Rob Christensen is Vice President of Product Management at tZERO, a global leader in the development and commercialization of blockchain-based financial technology. In this role, he is responsible for tZERO’s Security Token Trading Platform and the industry’s first regulated Security Token Exchange. Christensen has been with tZERO since its inception in 2014. During this time, he led technology teams to the issuance of the world’s first CryptoBond in July of 2015, and the world’s first publicly traded CryptoSecurity “OSTKP” preferred shares in December of 2016.
Christensen has a bachelor’s degree in Project Management Administration and is an Agile Certified Product Manager through the AIPMM. He is credited as co-inventor on three pending blockchain patents in the U.S.
tZero's blockchain technologies aim to revolutionize the market and fix the inherent inefficiencies of Wall Street so that financial processes are less beholden to traditional, institutional market structures.
Jor is heavily involved with building out the ecosystem for digitizing and trading securities on the blockchain. He is most well-known for his expertise in alternative finance, including EB-5, crowdfunding, and initial coin offerings (ICOs). He is a co-founder of VerifyInvestor.com, the dominant accredited investor verification service in the world. In addition, Jor practices corporate and securities transactional law in Los Angeles and is a founding shareholder of Homeier Law PC. He is an expert on attracting and verifying accredited investors.
VerifyInvestor.com is the leading resource for verification of accredited investor status as required by federal laws.
Hi, I’m Adam Chapnick with the Security Token Academy. Today, we’re pleased to bring you an interview with our gold corporate member, tZERO.
tZERO is a technology company servicing the financial and capital markets industries, integrating secure distributed ledgers to reduce settlement time, increase transparency and promote efficiency. They are most well-known for their secondary trading technology utilized by PRO Securities LLC, a wholly-owned subsidiary that operates an alternative trading system in security tokens. They also expect to launch a national exchange to allow trading of security tokens through a partnership with Boston Options Exchange later this year.
Today, we’re going to learn more about the company, their products, technology, their team and much more. And to do that, we go to Salt Lake City where I’m joined by none other than Rob Christensen, Vice President of product development. Rob, thanks for being here today.
Hi, thank you Adam. It’s a pleasure to speak to you today.
And before joining you a little more for some questions, I also have here in the studio in Los Angeles, the one and only Jor Law. Jor was previously the head of issuance at tZERO. He’s the co-founder of Verifyinvestor.com, which is a subsidiary of tZERO. Jor, thank you for joining us.
Thank you for having me.
Okay Rob, let’s begin with a little background on tZERO. Can you tell us how and why tZERO was created?
So it really all began with Overstock.com as the first major e-commerce business to take bitcoin as a payment form. The founder and CEO, Patrick Byrne, started investigating other use cases for the underlying blockchain technology, and one of the strongest use cases that came out of that exercise was the tokenization of corporate securities and corporate debt.
So in January of 2015, tZERO was formed, and we had the simple mission to issue the world’s first publicly traded, we called them crypto securities back then, the word token was not in heavy use yet. But we set out January of 2015 to issue a corporate security that was settled on the blockchain away from the DTCC, and we did so in December of 2016.
So since December of 2016, it’s really been an evolution of creating tZERO as you know it today, getting the alternative trading system set up, issuing the tZERO tokens last fall, and then really scaling that network to other assets, as well as scaling the secondary liquidity in terms of broker dealers and investors tied into that trading platform.
Yeah, you guys have been on the vanguard for sure.
So Jor, here in the studio, you were the head of issuance at tZERO. Can you explain maybe what that job entailed and anything that you’ve seen from that perspective?
Yeah, certainly. So tZERO is a technology company, and they’re most well-known for their secondary markets technology, which is utilized by PRO Securities or other folks that will effectively license that technology. Now before you can have a healthy secondary market, of course you need a vibrant primary markets. And I think over the course of time, you had a lot of issuers that came out to tZERO, and they effectively said like, “Look, our end goal is to be traded on a tZERO-affiliated exchange or tZERO-affiliated ATS. How can we just work with you or within your network of families to get to that goal without redirecting us somewhere else?”
So while tZERO does have strong relationships with other primary issuance platforms out there, they thought that maybe it would be a good idea to serve some of these clients internally as well. And therefore there is a primary markets division, and the primary markets division effectively are tools consulting in technology that helps people conduct primary issuances.
Now you’re also the founder of something called Verifyinvestor.com, which is a platform that enables legally compliant verifications, for accredited investors. Now how did Verify Investor get involved with tZERO?
