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How Blockchain Helps the Asset Management (ETF) Industry

Expert Interview


 
Dan Doney of Securrecy

Dan Doney

CEO of Securrency

Dan Doney is the CEO of Securrency, Inc, a financial services company that combines world-class security, advantages of distributed ledgers, and a global compliance framework to produce a new kind of financial instrument: a highly-liquid, dividend-yielding, investment-grade securities tokens with the stability of bonds, transferability of Bitcoin, and exchangeability of dollars. The Securrency platform provides end-to-end financial services by offering decentralized investment banking technologies.

Prior to founding Securrency, Dan was a leader in US government IT innovation for 15 years. Dan has been an innovator in a wide variety of fields (process automation, enterprise architecture and software development, financial modeling, organization theory, robotics, and signal processing) drawing on his background in social systems, control theory, software engineering, and artificial intelligence. He is an avid software developer, architect, and engineer and remains deeply engaged at the forefront of technology. Dan graduated from the U.S. Naval Academy in 1992 with a B.S. in Control Systems Engineering and an additional major in Economics and received an M.S. in Nuclear Engineering from MIT in 1994. Dan and his wife Jodi have 5 lovely children and live near Annapolis, Maryland.

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Securrency - Gold Member Securrency - Gold Member

Securrency is a financial services technology infrastructure and products company that delivers decentralized investment banking services built around core universal identity, custody, and interoperability technology. This lightweight, yet powerful, infrastructure supports Securrency’s complete suite of compliance and financial services products to enable the creation, maintenance, transfer, and secondary trading of tokenized securities by issuers, broker-dealers, alternative trading system (ATS) operators, and exchange operators.

Securrency is a Gold Corporate Member of the Security Token Academy. Learn more here. 

Transcript


 

Adam Chapnick:

Welcome to a special interview from Security Token Academy. Hey everybody, I’m Adam Chapnick, and we here at the Security Token Academy are bringing you a special corporate member interview from a remote home studio. Today, I’ll be speaking with the one and only Dan Doney, co founder and CEO of Securrency. Securrency of course, is a platform allowing issuers to construct offerings, define terms, KYC AML, potential investors and of course, tokenized securities. Securrency is also a gold corporate member of the Security Token Academy. Welcome, Dan. Good to be speaking with you again.

Dan Doney:

Thanks, Adam. I appreciate it. Always a pleasure to speak.

Adam Chapnick:

Always. So as you know, as we all know it’s a tough time for the financial markets and everybody because of this Coronavirus. How is Securrency doing? How have you guys fared during this time?

Dan Doney:

This has actually been... Personally we’ve had... One of our employee’s wives was affected by this. We’ve been... Fortunately, my family has been unscathed. As a company, we’re a global company already, we work remote as teams so we haven’t been affected in a significant way. I’m spending a lot less time in New York and certainly not traveling a lot, which means I’m focused a lot more on delivery. And so it’s really not been a substantial impact to us. And in many ways, it is justification for security tokens. So a lot of the uncertainty and the cracks that we see in the market are the very reason why companies, the Security Token Academy exists and companies like ours are so excited about the future. Because we have the tools to do this better. And so in that way it’s providing a tailwind for us.

Adam Chapnick:

Yeah, it’s really... I mean, obviously no one’s celebrating what’s going on. It’s a horror in so many ways to so many people. But from a strictly sort of macro level for this industry, it really is showing a lot of the use cases that would be improved by having this really ramp up for everybody. Obviously, Securrency is a huge part of that, globally already like you said. So you guys have some interesting news and there’s a specific kind of operation and participation, let’s call it that you guys are taking part in and that’s around ETFs. For people who might not be that fluent in terminology and acronyms, what’s an ETF? And how does it compare to a mutual fund? And then once we define that we’ll get into some more meaty stuff.

Dan Doney:

Yeah. Actually one of the shining stars in the whole volatility in the market has been exchange traded funds. So they are... What an exchange credit fund is: is a fund that is an asset that contains other assets, that trades on public exchanges, the New York stock exchange or NASDAQ. They represent.... So if you buy shares of an exchange traded fund, what you’re actually getting is ownership rights of a bunch of shares of other things. So a simple example, one of the earliest exchange traded funds was a SPDR fund. So now instead of having to invest... SPDR being the S&P 500, a fund the represented the S&P 500, so instead of having to go and buy shares in each company in the S&P 500, you buy one share or the shares of the fund and in turn, the fund is managing all of those underlying shares.

