretty dramatic difference in the digital asset landscape: people are self-regulating, businesses are more professional, and people are asking better questions. I know many people would like SEC regulation so that they can easily follow the law.
HP: I understand that too. I think we are trying to come to a place where we can make it easier for people who are trying to do the right thing to do it in a way that is compliant with our rules that also achieves their objectives, that’s the place that I want to get to. It will never be particularly simple because our securities laws can be really difficult, but we can certainly make it easier than it is now.
RS: Do you foresee the regulations becoming easier for people to follow in the next year or two?
HP: I remain hopeful which is why we want to get the safe harbor draft idea out there so that we can get people thinking about it. One piece of the US regulatory infrastructure that makes nothing simple is that we have so many different regulators who have a potential interest in this space. So even if we do something at the SEC there are other regulators that may also have something to say. There is cross-government cooperation but I think we are going to hear even more calls for there to be even better and closer cooperation.
RS: Is there anything else that we did not touch on that you would like to share?
HP: No, I think you covered it well. You are right to focus on this question of where do things fall with respect to our securities laws and how can we work on adjusting those securities laws so that they help to make it clear to potential people who are interested in getting involved in the space. When a project is really seeking to do something legitimate with the funds and when they are seeing to do something not legitimate with the funds, trying to make a clear path for folks who are trying to do the right thing and I think will serve all of us well.
Below are some additional useful links:
- You can check the SEC database to see if a company you’re thinking about investing in has filed notices such as Form D, Form 1-A, Form C
- One stop shop for SEC news on ICOs and digital assets
- Investor Alerts
- FinHub, the main point of contact for innovators, developers, entrepreneurs to engage with the SEC
- SEC Spotlight on ICOs – for investors and market professionals
Matthew Le Merle, Co-founder and Managing Partner of Fifth Era and Keiretsu Capital – Interview Series
Matthew Le Merle is co-founder and Managing Partner of Fifth Era and Keiretsu Capital – the most active early stage venture investors backing almost 200 companies a year. He is Chairman of Securitize (Europe) and CAH, Vice Chairman SFOX and an advisor at Warburg Pincus.
He is also the Co-Author of Blockchain Competitive Advantage, a book that we highly recommend for both entrepreneurs and investors in the space that is available at Amazon, Apple, and Smashwords in hard and paperback, ebook and audible.
You have been an early stage technology investor in Silicon Valley for decades including at Keiretsu and Band of Angels. Is this where you were first introduced to blockchain, and what initially excited you about the technology?
While both Alison Davis (my wife and business partner) and I have been early stage investors in Silicon Valley since the late 1990’s we had focused on Internet, digital content and Fintech investing. For me that included investing as Managing Partner at Keiretsu – the most active early stage investors in the US – and as a member of Band of Angels. We have made several dozen investments in that timeframe and have seen hundreds more made by the investors that we work most closely with.
However, it was Alison that first became excited by blockchain. She has been a public board company director for decades including currently at RBS, Fiserv, Collibra and Ooma. It was the former (RBS) where she chairs the Innovation and Technology committee of the board that led to her needing to understand Bitcoin in 2013. She went on her own voyage of discovery that eventually led to her joining Bart and Brad Stephens and Spencer Bogart at Blockchain Capital as their Advisory Board Chairman.
For my own part, I initially resisted the idea of blockchain. From the 1990’s onwards I had worked with companies like Cisco, eBay, Google, Microsoft, PayPal and others driving the Internet forward and I was reticent to climb on a bandwagon with people who were saying that blockchain would be bigger than the Internet. In time I came to appreciate that as we move the world forwards towards a fully digital future, we will need enabling technologies like blockchain to complete the journey. We have to solve the issues that the Internet currently has including security, identity, concentration, and the lack of native digital monies and assets.
By 2016 I was fully onboard. Better late than never as they say.
Today in addition to being an active investor in the space, I am Chairman of Securitize in Europe and Vice Chairman of SFOX. I would say that being close to the leading global solution for digital securities and the leading crypto prime dealer has given me insights that are greatly informing our Blockchain Coinvestors investment thesis.
