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Stephen McKeon, Chief Strategy Advisor of Security Token Academy – Interview Series

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Stephen McKeon, Chief Strategy Advisor of Security Token Academy - Interview Series
Stephen McKeon is the Chief Strategy Advisor of Security Token Academy. He is also an Assoc. Professor of Finance at University of Oregon and Partner at Collaborative Fund.

 

When did you first become interested in blockchain technology?

I first learned about Bitcoin in 2013, but was busy working on a startup and tenure so I didn’t have much time to dive in.  It was a couple years later around the time Ethereum launched that I caught the bug and went down the rabbit hole.

 

How has this interest in blockchain affected your investment strategy for the Collaborative Fund?

Collaborative Fund has a history of investing in companies that make the world better by disrupting legacy extractive industries.  Many segments of the financial industry fit this description so investing in blockchains is a natural extension of our established thesis.

 

Not only are you a partner to an investment fund but you are also a professor of finance at the University of Oregon. Which came first and how did you find yourself in these roles?

The academic role came first by a long shot.  I joined the finance PhD program at Purdue in 2007 and started at University of Oregon in 2011 after getting my degree.  One of the things that attracted me to academia was the ability to design my own research agenda and this provided the opportunity to turn towards blockchains in 2015.

The role with Collaborative began about a year ago when they decided to launch a dedicated effort around blockchains.  I have known the founder, Craig Shapiro, for almost 20 years — we met at the beginning of our careers in San Francisco during the height of the dot com boom.  He knew I was researching blockchains reached out when they were looking to add more domain expertise around this emerging space.

 

You are an advisor to Security Token Academy, one of the leading voices at the intersection of blockchains and financial securities and you have published “The Security Token Thesis” that outlines your views on the emerging market of security tokens. Could you share with us why security tokens has you so excited?

What I’m excited about is the concept of smart securities, where we can program logic and conditions directly into the security itself.  Blockchain tokens are not the only way to achieve this vision, but they appear to be the best avenue to do so in a way that is interoperable and where market participants have an incentive to adopt.  Bringing these features to securities expands the design space in terms of how we think about financing and investment, which is exciting.

 

Which types of securities do you believe are best served by security tokens?

Since tokens are just a digital wrapper, they can be applied to almost anything.  In a sense, if it has value it can be tokenized.  That said, some assets are more conductive than others.  The first security token was a venture fund, Blockchain Capital, driven by the desire to create a secondary market that allows investors to get liquidity without forcing redemptions on the fund.  We’ve also seen some examples of equity and real estate.  One of the best use cases in my mind is bonds.  The payment streams are set in advance, making them particularly easy to codify, and they aren’t subject to the same investor limits as other asset classes.  Blockchain Credit Partners is doing some interesting work on this front.

 

Can you explain your views on automated compliance, and the benefits this provides investors and regulators?

Sales and trading of financial assets are highly regulated industries and maintaining compliance is a real source of friction for institutions.  Further, it dictates the manner in which we trade assets because they reside inside walled gardens.  By putting logic inside the security that checks off regulatory requirements in an automated way as it moves between wallets, we can reduce some of the burden that currently exists.  There’s still a long way to go because ubiquitous and secure digital identity is required to fully realize the vision, but there has been a lot of progress made over the past year.

 

You believe that digitized assets will require asset interoperability, can you explain your thoughts behind this?

My favorite line from the article is “The thesis underpinning the idea that everything will be tokenized is grounded in the aspiration that everything will be interoperable.”  People want everything to work together seamlessly and we simply don’t have that today for investable assets.  One of the great promises of blockchain protocols is that they create standards that facilitate interoperability among different components.

 

You’ve also described how in the future digital securities will offer unique investor access rights. Could you elaborate on what these investor rights will be and how they benefit investors?

If you boil down the question “what is ownership” you arrive at the idea that ownership is a set of rights.  In many cases these rights are bundled, for example, I get both cash flow rights and voting rights in many of the public equities I own, but I don’t get access rights to their headquarters.  However, people value access and that can take many forms.  Maybe it’s access to an annual meeting, as in the case of the Green Bay Packers, maybe it’s access to some type of discount, or early access to a product before public launch.  Whatever use case you can imagine, once public entities have more visibility on their cap tables, something they don’t have today, they can begin attaching additional rights that may be very low cost to the issuer but are valued by investors.