Dan Doney:

So it’s simple. You can get much broader exposures by purchasing these funds, and that’s beneficial because you don’t want your future to be based on the fact that one particular company or another company had a good day or a bad day, or stumbled over something, or is particularly affected by COVID, for example. We want to invest in a sector. And so it gives you risk diversification. Now what’s exciting about ETFs, exchange traded funds, is they have displaced, or they are rapidly displacing mutual funds. Mutual funds have been around for some time. There are places where you could get the same sort of exposure to an industry. You’d have emerging market funds that you can invest in. But if ETFs are a wrapper, a way of getting to those underlying assets, it’s much more efficient than mutual funds.

Dan Doney:

Efficient in several ways. First, with a mutual fund, I really only liquid at the daily level. So if I want to buy shares of a particular mutual fund, at the end of the day I placed my order and the next day it’s fulfilled. And so I have to wait. And this actually happened, I did an interview right in the middle of COVID, really when the news was hitting that this was a big deal and ask you know the markets had collapsed. I called the bottom, I thought okay this is a time to move capital into the market, on a day in which it was spiking up. Now I got lucky. This isn’t investment advice at all in terms of whether to get in or not, but because of the mutual fund in my retirement fund it could not wait to place that order. It did not place the order until the end of the day. I lost 8% on that entire investment as the market went up that day.

Dan Doney:

And that’s substantial in terms of the impact on my ability to retire, whereas with an ETF... When I call up the broker, I place that order, it’s instant. Now there are other substantial advantages that are really important in terms of tax advantages and other components as well, but what you see it a better wrapper. Now our investors... And in fact, our partner in this WisdomTree was one of the pioneers in this space in terms of exchange traded funds and what they saw... They came in as an indexing service, they saw that ETFs would displace the mutual fund industry. And so they’ve made their mark and they’re the largest independent asset manager in the ETF space. On the advantages that ETFs have are mutual funds, but they came to realize that tokenized mutual funds may in fact displace ETFs.

Adam Chapnick:

Okay. So that’s a good segue there for us here at the Security Token Academy. So for those who are riveted by what you’re describing now sounds like you’re going into the juicy part, which is how... So we get that everybody can understand that the ETFs had these advantages over mutual fund, what is it that the Security Token brings to an ETF that’s better than even let’s say an individual asset token or on the other hand, better than a non-token ownership share of an ETS.

Dan Doney:

Yes. So the WisdomTree spent a lot of time and due diligence looking across the various solutions in the space as they were looking into. Okay. We believe that this market may in fact, disrupt the exchange traded fund space, but as a institutional brand, they needed compliance tools. So their desire was to move from an asset that’s traded here in the U.S. and U.S. markets, or as they have a European presence in Europe, on European markets to an asset that could trade globally. So they wanted broader distribution. Of course, broader distribution, more investors, being able to reach global markets, which is the power of blockchain, because it is a global technology is gives them more assets under management. But it requires compliance tools that know the securities regulations of say Singapore or the Australian market, or the UAE, et cetera. And that’s the tools as we’ve discussed in prior discussions that Securrency really specializes in is the ability to make smart tokens.

Dan Doney:

That is tokens that know what they are allowed to do and know the regulation or the various jurisdictions, and therefore can move in efficient transactions between those markets. So that’s one benefit, immediate benefit to WisdomTree as we will be moving these funds out into global markets. The second benefit of blockchain is smart contracts. So ultimately the long benefit here is just the ability to automate back office functions associated with asset management. So we’ve recently submitted a patent, patent-pending on automated asset management strategies. And there’s a lot of detail to the way this works, but you can imagine funds that manage themselves and produce the information so that you can really drive down the cost of fund management.

Dan Doney:

And that’s key across all of the market in the funds world. In mutual funds world, in the exchange traded fund world is the fee compression is tremendous in those industries right now. Why? Investors demand more efficient assets. They don’t want money to go to overhead. They want it to go to producing value. So what they want is very efficient fund processing, and smart contracts actually create the channel for it.