In your book you mention that investors often “miss the forest for the trees”, could you share what you mean by this?
I don’t remember exactly where in ‘Blockchain Competitive Advantage’ we say that. However, investors tend to get very focused on the investments that they have and the ones that fill their mindspace. For most investors that means fixed income, public investments and some large cap real estate. But without exception those are relatively low returning asset classes. Over the last 25 years their annual net IRR has been around 3%, 9 to 10% and 8% respectively. Meanwhile, the driving forces of our time are the digitalization of our world and everything within it, as well as the life sciences revolution that is changing the very essence of life (for better or worse). This is why over the same 25 years the annual net IRR for venture capital has been 24% rising to an impressive 32% in the early stage of venture capital in the US.
We see most investors around the world putting most of their money in easily available, low returning, and relatively efficient asset classes. That is ironic, since we were all taught that only in inefficient markets can we hope for superior returns.
The superior returns of the last twenty years, and we believe of the next, will be derived from technology enabled companies that are driving the digital future and are capitalizing on new disruptive technologies such as AI, big data, the Internet of things, blockchain and so on.
We can’t understand why so many professional investors put most of their capital into low returning asset classes when they all intuitively know that the future will not be the same as the past.
You call this period of unprecedented innovation and disruption the Fifth Era. Could you elaborate on this?
Alison and I were very worried when we first heard the term the “Fourth Industrial Revolution” being used by many of the board directors and senior executives with whom we work and spend time. They seemed to think that the world’s innovators and most innovative companies were merely evolving the Industrial world forwards. Moving incrementally forward along the path that the world began some two hundred years ago when it discovered mass production, new energy sources, and the corporate model of organization with its focus on economies of scale and scope. As we talked with these friends we realized that this mindset was leading them down mental paths that were not helpful.
This is not an evolution of the past, or a new phase of the industrial revolution. Rather we are moving into an entirely new era of human existence in which the very conceptual underpinnings of the Industrial Era are being challenged and, in many cases, undermined.
We believe that if you accept this notion that the future is going to be fundamentally different from the Industrial era that we are passing out of, then you naturally take on a mindset that allows you to better see the shape of what is coming – the ‘wood for the trees’ if you will.
So, we named this new future the ‘Fifth Era’ in our book “Corporate Innovation in the Fifth Era“.
How can investors best capitalize on this Fifth Era that we are entering?
That is at one and the same time both very easy and very hard.
It is easy because all you have to do is change your allocations from a dominance of fixed income, public equities and large cap real estate towards a great allocation to private investments and especially early stage technology company investments. Just like the best investors have done years ago. For example, among endowments, everyone has heard of how Harvard, Stanford and Yale allocated more to early stage private investments twenty years or so ago, and have become the highest performing university investors of our time.
But most endowments globally do little of this investing even though they have heard the story for years. Why?
Because it is also hard. Much harder than creating combinations and permutations of publicly traded stocks and ETF’s. And much harder to access given that the big advisors, wealth managers, banks and so on only really have access to fixed income, public equities and large cap real estate. They make it easy to keep your capital in those asset classes. They tell a story that it is very hard to access the highest performing asset classes and that their performance is ‘fake’ or ‘illusory’. So, it in practice does become hard to step out and become a different type of investor. But primarily because you believe it is going to be hard and so in many cases don’t really try very hard to change how you invest – it is a mindset issue.
For those of us that have focused on creating the access for ourselves, we have done so. Whether angels, venture capitalists or investors in early stage venture funds, we have found a way to get capital into the hands of the most capable innovators and their companies.
But the easy path in investing is to focus on the access others will give to you, and that is always to the large, efficient asset classes which represent the past rather than the future.
In your book you detail current “barriers of adoption” for both DAPPs and blockchain projects. What do you feel are the current “barriers of adoption” for digital securities?
