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Global Markets and Security Tokens

Expert Interview


 
Graham Rodford, CEO, Archax

Graham Rodford

Graham is a qualified accountant, with over 18 years’ experience in financial services. Prior to Archax, Graham was COO, CCO and Partner of Omni Partners, a $1.4billion hedge fund based in London, where he was responsible for all operational activities and compliance. Graham remains a non-executive Partner of Omni Partners.

Before Omni, Graham held several senior operational, finance and compliance roles in the asset management and banking space, including HSBC, Caliburn Capital, Leo Fund Managers and Coutts Bank.

Graham has worked in both digital asset and traditional markets and has been responsible for funds across a wide range of investment strategies – including macro, event-driven, long short, systematic and private equity. He has also run operations for an $8billion alternative investments business and has worked throughout his career in various regulated environments, including the FCA, SEC and NFA/ CFTC. Graham has a BA (Hons) Accounting from the University of Bournemouth.

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Transcript


 

Adam Chapnick:

Hey, everybody. It’s me Adam Chapnick with the Security Token Academy, and we are here in Los Angeles at CIS, and I’m joined by the CEO and co-founder of Archax mister Graham Rodford.

Thanks for joining us.

Graham Rodford:

Thanks for having me.

Adam Chapnick:

All right. So, for everyone who hasn’t heard of Archax, which I’m sure is very few people, you’re globally recognized, so what is Archax?

Graham Rodford:

So, we’re a digital securities exchange based in London. We’ve just applied for our license to be a regulated trading venue in the UK. So, we can be one of the first. We’re backed by a hedge fund in financial professional, so we’ve been in the securities area for a long time.

Adam Chapnick:

Got it. And so, you are of a team of three of you that’s sort of running the show from the top level. What is your background that brought you to this?

Graham Rodford:

So, I’ve spent the last 20 years in hedge funds. Most recently the chief operating officer, chief compliance officer, and a partner at a hedge fund in London called Omni Partners. So, they were 1.4 billion, and ran over Archax’ strategies. So, most recently have been driven in lending in the past long/short macro systematics. So, I’m familiar with all sorts of trading strategies. And I actually left there a year ago with my two co-founders Matthew Pollard and Andy Flatt, who were the CFO and the CTO.

So, really we worked with the company to make our exit as painless as possible, but we all left because we just have a passion for this area. We felt, looking out on the crypto area, that there a lot of crypto exchanges out there, and there’s a lot of institutions that were looking onto this space with interest. But the problem was that it’s very hard for them to find a credible venue to trade with.

And so, what we’re trying to do is set up an institutional grade credible venue in London. And as part of that what we realized is that, actually, two of the issues for institutions are: Firstly, they can’t find a credible counter party, but, also, cryptocurrencies are difficult for them. Firstly, they’ve got the bad reputation, and, secondly as well, the venues on which they trade just don’t have the systems and processes in place for them to deal with.

So, due to that and due to the product volatility they’re much more interested in security tokens. So, quite early on in our journey we said, look… cryptocurrencies ... Well, we’ve always said utility tokens just aren’t interesting for institutions, and they’re not really interesting to us because of the value. I think the cryptocurrencies themselves they could be interested, but as they’re not regulated in the UK at the moment we’re staying away from those, and we’re focused fully on security tokens.

Adam Chapnick:

So, what do you think is the inherent promise of security tokens? I guess, sort of for humanity, for the world that what’s going to be different that there’s such a thing as digitized securities that can be traded?

Graham Rodford:

Sure. So, I guess, a lot of people talk about all the advantages like 24/7 trading, fractionalization, et cetera, et cetera. But what most people, that have worked in the world for a long time, realize is that you probably could have achieved all of those before. An exchange could have stayed open 24/7, it probably could have listed anything globally, and if you wanted to fractionalize something you could just put a piece of property into a SPV, and issue millions of shares. Those things could have been kind of been done before, but I think what the ICO craze did, if nothing else, was show people that there’s a whole generation of people. And I don’t mean it as an age thing, I just mean a mindset of people that want to be more entrepreneurial, want to have access to capital markets. So, it showed that people wanted to go to capital markets with their ideas, and it also showed that there were individuals that wanted to back these companies directly.

So, I think you saw that what you had was global entrepreneurs wanted to access capital markets, and global investors wanted access to products. So, I think that came about from the ICO point of view.

The issue with ICO is just the way they’re structured is you’re owning a discount, or a service, or a product in the future, but it’s so hard to get what that underpinning value is whereas digital securities are so different. Most of the time, let’s say, you’ve got property it has a value, if you got a fund it has a NAV, if you’ve got a company it has a valuation metric, a balance sheet, whatever it may be, and because these real evaluations it means that the value of the token is underpinned by something. As a result of that the volatility will come right down, and it will give investors a lot more comfort, especially institutional investors.

Sorry. So, just to answer your question a bit moreover-

Adam Chapnick:

No, it’s fantastic.

Graham Rodford:

It’s a global market, so it has the ability to really open capital markets up globally to everyone. So, you can get an individual in the UK investing, a small amount, in a security based out of South Korea, or whatever it may be. I think it’s quite ... That’s why I get really excited about it.

Adam Chapnick:

Yeah. That is thrilling. I mean, it’s an outcropping, an offshoot of the earlier crowd funding sort of craze that happened. Of course, there was no equity involved initially, and I think that was always the promise. It’s access to capital, and this two way street of investors who wanted to get into things all around the world, and people all around the world wanted access to investors.

