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Expert Interview


 
Henry Elder: Securitizing Assets on the Blockchain

Henry Elder

Henry is the Co-Founder of Digital Asset Advisors. Henry is also the Director of Origination and Investment for Slice. He has overseen more than $1 billion of investments across the real estate and technology sectors. He has also been investing in and advising blockchain startups since 2017. Now he uses his expertise at the intersection of blockchain, real estate, and finance to build Slice’s real estate investment platform.

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Transcript


 

Adam Chapnick:

Hey everybody, it's me again Adam Chapnick with the Security Token Academy. We are here in Los Angeles at the Crypto Invest Summit 2018 talking to all of the most interesting people on planet Earth. One such person is standing, not standing, but sitting beside me right now, that is Henry Elder. He is the president of digital asset advisors. Thanks so much for being with us.

Henry Elder:

Thanks for having me on! It's always a pleasure to be on the Security Token Academy broadcast.

Adam Chapnick:

Oh, that's very kind of you. Now I'm sorry for setting such a high bar, you have to be the most interesting person on Earth.

Henry Elder:

Oh gosh.

Adam Chapnick:

So, what could possibly go wrong?

Henry Elder:

Oh, so much.

Adam Chapnick:

Okay, so for everyone who's never heard of digital asset advisors what is it, what do you guys do?

Henry Elder:

Sure, yeah so we actually have two different businesses that we partake in. One of those is we work with companies that are either pursuing an asset tokenization or a security token offering. And then the other one is we work with conventional businesses that either want to understand the blockchain, or potentially implement it into their existing business practices.

Adam Chapnick:

You got it, amazing. Okay, so which one of those is the more sort of active side right now?

Henry Elder:

We bring clients in on the conventional side and then often times they end up on the security token, asset tokenization side as well.

Adam Chapnick:

Right, amazing. Well, we are, I mean, I particularly am much more interested these days in the whole asset tokenization but we talk a lot about you know, since we came out of the sort of the crowd funding world, the equity cover, sort of just issuance to raise money, it's awesome, we love it obviously, the Security Token Academy.

But, lots of people try to tackle it in different ways and, fewer people are sort of in the fractionalization of specific assets or tokenizing of assets, what are you seeing in that space?

Henry Elder:

Right, so we actually started the company originally to work with one client in particular and that was Slice. And Slice was tokenizing LP equity interests in commercial real estate, all over the country, for sale to international investors. Right? Which we thought was an incredible use case and you know, Slice has found quite a bit of success with that, but one of the things that Slice found was that a lot of the investors they were speaking to were not quite so interested in the blockchain side of it, right? The international investors were like look, we really want access to the product that you have, the actual real estate, right?

Adam Chapnick:

Of course, right.

Henry Elder:

We don't really care so much about the blockchain side of it. And, that was why on the DAA side for digital asset advisors, we were like, okay, we need to get more into educating these institutions, because everyone is tackling, alright, let's tokenize the world, right? Let's move all securities onto the blockchain. Let's tokenize every single asset. But the problem is if the actual investors, the buyers of those tokens, don't understand the benefit of the blockchain, well then they're not going to buy them, they're just going to look at it and say well why don't I just do it the way that I did before, and there's still a little bit of that association with the dark days of crypto. Right? When bitcoin was sort of a dirty word, and people were like oh, it's just money launders or whatever, and we know, we know, we empirically know, from studies with the London School of Economics and here in the United States as well, that that no longer happens, right?

But, in the world at large, the public, they still have a little bit of that. And so it's-

Adam Chapnick:

Well there's a lot of problems with that, not only is it just fundamental misunderstanding, but also from the perspective of the ecosystem itself, everybody's excited about the liquidity premium that we're going to get, but if they don't even understand that there's a benefit of liquidity they're going to keep the price low.

Henry Elder:

And there's no liquidity. Right?

