Jesus Rodriguez is a computer scientist, serial entrepreneur, angel investor, and internationally recognized speaker and author. Jesus is the Chief Scientist and Managing Partner at Invector Labs, a platform that is re-imagining software development on-demand at the intersection of artificial intelligence and blockchain technologies. Prior to Invector Labs, Jesus founded Tellago, an award-winning software development agency focused on the latest technology trends. Jesus has been the recipient of several industry awards including the Inc. 500 and Stevie Awards for American and international business. He serves as a board member and advisor to several enterprise software companies. Jesus is a regular speaker at technology conferences and a contributor to technology publications such as CIO.com, ComputerWorld, InfoQ and many others.
Howard Marks is the co-founder and CEO of StartEngine, the leader in Security Token Offerings and Online Public Offerings. Marks founded StartEngine with the mission to help entrepreneurs achieve their dreams. Marks was the founder and CEO of Acclaim Games, a publisher of online games now part of The Walt Disney Company. Before Acclaim, Marks was the co-founder of Activision Blizzard and Chairman of Activision Studios from 1991 until 1997. As co-founder, former Board Member, and Executive Vice-President of video game giant Activision, he and a partner took control in 1991 and turned the ailing company into the $50B market cap video game industry leader. As a games industry expert, Marks built one of the largest and most successful games studios in the industry selling millions of games.
Marks is the 2015 "Treasure of Los Angeles" recipient awarded for his work to transform Los Angeles into a leading technology city. Marks is also named one of the 500 most influential people in Los Angeles by the Los Angeles Business Journal. Marks is a member of Mayor Eric Garcetti's technology council. Marks has a Bachelor of Science in Computer Engineering from the University of Michigan. He is bilingual and is a triple national of the U.S., United Kingdom, and France.
StartEngine is a leading security offering platform that tokenizes securities for more efficient issuance and trading. Utilizing its expertise in regulated exempt offerings under the Securities Act, StartEngine has helped more than 160 companies raise capital and has over 150,000 registered prospective investors. Based in Los Angeles, the company was created in 2014 by Howard Marks, co-founder of Activision, and Ron Miller. StartEngine is committed to revolutionizing the ways companies raise capital and to helping entrepreneurs achieve their dreams. StartEngine Crowdfunding is a not a broker-dealer, funding portal or investment adviser. StartEngine Capital, LLC is a funding portal registered with the US Securities and Exchange Commission (SEC) and a member of the Financial Industry Regulatory Authority (FINRA).
Ryan Feit is the CEO and Co-Founder of SeedInvest. Prior to founding SeedInvest, Ryan worked at Wellspring Capital Management and Lehman Brothers in New York City where he invested in, financed, and managed dozens of private and public businesses.
Ryan was instrumental in the passage of the 2012 JOBS Act which changed 80-year-old U.S. securities laws to make it possible for entrepreneurs to raise capital over the Internet. Since 2012, he has worked closely with members of the SEC, FINRA, the White House, and the Treasury Department on the implementation of the JOBS Act. Ryan currently serves on FINRA’s Fintech Committee and previously served as a board member of the Crowdfund Intermediary Regulatory Advocates and the Crowdfunding Professional Association.
In addition, he frequently serves as a subject matter expert on startup investing and the JOBS Act for the Wall Street Journal, the Washington Post, CNBC, FoxBusiness, the Economist, and the New York Times as well as a columnist for Fortune Magazine and Inc. Magazine.
SeedInvest is a leading equity crowdfunding platform that provides individual investors with access to pre-vetted startup investment opportunities. SeedInvest has funded over 150 startups and boasts a rapidly growing network of over 200,000 investors. SeedInvest has had over 30,000 startups apply to raise capital since inception and has accepted less than 1% of those companies to feature on the platform. All securities-related activity is conducted by SI Securities, LLC, a wholly owned subsidiary of SeedInvest, and a registered broker-dealer, and member FINRA/SIPC.
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.
Vincent Molinari is the CEO of Templum Markets, (FINRA Registered Broker Dealer and ATS) and Co-Founder of its parent company, Templum, Inc. He is a Founder of 5th Element Group, PBC. He is also Co-Founder and Co-Chair of the Blockchain Commission for Sustainable Development, and is a Co-Founder and Co-Chair of Blockchain for Impact. Mr. Molinari has nearly 3 decades of experience as a licensed person in the securities industry where he began his career at Lehman Brothers and later at Janney Montgomery Scott.
He is a globally recognized thought leader on the modernization of securities law and the intersection of breakthrough innovation and technology solutions. He is an active Global Speaker on Market Infrastructure, Capital Formation, Blockchain, Digital Assets, Impact Investing, and The JOBS Act. He is he the host of the Digital Assets Report filmed at the NYSE. He has been invited to testify before the U.S. House of Representatives Committee on Financial Services, Subcommittee on Capital Markets, and Government Sponsored Enterprises. Mr. Molinari has also testified before The Securities and Exchange Commission's Advisory Committee on Small and Emerging Companies regarding secondary market liquidity. He has participated in authoring 16 Comment Letters and Petitions for Rule Change to the SEC and Finra. In addition, he consults with members of Congress and Senate on these issues.
Michael Oved is co-founder of AirSwap, a decentralized, peer-to-peer token trading network built on the Ethereum blockchain. Prior to AirSwap, Oved spent his career at Virtu Financial, where he helped grow the organization through its IPO in 2015. Oved is passionate about a future where people fearlessly trade digital value without third-party intervention.
So, this is the everything panel, we’re going to talk about everything. So we have like, 50 mini panels within the panel with different topics and we have a very diverse group of thought leaders in this space that are working in very successful companies. So I’m looking forward to gather perspective. So let’s start with interest and Ryan, we have to start with you because you were cool until last night. Now you have a new job.
