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.
Dan Doney, CEO of Securrency – Interview Series
You have a very distinguished career having served in various roles with NSA, the Department of Homeland Security (DHS), the Defense Intelligence Agency (DIA), and the Federal Bureau of Investigation (FBI). How did you transition from working with some of the most respected intelligence agencies in the world, to launching Securrency?
I have been fortunate enough to work on some of the most advanced technology innovations with the best minds during my time at various intelligence agencies from the DIA to the FBI, providing the perfect springboard to launch Securrency. This gave me an insight into how fragmented the information transfer is between agencies and the inherent inefficiencies of centralized systems. My experience, combined with my passion for software development, and cybersecurity to artificial intelligence and dynamic asset pricing got me in front of some interesting individuals across real estate and finance who wanted to find technological solutions for widespread industry issues such as asset illiquidity. In search of a solution to these issues, I discovered blockchain technology and tokenization and recognized the huge impact it could have on financial services. Through the development of Securrency, it is our vision to transform the digital asset space using tokenization to deliver true market efficiencies.
You initially designed Securrency’s core identity server, credentialing (rules) engine, and interoperating rails in a hybrid architecture (linking on and off-chain functions). What made you choose this structure versus depending on a specific distributed ledger (blockchain) solution?
As Securrency’s market infrastructure technology is first and foremost designed to provide convenience and support to all market makers, it needed to encompass both legacy and blockchain functions to ensure the widespread participation and adoption of digital securities. Frankly, most STOs are bridges to nowhere. Without a built-out, integrated, and interoperable marketplace in which digital assets can move about, there isn’t enough back-end liquidity to make the exercise worthwhile for most issuers. We hope that this infrastructure will be transformational in the long run, but the near-term objectives are more incremental in nature. It is important to keep this in mind so we can move past the hype and toward the mature, professional adoption of these technologies.
WisdomTree Investments together with Abu Dhabi Investment Office (ADIO) and other investors invested in Securrency, as they aim to integrate blockchain technology into the exchange-traded fund (ETF) ecosystem. Could you share with us how Securrency’s technology will be integrated into ETF exchanges?
WisdomTree is a high-profile, highly-credible asset manager, and, as a strategic investor in Securrency, provides an incredible opportunity to deploy its technology into the ETF ecosystem. The bottom line is the market needs recognizable products that already enjoy substantial liquidity, so ETFs are a logical and exciting use case for our technology. Most of the ETF-related digital securities activity has been focused on cryptocurrency ETFs, and WisdomTree has been active in this space in Europe. ETFs will not only attract the large, household-name exchanges, transfer agents, and investment services providers, but will also make it easier and safer for a much broader base of investors to participate in these digital investment products.
On January 7th, Securrency announced the successful completion of a Series A raise for $17.65 Million. What are the plans for the raised funds?
Securrency plans to use its Series A funding to advance its software and platform development, integrate with strategic partners and other customers and, build out its operational structure. Thanks to the ongoing support of our strategic partners; the Abu Dhabi Investment Office, Monex Group, Inc,. RRE Ventures, Strawberry Creek Ventures, and Panthera Capital Investments, we can achieve our strategic vision and mission.
Could you tell us more about the Securrency RegManager™?
The Securrency RegManager encompasses both our Rules Engine interface and the patent-pending Compliance Aware Token framework. Our Rules Engine is a plain-language abstraction layer that allows companies and their lawyers to not only rapidly create policies but to be able to readily audit those policies and update them instantaneously. This level of convenience is essential for widespread adoption. The RegManager interface is fundamentally about providing multi-jurisdictional compliance tools and unprecedented convenience to financial services providers and market participants.
I was also interested in learning more about the Securrency InfinXchange™ and the benefits it offers?
InfinXchange is Securrency’s biggest technology IP. It’s an API library and finance ontology which maps various financial services to a set of basic functions, e.g. capital formation, payments, exchange routing, transfers, corporate actions, asset pricing, and compliant value transfer across DLT and legacy networks. It’s a plug-in framework made to be integrated with third-party service providers.
2019 was a bit slower of a year than we would have liked to see for the emergence of security tokens, do you believe that 2020 will be different?
We expect to see an acceleration in the tokenization of publicly traded assets in 2020. This, along with financial service providers partnering with emerging security token firms to tokenize institutional-grade assets will be a major trend in 2020. Tokenization platforms built by big tech firms like Microsoft and Facebook are also likely to emerge in 2020, coupled with digital asset issuances from highly trusted investment firms and asset managers.