For the most part we believe that the world’s capital will continue to flow through the hands of the largest institutions who manage the capital on behalf of others (pension funds, endowments, insurers etc) and will be invested into products created by the world’s leading asset managers. And that these flows will continue to be highly regulated and will include traditional intermediaries, exchanges and so on.
While that may not be a popular view within the blockchain community, and we do agree that peer to peer, and direct access will become much more important in the future as well, we hold to the view that the bulk of the world’s assets will pass through traditional players.
So, the mass of digital security solutions have to be delivered in the context of the transformation of existing investment ecosystems. That is a significant challenge, not only because we have to deploy new technology solutions in order to create digital securities, but we also have to solve the issues of security, identity and trust and so on. Furthermore, we need to do this with existing players and within the context of existing regulatory structures. This is a very complex task of education, development and harmonization on a global scale. It is this task that the team at Securitize has taken on and we are very excited to be helping them in this regard.
While in the long tail it may be easier to bring point solutions of digital securities to specific groups of investors through new digital channels, we don’t think those represent the mass of adoption that will eventually come to the space. They are very important trailblazing evidence of what is possible, and we like to invest in those players too. At SFOX we are lucky to be working with the team that built the leading crypto prime dealer and it is amazing to see how they have not only combined the world’s exchanges and OTC brokers to create unprecedented liquidity in Bitcoin and other traded cryptomonies, but to also deliver the lowest prices and best trading edge to their clients. Once again, we can’t understand the inertia that leads to investors using solutions that are higher priced and less capable.
But the dog is the transformation of today’s investment marketplaces, while the tail is the creation of new disruptive investment marketplaces.
You and Alison are the Managing Partners of Blockchain Coinvestors which invests through investment vehicles into well-known blockchain companies, with an emphasis on early stage equity investing. Could you tell us a bit more about the size of this fund and the companies that it will invest in?
By law I can’t talk about the fund itself to an audience I don’t know, but I can share our investment strategies.
Simply put, we believe that the best practices of early stage investing continue to be true and will be the drivers of value creation in blockchain investing too. These are simple to say, but hard to execute. Invest early in the best teams alongside the best investors focused on the space. Get the broadest and most diversified coverage you can without diverging from this core strategy. Do it on a global scale. Make sure that the combined portfolio of companies that you are invested in has access to the capabilities, relationships, and other advantages that mark out the winners from the also ran. Then look for follow on investing opportunities as the emerging unicorns begin to surface.
For Blockchain Coinvestors this means that we are investors in the top 10 to 15 blockchain venture investors around the world including 1confirmation, 1kx, Blockchain Capital, Blockchain Ventures, BluFolio, Castle Island, DCG, Fabric, Future/Perfect, Ideo, Pantera and others. We have a combined portfolio now approaching 100 blockchain companies and are investors through this strategy in 9 of the 15 blockchain unicorns.
The access has taken us six years to build and we are very excited to be able to deploy capital in this way. We are always interested in talking to investors who want to learn more.
When looking at investment opportunities you like to forecast the state of the industry in ten years. Could you describe the future that you envision for digital securities ten years from now?
It is inconceivable to us that in the future there will be ANY paper based securities. Despite the fact that today more than half of the world’s assets are held on paper – most real estate, most funds, most private corporate investments, many fixed income investments and so on – that can’t be the future.
So, we are absolutely confident in asserting that in the future ALL securities will be digital.
Of course, the question is what is the path to that digital future and what will be the timing by asset class and by geography.
In the next ten years we believe that the world’s major financial centers will all have embraced digitalization across all asset classes and that the best issuers, investors, intermediaries and exchanges in those global financial centers will have made it a long way towards that future. The leading global financial centers have to be innovation leaders to remain in the lead and as we speak to the leadership in New York, London, Zurich, Tokyo, San Francisco, Chicago, Hong Kong and so on, we hear them saying exactly this back to us.
However, that does not mean that in ten years ALL securities will be digital. Just like you can still buy vinyl records, or classic cars, we are sure you will still be able to buy some paper from someone if you want to hold your capital in that format.
Though we are not sure why you would want to.