 

Where do you see the market 5 years down the road?

Security tokens went from $22M in 2017, to $442M in 2018, and the talley for 2019 will likely several billion.  And yet the space is still in its infancy.  There are many trillions of dollars of assets in the world, many of which could use an IT upgrade such as the one security tokens represent.  To answer the 5-year question one has to make an assumption about the rate of institutional adoption because that’s the hurdle that takes the space from billions to trillions.

 

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

For readers that want to learn more, Security Token Academy is a great resource.  I encourage them to check out the website and subscribe to the weekly newsletter.  Also, for those in the NY area, there will be a free meetup with a great lineup of speakers on the evening of Sept. 26th at Chelsea Piers, registration is available through securitytokenacademy.com.

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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

Aaron Kaplan, CEO of Prometheum – Interview Series

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Aaron Kaplan, CEO of Prometheum - Interview Series

Prior to Prometheum you were the Founder of EquityArcade, a platform that enabled consumers to buy shares in video game startups. Can you let us know how your experience at EquityArcade transitioned over to Prometheum?

EquityArcade was a Reg CF equity crowdfunding platform that allowed consumers (investors) to invest in the future revenue generated from indie game funded on the platform. Reg CF is part of the JOBS Act, which also contains the Reg A+ crowdfunding rules. Prometheum uses Reg A+ as a means to allow the general public to invest in blockchain securities. All JOBS Act regulations relate to online equity crowdfunding. As a result, we have been able to leverage many of the experiences and lessons from EquityArcade in building Prometheum’s Reg A+ offering platform. 

 

Prometheum enables companies to raise capital by offering their own Smart Security Tokens (SSTs). Can you share with us how SSTs differentiate themselves from other industry standards such as STOs (Security Token Offerings) or DSOs (Digital Security Offerings)?

SSTs, STOs and DSOs are all different protocols that are attempting to solve the same problem. Until there’s complete regulatory clarity around certain critical components – including custody –  of the blockchain securities ecosystem, it’s not possible to conclude which protocol provides the best foundation.

 

What’s the process for a company to launch an SST?

An issuer looking to issue a SST will submit an application for an offering to Prometheum. At that point, the issuer will submit all relevant documents that will allow Prometheum to conduct the requisite due diligence in order to determine whether the company is qualified to issue an SST. Upon passing the due diligence process, the issuer will complete the Reg A+ offering circular and submit that document to the SEC for qualification. Once qualified by the SEC, the offering will be listed on Prometheum’s offering platform and begin their capital formation activities. When the stated amount of capital is raised, there will be a closing and distribution of the SST into the investors’ Prometheum brokerage account. Upon distribution of an SST, Prometheum’s issuance platform coordinates the multi-signature, multi-stage process that is used to place investors’ SSTs in either their Master or Personal Wallet. Once the distribution occurs, Prometheum will list the SST on our retail based (i.e. open to all investors) Alternative Trading System (ATS), and secondary market trading will begin in the issuer’s SST. 

 

What type of fees should companies expect from launching an SST and hosting it on your platform?

Our goal is to allow companies to raise up to $50m in the most efficient way possible:  faster, less expensive, and easier than any other legal capital raising method. In terms of direct fees, we plan on charging issuers a small percentage of the total amount they raise (1-3% dependent on the total raised).  Once a token has been distributed and is trading on the ATS, companies are charged a quarterly membership fee of $2,500 for maintaining their order book.

Indirect fees not charged by Prometheum can vary and are related to legal and prep for the creation of the Reg A documents, accounting, auditing, marketing, and other possible professional services.  

    

SST will be Reg A+ issued. For investors who are not familiar with this legislation and what does it mean? Could you explain the benefits?

Regulation A+ allows issuers to raise up to $50 million from the general public annually, and such securities, when issued, are freely tradeable on a secondary market. Reg A+ is really the perfect regulation for issuing blockchain securities as it meets the spirit that was initially conceived by the crypto community- it allows the general public to invest, and the asset is freely tradeable upon distribution but in a regulated manner (unlike many historical token investments). 