I saw. I’m Ryan Feit. I’m the CEO and Co-Founder of SeedInvest. We’re leading equity Crowdfunding platform based here in New York City. We’re very involved in the formation of the jobs act back in late 2011 and early 2012. I’ve worked pretty closely with the SEC and FINRA over the years on turning that into our actual regulation that a lot of us see or take advantage of now. We have a couple hundred thousand investors on our platform, including 40,000 accredited investors and we today fund early stage startups and very excited to be joining the circle family and be launching security tokens hopefully in the near future.
Awesome. So this is Ralph … No, I’m getting Ralph couldn’t make it. So Max is here from tZERO.
Max Melmed, chief strategy officer at tZERO, was lucky enough to be a former CEO a couple of weeks out of college, as he was starting a company called SpeedRoute. Not a very sexy business basically, a smart routing broker dealer connected to all US equity markets, inbound connections from all the different trading systems, as well as an alternative trading system, which Patrick Byrne CEO of Overstock took particular interest in, when he wanted to build a new market for leveraging Blockchain technology, meeting capital markets, so wanted utilize our ATS. This all started back in 2014, and then we were fully acquired in August of 2015, where you wanted to take our ATS, as well SpeedRoute which had all the inbound connectivity, from kind of Traditional Wall Street. So we’re building out a whole for future security tokens and kind of Blockchain needs capital markets where it makes sense.
Cool. Howard Marks, is a very successful entrepreneur who is now venturing into security tokens and crypto. So, why don’t you tell us about yourself?
Yeah. I’m making my journey from the game world into finance and it looks pretty much the same. Maybe to-
Is that the intro?
Yeah. That’s my intro. So, I’m Howard Marks. I’m the co-founder of StartEngine. And my mission is to help entrepreneurs achieve their dreams, and I basically got started with StartEngine as an accelerator to help entrepreneurs. I made a lot of investments, most of them went out of business, couldn’t raise any capital and I felt very frustrated. So, I decided to see if there was a way to change it and just end the jobs act came out and I read it and I decided okay, we can make a platform around this. And so, that’s how StartEngine was born as a platform. And so we’ve raised capital for over 150 businesses so far, we’re launching about 30 companies a month and it’s going great.
We’re going to be announcing soon our ERC-1450 smart contract, to help tokenized securities. We have a registered transfer agent with the SEC, so we can hold all the shares and basically in book entry. We also are building an alternative trading system, although we’re not yet a registered as a broker dealer, but that could be hopefully very soon. I think we’re in the same list as a lot of people who are trying to put these trading places in place. So we’re pretty excited about this marketplace, and its growing fast, and we see thousands of investors coming in all the time or purchasing shares and we’re very excited about it.
Vincent you’re a CEO of one of the most important marketplaces in the space. Why don’t you tell us about Templum?
Thanks for that.
And you can pay me later for the promotion.
I’m not going to let you down. Vincent Molinari, co-founder, along with Chris Pallotta of Templum Markets. We are Blockchain Fintech holding company that is striving to create new market infrastructure for tokenized assets, digital securities. I am the CEO of Templum Markets, which is a broker dealer, fully licensed in all 50 states and number four jurisdictions. We are actually a registered ATS for the past two years. We also have a quotation bureau to be able to publish real-time marked market quotes on these instruments. Collaboration with S&P CUSIP, in order to put CUSIP identifiers on the tokens that transact on our platform, and as Howard just did [inaudible 00:04:40] we’ve also recently been approved as a transfer agent as a subsidiary, where we see that part of the ecosystem maybe a little bit different than a lot of the other folks in the marketplace as we look for a full end to end solution, that is engaged around security tokens. And we don’t look to compete on what may be deemed to be utility tokens or crypto currencies.
Cool. Michael, you’re going to help me keep this panel technical. So, tell us about AirSwap.
Oh sure, I will get there in a sec. Michael Oved, I’m the co-founder of AirSwap, as in Mathematician from Carnegie Mellon. Went joined Wall Street for a small company called Virtu Financial, which is now one of the biggest trading companies in the world. I left that company in 2015, just gaining a really deep understanding of financial markets trade on pretty much every exchange in the world, not only in the US. And then, in early 2016 I met Joe Lubin, and learned about Ethereum and just kind of realized that this was the future, and this is going to automate essentially the entire backend financial system, and I want it to be a part of it.
So, I started to really study space and look on the message boards and try to understand, what do people want in this space. And one thing everyone talked about, is a decentralized exchange. And so it’s kind of a misnomer and start studying the topic it talks a lot of developers and using my knowledge of markets, me and my co-founder Don, who was also a classmate of mine from Carnegie Mellon. We published a Swap Protocol in 2017 that form the basis for what is now AirSwap live. Earlier this week we announced that we’re doing a real estate deal with our partners of Propellr. This is our fore way to try to get into a security token market. We think that this is natural evolution of this space. Obviously subject to compliance and I’m very excited about it. AirSwap is it peer to peer trading platform? Our mission is to empower humans with global frictionless trade.
You just killed one of my questions, sir. Thank you very much. All right, so this supposed to be controversial. So, let’s start hot. The next panel after this is about tokenization platforms, polymath, security dice, hard work. Are those things going to get commoditized in your vision, Vincent?
Sure. You started off. Yeah, in all due respect [inaudible 00:07:01] and we have friends at all of those organizations. I think the token foundry business will be commoditized over time and probably already started to be today. Look, if we keep it really basic, this is a $2.4 trillion annual issuance in unregistered securities in the United States alone. That is a massive marketplace. So when people are talking about all this iteration of new things, this is a conversion of creating efficiencies to transparency, continuity of information around unregistered security instruments under Reg D, Reg S and Reg A+, with a very clear pathway to the secondary liquidity that is transparent, that doesn’t have Sarbanes-Oxley, Dodd-Frank order handling rules. What was perhaps Nasdaq have 30 or 40 years ago that was doing a five to 50, 100 million dollar IPO that doesn’t exist.
