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Security Token Academy Year in Review

Transcript


 

Adam Chapnick:

Hey, everybody, I’m Adam Chapnick.

Amy Wan:

And I’m Amy Wan. Welcome to this special edition of Security Token Insight, brought to you by the Security Token Academy.

Adam Chapnick:

As you know, the Security Token Academy is on the leading edge of the security token industry. We’ve held world-class events and conferences featuring the top industry experts from around the world.

Amy Wan:

That’s right. The Security Token Academy kicked off things back in June with the first ever Security Token Summit. It took place at the Conrad New York and was the first conference to focus on the emergence of security token trading organizations.

Igor Telyatnikov:

The evolution of smart contracts is what’s giving that comfort to Wall Street and other issuers that are looking to bring these assets onto the chain, and also giving the comfort to regulators, to reduce frictional costs, to increase the velocity of transactions and liquidity. Regulators also don’t want that to be an open free market. They want the same securities laws that apply to be applied in the new technology, and we have ways now to, via smart contracts, enforce the regulations in real time. You can drastically reduce the compliance cost of Wall Street, which is a huge cost burden on the industry today.

Andy Bromberg:

I would just add that we’ll see a huge class of traditionally illiquid assets become liquid, and we’ll continue this never ending march towards markets for everything and liquidity for everything. We’ll begin to see how does efficiency start to play into these markets as things that have always been illiquid, only been accessible by a small set of investors, become accessible to a much larger set of investors and see how those markets develop.

A lot of assets today are not digitized. There’s two steps to get to tokenization. The first is, should we take assets that are handled on paper or physically and move them into the digital world. Then there’s the next step, which is should we tokenize them as that path to digitization. The digitization does a lot of these things. It allows for 24/7 markets, it allows for fractionalization. Then you have to ask, why should we actually tokenize these assets? Why should we use tokenization as the method to digitize them?

Ralph Daiuto:

I think it’s really incumbent upon us, in the industry, to build out that venue, and do it, I think, with guidance from the SEC certainly, and CFTC and others, but they want to see a regulated token environment. I think once that’s there and once there is a viable liquidity in a secondary trading arena, I think, we’re going to see far more institutional players get involved.

Khurram Dara:

The reason why I think decentralized platforms are important to security token landscape is that, I think, it’s going to be some time before we see real exchanges, bona fide exchanges that are registered and regulated operating in security token space.

Juan Hernandez:

A lot of the challenge of the industry right now are adapting the current day technology back to that older infrastructure and getting back to a baseline. What’s exciting to me is once we’re back at that baseline, when we can innovate from within that framework, I think in a coming year or two, you’re going to start to see a lot more innovative solutions around custodianship, than just taking physical, doing cold storage, digging things in your backyard to maintain proper custody. You’re going to start to see a lot more innovative solutions in that space.

Daniel Eisner:

What’s really interesting about this entire journey in space ultimately is that the notion of tokenization is just completely ripped apart the basics of the capital markets in the sense that prior to cryptocurrencies, any sort of capital raised was done in a geography, in accordance with the laws of that geography. Now, all of a sudden through the issuance of coins, you have an access to global markets. What’s huge about, I was going to say humongous, but you took that word. What’s huge about the idea that you can raise capital globally is that you’re no longer bound by a nation state.

Tatiana Koffman:

I think what you have to remember is that in 10 years, everything that you could do in traditional securities markets, you will be able to do in these markets. This is the beginning. This is a little bit more of a decentralized way to issue capital. It includes less middleman. It includes more automation, which means lower legal fees, lower county fees, lower tax bills. It takes the power away a little bit from the traditional institutions at the moment, but in 10 years, this will be the norm.

Vince Molinari:

It all goes to regulatory frameworks. If we’re looking at Reg A plus Reg D and Reg S, there’s going to be sovereign nation issues, currency. Flows that have to be dealt with depending upon those jurisdictions. But putting the perspective, there’s $2.4 trillion of unregistered security issuances in the United States alone compared to our aggregated public markets that were 1.4, 1.6 trillion.

Juan Hernandez:

If you’re not doing it, as a Reg D, Reg S, Reg A, Reg CF right now, you’re out of compliance, and we got approached a lot by folks who have issued as utility tokens, and we just can’t touch them. We won’t work with them because there’s too much uncertainty there, until there’s better guidance given in that space. First and foremost, compliance and then afterward, certainly work, and that’s some of the other aspects of the campaign itself.