What are some of the projects that Securrency is currently working on?
Our primary objective is to facilitate high-quality, yield-bearing token issuances as we unlock the accessibility which fuels mass global adoption of distributed ledger technology in financial services – the dream of blockchain enthusiasts for over a decade. This requires working closely with regulators, market participants, and intuitive user interfaces.
Darius Liu, Chief Operating Officer for iSTOX – Interview Series
What is iSTOX?
iSTOX is the first regulated capital markets platform in any major financial centre to support the one- stop issuance, custody and trading of digitized securities. Drawing on the power of advanced smart contract and distributed ledger technology to streamline the issuance and trading process, iSTOX seeks to redefine private capital markets by allowing investors and issuers to connect and transact directly. Compared with traditional trading venues, iSTOX is a more flexible, affordable and inclusive alternative, and offers investment options that were previously inaccessible.
iSTOX’s key shareholders include the Singapore Exchange (SGX), Asia’s leading international multi- asset exchange; Heliconia, a subsidiary of Temasek Holdings focused on investing in fast growing companies; and Phatra, a leading Thai investment and private bank and a member of Kiatnakin Phatra Financial Group. Other key shareholders include Japan-based Tokai Tokyo Financial Holdings (Tokai), a well-established Japanese financial services firm, and more recently Hanwha Asset Management, a leading asset management company in Korea.
Before iSTOX, you worked for GIC, which manages Singapore’s foreign reserves. How did this experience inspire you to launch iSTOX?
Actually, before I worked at GIC, I worked as a policymaker in the Singapore government, including a stint at the Ministry of Finance. Thus, my experience spans both policy making and asset management / investment within a commercial context. I can therefore relate to considerations from both sides of the fence (government and industry):
- On one end, the government wishes to promote industry transformation and innovation, while maintaining stability and protections for users.
- On the other hand, industry players see gaps in the market, and inefficiencies in current process In the case of capital markets, this takes the form of frictions arising from legacy processes involving multiple intermediaries. While technology exists to bridge the gap, the capital market space is a regulated arena – industry players often see regulation as an impediment to innovation.
Having experience in both spaces made me see that regulation is the friend – and not the enemy – of innovation. The innovation I’m talking about is innovation by serious, long-term players looking to add value to the economy as a whole. There is a gap in the market and working with regulation can add value. That led me to believe that iSTOX was an idea that was not only sound conceptually, but feasible from an execution standpoint.
The concept of digitized securities, as well as the whole capital market end-to-end infrastructure layer built on a blockchain is a new concept, both in terms of technology and operating model. The sandbox has been useful for iSTOX to start operating in a “live” environment with real issuers and investors, while simultaneously co-creating the regulatory environment together with MAS. This gave assurance to us, MAS and market participants that the iSTOX platform is stable and secure.
We are confident of transitioning out of the sandbox to serve a larger number of users. We expect to graduate from the MAS Fintech Regulatory Sandbox into full operational status soon this year.
Singapore has many existing gaps in the private capital markets that results in accredited investors being underserved by the current financial market. Could you share with us what these gaps are and how iSTOX solves this problem?
Investors today face a challenge. Low rates of return within the public markets continue to drive strong global demand for high-growth pre-IPO start-ups, exclusive hedge funds and other private market opportunities. In 2018, for example USD $778 billion worth of new capital flowed into private markets. In the case of private equity alone, net asset value grew more than sevenfold since 2002, doubling market cap growth of equities in the public market.*
Despite all this, the private capital market system itself has remained highly fragmented, inefficient, complicated and costly. For investors, this has resulted in limited access to a closed group of well- connected and privileged investors. And even for those that do have access to private capital markets, the antiquated and fragmented nature of the current system means they must go through multiple intermediaries to gain the investments they seek.
Fortunately, there is hope on the horizon. The rise of distributed ledger technology (DLT) and smart contracts, combined innovative business models and forward-looking regulation now make it possible to bring new kinds of capital markets platforms to investors.
In the case of iSTOX, this has resulted in the first regulated capital markets platform in any major financial centre to support the one-stop issuance, custody and trading of digitized securities. iSTOX seeks to redefine private capital markets by allowing investors and issuers to connect and transact directly under a safe, MAS-regulated environment. By coupling this with an innovative and accessible business model, iSTOX opens private markets opportunity to a broad range of accredited investors.
iSTOX enables investors to access previously inaccessible investments which includes exclusive funds. What are some of these funds and why should investors take note?