The result of that solves the pain points of access to capital is we all like to talk about the democratization of capital and opening new assets and abroad, away for wealth creation to investors, giving issuers better pathways to access those investors and having a level playing field. We can put all the other sizzle around it. The end of the day in this marketplace, this is still a securities market practice.
Cool. Onto Max, you guys are on exchange by you also or think about insurance. Do you see token issuance as a commodity four, five years from now?
Yeah. I think Vincent put it very well. At the end of the day, any type of technology that’s being built down as its new and has a tremendous amount of potential. You’re going to see a proliferation of issuance platforms, technology providers, as it gets more and more mature and due to kind of the open source nature of the smart contracts, I think we’ll start to see maybe best practices, but still firms will need to differentiate based on reputation, performance, customer service, and to Vincent’s point about the amount of money that is flowing into traditional capital markets, when you’re a company and a billions, or if you’re apple and they were going to issue, a security token, trillions of dollars’ worth of capital. You’re going to want to go with a trusted brand and somebody who has good experience in the space.
And even AirBnb’s recent letter to the SEC talking about potentially having the people that are hosted in their network, where things are going to share the economies with these types of players that are going to want to work with somebody who’s trusted. So yes, I think it will get commoditized and even the different types of contracts at a Reg D type of contract, an SPV type contract, or Reg A+ type contract. But it’s still going to be reputation performance and then also integration with the other players in the space on the exchange side, and then on the capital raising side. So I think we’ll see it happen, but it’ll take some time.
So, Howard, if issuance platforms are in commodity, in five years from now. Companies too, they are coming to star in with a token that is basically a KYC check on a basic ERC-20 token. Fast forward a few years from now, how come platforms, I guess StartEngine on SeedInvest can help startups to be better with their tokenization? What kind of capabilities fisher services should be in the platform to … for a startup to feel very confident about issuance with a StartEngine or SeedInvest.
Well, you’re talking about a lot of the plumbing, when all these buzzwords are being mentioned like AML/ KYC, it gets lost and I think it’s what it really means. Frankly, this is all the plumbing. The entrepreneur wants access to capital; they want access to investors who are able to invest, that’s what they really need. So, if the plumbing is a very exciting to all of you here, great. But that’s not really what people want. They want the money in the bank account and they have to issue shares for that, so it’s going to end up being exposed in different ways. Hopefully on Ethereum, some people are talking about repo, some people are talking about Cardano. There are a lot of options out there. And so, I don’t know if you use Microsoft operating systems of windows or you use MacOS. It may matter to you, may not matter to the ordinary consumer. They just want to make use of their computer. And I think the entrepreneur is the same thing.
Yeah. So Ryan, let me take a different take under same question.
No, I was just interjecting with Howard.
Men, we said no interruptions before.
Missed that part I’m sorry. That’s I was in the principal’s office, I’m sorry, I’ll wait my turn.
No. Go ahead though.
I think Howard makes a great point, but I think the practical reality of the evolution of the cycle where we are today, there is an existing regulatory framework that we have to adhere to. And AML and KYC are not just buzzwords, those are regulatory compliance functions that have to be performed when you’re handling money. Otherwise you’re out of business. So, what technology may allow us to do in two, or three, or five years or even today, if we don’t have it integrated into a regulatory framework when we’re talking about security tokens, we all have a problem and that speaks to investor protection and it speaks to the proper movement of capital through the system.
Okay. So Ryan, let me take a different take on the same question. Somebody comes to StartEngine. So, Howard believe that having investors is the key, or SeedInvest. I’m sorry. What protocols, what features should be in SeedInvest for investors to feel comfortable, that if there is a token for a startup issue, by SeedInvest or listed in SeedInvest, is legit. The liquid is going to be there. Like what are those capabilities?
I mean, I echo a lot of what Howard said. Some of these things we’re talking about are a cost to doing business and ultimately everyone’s going to get there at some point. But people don’t come. They haven’t come to SeedInvest over the last few years to raise money or to invest because we have KYC or AML accreditation verifications. That’s just a fact. It’s a cost to doing business. People come to our platform because we have a reputation, both in hopefully getting investors into quality deals that are vetted and in getting the entrepreneurs at the end of the day, giving them the ability to raise capital in a more seamless fashion, so they can actually focus on building their business. What matters at the end of the day is the experience that people have.
Airbnb is not … you mentioned airbnb. People don’t go to airbnb because they have this amazing technology that connects you with hosts … Anybody could build that. It’s about the, it’s about the community that they have and the viability of the marketplace. So, I think those at the end of the day, when we flash forward a few years, they’re going to be the things that matter, all the plumbing is absolutely mission critical and everyone in this room knows that we’re at the ground floor, just like a few of us were at the ground floor years ago around the jobs act. We all had to figure out a lot of these things, when we were on April fifth, 2012 and we signed the jobs, act into law. We had this idea of maybe verifying accreditation but nothing like that existed. So we had to build that. But that’s. People don’t come to SeedInvest, because we have that system. That’s something that people can build. I think it’s very similar to what we went through years ago.
So, Michael, you and I held out on an email exchange a lot this weeks ago. What’s wrong with the standards in this market? When it comes to security tokens, do we have the wrong standards? Do we have too many standards? What are we missing?
I think standards are a good start. I think I do feel like we see new standards coming out every couple of weeks, and really with what Fabians his presentation was fantastic earlier today, which basically said that in my view, ERC-20 tokens are the reason why this technology’s really proliferated. It’s basically you have very simple functions that you’re programming into a smart contract that everyone agrees on and on chain and you can have an interloper operability protocols. So, I think people are trying to do that for security tokens as well. I think the problem is there’s maybe too many standards and not enough actual activity on those standards itself.