So Verify Investor a is a solution that handles effectively 506(c)-style verifications of accredited investors. We are probably the dominant provider of that service in the crowdfunding days, and as the people that were doing ICOs or STOs started doing them in a compliant manner, they’d often turn to Verify Investor for that service.
Now tZERO was one of those clients, and in the course of the relationship of providing those services to tZERO, we got to meet the tZERO management team, got to understand the business, and we thought that there was a synergistic fit, and therefore tZERO later acquired us.
Fantastic. That’s always happy story.
So Rob, tZERO uses its own special technology to connect issuers with investors. Can you discuss some of those tools? What services do you provide?
We really view the market as a two-sided market with tZERO’s core exchange and execution venue technology at the center. And we connect issuers to investors through our issuance platform, which facilitates not only the tokenization, the technical pieces, but also the fundraising as well. And as far as services go, we offer technical services, tokenization, as well as security token offering consulting.
And then on the other side of the market from that, we do offer through tZERO-approved broker dealers that are tied into Pro Securities ATS for secondary trading, we do provide access for accredited, and coming soon retail investors, to access and trade those security tokens.
And Rob, do you guys have any new product announcements or news you wanted to share?
So the most exciting launch we have coming up here in June is going to be the tZERO wallet. The tZERO wallet, and I can’t give you an exact date on that, Adam, I apologize, but the tZERO wallet will be coming here in June, and the key features around the wallet is going to be the biometrics as well as the multi-signature key recovery.
This is going to be a huge asset to investors where it provides an added layer of security and stability in that if they lose their private keys, those keys can be recovered through a multi-signature process and their assets can be safely recovered and transferred to a new address. This is useful in the case of theft of security tokens. Should that happen, they can be restored back to their rightful legal owner. Also, in the event that they lose their seed phrase or their private key, they can restore their funds and have access to them as well.
Yeah, that’s critical. And we hear more talk about that all the time.
So we here at Security Token Academy have also started seeing a tokenization trend. Now for our viewers, can you explain what tokenization even is and why one might tokenize with digital securities? Actually, let’s start with you, Jor, and then we’ll go to you, Rob.
Tokenization, to me, is really a technology. It’s the act of creating a token to back, in our case, securities. And in this case, the tokens are created using distributed ledger technology. So tokenization is effectively taking something and manifesting it in a digital format through a token. And I think that has certain advantages in the securities space because the technology allows effectively better tracking and audit capabilities. And that, in turn, allows for many other kind of improvements to existing securities markets.
So those are mostly the issuer benefits, right? Are there benefits to tokenization from the other side, from the investor side?
Well I think any time you have better tracking and better information, the entire market benefits. Not only does the issuer benefit, but the investors benefit from having perhaps faster settlement times, clarity as to ownership, settlement, and clearinghouses could benefit in a sense of cutting down their efficiency and time to settle trades and things like that. This is something that Rob’s team at tZERO has looked into extensively as well.
Yeah. Right. And also of course the name, Rob, right? Why is it called tZERO?
So tZERO comes from our mission to reunify trade and settlements. So in the national market system, all equities transactions used to be settled on a t plus three, meaning the date of the transaction plus three days is when it would actually settle. Recently, for certain asset classes in the US, that’s moved to t plus two. Our end goal is to reunify the trade with the settlement and do that in real time.
The only thing I would add as far as investor benefits, to add onto what Jor has already mentioned, is we see a future at tZERO where we will have exchanges, plural, not just in the US with the PRO Securities ATS and also the Boston Security Token Exchange, but as we launch international exchanges in different jurisdictions around the globe, giving investors the opportunity and the portability to trade those assets in different jurisdictions across the globe and the ability to cross-list assets, giving US-based investors access to international investments they may have not had access to before, and vice versa for US companies looking to raise funds from international investors.
That’s a great point.
So Jor, we know security is a top priority at tZERO also. Can you talk about some of the security features that tZERO uses to protect investments?
Yeah. I’ll speak a little bit to Verify Investor and the security features that make us, I think, a little bit unique from other providers. And then Rob, who’s been building a lot of product within tZERO, can talk a little bit about the security features within tZERO as well.
So at Verify Investor, we’ve thought about security very, very seriously. When I first created Verify Investor, I thought I don’t really want to give this information to someone else, and I certainly don’t want someone else to misuse this information. So it starts off, I think, with trying to request as little information as possible from the investors in order to accomplish the tasks needed.
