Rob is the managing partner and CEO of CityBlock Capital, a venture capital platform issuing security tokens backed by equity or tokens in blockchain companies. Rob is also the co-founder and managing partner of Edgewater Equity, an early stage venture capital fund based in New York City. He manages a portfolio of early-stage companies around the globe. Outside of CityBlock & Edgewater, Rob advises a diverse group of operating businesses that range from restaurants to medical cannabis dispensaries. Rob holds a Bachelor of Science in Finance from Winthrop University and Master of Science of Law in International Taxation from Thomas Jefferson School of Law.
Hey everybody! It's me again, Adam Chapnick, with the Security Token Academy! We are here at the Start Engine Summit 2018 in beautiful Santa Monica, California, and I am joined by friend of the show Rob Nance, co-founder of none other than CityBlock Capital. Thank you for joining us again.
Hey, thanks for having me, Adam.
First of all, before we get into some of the fun stuff, for people who maybe haven't heard of CityBlock, why don't you tell us: what is CityBlock Capital, and what do you do?
CityBlock is a venture capital fund. It's built on top of the blockchain, so that we can hopefully provide liquidity to investors. One of the problems with traditional venture capital is that your money's locked up for a long time period, and so we try to overcome that objection. And we did that by building on the blockchain, and we've kind of tokenized, if you will, these limited partner interests. And the hope is, as the market continues to grow, that there will be secondary exchanges where this can trade. So, if an investor makes three, four, five times their money in, let's say it's four, five years, and they say, "That's a good return for me," they could potentially sell it to another investor.
Yeah, that is a good enough return for me! Love it. Now, I like talking to you, because you have a warts-and-all approach to sharing your feelings about what's going on. So, when you look at the space that you're in more than most, what do you take from it? What's happening right now? Is it promising? Is everything humming, no problems, free and clear, everybody's jumping in and everything's easy, or is it something else?
I think at the end of the day, every asset in the world eventually will become a digital asset. I think it's a better form of ownership.
What I don't think is that there's this utopia that exists now that investors are clamoring for digital assets. So I think, you have crypto investors, and those crypto investors aren't really interested in investing in traditional assets, necessarily. So we're a venture fund investing in equity of real companies, and that's not really attractive.
On the other side you have institutional investors. And those institutional investors are definitely not ready to own a digital asset. So, the area in between that it kind of works is the high net worth individuals. And so we look at those high net worth individuals and have to tell a story to convince them to own something that they've never owned before, which is a digital asset.
So, what we tell them is, "Listen, you still get an LPA, a Limited Partnership Agreement. You still get a private placement memorandum. You still get a subscription agreement. You just happen to hold these tokens that are a digital representation." But it's not scary like holding bitcoin. If you hold bitcoin and you lose it, it's gone forever. It's not how it works with a digital asset.
And why not? Why isn't that the same?
Because we ... and gasp, for all the crypto investors ... have a centralized record of ownership. So just like, when people actually had stock certificates: if you took my stock certificate, it has my name on it, not yours, right? So it doesn't become yours, unlike cash. Because of that, it's a little bit easier to get them more comfortable with.
But I would say, in general, the market is not necessarily ready for mass adoption of digital assets yet.
That is a radical yet simple statement that we don't hear said most of the time.
What about, if you have exposure to the institutional guys, what do you find is their hesitance to jumping in? What are the things that they're not comfortable with?
Well, it's just new, right? This digital-
To own a digital asset is something new, right? And I think you've seen in recent weeks the announcements of Yale and MIT and Harvard investing in crypto currency funds. So that's kind of the first step.
I actually think that the digital asset adoption will be driven by limited partners, like pensions and endowments, that say, "Listen, I like you, but at the end of the day if the market falls 80, 90%, right, or 50% like it did before, I want to be able to sell out of these assets. These illiquid assets. And so I think eventually it'll be the limited partners, who are institutions, of these big funds that will actually drive the adoption of it.