So, we haven’t really been focusing on the standards itself. We’ve seen new ones coming out every day. Where we tried to do is we tried to push forward a framework, which I’m calling the two to two token waterfall, which is basically a liquidity optimized framework for private placement securities. It can adopt to any standard. We’ll pick the standard later on. Basically what the framework is trying to do is it’s trying to solve a liquidity problem in private securities. It’s you’re replicating the entire stack of a financial transaction, there’s token A, token B. Token A represents death, token B represents equity.
And if you look at a real estate property, if you can basically fully capitalize the deal through these two tokens. You can have transparency on the deal that you can see it. If you basically have a viewpoint on the asset, what the asset is worth, you can price token A, and you can price token B. So, this kind of no arbitrage scenario allows you to, with that plus transparency. I actually having full transparency on the entire asset will help liquidity. So, that was our attempt to push this industry forward.
You just killed one of my questions again; ahead of time, but okay. So we’re talking about protocols. So that’s a nice segway to the next section. Vincent, I’m going to go with you. Every STO today is equity token for the most part, it’s on equity for a presentation share or something. Isn’t that like the killer scenario for security tokens? Do they give it up they pay dividend or is it yield? Why aren’t we focusing more on that?
I think some of us are. Again, I guess being a little bit older and been through a few cycles. We look at smart contracts as the ultimate structured finance product. So, it can be dead, it could be equity, it could be profit participation, it can be a revenue participation combination arrow. Monday night, we’re very pleased to a close on Aspen digital tokenization, as the aspen savory just resort. That wasn’t a pure equity that was a REIT. 10 days from now you’ll see us announce a very large fund interest that is tokenized. Three weeks after that will be a very significant debt instrument. So, I think that and part of the panel earlier before us was very astute, and the disintermediation of some of the middle folks by access of the … Again, the investors who haven’t had that opportunity, that we’d be very happy with a 5% or 6% yield. We’re particularly seeing that in real estate. I think compression of cap x as a result of it, certain illiquid instruments, right? Illiquidity, discounts at 30, 40% on illiquid instruments are going to begin to evaporate a bit, when they have access to liquidity and we think that’s going to be the case in many debt instruments.
Ryan, how do you guys think about that, when one comes to SeedInvest?
Yeah. I mean, a couple of things. One I think over the last 18 months, a lot of people in my space have learned this, but if you take a crappy investment that hasn’t entered on the blockchain, you put on the Blockchain, it’s still crappy investments. So, it’s the same thing, right? That I just want to make clear, along the same lines of that, I don’t see why the market 10, 20 years from now will look that much different in terms of the makeup. So, real estate debt equity, it all hopefully should be Blockchain. I think everyone’s in this room because they believed that. Now, which asset classes are the early adopters that might be why some people are going towards equity or real estate, but I think at the end of the day it’s going to kind of mirror the private capital markets that you see today.
I see. So, Michael, let me go back to you. Like, why don’t we have a protocol for tokenized death today, until sort of your paper came out, which wish I probably called the most important paper in security tokens in the last year. But what are we missing?
Thank you. The co-write on that paper is brilliant, and they said a very significant portion, they should be on this panel instead of me. If you look at security tokens are just basically a digital version of the real world assets. So, the compliance is the same functionality is the same. You’re putting a digital wrapper around something that, I previously was very difficult to transfer. So Derek, I ever saw a crowd wrote this really great article called the digital wrapper. And what he basically explained as you went through the history of the Internet and, and kind of tried to explain what email did to mail, right mail previously, in order to get information around the other side of the world, you have to mail something, someone else, it takes a week for example.
But now you have email and you can basically have to click a button, send something to someone on the other side of the world thinking about what kind of impacts that have the business, what kind of the education really impacts the society, globalization, all of that from being able to transfer information seamlessly. It’s digital, rappers going to have that same comparison effectively as he put it around a security. You can send it obviously submits it to compliance. You can send it to someone else in the other side of the world. Whether that’s token, whether that’s equity or whether it’s that I think there’s going to be some term that comes out that’s not globalization. Some thought leaders going to come out with it and it’s going to be a bigger than, I think with globalization did to society.
If I had a talk and every time I heard that email analogy, I’ll be there in free world right now. Well, we need a better one. So let me stay with you there. I have this theory about what I call financial primitive, like when you think about the next generation of platforms, programmers writing this protocols. What are the things we need a depth protocols, equities during…How do you see that world? Like what primitive you should offer a developer to be able to ride STO’s in a very compelling way without hacking smart contracts by hand like you did today?
Yeah, I mean, I think the ultimate goal is to extract all of this away to Blockchain completely, from the end user, right? People around them are they not, they’re actually transferring value in using these, these protocols and using these platforms, they don’t actually realize that they’re using it. Because the app that they’re looking at, it doesn’t look like a Blockchain doesn’t look like a shell terminal because that’s, they’re not managing private keys. That’s really confusing to most people. So, I think that the tokenization platform, eventually it will just be some sort of portal or a developer can come in and they can upload information. Obviously they have to make certain disclosures; they have to structure the deal appropriately, and then primary issuance platforms like SeedInvest which is really incredible. Congrats on the news today.
Thank you. I appreciate.
Their job is to find the buyers, right? Their job is connecting buyers and sellers. And so ultimately, there is the way you distract us away from developers. They think about it as they drop their asset into this digital bucket. It spreads it out onto all these people and now they have access to these assets they never had before. It’s kind of like the uber verification of a real estate or assets, right? Previous to the rest of bankers in this room, but previous to doing real estate deals, you’d have to go to the bank to finance your debt right? This allows people around the world to basically finance debt, to fractionalize and finance it. And then you have the right framework. If you have the right structure, you can potentially have liquid markets emerge afterwards.
So, Howard, let’s go with your favorite topic, Decentralize Exchanges on trading. Do you think there is a place for decentralized exchanges, when it comes to security tokens or is it all centralized?