 

Tokens that are created on your platform will then be tradeable on a custom ATS (Alternative Trading System). Could you elaborate on how your ATS will operate?

On the surface, the ATS operates just like a traditional equities electronic market.  Every token has as order book representing supply and demand for that token – bids (what buyers are willing to pay, and the number of tokens they want) and asks (offers to sell, or what sellers are willing to sell for, and the number of tokens they want to sell). This order book is managed by the matching engine which uses an algorithm to arrange the bids and asks into a price, upon the price quote the engine then utilizes time priority, and ultimately “matches” buyers and sellers when they meet at the same price.  There is an online trading platform, similar to Etrade or Schwabb, which allows traders and investors to see the order book, look at charts, enter orders and see their account status and previous transactions. Through the use of omnibus accounts, other broker-dealers will be able to offer their customers access to SSTs. Our ATS intends to operate 2 sessions everyday, both 11 ½ hours long with two 30 minute breaks for settlement. When there is an executed trade, meaning an order between a buyer and seller is matched, the trade is written to the blockchain, as well as recorded to a database to ensure compliance with traditional record keeping.  

 

Are SST tokens launched on your platform tradeable on regular security token trading exchanges such as OpenFinance and tZERO?

SSTs are compatible with Prometheum’s ATS and work as both securities and utility tokens in the Prometheum ecosystem. It may be possible for SST issuers to create a bridge to other exchanges or blockchains by building smart contracts on the Prometheum Utility Blockchain. As the equivalent of a national market system for digital assets develops it will likely be necessary for digital assets to have the ability to trade across security token exchanges and alternative trading systems. 

 

What are Ember (MBR) tokens and what role do they play in this project?

The Ember SST fuels all SST transactions and allows holders to provide services at the protocol and application layers. Prometheum’s Ember token has both profit-making utility (work/access) and proprietary payment currency features. Ember provides the fuel for the Prometheum blockchain Network and demonstrates the versatility and value provided by a modern approach to using securities to transfer value in a decentralized, blockchain based environment. Ember is the first SST issued on the Prometheum Blockchain and sets the legal and technical precedent for further SSTs.

 

It seems like you are building everything from scratch, why not use an existing blockchain?

The Prometheum blockchain is required in order to ensure that regulatory requirements are met while also providing a viable method for the use of blockchain securities as utility tokens. This includes direct interaction with distributed applications as well as processes for moving blockchain securities in and out of brokerage accounts when a user wishes to trade them on the Prometheum ATS.

 

Is there anything else that you would like to tell us about Prometheum?

Prometheum is creating the market infrastructure needed for digital assets to go mainstream. When the SEC essentially declared that tokens were securities in the 2017 DAO report, such infrastructure didn’t exist, which meant that there were no compliant facilities for the issuance, trading, clearing, settlement and custody of token securities. Prometheum sought to fill that void and is creating the infrastructure that will allow the general public to invest and trade in digital assets, while also providing mechanisms for clearance, settlement and custody after trades are made. The Prometheum Network is meant to allow the general public to participate, which is required in order for digital assets to go from a new asset class to a mainstream asset class. 

To learn more visit Prometheum.

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Interviews

Philip Moustakis, Counsel at Seward & Kissel LLP – Interview Series

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Philip Moustakis, Counsel at Seward & Kissel LLP - Interview Series

Philip advises companies and individuals on SEC enforcement matters, including criminal enforcement investigations, internal investigations, and cryptocurrencies and blockchain technology.

Philip has extensive experience with securities enforcement matters. For more than a decade prior to entering private practice, he served as senior counsel in the SEC’s Division of Enforcement, investigating and prosecuting complex matters involving violations of the federal securities law.

Before being employed with Seward & Kissel LLP you were a member of the SEC’s Cyber Unit which focused on cryptocurrencies and ICOs. How were you initially recruited for this Cyber Unit?

