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Security Token Exchanges and Trading Organizations Take on Wall Street

Alex Blum, Atomic Capital

Summit Interview

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Transcript


 

Adam Chapnick:

Hey everybody. It’s me again, Adam Chapnick with the Security Token Academy. I’m excited to be joined today by a very special guest. We have Alex Blum here from Atomic Capital. Thanks for joining us.

Alex Blum:

It’s great to be here. Thank you.

Adam Chapnick:

Sure. Tell us a little bit about what you’re up to at Atomic Capital.

Alex Blum:

I mean Atomic Capital like a few other companies is focused on helping people raise and issue tokens in way that’s compliant with SEC law essentially. That’s everything from vetting people for AMLC and accreditation to issuing a token that complies with certain lock-up periods or wait listing laws. It’s the standard things that in my estimation they’re all known kind of factors and it’s just making sure it all flows seamlessly for people to use.

Adam Chapnick:

So, are you a technology company that has built your own token? Or are you an advisory that helps people build their tokens? Or a little of both?

Alex Blum:

Neither of those things.

Adam Chapnick:

Oh neither!

Alex Blum:

We’re a technology company but we don’t have our own token. I don’t think there’s any reason to ... if we’re just passing people through a process that’s a bunch of different steps there’s no need for us to have a specific token, and in fact I think it creates extra friction if you’re requiring people to have that extra token.

It’s like a convenient fundraising tool but isn’t actually needed for what we’re doing.

Adam Chapnick:

Do you have a protocol, or I’m thinking of like Polymath, have they their things that do, or totally different?

Alex Blum:

Right. I mean you can call it a protocol. I think it’s a nice branding thing, I mean honestly. But I think a lot of them, it’s a pretty straight forward set of things that these different companies are calling the R-Token or ST20, things like that.

We’re doing the same things as those protocols and running people through a process that complies with all those requirements. But to date we haven’t branded it and sold it as a new protocol.

Adam Chapnick:

Got it. Awesome. You have an exciting landmark day coming up shortly. What’s happening next week?

Alex Blum:

This coming Monday, June 18th is first launch with our first client which is going to be called Byproxy. It’s a group that used to lead a company called Tenex.com which was in the commercial real estate software space, the largest prop tech exit in history at like 1.6 billion dollars. And now they’re going back into a similar market but not exactly the same, using some blockchain creations and selling equity as a security token on our platform.

Adam Chapnick:

How great. We’re here with the Security Token Academy at the Security Token Summit, what is it about security tokens that got you involved? You’ve been advising for a really long time, for this space. Why security tokens now?

Alex Blum:

To be very honest, it kind of emerged from an organic need. I had this company Byproxy and a few other clients that were in the need of issuing a security token. Serious professionals that aren’t have nothing at stake if their reputation for if something goes wrong. And I talked to a few other competitors out there and looked at their fees and I said “I could make this for a lower cost than they’re charging you to use it once”. And we were a little uncertain about some of the legal gray areas as well as around some of the business models and how they’re structured. Basically I said “we can do it, the same thing and make sure you don’t break the law or that you have to give the money back and at a lower cost and you can own part of a company”.

Adam Chapnick:

What do you think about the promise of security tokens versus what happened in 2017 with the utility token? The ICO’s, what are your thoughts on that whole shift?

Alex Blum:

I guess I think all this stuff is a software. We can try to put into these tight bundles but you wouldn’t be like “is that a sass service a utility sass or a securities sass?” I mean in reality I think you’re on a spectrum from completely utility, maybe some bitcoin or maybe a theorem. To the other end where you’re just selling like a pure equity as a token. But I think there’s a lot of interesting kind of gray space in the middle where the SEC has these certain siloed baskets of you’re this or this or this. And I think in reality your software can make something that’s a quasi-blend of all those things.

And I think to date I understand, it was great to be able to sell something that you didn’t really have to sell anything related to revenue in the future or even ownership of a company and you can raise a bunch of money. And I think especially for monetizing the value of a protocol as almost as an idea, I can understand that on a certain sense but I think the vast majority of people and the vast majority of cases it doesn’t really compute or make sense as a business model. So I think you saw some successful use cases, people rushed in behind and said “oh I would to sell nothing for something”. And now I think there’s a higher level of stringency and hurdles to overcome to sell it as a security token. However, I think it’s a good thing if you’re talking about making this a mainstream industry.