You’re setting me up, but it just-
Yeah, I did write an article that said that, ‘regulation is the enemy of decentralization.’ And if you think about it, what I’m really trying to say is look, the rules of regulations. There are thousands of rules that they’re complex. They’re just in the United States and then you can go into France, which everybody thinks has no rules, has tons of rules as well. And then a lot of countries are following what the SEC does. I mean Canada is a good example. They don’t have the jobs act yet, but they probably will get there. If you look at all those rules and then you look at decentralization, if you look at Bitcoin is a great example of decentralization. You can do regulation at the gates, right? You can do it where I think exchanges would ... They haven’t bothered to do that yet, but they probably won’t get there.
And the issue really is this, if you have a security token that can move around because the decentralization says, “Oh, we did the check on this person. This person is good, but they are not a broker dealer.” You can’t rely on that check, because you as a broker dealer have to do the check. So, decentralized is really a peer to peer system where one person, that means the other, they cannot be any commissions paid to, cannot be any money made out of it. So, if there’s tokens that were created to make incentives, it’s going to be probably an issue with regulators. Yes, they don’t have control on something decentralized, they would have to shut down to hundreds of thousands of servers in order to do it or who … I don’t know, kill switch if there is one.
But the reality is that we live in a world of rules and regulations and that’s it. We just have to deal with it. And a lot of people in this world have made an opinion that it doesn’t matter. It’s not important. I think they’re going to have a rude awakening.
I’m going to stay on that topic for a minute to see if Steven has a heart attack with this. You guys tZERO, how do you think about decentralized exchange? Are they the enemy or?
No, I wouldn’t say the enemy. I think it’s very interesting and as people keep alluding to the fact that this is, it’s so early in this kind of ecosystem and secondary trading security tokens at the moment to make regulators comfortable even with a centralized exchange and just having a security token, trading on a registered ATS with the clearing firms who satisfies custody and control in a broker dealer who does KYC and AML and risk management tools. I mean there’s a lot of pieces that are needed, a lot of people kind of take for granted a little bit from the traditional capital markets where yes, the technology is there to allow for decentralized transactions and I think the ICO boom and crazy of 2017, it was maybe the best and worst thing that happened to this market where you had a lot of capital coming in, a lot of people learning about it, but then people kind of thought, “Oh, this is how things can trade in an unregulated world.”
And when we were even doing our own offering, people coming to us and saying, what’s the deal with this? I got to do KYC, I have to give you my social security number and we’re saying it’s a registered offering and what’s the deal with all the disclosures and will the same disclosure existed in other ICO, they just didn’t tell you about them. So it’s something where you kind of try to match the technology with the regulatory environment, but to say that in the future, decentralized exchanges won’t be a thing or won’t be a little more popular, the way to go. I think it’s a little tough. You’ve been looking at eCommerce. I mean the richest man in the world now is a founder of an eCommerce site, where I think in like early 1990’s, eCommerce was illegal.
So to kind of look at how the regulatory environment will evolve, the technology will evolve, we’re still so early, but the idea of having … being able to do a trade without any middleman is great, But also back to the decentralized exchanges, that’s where you’re going to have more liquidity, you’re going to have more price discovery and you’re going to be able to do it in a way that satisfies regulators. So I think for the near future we’ll see more centralized exchanges and those centralized exchanges connecting with each other. Decentralized exchanges in a regulated environment, I don’t think is there yet.
That was a politician’s answer. Michael. Let’s take the contrarian viewpoint on this one. You’re behind a protocol for decentralized trading. How much do you think programability will help to make regulation on change undecentralized?
Yeah, I think that’s exactly what’s going to happen. I think all the compliance is going to get certified into the smart contracts, that way it’s transparent. That way regulators themselves can just run scripts and actually see what’s happening on chain. We take compliance very seriously today. We announced a partnership with Genesis Block, Lee Schneider is our broker dealer. So that’s how are going to be our foray into tokenized securities.
The way I think about decentralized trade, the way I look at trade itself is as five core components to trade, there’s pure discovery, there’s price discovery, there was execution, there’s clearing and there’s custody. You go in that loop every time you want to do training, right? So if you can decentralize all of those while staying compliant, you can gain very, very significant benefits. Like for example, decentralizing custody, let’s just focus on that for a second.
Custody itself is a very highly regulated event on Wall Street, right? You have to have the securities approved that you want to take custody. And that makes sense, right? Because you’re … someone is taking over your asset, they’re holding your asset for you, and that’s scary, right? So obviously, a very highly regulated event. Now take a step back to what security tokens are, what’s the entire addressable market? We have public securities which are highly liquid. We have private securities which are much less likely.
My thesis … Our thesis is that the public securities market, we already have strong capital markets, I’m probably not going to address those with security tokens. It’s not going to provide an immediate benefit, but the private securities market, that’s something that they’re $10 to $15 million deals, something like that. If you can bring those on chain and you can provide the right framework around them, they can trade in compliant peer to peer matter.
In fact, the custody, right? If you’re trying to scale this, private securities market, there’s probably 1,000 different securities, 10,000, 100,000 around the world that you can essentially bring on chain. It doesn’t really scale with the regulatory requirements. So being able to actually decentralize custody is something that I think is going to allow decentralized training platforms to have a significant competitive advantage over the centralized.
Cool. Let’s move to talk
about the market itself. Ryan and Howard, you guys, somebody used a term to describe you guys yesterday. They said that your both survivors from the job act. That you’re two of the few companies that are still standing. What lessons, Ryan, let’s start with you. What lessons have you learned from the job site that are relevant in this world now?
Capitol Hill takes a lot longer than you think? We certainly learned a lot of lessons through the whole ordeal over the last six years. One thing I think that we did well as a space is we had a very open dialogue that we initiated with the regulators in the beginning before the bill was even passed. So we maintained that dialogue and I think there are other industries that made the mistake of not doing that. So a great example in Fintech is Prosper and Lending Club that happened before the jobs act and they thought that their model is legal because they’d done their homework and had attorneys that told them it was legal. And they both got it knock on the door from the SEC.