Adam Chapnick:

Amazing. That makes perfect sense. So you guys have been known, or at least to those of us who follow you, sort of the word that comes to mind for me at least when I think of you and Securrency is sort of the interoperability. And so the ways that you guys were able to crack that nut, are you focusing... You said you have a patent pending on fund management. Was it automated fund management strategies, is that what you said? Are you shifting some of your focus into that as a specialty?

Dan Doney:

Generally it’s asset management.

Adam Chapnick:

Asset management. Sorry about that, yes.

Dan Doney:

One class of assets or funds. And so you can imagine self-reporting funds where hearkening back to the 2008 problem. So what happened our last global financial collapse happened in 2008. What was the issue there? Well largely it was these mortgage-backed securities, portfolios or funds. And in these funds you’d have tens of thousands of mortgages in residential mortgages, for example wrapped up in a fund structure. And what happened was those portfolios began to underperform. Individual loans were not performing as was expected, and no one had transparency into those underlying assets. So you couldn’t see that they were underperforming. If you’ve seen The Big Short you know the story. When everyone realized that these were underperforming, it became difficult to price what exactly do we own? What is the price of all of this? And what you saw is banks, financial institutions around the world had on their balance sheet, these things that no one knew what they were worth. Which means then we don’t know what that bank is worth.

Dan Doney:

And that caused a problem with liquidity broadly. Here’s how this fixes that problem. We now have the ability to have an asset. A mortgage for example, there’s a defined implication we do self processing mortgages. So imagine this: I make my payment directly to the mortgage using a QR code. I’m making the payments, it’s actually processing then that mortgage payment, we have full transparency, thanks to the power of the blockchain as to that payment. We also have a great record as to what the present value of that loan is. Now I take and plug that in to another asset that owns it. And that happens to have 10,000 other things like this, where I now have full transparency and the ability to drill through that fund into these individual assets and report on this overall structure. And every transaction of buying and selling the mortgages in and out is fully transparent. And all of those processes are audited. So you now have real-time assets that actually very directly solve the problems of 2008.

Adam Chapnick:

Yeah, it does. It’s fascinating. It sounds so simple. And yet it’s so fundamental and revolutionary. So that’s clearly how the blockchain process helps the asset management industry, the ETF industry, that kind of drill down transparency that there’s a nimbleness that can come from that. How does the tokenization of ETFs help the blockchain and Security Token Industries? Do you think?

Dan Doney:

Yeah. Great, fantastic question. The big challenge in the blockchain space so far, our promise. We talked in 2018 about the promise of liquidity coming to these markets. And yet it has not materialized in any substantial way. And there’s a reason for that. And we think that these assets will change this. The first is folks are focusing on the tokenization of individual assets, specifically in real estate has been probably the largest focus in the Security Token Market. The problem with that is those assets are hard to price. And so in other words, if I expect active trading of a hotel somewhere, or a piece of property in Manhattan to occur, if I’m going to go and place a buy or sell order on that piece of property, I better know I’m not the last guy to know that they’ve just discovered mold in the property or that something has just gone on and wow the price is going down, I just didn’t know, or the price is going up for this or that.

Dan Doney:

It’s hard to price an individual asset. Whereas in a fund, which you’re actually betting on... Firstly you have diversified assets. So the individual performance of a particular property no longer becomes so important, but also you’re betting on the curator. That is the asset manager or the fund manager, because you look at their performance. How have they done over time? Are they picking the right assets? What kind of ROI are they producing? And it’s their job to actually manage those individual assets. The reason why mutual funds and exchange traded funds have become a popular investment offering for mom and pop because they don’t want to be the expert who’s picking every winner up here and there. So funds are important. And now the here’s the second benefit. They’re very easy to price. So these funds, WisdomTree’s funds trade and have very strong pricing indicators already on the New York Stock Exchange on NASDAQ.

Dan Doney:

So I don’t have to question what those assets are trading at right now. I know exactly the price. I know the price in a very deep market. So a tokenized version of the same fund, the exact same assets, I know exactly what it’s worth. That creates the conditions by which you can have active trading. So you need a baseline for institutional value. So imagine you want to come in. You’ve got $50 million worth of retirement income. You want to move into the blockchain space so you can buy and sell a bunch of assets on a Security Token exchange for example. Where do you park your money? Do you park your money in Bitcoin where that $50 million could go up and down considerably? And remember your purpose is there for good, strong investment thesis, not to ride the risk of a particular asset.