At Securities.io we often come across projects promising to tokenize everything from VC funds, to art and real estate. Which type of tokenization projects make the most sense to you, and have the most potential for real-world mass market adoption?
We think investors want quality assets that they know represent good investments from blue chip names that vouch for them, are prepared to ensure quality issuance, custody, trading and settlement etc. So, for us, quality matters in investments. So, it is less an issue of which asset class, and more an issue of whether the specific investment is a quality one.
The good news is that at Securitize and SFOX we are working with players that are keen to bring some of the world’s most attractive asset classes to a native digital format, and you should expect to see these types of offering later this year and in 2021.
Do you have any final words for investors in the space?
The main thoughts we would like to leave your readers with are:
– Investing in the future has got to be better than investing in the past
– The highest returns come from early stage technology investing. This is a fact, not simply an assertion
– You can have access if you want it. But it won’t come from traditional players who wish to keep your capital in easily accessible, efficient and low returning asset classes
– Finally, all the world’s asset will be digital in a digital world, and blockchain will be an important part of making that happen
To learn more about how Matthew views investing opportunities in the blockchain space we recommend reading Blockchain Competitive Advantage.
Luka Gubo, CEO of Blocktrade – Interview Series
We sat down with Luka Gubo, CEO at Blocktrade, to find out how he combines his professional experience with technological developments to advance Blocktrade’s mission to transform the way small and medium-sized companies raise capital.
Luka, you have a background in trading, investing, and risk management. How did you become the founder and CEO of Blocktrade?
I started my career just before the great financial crisis, as a high-frequency trader at a small proprietary trading firm, where we traded mostly futures and other derivatives. Our most important strategy was macroeconomic event trading, which means that we tried to enter the market a couple of milliseconds after the release of major macroeconomic data, such as GDP growth or employment numbers. Our servers were collocated with different exchanges so that our orders arrived at the order books as soon as possible. At some point, we were executing several billion US dollars worth of futures on CME per month.
After the great recession, large competitors with better access to these markets entered the picture, and trading became less profitable, so I started focusing on more long-term investing. I developed a couple of investment strategies based on theoretical and empirical models, one of which I implemented into a first fully quantitative fund in the region. I have always been at the intersection of trading and technology, so I quickly realised – especially after reading the Ethereum white paper – the potential of blockchains on primary and secondary capital markets. I wanted to contribute to this transformation and build on my experience to develop new processes and increase access and transparency of markets. In 2018, I set the vision for Blocktrade, and our goal is to use these latest technologies to improve the inner workings of capital markets, mainly in Europe.
Blocktrade is applying for the authorization to perform investment services in the European Economic Area as per Directive 2014/65/EU (MiFID II). What is this directive, and what does it mean for investors?
MiFID II stands for Markets in Financial Instruments Directive, which is part of the broader European capital markets regulatory framework. The directive regulates all activities related to exchanges and investment firms (or broker-dealers, as they are called in the US) that provide different investment services on the primary and secondary market. MiFID II has more than 30,000 pages, including its delegated regulations and regulatory and technical standards. But there is also other relevant legislation that regulates European capital markets, such as the Central Securities Depositories Regulation (CSDR), Prospectus Regulation, Market Abuse Regulation (MAR), Settlement Finality Directive, and Anti-Money Laundering Directive (AML/CTF Directive) and many others.
The goal of these regulations is to protect investors and ensure market stability and transparency while reducing risks and enable the efficient allocation of funds in the primary and secondary markets. Although this objective is admirable, one could say that EU capital market regulations are overly complex, and they harm investors and especially issuers trying to tap the markets for funding. Furthermore, disruption is hardly possible because of the large regulatory, operational, and capital requirements to enter the industry.
By applying for such a licence, we aim to make it much more convenient and less expensive for issuers to raise capital from investors. At the same time, we want to provide large and small investors with access to previously inaccessible asset classes. The technology allows us to reach that goal, while the license will provide us with the necessary trust from investors and other financial institutions.
