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Oliver Siah, CEO of Fraxtor Capital – Interview Series

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Oliver Siah, CEO of Fraxtor Capital - Interview Series

You have an interesting and diverse life story, having spent 17 years in the civil service as a Republic of Singapore Air Force Officer, and Pilot. How did you transition from such a career to launching your first real estate investment company Hanson Court Pte Ltd?

I had two passions growing up. One was Aviation, and the other was Real Estate Investment. I enlisted as a pilot in the Air Force when I was 19 years old and was offered a government scholarship to further my studies in Australia. At 21 years old, I bought my first commercial real estate, which was a retail unit in a shopping mall in Singapore. By the time I graduated at 23 years old, I had sold the retail unit for about double the purchase price, netting me more than 10x return on equity. I was so intrigued by this that I could not wait to buy my next property, this time, a residential unit in Singapore. I sold this unit six years later for more than double the purchase price as well.

I knew I was on to something. So I set up my family investment vehicle Hanson Court Pte Ltd (named after the first property we acquired) after completing my Pilot training in the Air Force in 2009 (during the financial crisis). We went on to buy ten commercial and industrial units in Singapore, with a strategy to add value to the assets through asset enhancement. By doing so, we managed to push the rental income up substantially and sold the units five years later, achieving more than 40% IRR (p.a.).

After serving for 17 years, in 2018, I left the Air Force to focus on my startup Fraxtor.

 

In order to familiarize our readers better, could you share with us what Hanson Court Pte Ltd does?

Hanson Court Pte Ltd was formed as a property investment company in Singapore. During the financial crisis in 08/09, we acquired many commercial and industrial assets for below valuation and held on to them until the market recovered, earning us more than 40% IRR. At the moment we are still invested in commercial units in Singapore and have also ventured abroad to China to develop properties.

 

Was there something that your saw or experienced operating Hanson Court that inspired you to launch Fraxtor, a company that specializes in offering tokenized and crowdfunded real estate?

Through my experience investing in property, I realised that some pain points could be addressed through tokenisation. First, it was the large capital outlay that is required to purchase a property which makes it difficult for investors to diversify their portfolio.  Second, it was the lack of liquidity of the investment, which makes it prohibitive for people who want to invest in the short term. Third, it was gaining access to the global real estate market. The know-how required to conduct the due diligence on the property and even to structure the investment makes it difficult for individuals to invest overseas.

With a platform like Fraxtor, we can allow investors to co-invest with us from as low as $10,000 and enjoy a hassle-free investment experience.

 

Could you elaborate on how Fraxtor sources which property to invest in?

We currently focus on opportunistic and value-add projects in matured markets like Australia, Japan, Singapore and Europe (including the UK). These are markets that our team is more experienced as well.

First, we look at two key factors: location and potential. Location is something we cannot change. Hence it is essential to select projects based on the accessibility and desirability of the asset’s location. Potential is what we can unlock in the property through redevelopment or asset enhancement initiatives. This we feel would be the allow us to increase the value of the property.

Next, we look at the financial structuring of the asset. We look at the best way to structure the capital stack of the investment to maximise the return for the investor. In the current market situation, we are looking at 10+% IRR for value-add projects and 15+% IRR for opportunistic projects.

Projects that meet our criteria would be presented to our investment committee for selection.

 

How long are the properties held? Is the goal to tenant them, or to flip them for capital gains?

The duration of the holding period depends on the type of property and the strategy we adopt. For our development projects, we aim to sell the assets as soon as possible to unlock the return for our investors. This would probably take between 1.5 to 3 years. For our investment projects, the goal is to add value to the assets through enhancement initiatives, increase the net operating income and subsequently sell them for capital gains. This would take between 3 to 5 years.

 

Are monthly or quarterly updates issued to investors? What type of information can they access?

Investors are updated as and when there are updates on the property. Investors are able to access the information memorandum for the property as well as the financial feasibility study that we had done for the project.