Dan Doney:

Now you may want to go long and Bitcoin as an individual thesis, but that’s not the stepping-off point to invest in other things.

Adam Chapnick:

Right.

Dan Doney:

Now imagine for example, WisdomTree Treasury Fund. This is a stable, highly liquid instrument that is strongly priced and produces a very nice dividend. So you’re now an institutional investor. You park your money in this token from which you can trade for other tokens. And that gives you a place by which you can enter a Security Token Market in park and then make markets. Institutions haven’t had that. So they don’t have a place to park, that means they can’t then trade. So there’s no easy way to get in and out of the other assets. This creates the foundation on which liquidity occurs and market hasn’t had that. And if you don’t have that foundation, you will never get the liquidity that we want industry-wide. So this is a very big step for the Security Token space broadly.

Adam Chapnick:

Yeah. That’s well explained because liquidity has long been sort of the Holy Grail promised to everybody. The answer to why should we care if people don’t understand or aren’t already into this whole thing as an exciting prospect. The simple answer has always been liquidity and then the frustrating fact has been, it’s taken a long time to manifest, but that’s a great explanation I think for the average guy to understand how now ETFs are sort of the pathway to it. So this is good news for the Security Token sub-industry I think the way you’ve described it. I think to add to that, the one other part is the elusive user experience [inaudible 00:18:09] for the mom and pop investor that I think the industry as a whole is starting to wrap their head around and address, which is exciting.

Adam Chapnick:

How does the average retirement age guy or woman is just immediately put off by even the words Security Token don’t understand it, won’t do it. And then when they’re introduced to the idea of wallets and these new exchanges with names they don’t know, or other ways of interacting. the risk is perceived as too high. And so I think though we’re starting to see all kinds of ways, definitely Securrency has been and remains one of the leaders of addressing all these things. So personally, as a guy who watches this probably too closely, this is exciting. You’ve mentioned WisdomTree a bunch of times. Can you talk a little bit about what’s your relationship with them exactly. And how you perceive that proceeding?

Dan Doney:

Yeah, so they were our lead investor in our Series A rounds and-

Adam Chapnick:

Mazel tov.

Dan Doney:

Oh, thank you. And they brought with them a number of other prominent [inaudible 00:19:19] we’ve got some sovereign investment as well. And we’re excited about all of our cap table. So the WisdomTree, of course... They’re a real intellectual leader in their space. So their CEO, John Steinberg, their strategy officer Will Peck... They really have just fantastic intuition. And it’s really been a pleasure for us to work with them because they see where all of this is going. Now it’s good to have a partner who’s eager to move because the Exchange Traded Fund space and the fee compression generally across the marketplace has created an imperative to create markets, to create new opportunities. And so they’re really driving change within the space.

Dan Doney:

But as I mentioned, John Steinberg early on saw the whole ETF market, when it was a tiny, little market, it’s now a $5 trillion market, and it’s expected by 2030 to be a $50 trillion market. Whereas mutual fans are rapidly declining in terms of assets under management, ETFs are exploding. And now this next generation actually creates the conditions for global assets. So as an institutional partner for us in the Security Token space, when you walk into conversations with Bank of America or with State Street, or with KKR you’ve got a certain amount of credibility and you’ve got a clever message, but when you walk in with WidsomTree, folks that are rich, premier asset managers, it’s a different kind of conversation. So it’s opening doors for us broadly into these circles where we think there’s the biggest impact and also the most value.

Adam Chapnick:

That’s exciting. Well, Dan Doney, co-founder CEO at Securrency thanks so much for chatting with me again today. We always wish you and the entire team and Securrency the best of luck.

Dan Doney:

Thanks, Adam. It’s always great to chat with you. Thanks for leading.

Adam Chapnick:

We’re doing what we can. You can find more information on Securrency by going to our website securitytokenacademy.com. Click the membership tab and select corporate member. For everyone here at Security Token Academy, I’m Adam Chapnick. Thanks so much for watching and stay sanitized.