Tatiana Koffman:

Folks just need to issue what they need to issue and do so in a compliant way. If you need to issue utility token, issue utility token, just make sure it complies with securities laws and don’t try to make it a massive x security. If your token really hinges on your cash flows and make sure it’s an asset-back token and not a utility.

Brian Wirtz:

If we do this right, this could be the next 20 years of growth in innovation. Small businesses, they alluded to our earlier. If we just are thoughtful about the way we regulate this space, let the innovation grow, just like we did the Internet, this will be a great tool for small businesses’ freedom across the world.

Frank Hourigan:

There’s good reasons to believe that there’s been fraud and scams and retail investor abuse and market manipulation and things that a lot of us that had been in the financial services world have seen many, many, many times through the last several cycles. So this is a new asset class, and it’s being whipped around and it’s time to just put the brakes on and see who’s who and what’s what.

Jamie Finn:

I think, obviously, environment has its own nuances to it. So keeping track of those things over time, like what does accreditation look like in Europe versus the US? Can you self a credit? Could you have retail investors in Europe? All these nuanced pieces are components that you have to understand and that when we’re speaking to a customer, we have to educate them on what they can and can’t do in their market.

Our smart contracts were all upgradable. We’re actually in the middle of reissuing a few of the first security tokens, on our platform, for that reason exactly.

James Haft:

It’s interesting. It’s been said a couple times already today that this is not something different, this is just the next iteration of the capital markets. So, all the things you’ve seen previously, they’re all going to be involved in this next phase as we go forward. And all the different derivatives and other products that come in and ways that people create liquidity are going to be exercised against this market, just like they’ve been exercised against all other financial markets over the last hundred years.

Ralph Daiuto:

When I’m asked about a vision of the next few years, Bob Greifeld, former chairman of Nasdaq, recently said a quote that 100% of the stocks and bonds on Wall Street could be tokenized today. In five years, 100% of the stocks and bonds on Wall street will be tokenized. I think that’s a very telling quote. I think it certainly serves as an indication as where this industry is headed.

Adam Chapnick:

After that great event, the Security Token Academy team worked hard to bring our next event, the launch of the security token industry in October. Attendees who’ve purchased tickets to our two-day cruise and conference in New York, boarded the Spirit of New York yacht from Chelsea Harbour for an evening cruise along the Hudson River. Take a look.

Hey, everybody. It’s me, Adam Chapnick, with the Security Token Academy. Thanks for joining us here in beautiful New York City. We’re here on the river for Security Token Industry launch week. We have been talking some fascinating people. I want you to take a look.

Nancy Fechnay:

If you’re investing in token assets, you’re able to actually do all those investments on the blockchain, and which means that you don’t have to do audits, you don’t have to actually execute waterfalls with lawyers. Everything is done automatically. So when a deal exits, or when you want to sell a portion of your ownership in that deal, it automatically is distributed to your investors.

Cliff Pace:

The government took a very strategic stance a couple of years ago in respect of blockchain and distributed ledger technology to say we need to put more on the map in respect of this new technology. Malta is a small island, very few resources, obviously, human resources. We are looking forward. Looking to internationalize as an island, as well as an exchange. I think that it was an opportunity, it is an opportunity to look at something, which is growing, look at the potential, and say, “Do we want to be a part of this or not?” The government as well as the exchange, has said, “Yes, we do.”

Dave Hendricks:

There are a lot of companies, and this is my particular experience as a co-founder of a venture-funded company, there are so many. Look behind us. There are so many companies here in this city who have taken venture capital money. They’re too big to get easily acquired, okay? They’re too small to go public, okay? I call that the gulch. Okay? So there are all of these companies that are in this gulch. In the next year, as they may struggle to raise more funds, they may think, “How do I get closer to liquidity?” If I’m too big to get acquired and I’m too small to go public, tokenizing, using an equity token, is a way for them to activate the capital that they’ve had invested in them. Maybe get some liquidity to early investors or early employees.

Adam Chapnick:

This is a fantastic observation. This is something that I’ve heard no one else say, but that is a huge sampling. That’s a huge sampling.

Dave Hendricks:

Yes.

Adam Chapnick:

I think that’s a great point.

Dave Hendricks:

These companies are all over the world. There’s so much latent talent. There are so much capital that’s locked up in startups, which are in the five, seven, nine-year age. Those companies could be tokenized. They’ve got financial results. Okay? Operating history.