 

Where is Fraxtor regulated and what licenses does it have?

Fraxtor is currently exempted from licensing in Singapore as we only deal with accredited investors.

 

Could you tell us about some of the current investments that you offer, such as the location and property type?

Our current project is to redevelop a residential landed property in Singapore. The property is situated in Adelphi Park Estate along Upper Thomson Road. We plan to demolish the existing property and build two semi-detached units on the land.

 

Is there anything else that you would like to share with our readers?

Fraxtor will be expanding our operations in Australia soon and we are in the process of obtaining an Australian Financial Services Licence.

To learn more visit Fraxtor Capital.

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Antoine Tardif is the CEO of BlockVentures.com, and has invested in over 50 blockchain projects. He is also the founder of Bitcoinlightning.com a news website focusing on the lightning network, and a founding partner of Securities.io

Interviews

Matthew Unger, CEO of iComply Investor Services Inc – Interview Series

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Matthew Unger, CEO of iComply Investor Services Inc - Interview Series

Matthew is the CEO of iComply (iComply Investor Services Inc.) is an award-winning Regtech platform powering the digitization of institutional finance with coverage for over 160 countries.

You have been involved in cryptocurrency for many years now. Can you share with us how you first learned about crypto?

I first heard about cryptocurrency (Bitcoin) in 2011 at a meetup in Vancouver. Before that, I spent over half a decade as a wealth manager. I saw how blockchain technology would transform capital markets. Since then we have seen a ton of innovation. To compare it to digital media – if Bitcoin was the Napster of finance, Ethereum’s smart contracts were BitTorrent.

 

How did you come across the concept for iComply Investor Services?

The need for iComply arose out of two major events, in 2014, the fintech I worked for was building a platform for broker dealers and asset managers to manage their entire business from an iPad. For KYC, there were a few APIs on the market but even today most of these tools do nothing more than onboarding or identity verification.

Over the past 15 years, I have gone through many regulatory audit cycles and did my first AML training in 2005. I saw a need for a toolkit that would let businesses easily manage the global variations and frequent changes to local regulations – whether for onboarding, identity verification, AML, or even disclosures and legal agreements. Today, iComply offers institutional-grade identification and risk management tools that support AML compliance for the entire customer lifecycle.

 

You led a 2016 project to use Ethereum smart contracts to automate the matching and fulfillment of CME interest rate swaps trading over LIBOR. How did this work and what was the outcome?

Actually, I only led the technical part of this proof of concept (POC) with a team at MIT. Our goal was to build a business case and technical POC to identify if smart contracts could be used for clearing derivatives effectively. This required that we map out the entire workflows, business and compliance requirements of the second largest clearinghouse in the world. We connected the dots between transaction counterparties, their law firms, and a whole web of proprietary software.

Looking back, our solution was a mess – we had way too much logic and potentially confidential information on-chain, and Ethereum was integrated into a customized Salesforce interface. It was early days. Shortly after the DAO disaster unfolded and the resulting hard fork killed all interest from the major institutions. Still, the results from the POC were exciting – we could take a traditional institutional process that takes 4-6 weeks and costs upwards of $10,000 per transaction and boil it down to under a dollar of gas in under a minute.

 

We witnessed the ICO boom in 2017 with the follow-up crash in 2019. Why do you personally feel that STOs will be different?

First, ICOs were seeking to do something very different than digitizing a security – in many ways utility tokens are a new asset class, security tokens are new technology applied to, for the most part, very traditional financial instruments. I still believe there are excellent use cases for utility tokens – but many utility tokens still need to comply with all sorts of laws and regulations outside of the securities.

In contrast, STOs are focusing on operating within securities regulation. This means they will be held to a higher standard and their tokens have to observe the securities regulation of any jurisdiction they trade in – even for peer-to-peer transfers between wallets. These regulations vary widely from one country to another, in the world of paper or digitized PDF legal agreements there is little risk of a regulator in EU catching a US issuer raising capital for a private placement in a business, fund, or real estate deal.

