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.