Very interesting. What are you finding is the way to determine when you're talking to LPs ... are these like dentists and just anybody who's got a bunch of money? Is there a profile of who might be a little more amenable to your pitch? Or is it just, you never know?
What's interesting about our pitch in the way that we look at this, and the way that we think about it is: this is a venture fund. And if you believe in our investment thesis, you should invest. We just have a better ownership structure.
Which is a digital asset, right? It's a tokenized security. So, when we look at it and we think about this space, we say, "Listen, we're investing in blockchain infrastructure." And a lot of times dentists or doctors will say, "Oh, blockchain, crypto." And we say, "Listen, we're not investing in crypto. We're not investing in protocols. We're investing in the companies that are being built on top of those protocols." So, companies like Coinbase. And I think that they can get comfortable with that.
So if we can get them comfortable with the first step, the second step is: you have this digital representation, as I said before, you don't have to hold it. We can hold it for you. You never have to touch it. If you want to own the fund for the whole duration of it, you never ever have to deal with those tokens.
Got it. Is there any complication with the idea of having a hard wallet? Do they have to deal with that, or they never touch that?
They can if they want. They certainly can custody their own tokens. And any wallet that holds ethereum can hold the NYCQ, which is our tokens, but again, they don't have to. Some people like the idea of custodying unto themselves, but otherwise we can custody it for them.
Got it. So fascinating.
Okay, so shifting gears a little bit: from what you see on the ... maybe they're issuers, maybe they're not, but the company side ... what do you see as the most interesting places that people are utilizing token tech ... Oh, actually, first of all: are you investing only in tokens, or are you investing just agnostically and issuing your own token?
We're only investing in equity of companies. It could be digital equity. But only equity. No tokens that are utility tokens, no crypto currencies-
But you're in some companies that are just traditional equity-
Interesting. Okay, so what's the thesis of the company for what you're investing in?
So, it's blockchain infrastructure-
Oh, and some of those are not token?
Right, correct. So, you have a company ... an example I kind of use is Coinbase, right? Coin Base is a regular company that has regular equity interest, but it's certainly a very important part of the blockchain and crypto ecosystem. So, instead of going the protocol layer, we're looking at the companies that are on top of that. I think there'll be a couple protocols that really win. Just, as a venture capitalist I don't know how to pick those. So, I'm going to pick companies that could work with any protocol that exists. So, ethereum may become dominant, but it might not. It might be something else. And so I don't really care what becomes dominant, because those companies will just work with whatever the dominant protocol is.
What do you see as the most encouraging sign in the area of, let's say, the security tokens but also in just the blockchain infrastructure space? What are the promising signs, and what are the warning signs?
Some of the promising signs are the really smart entrepreneurs that are starting to move into this space. That have had successful startups that they've sold before, that are building very thoughtful companies in this space. To me that's really exciting. I look at someone like Clay Collins, who just started a company Nomics, somebody that's very thoughtful, building a really, really amazing project. And when you start seeing entrepreneurs like that move into this space, you go, "Okay, this is going to become real, because these are-"
He's from Leadpages, right? Is that Clay-?
Yep, yep, yep, that was his first startup.
Yes, I'm on his newsletter, yeah. (laughter)
Yeah, he's building this company, and if you look at the tech, if you look at what's behind it, it's very, very elegant programming. And it's not something you've always seen in this space up until now. So, really excited about entrepreneurs like him that are entering this space.
I think the concerning part is, we're still trying to get rid of a lot of these really bad projects that launched under the ICOs, the illegal securities that weren't registered. And so I think those have to still get flushed out of the system, because I think that's left a bad taste in traditional investors' mouths. And that's what's keeping them away. And so what we're trying to do is bring those traditional investors into the space, investing in real companies and real securities, as a regulated offering, and I think as we do that, they actually get more comfortable with the idea of crypto currency. Because, they'll wire us money, and then if we have an exit, we send them back ethereum, because we're built on ethereum. And all of a sudden, they go, "Well, that was really easy. I got the money right away! I didn't have to wait for a wire to come in two days later."