Putting these transactions onto a blockchain completely changes this because regulators are already able to monitor the market in a way that is simply impossible to do today. Token issuers today are still buying basic APIs for KYC and AML, and many still think of global regulation as binary – SEC vs no-SEC (i.e. Reg D and Reg S). However, when a tokenized asset is able to easily manage the jurisdictional variations of identity, privacy, data, AML, and securities regulations, including disclosures and legal agreements, etc., the old way of doing things seems insane. That would be like someone using Telex today instead of Telegram, email, or Slack.

 

What are some of the tokenization use cases that iComply can assist companies with?

Since we launched Prefacto in Feb 2018, we have seen a lot of really cool token projects from Cryptokitties to tokenized funds, real estate, bonds, private shares, futures contracts, and even fractional ownership in casks of luxury Scotch, whiskey, and wine.

The Prefacto toolkit makes it simple, and very cost effective, for token issuers to manage compliance requirements not just for the initial offering – but for every transaction throughout the lifetime of the asset in almost every country in the world. If your lawyer is able to write up a term sheet, purchase agreement, or licensing contract – you can probably tokenize it.

In 2018, we started to see a lot of new blockchain startups launching platforms for  issuance, trading, transfer agents, and cap table management such as Polymath, Blockport, Securitize, etc.. We started getting requests from a lot of STO platforms on how to handle the cross-border AML compliance for onboarding corporate investors so we released a second product, iComplyKYC, as a toolkit that easily plugs into these types of platforms. What we were not expecting was the demand from the traditional capital markets where back offices are simply not ready for blockchain. This is a very exciting trend because we are now connecting the dots for many of our clients bridging the gaps between traditional brokers, issuance platforms, and even some exchanges.

 

One of your exchange clients is Motto Technologies, a UK based cryptocurrency exchange going public on the LSE. Could you walk us through what Motto does, and how iComply was able to assist them?

Motto was early to the “let’s get regulations right” game. Their platform allows users to buy, trade cryptocurrency but they also give their users a Visa card that lets you easily spend your crypto anywhere that takes via. In order to get past audits from their banking partners, Visa, and the Financial Conduct Authority.

We helped Motto find local regulatory experts, get their policies and procedures ready for audits, approvals, and go-public due diligence. Before using iComply, their bank had required them to use an API based “e-KYC” tool which might have worked if they were just doing a traditional crypto-exchange. Our iComplyKYC toolkit enabled them to build and maintain a robust compliance program that could stand up to regulatory scrutiny. Most of the other platforms are still mucking around with 10 different APIs and manual systems to try to appease regulators. We helped Motto get ahead of this curve, and as a soon to be publicly traded company their shares will be available to accredited and non-accredited investors alike – I’m not aware of another exchange in the market that can say that.

 

One of your software products is Prefacto, a regtech solution for tokenized assets. What problems does Prefacto solve?

Prefacto enables businesses to manage end-to-end compliance on their tokenized assets. This includes planning and structuring, launching smart contracts, developing and implementing a compliance program, issuance and distribution, and finally ongoing token management. Compared to what many issuers are doing today, our clients can save time, money, and a whole lot of pain if they talk to our team early on.

 

iComply also offers KYC services. What are some of these services?

In late 2018, we started reaching out to other token issuance platforms, transfer agents, etc in the security token market to offer them demos and the opportunity to share knowledge and collaborate rather than compete. Several players took us up on the offer and we all learnt a lot. One of the key takeaways for iComply was that, while we thought Prefacto was cool, our compliance tech was a key missing piece to these other platforms.

At the time, none of the other platforms could manage compliance for corporate investors, distributed broker networks, or multi-jurisdictional variations in regulation. This led us to refocus our business on what we are known to be best at – intelligent compliance automation. It took about a year to refactor our platform and launch the current version of iComplyKYC, a suite of tools that makes it easy to build and maintain a robust global AML compliance program.