And at the time Prosper was the first. They were the largest, and Lending Club said, “Let’s talk,” and Prosper said, “F off,” you get it? And they almost got taken down, and I think they spent a million dollars on legal, and that Lending Club ended up taking the lead because of that. And we took a very different perspective. Is our … First of all, are the rules of the jobs act perfect right now? Absolutely not. There’s a lot of … I mean, it’s workable and we’re all taking management, but there are a lot of improvements that need to still be made.
And I think when you think about crypto and security tokens, and how that fits in a regulation, and there’s a very strong argument that we have a square peg, round hole issue, for sure. Do I think that the rules today are viable and that we should pay attention to them, and try to work with the existing rules? Yes, I do. Do I simultaneously think that as an industry we need to have that dialogue with the regulators to try to improve the laws? Absolutely. But a lot of that comes down to educating them on what we’re all talking about because it is complex and a lot of people don’t understand it quite yet. So I think that’s a big lesson that we learned that feels very similar to 2012 to me.
Let me put you on the spot to earn my reputation here. Do we need to change securities law? Like is securities law updated to deal with this new ecosystem?
Of course. Yeah, of course. I mean most of the securities laws were written in the early 1930s when the popular technology was the telephone and they were and these came around because after the great depression, they were snake oil salesmen in Louisiana calling people up and getting them to send them money. And obviously we have a lot more information through the Internet on people and offerings than we did back then, so it’s a different world. And since 2012, we had to do a lot of work on educating the regulators on social media and how that works, and things that seem obvious to some of us.
But yeah, I mean we need to do … I think education is the first and foremost thing that we need to do as an industry to educate them because, yeah, when they were thinking about protecting people from snake oil salesmen calling them on the telephone, they were probably not thinking about crypto back then, so.
Howard, how do you think about securities law today and how do they apply to Crypto? As a country, we’re very good of taking all laws and reapplying it to new trends. Is that what we need to do or do we need to take a serious look at legislation and say like, “look, it’s time to change some things.”
Well, first of all, I think the jobs act is an extraordinary new legislation for securities. What I’ve learned through when I started, that most people don’t read and there was very few people who understood what it was about. We talked to attorneys and pundits in the space, and they all recommended that I stay away from it because they thought the SEC will never implement it. And even if they implemented, all the investors will sue you to your ground. And that gave me an inspiration to do this business. And I did that with the game industry, everybody said don’t go into the game industry, it’s dead. What?
You should put that on the website.
Yeah. But Atari was dead, so everything is dead. People can’t see very far. I think Ryan is a visionary for doing this jobs act. And I think I would love to … And I learned from my conversations with him, but I have to tell you the jobs act is amazing. We’re the only country who has it and everybody complains here. Everybody wants to leave our country, and go, and move to Malta. It is unbelievable. They don’t get it. They really don’t. But they will. The SEC is actually a great organization. It’s very thoughtful, very thoughtful.
I had conversations with FINRA, it was the SEC, and they are really thinking about this space. They’re not taking it casually. They’re not trying to cut innovation in our country. That is not how they operate. On the other hand, there’s incidents with Elon Musk, who I’m a big fan of. They’re not amused when people just treat them like they’re not important or they defy the rules completely. They’re not amused by that. And so, there are sanctions and enforcements, and you see investors saying, “We won’t invest in American companies anymore because I got a subpoena.” “Well, why did you get a subpoena in the first place?” “Well, probably because they were not thoughtful of what they were doing.”
And so my view is that the jobs act is great, it will get enhancements and that’s what usually does. The house puts an act in place and then it goes out, and the regulators put in place, and then there’s always some fixing going on. But we’re blessed. We’re blessed with an extraordinary piece of legislation. We should take advantage of it. And I recommend people to read it because even today, a lot of people are … You didn’t mention the regulation crowd funding in your list. Regulation crowdfunding is unbelievable. I mean, again, most people don’t see it this way, but I see it.
You can raise up to a million dollars, soon it will be probably going up. You don’t have to go through a whole SEC review. They use a company to do the review. You can have … The investors have a one year lock up on their shares, which is okay. But it’s very inexpensive. You’re talking about thousands of dollars to do an offering, and that is a revolution in itself. But it’s masked by this whole crypto world who is raised billions of dollars, billions. It’s masked, but guess what? It is a very, very well thought through legislation, very strong. It has a future.
And what you’re going to see was the crypto and the Blockchain is gone move towards that regulation, is going to move towards it and adopt it. And that two together is the perfect storm that is going to allow us to become a very big industry. Yeah.
I would just add to that really quickly, I mean regulation exists for a reason and it’s been built up over the last eight years for a reason because it is a balancing act. On one hand we want to remove friction so that we can allow entrepreneurs to build companies and create jobs, and build GDP, and that’s great. But on the other side, we do need to protect investors in some of the regulation is instrumental for that. So it’s a continuous balancing act. And as new technologies emerge, you sometimes need to revisit these concepts.
All right. So Vincent, if you look at public market architectures, I mean Wall Street makes money based on trust. Most people don’t think about it that way. A lot of the capital that gets moved on trade, it is based on trust established between different players. Most people in this conference, we actually believe that security tokens are going to disintermediate a lot of those aspects. Carlos Domingo from Securitize, used this analogy in the previous panel that we only need three layers or three components, or whatever. However, I feel that almost every player that we hate in public markets like pick your favorite clearing houses, broker dealers, the dealer is trying to make a play for the security token space. Are we taking that risk that we’re going to rebuild the same mess we have today under a decentralized architecture?
Couple of comments there. So first and foremost, we’re going to have less of a mess as a result. We’re still going to have a mess.