And so we think that actually, the adoption of crypto currency will be driven by the security token market.
Yeah, it's like a gateway drug. I love it. That's so funny.
Okay, so: what do you think needs to happen, whether it be via regulations, or technology, or who knows what, to maybe grease the slide a little more for people to adopt, in whatever means it is? Whether it's buying into an issuance, or buying into a tokenized fund, or whatever it is. What's missing?
I think a couple things are missing. One: clarity on regulation. A lot of funds like our self issue out of Cayman, because that makes it a lot easier for us to work with non-US investors. I think there's still a lot of questions there, around some regulation and working through that.
I think the other part is just regular investors getting comfortable with this space. And I think that will be the driving force, is when people that write $50,000 checks into normal smaller micro venture funds say, "Oh, I want to move into this space. I feel comfortable owning this asset."
It's kind of like email, right? When email came out in the 90s, people were like, "I don't know how to deal with this. I don't know how this works." And today we can't imagine living without it. And certainly today there still is traditional, we call it now snail mail, and there still will be assets in the future that are traditional assets, that are built on paper instead of on this. But I think long-term, the adoption will be driven as the mass public starts to become comfortable.
On a different note: do you think that there's a big problem that has to do with interoperability? Is that something that people are overlooking, or am I just the one who seems to think that that's really, really important, and there's only a few players that are really dealing with it? What do you think about that question?
You think of people like Harbor, right, that are trying to build on 0x? For a-
Right, or you've got Securrency, that already says they're interoperable across all sorts of chains, or ... The more I think of all of the companies that aren't talking about it and that things seem to need to be siloed to work with them, and how is that going to work, and is that going to create a big problem?
I think it is a problem that'll have to be solved eventually. I think what's more important now is getting digital securities out there. And I think it will be solved later. Like I said, I think that whole protocol layer will end up working itself out eventually, and there will be a dominant player, or a couple dominant players.
But what is interesting particularly about finance, and I don't think most people realize this: there's not just one company that ever wins. Think about this: there's not just one big bank in the country. There's multiple big banks. There's not just one brokerage house. There's multiple brokerage houses. And that's because of the psychology of money. So when we think about money, people aren't comfortable only having one option, or putting their money one place. They want competition to exist in a financial market. And so, when people that are tech investors come into the space, they go, "What is the one company that's going to win? What's going to be the Google of this space?" And what I say is, "It's not."
There's going to be multiple winners, for the reason that no one is comfortable working with one provider in the financial services arena.
Yeah, it's very true. You need to be able to threaten to bring your business elsewhere, right? (laughter)
You have to.
Because it's your money, right? And so, there is a big psychological element to this, I think.
Very interesting. Okay, so, looking in the Nance crystal ball. Where are we now? We're in the end of 2018. The end of 2019, what will be the major shift that we see in the security token world, if any? What will be the state of the union then?
I don't think there'll be much of a change.
No change? We'll be where we are?
There may be some exchanges that come online, but the liquidity is going to be very limited, I think for a number of years. I think four or five years, before there's-
Oh wow, okay.
Because there's two things that brings liquidity to market. One would be high-frequency trading, and the other is a derivatives market. So until we have both of those that exist in the tokenization-
In STO, right.
Right, in that market ... there'll be very limited liquidity.
Yeah, we saw that obviously in the crypto currency side, exactly as you describe. But you're right, those have a long way to go before we have that on the STO side. But that's very insightful. I love it.
And I would say the one other thing I think would be interesting that may happen is seeing a major corporation that goes and tokenizes their equity ownership. That changes it from a traditional ... maybe by the end of 2019 that would happen, but I think that would be a big tipping point for the space.
Yeah, love it. All right, well Rob Nance, thank you so much for sharing your thoughts with us.
Good to have you.
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