I started in the SEC’s Enforcement Division in 2008 and began working on Bitcoin and cryptocurrency-related matters about five years prior to the creation of the SEC Cyber Unit. I brought the SEC’s first Bitcoin-related enforcement action against the operator of Bitcoin Savings & Trust and led other cryptocurrency-related matters as well. I briefed Chair Mary Jo White and the other Commissioners, and frequently conducted training for the FBI, FINRA, and others, on Bitcoin and blockchain technology. I also presented in academic settings on my work.  So, when the Cyber Unit was formed in 2017, with a mandate that included cryptocurrencies and ICOs, I was a natural fit.

 

How did the action against ‘Bitcoin Savings and Trust’ influence future enforcement actions by the SEC?

Bitcoin Savings and Trust, which raised a staggering 700,000 Bitcoins from investors, was charged as a plain vanilla Ponzi scheme, with the exception that all investments were solicited, and purported returns paid, in bitcoins. But it was notable for several reasons. First, it established that the investment of Bitcoins could satisfy the “investment of money” prong of the test for an investment contract, otherwise known as the Howey test. Second, it demonstrated that the SEC could conduct a flow-of-funds analysis on the Bitcoin blockchain. While we could not demonstrate where every Bitcoin came from or went, we could show that more Bitcoins were going out to investors than came into Bitcoin Savings and Trust from any source other than investors, thereby proving the Ponzi. Third, we did not take the position that Bitcoin itself was a security. And finally, the case was significant for the disgorgement theory advanced by the SEC, namely, that the disgorgement ordered by the court should reflect the dramatic increase in the value of Bitcoins from the time the investors handed their Bitcoins over to the defendant, to the date of the judgment. The Bitcoins the defendant raised from investors were worth about $4.5 million at the time, but the final judgment against the defendant was for more than $40 million in disgorgement and penalties.

 

You were a founding member of the SEC’s Distributed Ledger Technology Working Group. What is the purpose of this group, and how does it impact both investors and STOs?

With the wider adoption of blockchain technology, the SEC’s Distributed Ledger Technology Working Group was simply an effort to coordinate both with other regulators and within the SEC. It was important to ensure the various divisions and offices of the SEC were not working at cross-purposes with one another. The SEC has since built on the work of the group with the creation of its Strategic Hub for Innovation and Financial Technology (FinHub), which engages in outreach to both investors and issuers.

 

You were responsible for investigations into multiple initial coin offerings (ICOs) for possible violations of securities laws. What’s the most blatant violation of securities law that you have witnessed?

Without hesitation, it’s the ICO craze of 2017 and 2018. In February 2018, SEC Chairman Jay Clayton, testifying before the Senate Committee on Banking, Housing, and Urban Affairs, famously said, “I believe every ICO I’ve seen is a security.” A few months later, in a televised interview, Commissioner Robert Jackson said, “if you want to know what our markets would look like with no securities regulation, the answer is the ICO market.” On the whole, I agree with those sentiments. Most ICOs, during that period, were traditional capital raises, with the basic difference being that, in an ICO, one could purchase shares in a company’s primary asset rather than shares in the company itself. It’s not to say that most ICOs were frauds or not well-intentioned. However, there wasn’t much ambiguity about the fact that they were unregistered securities offerings.

 

It’s common practice for ICOs to block investments from USA investors. Nonetheless, those same blocked investors can then later purchase these tokens on cryptocurrency exchanges. Does this strategy of initially blocking USA investors keep ICOs safe from SEC enforcement action?

The short answer is no. If an issuer accesses the U.S. capital markets, if it offers or sells securities in the U.S., directly or indirectly, the SEC will have jurisdiction. The SEC has made it clear that it is not sufficient to take cosmetic or half measures to prevent one’s security token offering (STO) from reaching U.S. investors.

 

Do you believe that the SEC will become more proactive in pursuing legal action and shutting down unregulated cryptocurrency exchanges?

Yes. Bringing enforcement actions against exchanges that decline to come into compliance for whatever reasons, despite the SEC’s messaging in the space, makes sense for the Enforcement Division. Not only to give teeth to prior statements by the Chairman, other commissioners, and certain members of senior management, but also because an enforcement action against an exchange, on the whole, should have a greater programmatic impact from a regulatory perspective than an action against a single issuer.