Like from 100% to 99% or from 100% to-?
50% to 75%. And I think it’s actually the essence of this very conversation, and Michael is absolutely brilliant, and I’m blown away with the stuff that he comes up with. But starting with, we’re not an advocate of a decentralized exchange for Securities, and Michael knows us. We have these wonderful conversations and I think those conversations challenged both of our thoughts to come out with great results. And mad respect for Ryan, and so excited as a fellow entrepreneur and a brother who we were at the … I think we were the first six folks that started the crowdfunding professional association and crowd funding intermediary regulatory advocates during the jobs act. So we go to the beginning of the jobs act.
And that there’s another lesson in that as well as this is history repeating itself in Blockchain. It’s many of our technology friends who are coming to the fore way and they’re going to decentralize, and they’re going to disrupt, and they’re going to dismantle everything. And guess what? You may have the best technology in the world, but when you’re dealing with the security, you cannot even begin to transact until you have the regulatory licensing and provisions in place.
And Ryan, he’s one of the survivors who pivoted and grew and iterative, but I can’t tell you how many dozens of our friends who are Reg. CF or Title III aspirational platforms who knows … And this was when law was in place in the past and we had six months or 180 days of rulemaking to get through, and guess what? Five years later when the final rules were put forth. So many, many, many of those aspirational great technologies never saw the light of day because they couldn’t put it through.
So we started with regulation first, right? And do we think that the laws are right today? We’ve done 23 petitions for real change comment letters and no action letters to the SEC and FINRA in the last 32 months. So no, we don’t think they were all right, but it doesn’t matter if you think they’re all right today. If you want to be in business and transact, you have to comply with the rules that are there today. So we start with being executable. That’s why we closed the deal on Tuesday.
That’s why we’ve done the first secondary trades if there’s a security token on an ATS because we have the regulatory approvals and we’re skating to where we think the rules we can change over the next year, two years, five years, and 10 years, and maybe in that point we’ll have fully decentralized, but it it’s a long answer that goes back to trust. We’re not going to see institutional participation in this space unless they fully trust the market infrastructure, removal of counterparty risk, KYC/AML, suitability requirements, all the things that could be deemed pouring but a hallmarks of our financial service industry.
Why do we collaborate with CUSIP? Because we have continuity of information, price disparity, information disparity now has symmetry across all investors and can be discovered on the Bloomberg and Reuter’s journal. I think that’s pretty cool. There’s 10 million CUSIPs out there. We’re going to move into tokenized instruments now. Well, when we talk about decentralization, again, not knocking on Michael, but when we talked about 12G, how many people know what 12G is, that holder of record rules, right? Back to the jobs act. We moved that from 500 to 2,000 shareholders. Guess what? When you have 2,000 shareholders, you have to be compelled to be a public filing company.
How many people in the decentralized world are thinking about that and have a system to do that? Why do we reconcile back to a transfer agent? Because there’s verified holder of record rules that now the regulator is saying, “Got it. We have a level of comfort.” These are the things that I think drive trust and it going to continue to iterate-
And I think everything you described can be programmed into smart contracts, and I’m super excited for that to happened because computers… well you programmed the regulations and so the smart contracts it’s very clear.
One at a time, one at a time. Right?
Do you have ATS? Computers are much better than humans.
Guys, you’re making Howard look good.
This is entertaining.
Ryan Feit: I think the audience wants this to happen.
Steve said we have to have a little bit of spice.
Michael’s point is programmability amplifies regulation to a point that it can all become smart contract.
You know it’s right? You know it’s true. Well, you don’t need to trust this central account anymore.
… but I’m dating myself 35 years ago, but the reality is you have rule 144 where you have to know if you’re an affiliate what the amount of trading there is on every marketplace is to decide if this affiliate can trade means you need an oracle, which means you need a trusted source and you’re decentralized. It’s no longer decentralized if you have to have a trusted source. How are you going to reconcile that?
Right. So you basically have walled gardens and you basically have oracles. I think you’re exactly right. You have oracles that are telling you on the Blockchain who can trade, who controls the white list-
That is no longer decentralized.
It’s called licensed people. It’s called ATSs, broker dealers, clearing firms, transfer agents. The essence, therefore it is not decentralized. It is semi-centralized at the best and by the way. The subject of a patent that we were just granted globally to cover trading clearance, settlement and depository of a security on a Blockchain. So there is a precedent and we’re doing that for no other reason to create standardization of best practice so that we can all collaborate and have an infrastructure to work from. But decentralization- cannot exist with regulation.
I think the bottoms up approach is going to win, but that’s my opinion.
Guys, you didn’t get this with any other panel. All right, so Max with tZERO, can we get rid of some these guys, some of these players or do we have to rebuild the same mess on top of decentralized infrastructure?
I think there’s a lot in there and I think there’s a lot that some folks, even myself before joining the … I dropped out of finance as a sophomore in college because I didn’t like it and I thought it was corrupted. I thought it was BS, but there’s a lot that you realize that you take for granted in the back end. And so the things that Vince is alluding to from the broker dealer declaring from the transfer agent, all the pieces that work well together, yet there’s still a big mess in the back office and a lot of things that can get automated and can be put on a distributed somewhat immutable ledger.
It makes sense to move that way. I mean we can’t argue that there aren’t things that are messed up and you look at Procter & Gamble, they had a shareholder vote. They had three recounts and they still came up with different results every time. Obviously that system isn’t working. A securities class action recovery industry, not many people know about, but if you invest in Enron or a Tyco, or there’s a fraud and almost any merger or acquisition that gets announced, there’s a securities class action case that comes from that. The people who held those shares and lost money because of it, are owed money back and there’s this very messy process with claims administrators and sending out letters, and finding out who the shareholder of record is because everything’s held in street name and you don’t know who actually owned the stock.
