Security Token Academy encourages you to read our

A Macro View of the Security Token Industry

Aubrey Chernick, Founder & CEO of Security Token Academy


Aubrey Chernick

Founder & CEO, Security Token Academy

Aubrey Chernick is a philanthropist and entrepreneur. He founded Candle Corporation, a software company that built software to manage the new IBM Operating System. IBM would go on to become a customer of Candle, and eventually acquire the software company. Now, Chernick’s key interests include supporting education and the arts, as well as helping the next generation of start-up companies.

LinkedIn    |    Twitter    |    Company



Aubrey Chernick:

Lets go over then this macro view about what this is all about. So we’re going to go over the basic, you know, state of the art right now, talk about the ecosystem and also take a look at a 10 year view of where this industry might be going. So terms of a basic overview, a lot of people ask the fundamental question, well how does this all differ from cryptocurrency and ICOs? As the video said, we’re looking at three different ways of what we would call a new financial internet, where the first wave is about cryptocurrency, Bitcoin, great to use for payments, but you don’t need escrow capability for payments, you know. The second wave, ICOs. You want to raise money so that’s what happened. Billions were raised, some people would say 13 billion dollars were raised, often in a noncompliant way. A third wave is what we’re talking about today, that we’re going to be launching in the next few minutes.

You’re here, you have the coin. Do you all have your coins? Yes, you should have this coin because this is, you got to make sure the red dots on top and you put it beside your face, take that selfie, you know, for your kids cause you were here, you know FOMO, you’re missing out on what could be the next big thing, this is to, it’s better than a t-shirt, it’s to show you, you were here, so do the selfie it’ll be up on the launch wall board. Okay, so, third wave, you know, security tokens, that’s why we’re here today, okay. So this charts show that over the last, you know, year, 2017 to where we are now, about 13 billion dollars has been raised. Peaking as you can see around the end of last year, January, etc. And so the ICO trend, as we all know, is going down and that’s because the industry needs a do-over, they need something like security tokens that have elements of being compliant with regulations.

The main applications, the use cases of security tokens, are really, really important, sometimes people get confused about these but there are three. One is to raise money for startups for companies that are operating, like an ICO or an IPO. Startups don’t necessarily have a lot of assets, they may go out of business, they are very risky. That is way in your asset allocation portfolio that’s only a small amount, five or ten percent of risky, you know types of investments. The next box, securitization of real estate. Real estate is a little bit more secure. You invest in commercial residential real estate, the building burns down, you got insurance, there’s land value, etc. So you want to unlock that value sometimes through security tokens. The third use case, is what I would call the Crypto fractional ownership of things like cars, special cars, sometimes people want to fractionalize art, etc.

These are the three dominant use cases you’ll hear talked about in the industry. Now what are the benefits? Certainly one of the benefits is 24 by 7 trading. If you want to buy something on Amazon, you don’t have to wait for the bell to ring, 9:30 in the morning. Same thing, that’s where this industry is going, 24 by 7 trading, buying and selling, etc. But there’s other benefits such as efficiency, some estimates have said that Wall Street could save over 5 billion dollars a year utilizing blockchain and other related technology. Speed, the compression and reduction from trading and settlement time of T plus 2 to T plus 0, is one of the aspirations, and realities of this industry. So, that’s great in terms of speeding things up, reduced naked short-selling and making things more efficient, if you’re a day trader that could be useful to you. Not everyone wants speed, some people, some industries want to live off the float of having it there a while longer. Liquidity, of course the promise is better liquidity.

The industry is not yet identified from a quantitative point of view. What a liquidity premium really has been, maybe that’ll be another year based on some companies I’ve talked to. So, the concept is improving liquidity or reducing ill liquidity discount, we’ll see what the quantitative measures of that are, over the next year or so. So what are security tokens? There are a diversity of opinions about what security tokens really are. Some people would say, security tokens are a way that is compliant with regulations to raise money, unlike ICOS. That’s one very common definition and it’s a very important aspect, it’s not simple because there’s regulations all over the world as countries go through what we call a regulatory journey. So, in the US, primarily it means RAG-D, 506B, 506C, there’s only 30 words here, once you know the thirty words you’ve already got your bachelor’s degree cause you’ve gone over 7 of the 30 words, so you’ll be there, okay. So, REG-D, and then if you’re international of course, then it’s REG-S, you know.

So there’s a few other words there, but primarily RAG-D, RAG-S. And RAG-D in the US means that it’s not for everyone to invest in, it’s for accredited investors. For about 12 months lock-up, and then when the lock-up’s expire, then everyone can kind of jump in. So, that’s really the state right now in terms of the regulatory aspect. But there are other aspects of security tokens have a technical foundation. Today block chain, of course, supports many different applications in the financial area. They can support cryptocurrency for payments, as we talked about, funds transfers etc. And they can support utility tokens. But in the security tokens space, there’s something very important called “smart contracts.” And we’re going to hear later today from the founder of, the author of the ERC-20 token, Fabian Vogelsteller, who’s here today, flying in from Germany.