Adam Chapnick:

Right, that's the problem, so that's a super interesting observation. So, what do you think is the answer to that, to having all ... you got a ton of money that's wants into fractionalized real estate, but they don't get that it's better to have it through a token system, what, what's the answer?

Henry Elder:

It's education, it's education.

Adam Chapnick:

How do we educate? Is there a, maybe some sort of channel that does videos with experts like yourself, focused on security tokens that could help? Maybe?

Henry Elder:

I think that's a fantastic start.

Adam Chapnick:

We should try that. But after that, what else?

Henry Elder:

So, it is you know, it's a multi-step process, right? So, for instance, if you want to create a security right, or if you want to convince someone that has securitized assets normally, and you're like okay, well now since you securitized them on the blockchain, right? Well, there are a series of steps that they have to go through that you need to, you need to get them comfortable with the fact that blockchain-ifying it will not have a negative impact on each step of that process, right? So, for instance with real estate evaluation, right? A read is particularly interested in how the asset, the security asset that they're creating that's tied to the real estate will be valued. Right? And so you need to talk to the firms who are valuing those assets, the securities themselves and say alright if we put this on the blockchain, how will that effect the process by which you value the securities themselves?

Adam Chapnick:

And do you even understand what we're saying, is also important right? Before you answer that question.

Henry Elder:

Yes, yes exactly. It's one step at a time and it's also, you know you go in to talk to these people-

Adam Chapnick:

That's very interesting actually. Sorry to interrupt you, but yeah that's, to go straight to the people who are creating the evaluations is a very obvious solution that I hadn't considered.

Henry Elder:

Right, right! And a lot of people aren't thinking about it because in the blockchain space everybody's so excited, you know? They're like oh we're going to change the world you know? We're going to create these things and people are going to buy them. But the thing is, no, there are intermediaries that, you know, our industries is obsessed with the idea of disintermediation. But there are intermediaries that are actually very important for that process, because as an issuer you need to be able to protect yourself from liability, right? That is one of the most important things, and those intermediaries are ways for those issuers to outsource their risk. The liability of their LP saying, well did you take the proper steps to insure that our investment is protected, right?

So, this education process is a matter of hitting all of those not well known intermediaries. You don't interface with them regularly, their names are not well known, but they're still incredibly important to that process and you have to educate them as well.

Adam Chapnick:

Yeah, fascinating. So, wow. That is a much larger challenge that I don't think many are directly built to address, I mean people say we should do that, but our core business is x. But that's not what we do , but we need to do that. But our core business is y.

Henry Elder:

And it's also not money making in the short term.

Adam Chapnick:

Right, that's right ecosystem lifting, it's not, yeah, that's fascinating. That's actually what we're built to do but, we are but one company.

Henry Elder:

Right, right! Which is why I like going on your guys' podcast. And this televised one as well because it is a venue for education, and people look to the Security Token Academy as a source of quality education, because like you said, you can create a YouTube channel and the quality can be suspect. There are so many out there that are like, oh it's just another YouTube channel. But, you know creating something like what you guys have created, a brand where it's incredibly high production value, you speak with people who are very knowledgeable in the space and are actually trying to work on these fundamental problems, and then you become that conduit where you know, if I'm talking to one of these valuation people and I have a question that I can't answer, right, or if they just need some better education on something that, just something else in the ecosystem, well I know that I can direct them here, and it will be that conduit of incredible knowledge that I may not have myself, you know? And I know that it's quality.

Adam Chapnick:

That's very kind of you, and we are going to send that clip to my mother, Elaine Chapnick. Save that, thank you Henry. So, what do you think it's going to take, I know we said education, but in terms of a sort of, maybe an ecosystem wide uptick in adoption, wherever it may be, if it's with more issuers deciding to do STO's, if it's more investors deciding to take a try, is it the institutions coming out, what's going to be one or more of the things that really drive the increase in the, the size of this ecosystem, maybe, say next year?