Most of us are familiar with the mutual fund offerings from banks. Many are products with fairly high upfront and ongoing fees. There are some funds which have a track record of positive returns across different market conditions. For instance, the top global macro and private equity funds.
Such funds are generally only open to large institutional investors like the biggest asset managers or sovereign wealth funds. They do not market even to high net worth individuals and have relatively small fund sizes (compared to many mutual funds) which makes their offering even more scarce.
Also, they tend to have long lock-up periods like 3 years or more. If investors want the returns offered by these funds, or the return streams to add to their portfolios for return enhancement or diversification, there is currently no way. But with iSTOX, it will be possible.
Alternative investment products will also be available to investors. What are some of these products?
We have also shortlisted some very exciting opportunities for the new year. These include a discretionary fund that builds returns through mezzanine deals and private debt financing, as well as a range of debt, fund and equity-linked issuances across a range of sectors (including real estate, entertainment, and lifestyle).
Where are user funds held?
Funds which you transfer into your iSTOX account reside in a customer segregated account held with DBS, Southeast Asia’s biggest bank. Your funds are interest-bearing, and you will have access to your funds through your online iSTOX Wallet. Digitized securities are minted if you make an investment and after funds have been debited from your iSTOX Wallet. These securities are custodized with
ICHX Tech Pte. Ltd., the operator of the iSTOX platform.
Investors who open an account with iSTOX before February 1st, 2020, receive certain exclusive benefits. Could you share with us what those perks are?
Select investors enjoy a certain number of guaranteed allocations in primary market issuances and waiver of fees associated with primary market subscription and secondary market purchases for a limited period of time.
Is there anything else that you would like to share about iSTOX?
I would like to share a bit about the iSTOX philosophy as well. Where we are now, what we do, it comes down to the belief to provide investors with greater accessibility, freedom and flexibility, with a desire to bring about improvements to the world.
We believe that all investors can and should have the capacity to build and manage their portfolios with the same freedom and flexibility now available to the very wealthy. In addition to generating good returns, investors should be able to freely engage with industries, technologies and causes that fire their passions, provide them exposure to potentially transformative developments in technology and society, and allow them to improve the world around them.
We believe that access to opportunities like high-growth pre-IPO start-ups, exclusive hedge funds and Asian unicorns can and should be open to far, far more investors. While technological limitations and other barriers previously locked out all but the very wealthy and well-connected, the new advances that are starting to make themselves felt in financial markets will fundamentally change this equation. We believe the financial industry should embrace these changes.
We believe that DLT and smart contract technology will open new worlds of possibilities when it comes to how investing works. These possibilities will include but will certainly not be limited to assets that can be traded and owned in fractions for greater liquidity and access, including real assets like buildings, aircraft, wind farms and more. Investors deserve access to these innovations as well as others.
Derek Schloss, Director of Strategy for Security Token Academy – Interview Series
How did you initially get involved with the Security Token Academy?
I have a background in entrepreneurship, law, and a fairly strong interest in disruptive technology. A few years ago I became interested in the intersection of blockchain, digitization, open networks, and securities law — and started researching and writing about these topics. At the time, I was running my previous company and teaching entrepreneurship at the University of Oregon.
Stephen McKeon (Partner, Collaborative Fund) is a good friend of mine, as well as a former advisor on one of my previous startups. Stephen had put together some amazing written work and thinking around security tokens and was operating as the Chief Strategy Advisor of Security Token Academy (STA). After spending time with the STA team and learning more about its educational work, I joined STA as Director of Strategy in January of 2019.
Could you share with us the overarching goal of the Security Token Academy?
Security Token Academy aims to be the leading educational platform for the security token industry, and the team is dedicated to covering and facilitating the evolution of digitized securities as the industry progresses over the coming years. Powered by a strong interest in the future of finance, STA hosts educational events, video and podcast interviews, an industry-leading weekly newsletter, and insightful case studies and narratives with the teams and service providers building out the security token industry.
What are some of the projects in the digital securities sector which you find most exciting?
The area I find most interesting is definitely the infrastructure layer — the projects building out the tooling and foundation for the industry across both retail and institutional markets. I’ve written about this before, but unlike other areas of the blockchain industry, a fully optimized (and compliant) end-to-end ecosystem will be required for us to see mainstream security token adoption. This includes areas like legal, broker-dealing, issuance, trading, custody, and lifecycle compliance.
