Dan is the former Chief Innovation Officer at the Defense Intelligence Agency and 2014 Fierce 15 awardee as a top government change agent. He has 20+ years of experience in emerging technology development and finance across government and private sectors. Dan is a software developer and innovator in artificial intelligence, cybersecurity, process automation, dynamic asset pricing and enterprise architecture. Dan holds a B.S. in Systems Engineering & Economics from the U.S. Naval Academy and a M.S. in Nuclear Engineering from MIT.
Hey, everybody. Thanks for joining us here at the Security Token Academy. I am, of course, Adam Chapnick. I am actually quite excited about this one today. Today, I am joined by Dan Doney, the CEO and co-founder of a company you may not have heard about yet, but I have a feeling you are going to be hearing about, Securrency. Thanks so much for joining us. Thanks for being here.
My pleasure. Really looking forward to this.
Yeah. Me, too. Okay, so okay, tell everybody ... Just let's start way up at the top. What is Securrency?
We are a technology company. We layer compliance and security over top of blockchain networks to allow folks to tokenize securities. We've been working at this for several years to make it straightforward for issuers. Someone who wants to bring a new security to market, engage in a primary market offering or secondary market trades, we give them a one-stop shop where they come to our platform. It has the compliance components built in so that they can just quickly issue their tokens, and they don't have to worry about navigating all sorts of rules that may be confusing and difficult or starting from the beginning. We give them the tools that they need.
Okay, so that is the whole enchilada. That is what a lot of people have been saying. "Wow. We need something like that, and someday, someone's going to do that, and that'll be great someday." I'm excited to dive into that, but before we kind of get into the weeds on it, you guys, your team, has a super interesting background as a group. Can you tell us a little bit about what you, where you come from?
We have a number of folks who have prior military experience. This has been a real advantage for us, because first, it requires a certain discipline and ethics to do things the right way, and compliance, certainly, in security token offerings requires that as a core set of values. It also requires operational discipline. What will surprise most folks is, we've been at this three years rather quietly building out what we're confident is the most substantial compliance framework in the industry, and so it took a lot of hard work, a lot of discipline, to get here. As far, there are a few of us, ex-Navy pilots, a number of Marines. I've got a background in the intelligence community. These were all tool sets that are certainly very important in what we've rolled out. I had happened to do advanced research in artificial intelligence at NSA for the bulk of my career, and most recently was the Chief Innovation Officer at the Defense Intelligence Agency. It was my job, really, to roll out cutting-edge solutions, really scan the technology horizon, and bring them into mission settings.
We certainly had an interesting blockchain at that point. That was really where I was introduced to it in 2012. We saw a marvelous tool that had huge potential, and so I happened to have degrees in economics and also in control systems engineering, so I saw a great opportunity in blockchain to tie all these things together.
Yeah. Amazing. Amazing. People might, that might not have resonated with people, but you've been identifying this as a potential big idea for years when most of us, even in the show, included, have been, maybe half that, we've even heard of any of this. You really have had almost an eternity to focus on working on all this, so in the sense of-
... the industry-
It's easy to say now, "Wow, security tokens. That's a big deal," but really, the early days of this, before folks really realized the potential of it, what the opportunity that we saw was that there was, first, not real stable value in the system, and I wouldn't invest my kids' college education in the currencies that were available in 2015. I wish I had, at this point, but there was really not investment-grade instruments in this space, so we saw a need to really fill that. The simple, the lights go off kind of lights go on mindset was, "Hey, a token can equal a share." Once you make that leap, you see an opportunity to bring all sorts of new things to market.
We quickly saw this was, and this should be striking in terms of the impact, we focused first on securitization, and we knew that securitization sort of had a bad name. The 2008 problems that nearly caused global financial collapse centered on a lack of transparency. People didn't know what was in the mortgage-backed securities. There was no easy way to see what was going on. Well, lack of transparency nearly causing global financial collapse and a tool, blockchain, built on a transparent, immutable ledger, it became clear to me, as I was driving the lawnmower in 2015, "This is a big thing. We might address the biggest problem in all of finance by tying these two things together," and we set out building a framework to do that.
Yeah, so one of the first elements that you have to tackle in doing such a framework is your global identity management. Let's start ... I mean, we can pick a lot of places to start, but that's one. How is that going to work in your framework?
Yeah, so the bottom line, the very first thing that we came to recognize, we began tokenizing securities in 2015, so we issued our first tokens in that timeframe in a very closed network. We realized compliance was the key. In fact, the lawyers told me, "If you try and sell these things publicly, you're going to go to jail," so we knew we had to take the compliance components and build it in the framework. The very first centerpiece of all compliance decisions starts with identity. Now, both the strength of the blockchain network is its global reach, but the real challenge, then, to compliance, at least identity compliance, is, you need a global identity framework that goes along with that, so that's what we set out to do.