Then it starts off with technological improvements in how we present the data. So for example, investors can upload information, and then they can go through an online redaction process, and then the reviewing attorney that claims that task will only see the redacted versions, and of course the reviewing attorneys can only see the files that they have claimed. And then once the entire review is done, everything’s locked, the reviewer can’t get back into it, the investor can’t even get back into it.
So we’ve taken some of these tools along with the standard technological security tools that most companies use, and we’ve all packaged that up and that forms the basis of the verifyinvestor.com security.
Yeah, that’s interesting. There’s a whole ton of friction from the investor side that’s just the ick factor of sharing personal information that’s necessary to comply with SEC rules, and you guys have sort of used technology to overcome. That’s a non-technical friction. It’s a person’s unwillingness to share some of their personal information. I think that’s overlooked sometimes in the process. We always think that tech is everything, but that’s important, and tech has solved that. It’s interesting.
So Rob, what about you? Can you elaborate on some of that about the security?
Security is always paramount at tZERO. As a leader in the space that has many partners that are existing marketplace partners, even if it’s one of tZERO’s partners that potentially gets hacked or has an incident, the headline’s always going to read tZERO gets hacked. So we take it extremely seriously. And I’ll highlight a few things on the investor side around specific security measures.
I mentioned the wallet we’re going to launch. So this uses biometrics in the form of facial recognition and fingerprint scanning to verify identity for the transfer, purchase and sale of not only cryptocurrency, but also security tokens. On the trading platform itself, we use two-factor authentication, either via SMS or through popular third-party options such as Google Authenticator. So what we try to do is ensure anytime that you’re authenticated and you’re interacting with the platform that it is actually you tied into the platform, regardless of whether you’re using the wallet or you’re using the web-based application.
On the issuer side of security, we’ve specifically designed the smart contracts to have a minimal attack vector in terms of the logic that rides on the asset token itself. And our architecture is a little bit different from a lot of the other competitors in the space, where we’ve abstracted some of the investor registry functionality as well as the enforcement of compliance rules outside of the asset itself. And what this does is it allows for simplified solidity code in the asset contract to be a number of lines, 10 to 20 lines of code, versus hundreds to potentially thousands of lines of code that could be potentially hacked by an attacker.
So, what we’ve done is we’ve reduced that attack surface to be as minimal as possible so the security around the assets and the amount of opportunity that hackers have to corrupt that asset or steal all of the security tokens associated with that asset contract.
That’s really interesting. It’s the first time I’ve had someone walk me through that approach to where you’re actually reducing the surface area in code that’s accessible by a hacker, so there’s less for them to hack. That’s really interesting.
Yeah, Adam. And when you think about it, if the asset contract itself is large and complex, it increases the chance that human error could occur at the time that you deploy the actual contract onto the Ethereum main net or any other ledger solution for that fact. And what we’ve done is we’ve tried to minimalize that.
And an added benefit of doing this, since the compliance rules and the registry functions are abstracted, it means that you can update compliance rules over the life cycle of that asset. Different rules need to be enforced at different times based on lock-up periods or other events that are on a timeline. It allows us to update any compliance rules we want without having to reissue the asset contract itself or putting up some kind of a proxy contract, which as you know, for the blockchain purists, is kind of a problem. Anytime you’ve got to reissue something or set up a proxy, it’s seen as a negative thing by the blockchain community.
Yeah, absolutely. Makes total sense. And speaking of compliance, let’s put a question to both of you guys about compliance. We’ll start with Jor. What in general is the importance here of compliance in this whole ecosystem?
You asked a corporate securities attorney that question. You’re in for hours of response.
How much time do we have? Right.
Of course we’re in a regulated space. And not just are we in a regulated space, but we’re in a space where people’s savings and investments are at risk. So not only do issuers need laws that protect them, but investors need laws that protect them. And the fundamental health of the US ecosystem effectively is strong compliance and strong laws that give investor confidence. That’s why we have vibrant capital markets.
So compliance is very important. It’s important to verify investors, it’s important to tZERO, but frankly, it’s important to the entire industry, and we need to take it seriously. I think it starts from the very beginning when issuers are conducting security token offerings, to think about how they properly structure it, look at the SEC guidance and look at the guidance of other authorities out there and make sure that their primary issuance is fully compliant, that their AML KYC procedures are fully compliant, and that it carries through all the way through the ecosystem, through the trading venues, through the investors, through the Ras, through the broker dealers. Everyone really has to take compliance seriously, and it’s something I think that a lot of energy within the industry is focused on right now.