With security tokens, we’re creating radically new financial architecture — one where every asset imaginable can be digitally wrapped, tracked, and traded in concert with trustless ledgers. A number of projects have invested significant resources to build and optimize different parts of this infrastructure layer, and from my perspective, watching these puzzle pieces start to fit together has been fascinating to follow.
Regulated security tokens are using SEC crowdfunding rules to raise capital. Could you give us a breakdown of each regulation? For example, Regulation A+, Regulation D, Regulation CF?
Anyone reading this should hire an attorney for more specificity and nuance, but I can run through a few of the highlights. As security tokens are simply digital representations of securities, they are also subject to the same rules as non-tokenized securities offerings. As a result, securities offerings made to U.S. residents must either be registered with the SEC, or exempt under the Securities Act of 1933.
There’s a number of benefits to conducting a registered offering — issuers can generally solicit, sell to diverse investor pools across accredited and unaccredited investors, the securities are freely transferable for trading immediately upon sale, and issuing companies are not subject to regulatory limits on the amount raised. With that said, registered offerings and ongoing reporting requirements can be quite costly and time intensive.
Alternatively, an issuer of securities may seek an exemption from registration. In 2012, the JOBS Act was signed into law, creating an updated regulatory framework for retail participation in exempt securities offerings under Reg CF, Reg D, and Reg A+. While there are a number of unique rules that exist, here are some general features of each category:
Regulation Crowdfunding (Reg CF) enables certain companies to offer and sell securities (up to $1.07M annually) on an internet based platform through an intermediary that is a registered broker-dealer or registered funding portal, and allows both accredited and non-accredited investors to participate.
Reg D Rule 506(b) does not permit the use of general solicitation, but allows issuers to sell securities with no annual fundraising limit, to an unlimited number of accredited investors, as well as to a small number of sophisticated non-accredited investors.
Reg D Rule 506(c) permits the use of general solicitation to sell securities with no annual fundraising limit, where all purchasers are accredited investors, and the issuer takes reasonable steps to verify that each purchaser is an accredited investor.
Regulation A+ permits general solicitation to sell securities up to $20M (Tier 1) or $50M (Tier 2) and allows both accredited and non-accredited investors to participate.
Which of these regulations do you personally believe caters best to STOs?
This is certainly a case by case decision — for issuers, it’s important to understand the long-term goals of the fundraise, then work backwards from there to find a framework that is narrowly tailored to those goals. In addition, there are also a number of legal questions and considerations that issuers face when attempting to choose the best legal framework for their securities offering. I always recommend sitting down and reviewing the available options with legal counsel who have experience in both securities laws and blockchain-based fundraising.
Do you have any examples of projects using the above exemptions?
A number of the earliest security token projects in the U.S. have leveraged the Reg D Rule 506(c) structure. With that said, there have been a number of offerings who have used different frameworks that were better tailored to their offering. Over time, I expect to see more Reg CF, Reg A+, and eventually, registered offerings.
As it relates to “network” tokens — one major trend I’m continuing to see is more and more pre-launched networks looking to U.S. securities laws to compliantly kickstart their new networks. Blockstack sold $23M worth of “investment contract” tokens under Reg A+ and Reg S. Althea is bootstrapping its decentralized internet network by combining the concept of Reg CF with the concept of “token airdrops” on the Republic equity crowdfunding platform. CoinList is helping projects like Kadena and NuCypher launch regulated Reg D offerings on top of the CoinList platform. I expect for more pre-launched networks to follow this theme. Over time, the aim for many of these networks will be to reach a state where the network tokens originally sold as investment contracts can transition from security to non-security as the investment contract factors erode, and the underlying network becomes more decentralized.
Where do you see the marketplace in 5 years?
Digitation and trustless ledgers offer an overwhelming number of benefits compared with our legacy systems — I feel strongly that as the tools and regulations mature, the industry will thrive.
In the meantime, we need to build the industry’s foundation for a variety of use cases and end users — in other words, the right tools for the right segments. We need attorneys committed to understanding asset digitization, and to view tokenization as a strong path for clients. We need legislators and regulators providing guidance narrowly tailored to this disruptive technology. If legislators and regulators can work together across jurisdictions, even better. Finally, we need to continue improving the education in this space — that’s something we’re focused on at Security Token Academy.
Eventually, issuers will prefer tokenization and investors will demand it.