In October 2019, you announced that Cryptix completed the acquisition of Blocktrade. Who is Cryptix, and what does this mean for the future of Blocktrade?
Cryptix is a Swiss-based full-service provider that focuses on disrupting the finance industry with a long-term focus on combining both worlds: regulated and decentralized finance. Being part of the Cryptix Group has many benefits for Blocktrade: Cryptix shares and even expands our vision, and, together, we connect the entire financial ecosystem. As a first step towards creating the people’s financial marketplace, Cryptix is applying for an EMI licence while Blocktrade is applying for a MiFID II licence.
With a plan to combine an entire financial marketplace in one app, Cryptix aims to offer a seamless experience for users, who will be able to access different financial services and products. Blocktrade will take care of the capital market part, both on the primary and secondary market side.
The future of Blocktrade is very bright. We have broadened our mission: We not only facilitate access to the primary market but, by offering fundraising, structuring, advisory, and placement services, we also help European entrepreneurs become more competitive in the global environment. Together with our technology for the secondary market – which we will operate as an investment firm when we get the authorization – we will be able to cover the full spectrum of capital market services, including safekeeping and custody, settlement, reporting, routing, and execution.
Blocktrade will be offering the listing of security tokens for trading. When do you expect this to happen?
Listing financial instruments on our multilateral trading facility (MTF) will be possible after the licence is granted by the regulator. We are not allowed to touch securities until then. I think 2020 will be an exciting year for existing issuers of security tokens but also for new STOs.
What will the listing requirements for security tokens be?
There are various requirements that include legal, governing, technical, and financial aspects. From the legal perspective, only a legal entity can issue securities, and their statues and articles of association have to allow the transferability of these securities and have clearly defined rights for the owners of the securities. Before the listing, the securities must be entered into a book-entry form with a CSD.
The governance-related requirements include that a company has clear company governance in place – preferably with independent board members – that facilitates the primary market. Furthermore, management and board members need to pass a fit-and-proper assessment, and management must be trained on the MTF’s rules on reporting, market abuse, insider trading, transparency, and governance. On the technical side, we aim to support as many security token protocols as possible since there is no industry standard. However, there might be a need to switch to a different protocol, potentially a permissioned DLT, to enable the streamlined, straight-through processing of executed trades. When it comes to financial requirements, it is important to be aware that the minimum size to be listed on the secondary market is currently EUR 1 million in market capitalisation. Although we plan to support large and small issuers, we need to adhere to this limit. However, the requirements might change once we see what the actual liquidity of these securities will be. Finally, while we prefer established business with growing revenues and profits, we do not exclude startups that have not yet reached profitability.
Do you have any security tokens lined up for the launch?
Our strong network includes several strong issuers of security tokens, and they are eager to provide liquidity to their shareholders.
What are some of Blocktrade’s institutional services for banks and other investment firms?
We will offer trading opportunities to a range of institutions – from brokers to fintech companies to (neo)banks and investment firms – and we create new revenue streams for them through white-label solutions. They will be able to execute their clients’ trades on the secondary market (for both cryptocurrencies and security tokens) and offer direct investments in STOs to their clients. Businesses that do not have their own platform to raise capital will be able to use our white-label solution, while unlicensed entities will be able to become tied-agents, which means they will be able to act as an STO investment platform and enable routing of clients’ orders to our MTF.
What are some of the features and tools that we can expect to see on the Blocktrade platform?
Our goal is to provide a marketplace where demand and supply for digital assets meet. A primary market where companies issue securities in which investors can invest directly is one of the essential features that we are building. Of course, we are also focused on finalising the development of the secondary market, where these securities will be traded. We will offer this new digital asset class with all the necessary tools for a professional trader, investor, or any financial institution. We are entirely API driven, which enables us to integrate with existing market infrastructures while allowing other platforms, apps, and algorithms to connect with us.
Is there anything else that you would like to share about Blocktrade?
Yes, there are always some good things to share. We are very thankful for Cryptix’s warm welcome and for the opportunity to work out of the new headquarters in Vaduz, Liechtenstein.