So, X and welcome, Fabian, to our event today. So that’s the state of the art today but work is going on in terms of other types of protocols. They happen to be labeled “ERC Ethereum request for comment” but these protocols are not necessarily tied only to Ethereum and they can potentially be utilized on other block chains that are out there. And I know you’re all wondering, “What do these ERC letters mean?” So for those of you that really want to know, you can write this down and memorize it and Ozzie will ask you later on what these things mean. So, let’s shift now to the global ecosystem. Where are these going on terms of the participants in this industry? Commercial, public sector, etc. So from a commercial point of view, it’s very interesting, about six months ago we thought where there’s 20 companies participating in the security token industry. Now we’ve inventoried about 220.

So you can imagine six months from now where that’s going to be. We’re in the process of compiling a very exhaustive directory of the participants, here you can see some of our security token corporate members that we have inventoried on our platforms. So this list is growing dramatically. Some of these companies support primary issues and secondary trading. Some of them are more infrastructure companies, such as brokered dealers, transfer agents, escrow. Other types of companies, marketing, legal. Do we have any legal folks in the room today? Jennifer, Amy, Ozzie, okay, a few others, thank you! Thank you for coming today. Commercial participants really important. There’s also the question of where do they come from? It’s very interesting. Some of them come from the cryptocurrency field. Some from crowd funding, some form startups. And some from, you know, traditional Wall Street and traditional finances, you’ll hear later today.

So, again, some of the initiatives we have in the security token academy are to keep track of the evolving industry, as Lindsey said, through the directory, through other initiatives. We also want to make sure we understand reality by having a series of interoperability demos, interoperability is really important if you want to unlock liquidity. So, we want to encourage vendors to show how they interoperate with each other especially if your exchange, you don’t want your investments locked in one exchange so when your trading you want to make sure that you have interoperability with a different exchange.

By the way, very interesting we’ve now inventoried about fifty to sixty companies around the world that aspire to be security token, secondary trading organizations. Yes, sometimes we will use the word exchange as a short hand and yes in the united states most of them are really going to be ATS’s as oppose to exchange but technically they’re secondary trading organizations but you know heroes use the word exchange as kind of a short hand for their. So on the national, international front there is about two dozen or so countries that aspire to be somewhat involved in the security token industry and they’re a little bit conflicted because often the regulators want to shut things down but you know the leaders of countries often really don’t want to miss out on what could be the next big thing. They have FOMO, fear of missing out on the next big thing. They don’t want to miss out on the next internet and they don’t want to miss out on crypto and they don’t want to miss out on security tokens.

So they’re all going through kind of a regulatory journey of trying to figure out how much do they open it up and how much do they kind of you know constrain it. So that’s the landscape on a national, international footing but you know in the united states we have fifty states, blue sky laws, they all have their own regulatory position and thoughts on this whole space and there’re special states as we know. There’s Delaware where a lot of corporations are founded and there’s Wyoming and of course state of New York, they have their own special opinion about regulations, what they should be and how they should be enforced, and you know in terms of enforcement we all know Chuck Rhoades, right? So, this is very important in terms of making sure we’re on top of things because no one wants to have Chuck Rhoades knocking at their door, okay.

So, the issues of the regulatory journey important worldwide, the United States, Canada with ten provinces, they have different opinion on this so the regulatory landscape is changing, flowing, it’s not really easy to see how this could go. A major use case for security tokens is to utilize with somewhat illiquid acid such as real estate. Is there anyone here in addition to Ozzie that’s involved in real estate? Terrific, so whether it’s the commercial real estate sector which is estimated worldwide to be about thirty-two point three trillion dollars or whether it’s the residential area that is estimated to be a hundred and sixty-eight trillion, these numbers are bigger than billions, I don’t know what chuck is going to do. I think they need to rename the show from billions to trillions, be more aligned with you know the security token trends here.

So really whether there’s improving premiums or whether it’s reducing the hair cut or the discounts that you have to have if you want to get out of real estate deal early, these are some of the aspirations of the security token industry and how many of you saw the tokenization of the thirty million dollars of condos in New York just in the last couple of days. Yeah, so this starting to happen alright. Where is the industry going to be in the next ten year, so let’s take a look, one of the aspirations of the security token industry is to see how it can execute on a worldwide basis and worldwide basis in part you know relates to cross-border trading and potentially a cross-border trading premium. But that’s complicated because of KYC and AML and there’s some other initials in there like you know CYA and NSA but we’re not going to get into those.