We built our own KYC tech because we knew the APIs on the market would not meet regulatory requirements – there is a reason you do not see these tools being used today by firms such as HSBC, Santander, Vistra, etc. After launching iComplyKYC, we discovered that the institutional players were very interested in using these tools because they were built to the current standards and frameworks of traditional compliance – we just do it for 95-98% lower cost per transaction than current mid and back office systems.

 

Where do you see the industry five years from now?

In 5 years from now – if you’re familiar with the concept of Gartner’s hype cycle – we’ll see security tokens start to take off in mainstream adoption. Right now, if you look at the digital media as an example, right now security tokens are for the people that would have used Napster or Kazaa. In five years we will have an iTunes, maybe even a Netflix.

Traditional firms will be past POCs and MOU press releases. Like the Netflix pivot from mail order DVDs to digital delivery, some of the big guys will have made public blockchains a core to their business strategy like EY has already done with Ethereum. Others will go the way of Blockbuster.

Simultaneously, the security token startups will be more collaborative and more interoperable. The cost of launching a token will be at least 90% less than it is today. The platforms who chose public blockchains, rather than proprietary private or purpose-built chains will start to see the benefits of this long term thinking.

Finally, over the next 1-3 years I believe we will see and hear a lot about private chains with the rational of scalability, security, etc. This is a last-ditch effort to protect their business model from being cannibalized by decentralization and democratization in finance. The early members of the R3 Consortium spent millions to learn this, Salesforce and S&P scrapped their Hyperledger project, JP Morgan recently gave up on Quorum – the truth is we have had DLT in finance for over 30 years, systems such as CDS are incredibly efficient and secure.

There is nothing innovative about a private blockchain or mesh network in finance. Look at Java and C#, they won the race to build the internet. Public cloud solutions such as Google, AWS, and Azure won the race for shared public server architecture. For digital finance, public blockchains enable full transparency which builds trust and reputation in a way that a private chain cannot. Within 5 years you will see SIX, ASX, GBX, and similar players will have scrapped their current infrastructure in favour of lower costs per transaction and lower cost of technology ownership, to adopt public blockchain infrastructure.

 

Is there anything else that you would like to share about iComply?

Our focus at iComply is to ensure companies can easily build and maintain a robust, global, and institutional grade compliance program. The problem we see in the market is that the institutional grade tools are too manual and expensive to enable digital transformation. Meanwhile, in the fintech, startup, and security token markets we see a lot of players that have a lot of deep experience in securities or finance – usually only in one market – but no real world experience in what happens in the mid and back office, much less compliance on an international level. They simply don’t understand that when you sell a Reg S to someone in Germany there are compliance requirements from BaFin, the European Commision, etc.. For the sake of this whole industry, I would urge token issuers to look at compliance holistically, and as early as possible.

Our clients realize very quickly that we’re offering a holistic approach. We support our clients through audits from regulators, banks, and financial partners – they need this in order to become successful. The eKYC API built for Uber and AirBnb don’t do this because they know their tech will not pass an audit – once they close the sale that’s it. This is what is unique about our focus at iComply, we are here to help our clients do business – we have aligned our business model with our client’s success.

To learn more visit iComply or visit or iComply Business Listing page.

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Commissioner Hester Peirce, SEC – Interview Series

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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:

 

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.

People who wish to set up a meeting or speak with staff at the SEC can fill out a request form here, or contact Commissioner Peirce’s office directly at CommissionerPeirce@sec.gov.

 

RS:  There is not much mention about STOs (Security Token Offerings) on the SEC website.  Do you think that investors are any better protected with an STO than an ICO?

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:  Absolutely.

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” :

The deadline for providing feedback to the proposed accredited investor definition is March 16, 2020.  Feedback can be sent to rule-comments@sec.gov, 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:

 

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Matthew Le Merle, Co-founder and Managing Partner of Fifth Era and Keiretsu Capital – Interview Series

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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.

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