 

Do you have any comments regarding the SEC’s most recent actions against Telegram Group Inc and its unregistered securities offering?

In my view, there are a couple of important takeaways. First, related to your earlier question, the Telegram case demonstrates the SEC will pursue overseas issuers of digital assets or cryptocurrencies who offer or sell those assets into the U.S., or otherwise access the U.S. capital markets. Additionally, I think this could be an interesting test case for the utility token argument. Telegram has taken the position that, while the token purchase agreement for the Gram was a security, the token itself is not. In its complaint against Telegram, the SEC alleged there was no daylight between the Gram offering and the Gram token. Rather, the SEC alleged, the offering was a traditional capital raise because, among other things: the company used funds raised for operations and to build out its ecosystem; there were no goods or services for which one might use the Gram; and Gram purchasers had and – absent the emergency action – would continue to have a reasonable expectation of sharing in the company’s profits should it succeed in building out the functionalities it promised. It will be interesting to see how the facts and arguments develop on this issue as the litigation progresses.

 

Could you share with us details regarding your current role with Seward & Kissel LLP?

I joined Seward & Kissel in February 2019 and work closely with several of the firm’s practice areas in both New York and D.C., including the Government Enforcement and Internal Investigations, Investment Management, and Blockchain and Cryptocurrency Groups. I spent the majority of my career at the SEC in the Enforcement Division’s Asset Management Unit, and Seward & Kissel has one of the largest and well-known Investment Management practices in the U.S., working with managers across all asset classes, including digital assets. As a result, much of my current practice centers on counseling our investment management clients on SEC and other regulatory examinations, investigations, and enforcement matters; internal investigations; and digital asset offerings. I have also been asked to lead the Enforcement Committee for the Virtual Commodity Association in connection with its efforts to establish a self-regulatory organization (SRO) for cryptocurrency marketplaces.

 

What are some recommendations that you have for companies that are considering launching an STO?

In my view, the best course of action is to engage counsel with deep knowledge of both securities law and cryptocurrency. While some lawyers have gotten up to speed on blockchain technology, many may be doing their clients a disservice because they are not as well versed in the fundamentals of the securities laws.

 

At what stage should companies who are considering launching an STO contact you or other legal counsel?

The earlier the better – ideally before any contact with a regulator, and certainly before the offer or sale of any token.

 

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

The SEC’s enforcement actions against ICO issuers clearly have had an impact on the market. However, Telegram, Block.one, and Kik were just three of the larger ICOs from the 2017-2018 period. We should see more such cases in the coming months or year. The SEC has brought enforcement actions against celebrity promoters of digital assets, but I would expect a continued focus by the SEC on promoters and sellers. It’s worth noting that one stated goal of SEC enforcement actions is to change the behavior of market participants, so I anticipate the SEC will continue to police digital asset exchanges and trading platforms. It’s the natural next step for the SEC after the issuers and promoters and, as I mentioned, an opportunity to have a wider impact on the market. In a similar vein, while a substantial number of the SEC’s enforcement actions in the space have involved alleged Ponzi schemes or offering frauds, with a continued focus on exchanges and trading platforms, I would not be surprised if, not before long, the SEC unearths more complex frauds involving market manipulation schemes or other market abuses. However, even well-intentioned market participants can be swept up in this and can find themselves the subject of enforcement attention as the SEC continues its efforts to increase industry compliance with securities laws and regulations. Seward & Kissel has been advising clients in financial services, corporate financing, and capital markets for more than 125 years. Our lawyers have extensive experience with STOs and digital asset offerings.

For more information or to consult with legal matters please visit Seward & Kissel LLP, or visit their Twitter or LinkedIn page.

 

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Interviews

Paul Claudius, CEO of BlockState – Interview Series

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Paul Claudius, CEO of BlockState - Interview Series

Paul Claudius is Co-Founder & CEO of BlockState.

BlockState is a Swiss security token platform for non-bankable assets such as SME equity and debt or real estate.

How did you initially get involved in digital securities?