Now, I had done some work earlier in my career around identity proofing and citizen-facing government systems that would allow you to proof folks' identities to access government-held privacy data. That piece of being able to prove when a user comes to the keyboard that they are who they say they are is the first part of KYC. I had friends who had worked this problem and had begun selling those kinds of solutions to the financial sector, to healthcare sector, and that are being used by Fortune 50 companies. We built those technologies into the core of our framework. They have global reach, so we're able to do high-level KYC, and many folks don't realize this, but for securities, you need a very high standard in terms of how well you know your customer. It's not sufficient to simply capture someone's passport and say, "Okay. I've got the passport that matches the face."
That's the beginning of understanding a person's identity, but you need to know their tax ID, among other things, in order to properly operate securities, so we have a global framework to do this. It centers around a fabric that allows for the exchange of data providers to come into the exchange and offer up certified attribute data about individuals.
That data allows you, once you proof the user's identity, to proof other things about their status, for example, the address that they live at. That allows you to determine the jurisdiction under which, the securities laws that they fall under, which allow us to make compliance decisions at scale as we govern our tokens and their behavior.
Amazing, and just, again, just to pick out of that something that maybe people missed, is that your address could be New York, but it could be Paris. It could be Sydney ...
... and that you are going to have that jurisdiction's governance requirements baked in for wherever they-
That's right, Adam-
... and look, this is a key point is, there are providers who offer identity services within this space. This is why a federation, an exchange of identity data is such an important middle layer on this, because, for example, Equifax has a good coverage here in the United States, but that doesn't help you in Sydney, so there are similar providers in each of these jurisdictions that we weaved together. That gets you maximum coverage. This is an open network, so additional providers can come in to get you the full coverage that you need to make securities decisions and to give global accessibility to these sophisticated tools.
Yeah. I mean, for someone who's been in this and talking about it, that's a big deal, and a lot of times, when we're talking through all of these things that are new, people can just say, "Oh, yeah. I get it, yeah," but that's a big deal, that you've been able to knit that together, so-
It is a big deal. It's-
... really the barrier to entry, because if you can't cross that bridge, you can't get to the rest of the important compliance decisions.
Right, so let's talk about the rest. When we say you're going to be end to end, I mean, that's, there's a lot of space between those two ends, so can you tell us a little bit more about what happens from one end to the other that includes what we just talked about, but-
... what's missing.
... and a lot of folks have explored, certainly many folks now know of primary market offerings. ICOs are an example of this, and now STOs, as you take and do capital formation, that's where you bring an offering to market. We have a simple workflow. Issuers sign up, fill out some data on a web form, and they are entered into the system. We do background checks, etc., but they're able to then take their offering to market. We call this single-click issuance. We do the work. We have tools that actually onboard the investors, and we work with partner broker dealers who register those folks to participate in the primary market offering. That's pretty well understood by many folks in the industry.
Secondary market trading follows, so now I've got my token, and at some point, I'd like to get liquidity. I'd like to trade it for dollars or Bitcoin. These are secondary markets. There are ATSs as well as exchanges that need certain tools to be able to trade these securities. Now, the key challenges there are private placements, that is, not public offerings, actually have a whole lot of flavors to them and varying distribution rules. Certainly, folks know of Reg A, Reg S, Reg D, but even within those frameworks, there's other rules, and real estate offerings are a little different, so mapping those rules to govern the behavior of the system is where we have our second patent is. We have a tool called a rules engine that allows lawyers to easily map in global securities laws that governs the behavior of the system, of the tokens, on-ledger and off-ledger. This allows you to engage in securities transactions with widely varying token types in a common venue.
Got it, so to pause there for a second, again, for like to synthesize, so this is a big deal, especially because when a lot of times, issuers, maybe they're not ... They may be an attorney, they may have an attorney, but they may not be super versed in all, like you said, the flavors of ... They just say, "Okay, well, we're going to keep it accredited, and we'll be safe." Well, maybe, but if you're talking about like you can slice Reg D in about five different ways, and you guys are going to give an opportunity for the issuer to rest assured, I guess, that once that's all sort of baked, their token will take care of a lot of the concerns that someone might have about who's who in your Reg D compliance.