The one thing I think about is there’s certain things that are trying to serve a mass market. Like a health care protocol that are going to end up on secondary exchanges and probably be treated as a security, but they need to reach people that aren’t accredited investors and so I think that tension hasn’t really been resolved to date.

Adam Chapnick:

Right. Exactly. I totally agree. We started seeing the companies that are launching two tokens at once. One to raise and one to use for lack of a better ... do you think that might be the future or is that just a clunky, sad outcome of this gray area you’re talking about?

Alex Blum:

Well so I think it was just the other day the SEC pretty much said everything is going to end up a security it looks like, and so I think it’s a convenient tool, and maybe right now you raise with the security one and you worry about the other thing in the future. Or I’ve been companies issuing one out of the US and one out of somewhere else-

Adam Chapnick:

Ah interesting.

Alex Blum:

Yeah I have a client actually doing that.

And so I think, I don’t know it’s all so gray and uncertain that ... if you’re a US company or live in the US and you’re selling something out of the Cayman Islands and it’s still being treated like a stock I think you’re not in the clear.

Adam Chapnick:

Right.

Alex Blum:

I think in the long term that maybe the SEC doesn’t believe it or not quite today, but there has to be some change to the structure in which we regulate these tools because they don’t fit into neat buckets in the way that our current regulatory environment is structured.

Adam Chapnick:

Right. So what do think is the most promising thing about the token structure that maybe that what you’re talking about is hampering? I can list, I shouldn’t say I can, but I often think I can list lots of things, it’s sad that that’s not happening because everyone’s scared of it being a security.

Alex Blum:

Right.

Adam Chapnick:

Do you encounter things that you think gee would be nice if they would get off the backs of these because they’re not going to happen?

Alex Blum:

Right. Well again, I think it’s, I can tell you this, the other day that was trying to build a protocol for relate for better healthcare data and transparency in sharing across different healthcare providers and people in that ecosystem. But they’re a US based company and they’re trying to use the utility token but it seems like a pretty high risk kind of approach in the current environment. And I think things like that, where it’s really trying to serve a mass population and you want these tools or these tokens in the hands of people that aren’t just the wealthy and accredited. I think that’s really the category I seen as not having a clear pathway at this point. Or those people all just go to different countries and kind of just avoid dealing with the US.

Adam Chapnick:

Yeah that’s also I think, there’s a risk there for just the US economy is a way that we’re just inviting people to leave. But we’ll see. I hope you’re right that the regulators catch up and to make it a little more gray.

Alex Blum:

Yeah. And maybe it’s ... I think also the entrepreneur and innovator, you always want to be on the front edge. But there’s something smart about Fortune 500 companies and big institutions and even governments waiting to see what happens and maybe stepping in after that and maybe that’s a more mature wisdom or slower moving wisdom that I don’t fully appreciate.

Adam Chapnick:

Right, well that’s very glass half full of you. I appreciate that.

What about the fictionalization, the sort of tokenization of existing assets? What is there ... the thing that I loved talking about is all the things that people trade and they have value like baseball cards and stuff like ... is that a security now? Or I always loved working in the Pokemon cards. But how is that going to look? All the things that people have but have never been liquid at all versus things that are kind of liquid, but only at like a baseball card convention. Where’s that going to go?

Alex Blum:

One I think that there’s two houses and one is fractionalized and liquid and other one isn’t obviously that’s actually a neatly more valuable product than the one that isn’t. It’s the same with private securities or private shares of companies I don’t know how. In the long run someone that’s going to be figured out and I don’t know how you can compete with the normal one if there’s the same thing or better being offered with these additional features, plus everything that the other one can offer.

On the liquidity side though, I think it’s ... you’re selling something that’s worth ten million dollars, how liquid is that, really? There’s not a giant global market moving around ten million dollars.

Adam Chapnick:

Right.

Alex Blum:

One thing I think about is maybe they’ll start bundling together packages of things with similar risk profiles or customized risk profiles. Like I want something that has this kind of return or this kind of risk profile. Instead of having oh I’m trading part of this house I’m buying, some kind of personalized asset that fits the things I’m looking for. Because no matter what, if you’re selling five million dollars of something, how much is that going to really be traded or how much of a solution of liquidity really is there?