I stumbled upon Blockchain and Bitcoin in early 2013 by pure coincidence. I was introduced to the Satoshi WP by a friend who has a computer science background. It took me some time to realize the impact the technology would actually have on capital markets and finance. As I started my career in Investment Banking and Private Equity I was very aware of the legacy process and involved costs charged by highly payed intermediaries. The opportunity to use DLT as a catalyst to transform an entire market, not only digitize new assets but in particular the opportunity to make them more accessible to a broader investors base was the reason I decided to build BlockState with my co-founders.

 

Outside of real estate and debt what are some examples of non-bankable assets?

Blue chips and other traditional assets are at an all-time high in terms of valuation. At the same time bonds deliver the lowest yields we have seen in the past years. This drives demand for alternative assets providing higher yields, not only for institutional but also retail investors. Therefore I believe we will see a lot more SME debt raised in the form of tokens by issuers but also other yield generating assets such as project financing or reverse leases that have been only investible for more sophisticated investors in the past made accessible through tokenised securities.

 

In July BlockState released a report on the state of the current Global STO market. Were there any findings in the report that surprised you?

We wanted to validate our assumptions we internally had on the market. Our findings confirmed the early stage we are currently in. At the same time regulators have been addressing the need and shown their willingness to clarify regulation building the necessary trust that is required for the market to accelerate what I believe we will see in early 2020. Also, necessary infrastructure providing liquidity in secondary markets through regulated exchanges will have an impact on the market adoption in 2020.

 

Could you share with us some details regarding the upcoming Streetlife STO?

Depending on the approval of the regulator we will see them go live in Q4 2019 or Q1 2020. For now, this is all that we can share as a large part of the issuance details are reserved for a prospectus that needs to be approved by the regulator. Apart from the Streetlife STO we are working on a number of other Swiss and German regulated issuances. We will share the update with the community as soon as we receive all the necessary approvals.

 

We previously reported on the BlockState’s intent to migrate a number of ERC-20 tokens from the Ethereum blockchain to a private distributed ledger developed by R3 – Corda. What was the rationale behind this, and has this been implemented?

A core value proposition of DLT based financial markets is to create accessibility to financial instruments. That’s why we believe it is important to create interoperability between different infrastructures that enable different investor types to access such assets. We see that regulated institutions currently have a tendency to prefer non-public infrastructure for a range of reasons that make a lot of sense. R3 provides an excellent infrastructure to these clients. We therefore want to enable an interoperability between our ERC based tokenised securities in order to make them accessible to market participants relying on R3 infrastructure.

 

Blockstate is able to launch an STO in as little as 10 weeks, could you share what BlockState does to make this a reality?

The time to go live is mostly defined by the time the regulator needs to approve issuances that address retail investors through a public offering. Apart from that issuers usually require some time to prepare their fundraising activity.

When it comes to the set-up time for the tech and infrastructure, we can execute an issuance within a week. With the new prospectus directive enabling issuances depending on the member state for up to Euro 8 million without a formal prospectus we will see the time of 10 weeks decrease even further.

 

For companies that are interested in your STO services, what are the minimum listing requirements? Also, how do you select which companies/products to tokenize?

We work together with companies who either have a very strong community or large client base which they convert into investors or more mature companies who have healthy financials and therefore are also attractive to more conservative and slightly more institutional investors. As of now there are no defined hurdles a company needs to provide. We look at each case individually.

 

For investors who are interested in funding an STO on your platform, what are the details that they should be aware of. Do you accept USA clients?

Investor acceptance depends solely on the offering, not on our platform. Usually we support with public offerings which enable the participation of both retail and institutional investors, making sure that our infrastructure caters to the issuer’s specific needs through self- custody and regulated custody partners.

US clients are a special case as compliance requirements create additional processes and reporting related tasks. Therefore, our clients often don’t accept US investors in their offerings.

 

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

As we are in an early stage developing this market, I want to highlight some of the great industry bodies we have been working with who are helping to building the framework for a professional digital asset space. I can very much getting in touch with  INATBAITSA and MAMA to anyone working in this space.

To learn more visit BlockState, our BlockState Business listing or follow Paul Claudius on Twitter.

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