Rob, any additional thoughts about compliance and tZERO?
Yeah, so Jor, well said, and I agree 100% with you.
The key place to start is on the issuer side, making sure that the primary offering is done within full compliance with whatever jurisdiction it’s being offered in. And then just to touch on the secondary trading aspect of it, as we bring tokens onto Pro Securities ATS for secondary trading, there is an additional layer of technology review to make sure that the tokens will be compatible with our trading systems and will stay within material compliance of securities laws.
I think what a lot of investors fail to understand is the regulators regulate everybody, meaning Pro Securities has to do their own diligence and their own vetting to satisfy their FINRA and SEC obligations, the broker dealers that plug into the trading network have to do their own, the issuers have to do their own under the SEC. And I’ll just echo what George said. When people’s investments and their savings and their future well-being are on the line, it can be annoying to deal with some of the regulatory hoops, but it’s absolutely essential in a capital markets sense.
So Rob, sticking with you, why is liquidity so important in the security token space?
I believe the secondary liquidity is key for a couple of reasons. Number one, we’re already seeing a trend where you have less and less companies actually going public in terms of a traditional IPO, and because you have companies staying private longer, and we’re also seeing a trend with security token offerings under reg D and reg S as private securities, these are securities that are traditionally illiquid, meaning employees at early-stage startups could potentially be stuck for a longer period of time without a liquidity event. Tokenization and trading platforms such as what tZERO’s brought to market creates liquidity events sooner in that life cycle for people that hold illiquid assets.
The second portion of that is if I invest in an illiquid asset and I’ve got to hold onto it for a long term, that means that my capital is tied up and I don’t have the freedom to redeploy my capital at will into other opportunities that arise. When you have a really robust and a really liquid market for an asset class that’s traditionally illiquid, it means that I can get into positions as an investor. When opportunity arises, I also have the opportunity to get out, because I have that constant liquidity event in the form of a secondary trading market, and I can seize other opportunities to invest and deploy that capital into other assets.
So Jor, what do you think as far as advice you would offer to someone who’s looking to, let’s say invest in an STO? We’ll start with you and then we’ll ask Rob the same question.
I think that fundamentally you treat all investments the same, regardless of whether they’re a STO or not, I think you have to look at the underlying investment value and look at what you are getting for your investment, what you’re actually investing, what is the underlying essence of this investment that you’re making. And that doesn’t matter whether it’s a STO or not a STO, you just have to look at the fundamentals, or if you’re not the type of investor that looks at fundamentals, then maybe you look at a technicals or something else.
But I think it starts down with what is the underlying security. If we’re investing in trading tokenized securities, the trick is not that they’re tokens, but the fact that they’re securities. So you vet the securities as you would any other security, and then maybe on top of that you do a little bit of vetting on the tokenized technology that wraps around effectively as a security. That’s how I would look at it. And certainly if you’re not capable of doing that yourself, then certainly retain professionals. And even if you are capable of doing it yourself, it might be nice to have some professional advisors along.
For people who are comfortable with vetting the fundamentals of an old-style company, what are some of the extra things they might ask? When you said looking at maybe the wraparound that’s added technologically, is there anything that’s a red flag or a green light you want to look for?
Yeah, honestly, that’s a little bit of a challenge in the sense that to the extent that you’re relying on the tokenized technology to wrap around securities and you’re not technical, it’s very hard for you to diligence whether this has properly been tokenized or not. So I think the best bet there is to diligence the providers of the tokenized technology and figure out are they strong players, do they have strong technology, a strong team behind them, do they have a track record or any history, do they have a brand that’s outside of ... are they brand new startup, a year out, or are they really the forefront of their industry, being covered by analysts and news and they’re the ones that are leading the industry.
So those types of things will help a little bit so that you know that I’ve decided that I liked the security, I have to make sure that the tokenized technology behind it and the ecosystem behind it is supported by strong ecosystem and players.
Rob, what do you think? There’s a whole swath, I think, of investors who are excited in theory but scared in practice of getting into STOs. How would you advise them? What do you think?
I think one of the important things, one of the ways to look at this, especially if you’re coming from the blockchain side of that type of investor, meaning you saw the craze of 2017, you’ve just lived through the crypto winter, it’s a very different how I would approach a security token offering versus an ICO or some other kind of coin offering where you’re not really looking at the hype cycle, the news, the media that a company that potentially has no operating history is putting out there, trying to time the upswing and that hockey stick pattern.