Yeah. That's what's so amazing about the power of the blockchain is, you can have financial instruments that govern themselves. As long as they have the right rules baked into their behavior, you can, the token knows where it's allowed to go within this framework. There's simply no analog to this in the old financial system, so it becomes easy, then, for issuers, what we've created is a workflow that basically walks the issuer through. What we found is, even if you talk to lawyer A or lawyer B, there's differences of opinion about what can and can't be done. All we are interested in doing is exposing those rules in a very common framework that regulators can look in, see, and verify that the rules follow their requirements. These are shared, we call these recipes, amongst folks, so you can look at earlier precedent. You can follow what previous issuers have done. You can innovate, or you can add additional rules according to your new set, and then share that as a recipe so that you don't have to reinvent the wheel every time or happen to find the right lawyer who's, if they're good, probably pretty expensive-
... in solving-
... this problem.
... this space.
Now, there is another point, Adam. We talked about primary and secondary market. The third piece that folks haven't talked about, and this is the critical piece that issuers kind of get themselves in trouble if they haven't considered this is, tokens have a lifecycle, and so there are important reporting requirements. For example, under certain rule sets, you can't have more than 2,000 holders-
... of a Reg D offering over time. You need to continue to govern that token even after the first year, lest it become a public offering, and engage in other reporting requirements. We have that token lifecycle management component built into our platform. This includes the ability to do dividend distributions in fiat or in crypto, have proxy voter or shareholder voter models associated with this, investor communication to all token holders, per the requirements, built-in capital gains reporting, etc., etc. All of those tools are built into our platform as well, and this is the piece that most issuers simply fall down. They let their tokens get out of the barn, and once they're out of the barn in the hands of folks who are unknown or unqualified, they simply cannot meet the regulatory requirements there. We help, we prevent that from happening.
Yeah, you make ... You follow the entire life of the token, and you keep ... Correct me.. you keep compliantly identifying the token holder per the regulations, no matter how long or many times it's changed hands.
Yeah, that's incredible.
Yeah, so that's obviously an important tool, but again, it's important, let's just take capital gains as an example. This token, I've had it. I've had it for two years, and I pass it off to Grandma. Again, if Grandma's not known by the system, and she turns around, she gets particularly lucky, the token doubles in price, and she, off she goes and she sells it. She owes capital gains on that piece, so both issuer and investor must report those capital gains. We make the tools very easy to do that.
Incredible. Okay, so furthering on our conversation about the whole lifecycle, you guys are going to behave a little bit like an exchange yourself. Right? You'll be, will you count as an ATS? Will you be an exchange? How will that be, and does it matter what we call you?
It does matter, actually. It's a very important term, and so I should be clear. We do order routing. We are not an exchange, so we-
... partner with key exchanges and ATSs. We're partnered with SharesPost as an ATS and are working some deals with some major exchanges as we speak. That piece, we route orders to venues which can match those orders. We have the ability to list, so when we take a token and we issue it, we automatically list it, and trading can begin as soon as trading is eligible on this, so it feels like we're an exchange.
When you ... Sorry to interrupt. When you say you have the ability to list, can you describe what that means and where, how that manifests?
Yes. What it ... Right now, when someone does a token offering, whether it's a utility token offering or a security token offering, they have to shop around and find an exchange that will take their token. We list, so meaning we don't, we have the means to list on exchanges, places where the orders are matched, where we don't have to get special permission to do so.
What that means is, you're guaranteed to be able to trade as part of-
That's a big deal.
... this offering, so it reduces the cost. It gives you day one liquidity as a part of your offering.
Yeah, and we've heard sob stories about some tokens who just couldn't convince anybody to let them on their trading exchange.
Yes. Now, again, it's important. There's rigorous compliance steps to make sure that you're eligible to list in a particular place, so if you haven't met those requirements, you'll be limited to specific venues where you can trade, and you may not have significant market depth. We actually have tools to enhance this. It's a little more than most folks can get their head around, but we have a Liquidity Engine that provides really augmented liquidity for EDGE tokens as part of our tool set as well, so this helps the market get going when tokens are at the EDGE. This framework, wrapped together, helps tokens really get into the market and get going. We are an interoperability layer, so again, the basic model, we're a security layer, a compliance layer, an interoperability layer. This allows us to layer on top of exchanges and ATS platforms to give you maximum access to various platforms to trade.
Yeah, and so there's something that we've discussed earlier, before the show, actually, about how that layer works with exchanges that I think is fairly mind-blowing. Can you talk a little bit about that? Like by layering you guys on top of one of the existing just order matching exchanges, something incredible is now possible. What is that?
Yeah, so let's, we should talk about the key problem with securities first, and then we'll get to how this applies to exchanges. Securities, by their very nature, have distribution control requirements. You have to know who's holding the token, and they have to be qualified to do so. That means that wherever that token's, happens to be, wherever that unit of value is, you have to govern its behavior in that setting. Now, there are a number of folks, great offers in the space, who have built their controls into smart contracts. We do, as well. For example, Polymath and Harbor have a nice model for distribution control that is built into the Ethereum network, but the limitation is, it's dependent on the Ethereum network. We have similar capabilities within the space, but we're ledger-agnostic, and so we're able to actually exercise those controls. In other networks, Stellar being a great example of a good partner of ours, EOS and so on.