Henry Elder:

It'll be bringing the market makers on board. And by that I don't mean market makers in terms of like the institutions that create liquidity for securities, I mean the actual market making Wall Street investment banks, right? The ones that go out there and you give them a securitized product and they go all right I can sell this, and so they go and make a market for it.

Adam Chapnick:

Right, wow.

Henry Elder:

I think that's the most important part because at the end of the day, we need demand for the products we are creating.

Adam Chapnick:

That's right.

Henry Elder:

And, again at the end of the day, as much as we may hate them, Wall Street has ...

Adam Chapnick:

The keys to the kingdom.

Henry Elder:

They do, they do.

Adam Chapnick:

Yes, we can all be friends, I feel.

Henry Elder:

Yes, yes.

Adam Chapnick:

So, okay that's industry wide, what about for you guys? How about the next six months what are you expecting to see happen, what can we expect from you?

Henry Elder:

Oh, so, hmm.

Adam Chapnick:

Or how do you project your business, flowing, in the next six months?

Henry Elder:

Right, and how do I say it without giving away too much?

Adam Chapnick:

Oh yes, okay, you don't have to.

Henry Elder:

That I'm working on that I don't necessarily want to go public with yet.

Adam Chapnick:

You could say we have three exciting things. That sound like ...

Henry Elder:

Yes, one thing that we're pursuing very much and it at the forefront of our mind is, people talk about reverse ICO's, right? And a reverse ICO is effectively just conventional company that is creating some sort of a tokenized offering. Which, the idea that that phrase, a reverse ICO doesn't make any sense-

Adam Chapnick:

Doesn't make any sense to me either.

Henry Elder:

It's just an offering, right?

Adam Chapnick:

Right, tokenize something.

Henry Elder:

And, we don't call an IPO a reverse IPO because it's an existing company. Right? So, but that speaks to this mentality that still exists in this industry to some degree which is that if you're selling tokens you need to be a blockchain company. And until we get rid of that mentality, we're going to have trouble scaling.

Adam Chapnick:

Right.

Henry Elder:

Because we need conventional companies to say alright, there is a significant benefit to offering my equity into tokenized format. Right?

Adam Chapnick:

Exactly, in fact I mean, and again, maybe it's because I'm not a technical guy, if anything I'm more familiar with the finance side, that, to me the way bigger opportunity is literally everything else being tokenized, right?

Henry Elder:

Yes.

Adam Chapnick:

So, I get surprised, especially when I'm talking to fund guys, like, we make sure that there's a reason why they're doing their token, it has to be blockchain, and if it isn't then forget it. But, isn't the reason that it's all these other benefits that come inherent with being on a, you know- on a ledger that's public?

Henry Elder:

Exactly. There are tons of industries out there that will remain not blockchain industries, and we want all of them to tokenize as well, and I mean frankly we want all of them to implement blockchain solutions, too. But it's like if you're a farmer, you're not going to become a blockchain farmer. You know? Like you're still going to be ... at the end of the day you're going to be in the agriculture business. But if you want to tokenize that business, and it has steady cash flows and investors who want to buy into that, well then you should absolutely be able to do that without farming, you know,

Adam Chapnick:

You do farm though, yeah. It's pig poo one layer, then, I forget, I have to look at the book.

Henry Elder:

It also smells like roses though.

Adam Chapnick:

It all ... very good it was very true at the end. So, okay great! In terms of 2019, is there anything you want to tell us about what you guys are going to be up to or is it all just sort of you'll let us know when the big news drops.

Henry Elder:

No, well so I do absolutely think that we will have several of our clients who are not blockchain companies but who strew evangelism and perhaps little bit of us putting rose colored glasses on their faces, they've decided to tokenize equity in their conventional businesses, so that's what I'm very excited about for 2019.

Adam Chapnick:

You are a friend of the show, you've got to come back and keep us posted on your progress, soon and often.

Henry Elder:

Yes.

Adam Chapnick:

Thank you Henry.

Henry Elder:

Thank you so much for having me.