The red box here means it’s a problem, it’s complex and if you don’t believe me here’s a slide based on some numbers from IBM that says here some of the metrics relating to the cost and complexity of KYC and AML, very costly. So, to some degree it’s not really viable if you have an issuance, you want to have a number of different countries. How are you going to do this? So the hope is that perhaps the security token industry can provide some type of technology to be a technological intermediary to deal with this complexity. Now when you have international laws wouldn’t it be great if they all worked together, that’s called harmonization. Do you think thirty countries, fifty states, ten provinces are going to agree, no and since the technology is changing every few months how are they going to keep up with it. So this dream of having harmonization of all the countries working together, I don’t see that’s happening.

So for what I foresee is something I’ll call regulatory interoperability that we need to have and some people are in this phase, this gentlemen from the Accuity says one of the main challenges is the systems that companies have they’re not evolving fast enough and so as I said I think the solution of this is really to have more regulatory interoperability that recognizes the individual aspirations of different regulators as appose to harmonization where they all have kind of a California kumbaya. I know you’re from New York Ozzie, but you know California we say everyone, okay. So the question is how is this going to work, is there some, what are the problems in terms of this interoperability and how could it work together.

So, I happen to have a background in technology, I started a company, after thirty years I sold it to IBM so I’m going to share with you some insights that I’ve never talked about before but your special so I’m going to share these with you okay. So when you have oil in a car, the purpose of oil in the car is to lubricate the engine, now Ozzie and I talked about this earlier, he says oil is good for maybe five thousand, six thousand miles or maybe six months etc. and after that the oil is no longer a lubricant but you know sofa, custom sofa in large corporation is also a lubricant. It’s a lubricant for processes again we’re talking custom sofa and that’s the case whether it’s within a company or whether it’s across companies and it’s in an industry such as the financial services industry.

But if you don’t change the oil in the car it turns to sludge and Similarly in a company, an enterprise or a financial services industry if you accumulate all this custom sofa and it doesn’t change it creates sludge so to speak for a whole industry, and there is kind of a half-life concept involved, for a car again this is Ozzie’s statistics not mine, maybe you got six months maybe you got a couple of years before the lubricant in your car is beneficial and then it hits the curve where it’s no longer beneficial and it starts to erode the capability in the car. Same thing in an industry, maybe you’ve got ten years before the beneficial aspect of software are good and then they’re not so good and then you accumulate what I call software cholesterol. These are terms that’ve already been made up, software cholesterol that can clog the corporate arteries or the arteries of an industry and what does this really mean technically. So over the last several years large financial services companies have done dozens and dozens of acquisitions, along with the acquisitions come a lot of different IT systems with incompatible systems.

Guess what they now get completely replaced or integrated, this is legacy cholesterol that builds up within a single company. Guess what there’s maybe fifty a hundred top financial companies that need to work with each other, their systems need to work with each other’s, so the pictures really all of these systems working with each other. Now you’re going to say this is history, no this is not just history this is the future. Why, because large corporations are going to be acquiring more and more crypto-companies. It’s going to be happening faster and faster, this is the past, this is also the future, so it’s a really big problem and then when you put on top of this the, all the different regulatory agencies around the world it’s a really big problem. So the solution to this in part is to have more component oriented approach and SOA, we’re not talking about sons of anarchy, Okay. Service oriented architecture the componentization of objects or components as well as special services etc. is common approach in software and it’s a common approach that I think security tokens might enable going forward.

So what does this mean from a layered point of view. What we’re trying to do in Security Token Academy is we’ve creating a niche, what we call the core foundation project and the participants are Jor Law over here from >Verify Investor and we have Fabian and we have David wheeled also on our comity and they’re going to help us understand what’re we going to do in the committee to identify different components and how they work together. So the first part is, what are some of the components, There’s classic components or objects, there’s new ones coming along or for the security token industry we need to really identify what are the key components, these are some but there’s a lot of TPD’s that we don’t know yet and the industry, and the more complicated issue is how do they work together, and then finally what’s a timeline where they might evolve you know over the next few years or so, it’s going to take a few years to obviously figure this stuff out.

If we are able to put these thing together than you can read the promise of some of the benefits, fast responsiveness of the ecosystem but the bottom line is the last bullet there, enabling faster financial services ecosystem evolution. The financial industry wants to move faster and faster, we just don’t want to accumulate a second wave or a third wave of software cholesterol, we want to make sure it’s enabled by having what’s called technically decoupling. So that’s where the industry is really headed, and we want to thank you for joining in our event today as we celebrate, get your coins ready as we celebrate the launch of the security token industry, Thank you very much.