Adam Chapnick:

Right, right. Yeah it’s interesting. What do you think about in terms of people ... you mentioned if there’s two houses and one’s just two million dollars and the other one is you can have a thousand dollars-worth of two million, right. What do you think that liquidity premium will do to I guess market ... I call markets, but different asset classes?

Alex Blum:

I think it’s like ... there’s a guy around the street from where I live and they sell boxes of cigarettes or individual ones-

Adam Chapnick:

That’s a great example actually!

Alex Blum:

You know what I mean? Selling things retail and smaller chunks to more people you can sell them for more. That’s the way businesses work, right?

I think there’s just one premium on the way in who you’re selling it to. It’s like wholesale versus a retail sale. Beyond that I think premium of liquidity, it’s going to, I think, vary from market to market. It’s not like things are liquid or illiquid like a VC firm for example is kind of sort of a little bit liquid maybe at some point. But you can make them much more liquid. And then other things are already pretty liquid like ... I don’t think tokenizing Apple stock today is going to really have change the liquidity or the premium around Apple stock. And so there’s probably a range or variance around how much of that is valuable.

I think a lot of people ... one of the clients I have and a lot of what of people talk around real estate in particular seems to be a prime spot where you can add a lot more liquidity and significantly increase the value of properties.

Adam Chapnick:

Yeah, it’s exciting. Looking ahead with what you’re working on, where do you expect or what are you most excited about for the coming say 12 months?

Alex Blum:

I think if you’re the one putting together people that are investing or institutions that are investing and the company’s looking for money or that assets, maybe not companies necessarily, that you’re kind of at the nexus of a lot of different players in this market. So a) you’re building up a giant database or constituency of people that are looking for these services and the companies that are in need of that kind of fundraising model. I think when you’re at the center of that there’s a lot of additional services and things you can do on top of that.

I think in the long term it’s going to be something like financial advisors for cryptocurrencies. At that point I don’t think we’ll call them cryptocurrencies like this crazy class, I think it will just be finical advisors for the way we trade and use securities and other kinds of assets. I think investment banking services around ... there’s the technology part of it, but then also building up, actually going out and pursuing people that would invest in these things that have reasonable financing rates is interesting.

And then I think, to me, my biggest interest is how do we make all this tech and all this money work in a way that’s better for society and not just a few people. I’ve lived in the Peace Corps with people that have literally had zero dollars, or very, very little. And how do you structure a new kind of wave of capital markets such that it’s not idealistic or crazy or there’s no profit incentive, but in a way that creates maybe more stable or sustainable outcomes for everybody.

Adam Chapnick:

And that’s something you guys are going to be putting some energy into?

Alex Blum:

I told you, I think to me a lot of this tech firm what we’re doing and a few other companies that are similar, it’s going to end up all pretty much as a commodity in the same thing. It’s pretty clear to me what needs to be built. To me it’s more about capturing market share and getting some kind of verticals that you own and that you’re focused on.

So one of them that we’re very focused on is around social impact bonds. I’m not sure if you’re familiar?

Adam Chapnick:

That’s right, yeah.

Alex Blum:

Structuring things that benefit society and has some kind of return so that they’re sustainable at the same time. Especially with my background with the things I’ve done, I know a lot of people in that space and everyone there’s a lot of promise and my thinking around how that could work but at the same time, it’s not like a mass market financial instrument at this point. But I think the flexibility around again, how you can use software to design how value is exchanged allows for a lot more flexibility and makes a lot easier to build those things more quickly in a way that the cost of building it doesn’t outweigh the return.

Adam Chapnick:

Amazing. Social impact bonds. I love it.

So okay, well Alex thanks so much for sharing with us all that you’re up to and please come back in the new year and we’ll check out if what you’re doing is what you said you’d be doing.

Alex Blum:

I can almost guarantee it’s not.

Adam Chapnick:

It’s fine! No it’s okay, we’ll keep tabs on you. Thanks for joining us.

Alex Blum:

Thanks man.

Adam Chapnick:

Alright.