Across ledgers, we can exercise the same rule sets and govern tokens, actually, that they can move across those ledgers, but even more important than that, and what most folks simply don't realize, is that when a token goes to most exchanges, most exchanges are centralized exchanges. They do that because they need speed. You've just left the ledger, and you've just left the ledger controls that are built into a smart contract, for example. You need to be able to govern the token's behavior off-chain as well as you can on-chain. Our rules engine exposes those same rule sets to, using open standards, to exchanges, such that they can govern the token's behavior off-ledger. What that means is, you can take a traditional cryptocurrency exchange and upgrade it, basically, to a securities exchange.
Now, this is, let me hand wave a little bit, as I'm sure my general counsel is probably squirming a bit here, there's license requirements associated with meeting the bar of being a securities exchange, but the technical means to govern the behavior of tokens is straightforward, and our platform offering offers this, such that cryptocurrency exchanges can augment their behavior to be able to exchange securities.
Yeah. I mean, again, as the guy who's putting the pin in the things that I think are extraordinary, that is a huge deal. Now, all of a sudden, any exchange doesn't have to create separate walled gardens for different types of users. Everybody can be in the same place, and the technology can divide up the rules according to the users, which I think-
Adam, this is transformational. It does, and so I'm glad you brought it up, let's see if we can walk through an explanation that makes quick sense here, because this is a thing that we've had to work very hard with the regulators on this concept. In the old-school exchanges, you'd have an order matching engines. Exchanges served two purposes, order matching, and they would form a venue. This would be, users would be vetted and allowed to come into the exchange, the New York Stock Exchange. You have to be a U.S. resident in order to participate in exchange of U.S. securities. There are rules that govern your ability to exchange value in a public market even there. That venue, you vet a person, and they get into a place where they can exchange things, becomes even more difficult for Reg D, private placements, and so you have ATSs that will govern a specific kind of private placement.
The venue has all like investors, perhaps institutional investors, that follow a same rule set, and they can engage in exchange, but when you have a whole bunch of different flavors of offerings that follow different rule sets, that means you have to have a lot of different venues in which you trade these. That creates fragmentation, and then you don't have any liquidity. Flip that model. This is a radical shift in the model. You can have a common venue, or even you can have many different venues that you pull together into what feels like one global venue, but where you have rules associated with each individual offering that are tied to each user. We call this a key lock structure. The token has a lock, specific set of rules about what it can do. The user, individual or institution has a key, which governs the notches on that key, govern what they can do.
Regardless of venue or place. Those rules can allow me to engage in a trade or transfer in a way that follows the applicable securities laws. Radically different model.
Yeah, and as the resident caveman on our show, where my role is to be the sort of intuitive, low-tech user, that is just totally logical and sensible from a user standpoint, so that's a big, big, big deal.
Adam, what you can see in this model is, the user suddenly doesn't have to be well-versed in all of these different laws.
They just go to their favorite place, and they can, the things that they're allowed to trade and transfer, they do so.
Yeah. I see that.
They don't have to worry about where they send their value, as they know that if a person is receiving it, they're eligible to do so. It's, again, a model that codifies securities laws and then makes it easy to transfer value.
Yeah. I can absolutely see it. Okay, so when do you see yourself being able to sort of be in market? When are customers going to be using this?
Yeah, so we're issuing our first token, securities tokens, here in just a week, so on August 22nd-
... we have a couple offerings going to the market. We, a little bit later on this year, we're having a big sort of coming out party, August 16th. We have offices in Washington, D.C., nice and close to the regulators, as well as in the Middle East in Abu Dhabi. In the Fintech showcase there, we're actually unveiling the full end-to-end platform, primary market, secondary market, and token maintenance components, for the first time for everyone to see in public. We're going live with the cryptocurrency exchange there, which will later be a securities exchange, and we'll bring those technologies back stateside.
Amazing. Well, Dan Doney, we wish you and everybody at Securrency the best of luck, and we hope you'll come back and update us in the future.
Oh, listen, Adam, it is a pleasure. Thank you for what Security Token Academy is really doing here. This is a marvelous task. This industry is nascent. It has tremendous potential. We all got to work together, sharing our information to get to the end state. You guys are doing the lion's share of the work, so thank you.
You are very kind, and amen to that, brother. You can find out more about Securrency by visiting their website, securrency.com. For the Security Token Academy, I remain Adam Chapnick. Thanks for watching.
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