A lot of these back office systems and middle office, and things that are behind the scenes can be made much more transparent, much more efficient and that those benefits will come back to the actual investors. But at the same time, we’re still early with the technology where it’s not scalable enough for cost effective to do things on chain. You even look at cryptocurrency exchanges like Gemini or GDAX, the trading still happens with a traditional matching engine and traditional risk management, and traditional trading tools. It’s different deposits, it’s different inputs and outputs in the trading system.
So being able to do transfers on chain, being able to leverage the technology and spots where it makes sense will definitely help to clean up the mess and anything that you can do to automate processes will take human error out of it. At the same time, there’s still going to be humans involved. There’s still going to be bad actors that look for loopholes. There’s still going to be things where you have problems, but the really exciting part potentially could be a shared back office across a lot of these different broker dealers and clearing firms. I don’t know a single broker dealer. We have over 150 broker dealer customers, I don’t know any of them that liked the clearing firm.
You have breaks and stuff to deal with and then there have been initiatives in the past with Goldman Sachs, Citi, J.P Morgan, to go to a shared back office and they can all agree that it makes sense in theory, but then it comes down to, “Okay, well, we’ll use my back office.” “No, we use my back office.” Well, now it can be a spot where we can have a decentralized ledger and a decentralized back office. So I think and I know you may say it’s a politician’s response, but we’re trying to move it forward using the tech that makes sense and as efficient today while filling the holes that are inefficient, and there are a lot of it but it’s a product.
That was a presidential candidate response. Um, um, one number with these guys. Howard to Max’s points, how much of this regulation with security token is going to take place off chain versus on chain? How much is people doing … Like today 90% of security token is taking place off chain?
So for those, just to explain the on chain off chain, so on chain means you have a smart contract that handles a lot of things and if you need information about the shareholder; the name, the social security number, address, that is called off chain, is in an old format database, hopefully not the spreadsheet, but you never know. And so that database controls what we call off chain. So today if you look at security tokens, most of the security tokens are done today are created in a smart contract under ERC 20, which in a way it’s interesting because it’s free form. You can trade it any way you want.
And so there’s new contracts are coming out with, for example, harbor and polymath, and securitized.io, and they’re creating something a little bit more in compliance because they have some blocks, so that it’s not free flowing. And at the end of the day my opinion is this, you’re going to have on chain, which is a smart contract to manage either the security as a stock certificate, digital security. Doesn’t do much, it’s there, it’s visible and you can see where it trades. Or you have more sophisticated ones that will take care of some of the compliance issues.
But ultimately, they have to go off chain and probably going to have to go to a registered transfer agent so that you can have more than 2,000 shareholders because liquidity with 2 or 300 shareholders is not liquidity. It’s a joke. You need tens of thousands, at least several thousand people. And in order to enjoy and not become a reporting company, you want to be able to issue it with regulation crowdfunding, regulation A-plus and then use the registered transfer agent, and now you can really put together a great marketplace. Right?
So, they’re telling us we’re out of time. So let’s end up with two questions on a high note, both controllership questions, and this is for everybody, so you have to go quickly, yes or no. Do security tokens deserve their own Blockchain? Michael.
I only get a yes or no answer?
A little and 20 seconds of why
I think there’s a potential for specialized Blockchains for security tokens.
Vincent, is ethereum good. Do we need a new one?
I’m sorry. Gentlemen. Consented friends? No. I think ERC 20 is the protocol for security tokens?
I know what Howard is going to say but go-
ERC 20 is important.
I don’t think it really matters. I think you guys are …You’re debating which Blockchain is going to make it. I don’t think it matters.
No, I’m saying do we need a new Blockchain specialized on security tokens are the protocol.
No, I don’t think you need a new one.
Well, I’m going to just take a different answer, which is I think part of the opportunity right now is that we have the ability to reinvent some of the rules. And so things like right now, why don’t private company shares trade because the lawyers put a roofer on all the deal docs. So we need to use this as a way to change some of those things. Otherwise, you’re not going to have any liquidity no matter how great the technology is. So I think that’s interesting.
I think we will see new Blockchains come about that or we’ve already seen kind of now third generation Blockchains launching. A need to solve things with scalability and cost effectiveness. And I’m excited to see things move from proof of work to proof of stake with the same security and the same protections that come with that proof of work. And I think we’re starting to see, and I think it makes sense to have a new Blockchain for securities [crosstalk 00:51:23].
… a little bit though, whether it is ERC 20 or a different protocol. There needs to be standardization and liquidity is hard enough. So I think a lot of people in this room are going to have to work together for this to actually take off.
All right, last question. Tell me something you believe about security tokens that most people disagree with and the next person who mentioned the upside gets kicked out off the panel. Go Michael.
That most people disagree with. Can we go to the other side?
No. Decentralized changes are going to be cool what have been?
No, I want to reiterate what Ryan says, that basically if you list a shitty security as a security token, it’s not-
No, everybody agrees with that?
I don’t know about that.
It seems like most of the things that are on the market have not been great up to this point.
All right, Vincent, what do you believe about security tokens that most people disagree with?
I think it’s regular regulation first and technology second, and that is going to win the day and move the space forward.
All right. Howard?
I think we need to decentralize the SEC.
That’s a … You get the award for the best answer of all the panels of the entire conference. Ryan.
I think there are a lot of people who have written papers and blog posts on this topic that are ignoring some very fundamental issues that they needed to start thinking about. 12(g), is one of them, Blue Sky is one of them. And there are a few of these very fundamental challenges that have not gotten enough air time and thought.
Is your answer, going to be that tZERO is going to launch. Max Melmed?
There’s a lot of things in the backend that don’t quite realize once you start getting into the weeds. But yeah, regulation is absolutely key, but you also don’t need to be a company that’s leveraging Blockchain technology in order to issue a security token. You could just be a great company and then wanting to have fewer shares issued and traded using the technology of the future.
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