The “When Lambo Factor” in the security token world isn’t a thing. So I agree with Jor, you want to look at the fundamentals around the company itself. You want to look at things like what is their executive team, what is their operating history, do they have revenue or are they still pre-revenue, have they raised money before, and do they look like they’re on a track to be in business for a while.
The second thing I would look at is what is the actual asset. Is it a debt-based asset in the form of a corporate bond that pays out some sort of dividend? Is it a revenue share model? And if it is a revenue share model, is there reasonable evidence that there will be revenue to share in in the future? Or is it an equity?
So getting smart on the different types of securities offered is a must for investors looking to get into a security token space. And it’s less about the technology, as we saw in the ICO craze where people were raising hundreds of millions of dollars in a matter of hours or even potentially minutes to fund the building of a technology platform. You’ve got to make that mental shift away from what is the company building necessarily and move into what is the company’s business, how do they generate revenue, and can I expect a return from investing in this company and expecting that to happen within a certain timeframe.
So what’s your overall vision for digital securities in 2019, let’s say? Rob.
So in 2019, I think we’re going to see a number of new asset classes come. I think we’re going to see the number of issuances grow, and we’re also going to see the number of tokens that are trading in the marketplace grow. And you kind of get into a self-perpetuating prophecy here, where as more quality assets are issued, they come out of their reg D lockup periods, they become available for secondary trading, you’re going to see a natural occurrence where people are going to start migrating to the broker dealers and the different companies that are tied into that pool of secondary liquidity and start trading more frequently.
So as more investors enter the ecosystem, it’ll become more attractive to issuers. And as more quality assets are getting issued, you’ll see it attract more secondary liquidity, more investors, market makers, broker dealer firms, and probably most importantly, institutional-level investors.
And I would actually add to that, both at Verify Investor, seeing the incoming interest and leads, as well as during my time at tZERO doing the primary issuance business, what we saw was a greater interest in security tokens, and not just a greater interest, but a greater interest by institutional or more reputable players, as opposed to a startup that couldn’t raise money and thought, “Well maybe I’ll just try STO,” you had actual real companies, some publicly traded companies, some very strong brands saying, “Well we’re interested in this space, we think it’s going to be the future and we’d like to get our feet wet now.”
So I think in 2019, you’ll start seeing some of those deals come into the marketplace as well.
Okay. So Rob, to you, we love crystal balls here at Security Token Academy. Can you peer into yours and tell us about your roadmap and any future goals?
So on the tZERO roadmap for 2019 and into Q1 of 2020, obviously we have our tZERO wallet launching this month in June of 2019, we’re very excited about that. Over the course of Q3 and Q4, we have a goal to have at least 10 to 20 new assets trading on Pro Securities ATS. We also anticipate having an additional 5 to 10 broker dealers plugged into the ATS for secondary trading. And of course in Q1 of 2020, we are hoping to launch the BSTX and be able to accommodate the full spectrum of security tokens all the way from registered publicly reporting companies, such as an IBM for example, trading on the BSTX national exchange, all the way down to the private equities, private debt securities trading on the ATS.
So by Q1 of 2020, we’ll have two exchanges trading here in the US, we’ll be able to accommodate a very wide spectrum of issuers, and we feel that we will have the greatest source of secondary liquidity in the US as well.
Amazing. And where is all this happening? Rob, where are you guys located around the world?
So tZERO currently has offices here in Salt Lake City. We are in Salt Lake City because this is the corporate headquarters of Overstock.com, which is our parent company. And we run most of our product development as well as technology out of Salt Lake City. We have about 65 development staff here in Salt Lake. And then also in New York we have an office of about another 50 people, primarily executive team as well as business development and consulting teams. So we run a little bit separated, mostly business out of New York, mostly technology out of Salt Lake.
Fantastic. Well thanks for sharing all this with us. Rob Christensen, vice president of business development, thank you for speaking with me today from Salt Lake City.
Thank you, Adam. It was a pleasure to speak with you.
And a big thanks to Jor Law, the co-founder of verifyinvestor.com, which is a subsidiary of tZERO. Thanks for your time today as well.
Thank you for having me on.
We wish you both and everyone at tZERO the best of luck.
tZERO is a gold corporate member of the Security Token Academy. To learn more, go to our website, securitytokenacademy.com, and click on the directory tab and the corporate member homepage. For everyone here at the Security Token Academy, I’m Adam Chapnick, thanks for being with us.
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