From your point of view you have a particular insight, and all three of you, as you all worked together at a hedge fund. What are the actual thresholds, or pain points that the big institutions need, or require there not to be in order to get involved in this space? What’s missing, or what needs to be built?

Graham Rodford:

Yes. So, I think we’ve talked about credible counter party already. So, I mean, the whole space is developing, and when we think of security tokens there’s a value chain. The issue of the person, the issues of the security token needs to work with a primary issuant platform, or tokenizer. You need good quality primary issuant platforms in place. And then if they’re going to go on and create a liquid secondary venue after that, you need a good secondary market in place. And then after that you’ve got all post trade events. So, you think of those like sentiment and custody, and you need all parts of that value chain to be appropriately developed-

Adam Chapnick:

And locked down. They have to be-

Graham Rodford:

Exactly. And they need to be-

Adam Chapnick:

Non-porous.

Graham Rodford:

Non-porous, and credible jurisdictions with credible counter parties.

So, we’re trying to address the secondary market piece out of London, and we’re credible, we’re transparent. We’ve approached the FCA from the start. We want to be fully regulated. We recognize, and the FCA do too, that these are securities. So, really it’s a well-trodden path. And there are companies like Securitized, Tokeny, River, that you spoke to just now, that also recognize the power of regulation, and they are trying to do everything in the right way.

So, I think the counter parties are evolving, and that’s good, but you definitely need good product. So, when we list companies on Archax we hope that they’ll be appropriate, robust, credible products to enhance the value of the area. And you also need demand for the tokens and liquidity. And that’s going to be quite a big challenge-

Adam Chapnick:

Yeah. I was just going to say-

Graham Rodford:

In this space.

Adam Chapnick:

So, the two things that are interesting ... Well, let’s go there. So, tell me how are we ... As a community how are we going to build that demand? Where’s the liquidity going to come from?

Graham Rodford:

It’s going to come from different places. So, I think I’ll run through them all, and then collectively, hopefully, it paints-

Adam Chapnick:

Lay it on us.

Graham Rodford:

A picture. So, the tokens themselves, when people are out there issuing the tokens. In the ICO world a lot of people were participating in those tokens because they wanted the multiple when they eventually list. You won’t get that sort of demand in this space, but I do expect to see security token offerings going at a bit of a discount. Hopefully the value of the company, or what they consider to be the inherent value of the company over time. So, naturally within every token you’ll get kind of a community that will support that token at the start, so when it lists on an exchange you’ll already have some activity.

Then beyond that, if you look at the market makers in this space, at the moment they’re not interested in making markets on a single property in London, or what it may be. But when it starts to grow it becomes more interesting. When you’ve got, let’s say, a hundred properties in London suddenly it can be a good proxy for an area, and it might be something they can use to hedge their portfolio-

Adam Chapnick:

That’s interesting. Yeah.

Graham Rodford:

And when you see exchanges, we’re already started talking to BlockQuake, tZERO, and these other guys that are operating in this space. And the reason being is they are competitors in a sense, but we all need to work together to help develop this area. And when you start having tokens listed on multiple venues that too creates opportunities for market makers coming to the area, and play all across between the exchanges, which helps develop liquidity in the space. So, that kind of gives an underpinning liquidity.

But the truth is for a lot of these illiquid assets, like properties, hedge funds, product funds, they’re just not going to trade at the volumes that blue-chip companies trade at. They’re small companies that what we’re trying to achieve here is better liquidity than exists currently.

So, if you’ve got a seven year private equity vehicle your trade is-

Adam Chapnick:

Zero.

Graham Rodford:

One per quarter.

Adam Chapnick:

Zero liquidity.

Graham Rodford:

Yeah. Exactly. It’s much better if it trades at some point.

So, I think on that side of things what you’ll ... You talked about crowd funding just now, and crowd funding is fascinating. But it doesn’t feel like it’s ever really taken off in the way that it could have done, because you’ve got several crowd funding sites. It’s quite hard, it’s not efficient to go through and look at all the projects, it doesn’t feel like a market. It feels like you kind of almost looking through a friend’s business plans, and you can chuck a bit of cash in if you want. So, they’re quite fragmented, and, I think, they’re a good step, but it feels like it could be a lot more consolidated on a global basis.

So, I think once you bring all of those together you start to create more liquidity, more interest in all those ideas that people can trade freely.

Adam Chapnick:

Got it. Okay. So, what’s on your 2019, let’s say, road map for Archax?

Graham Rodford:

So, we submit our application to the FCA to be a MCF, so there’s no doubt that’ll put us under a great deal of scrutiny over the next six to 12 months. We hope to get our permission, obviously, in six, but it may take longer. The FCA recently released a consultation paper where they laid out that they are working out their position on cryptocurrency, utility tokens they don’t [00:09:30] regulate, but securities they do, and security venues that will regulate security venues.

So, from our point of view it’s kind of we’re straight up the fairway for them. This is a security venue trading securities. So, hopefully it will be quite straight forwards, but, obviously, because we’re dealing with a slightly different asset class there will be a lot of conversations.

In the six, seven months, as well, we’re working out partnerships with companies like Securitize, and Tokeny, DLA and Tokeny in the UK. I just bought something called a digital token alliance, which is useful for moving the space forward. So, we’ll be working with those guys seeing how the whole ecosystem is going to operate.

And then hopefully towards the end of this year we’ll be listening, and we hope to come to market with 10 to 20 tokens on our exchange day one.

Adam Chapnick:

Terrific. Well, thanks for sharing with us all about the platform. We wish you guys all the luck.

Graham Rodford:

All right. Thanks very much.

Adam Chapnick:

Thanks for being with us.

Graham Rodford:

Thank you.