Adam Chapnick:

Absolutely.

Dave Hendricks:

They’ve got working product and clients. So you can take those companies and you can tokenize them and you can pay dividends on their revenues, or some other form of payment to stakeholder. What you can do is you can get some of the early employees, the angel of an early round VCs out of those deals.

Cliff Pace:

Most of the stock exchange is the domestic exchange. So we have Maltese companies onboard, we have Maltese investors. It’s an exchange in every sense of the word. So that’s fine. Looking at the blockchain, looking at the DLT technology just hitting our island, and hitting the world in general, we are looking at partnering with key players in the industry. We certainly have much more experience, have much more exposure to say than we do, and really joined forces in order to bring two parties to the table. We have the technology parts, the exchange parts, the token parts coming onboard. You’d get the regulatory structures and the structures of the exchange, which will incorporate anti-money laundering and due diligence and all the regulatory things that the legal type of structures, which you need to have.

To some extent, one thing which is missing is the legal certainty. In July, the local regulator, the Malta Financial Services Authority or the MFSA enacted or proposed…Parliament the law, the legislative structure, which will regulate cryptocurrencies, ICOs, DLT structures, virtual currencies, virtual financial assets and things like that. So we have created a structure, which will give, we hope, legal certainty to the different mechanisms which will be brought onboard by technology. We feel, at least, my view, my personal view is, is that the technology is moving at a very fast paced, and regulations are really finding it very hard to catch up.

Adam Chapnick:

That’s true.

Cliff Pace:

One thing which is missing is legal certainty. One thing which is missing is a way to address the issue of risk. Working in a currency exchange, working in any kind of exchange, one needs to address issues of risk.

Adam Chapnick:

Absolutely.

Cliff Pace:

What we hope to do is create a structure under which risk is either controlled or mitigated through legal certainty of issues in terms of what happens when things go wrong. It’s all great to say and talk about these things, and when they work, it all works nicely. But when things go wrong, what do you? We hope that we have the regulatory structure, which will address both when things are going well as well as when we have an issue and we have something which needs to be addressed. That’s what will help the confidence in the markets grow over a period of time.

Adam Chapnick:

Absolutely.

Jordan French:

Look, it’s been a really interesting year from a regulatory standpoint. People started the year really, really worried about, well, in particular, US and EU regulators might do. Well, here we are in October, Adam, and people are still very, very worried about what US and EU regulators are likely to do. We’ve seen a big split in just kind of a broader global market. We’ve seen some of these jurisdictions, like Malta, Gibraltar for sure, become bit of a safe haven for some of the utility tokens that could be securities or not and just don’t have address that question because they’re not stateside. They’re surely not raising money here. Then some of the Eastern ... Pacific Rim countries, right? So Korea’s maintained itself as a very big market for fundraising. Singapore, you know I was just in as well, very active. Hong Kong, much more activity than what you see here. It begs the question whether who’s right.

On one hand, we hold ourselves out in the US, having the strongest security market. It’s because of the regulations that make it that way. Well, there are certainly an equally sizable contingent that says, “No, no, wait a minute. You’re stifling this nascent market.” Time will only tell, Adam, which one is right.

Cliff Pace:

One thing which we have done is we’ve created an agency structure. So, in Malta, for any entity to be regulated and to be brought onboard as an ICO, as a representer of a fund, or representer of cryptocurrency, whatever, they would need to have an agent represented in the Maltese environment, who is going to be recognized by the Maltese authority. We’re in domestic exchange. So at the moment, we are definitely a Maltese issuer, we are government of Malta issuing paper and equity onto the exchange. This is taken up by Maltese investors. So that’s really our model.

Where we would like to be in five years’ time, I’d like to have, obviously, the Maltese market working because that’s our bread and butter, but the cream will be from international issues, either issues coming through the regulated main market, in the traditional sense, or the crypto ICO type of exchange structure, which could develop as soon as a year away. We’re not that far away.

Amy Wan:

The next morning after the cruise, hundreds of people were in attendance at the Conrad New York as industry leaders rang the opening bell to signal the official kickoff to the security token industry. Here are your highlights.

Adam Chapnick:

In just few moments, we’re going to count down from 10 together, okay? That’s not going to be hard, you’re going to recognize the number, it’s a one and a zero. We’re going to count down like it’s New Year’s Eve. There’s going to be a bell. I’m going to cheer. I hope you’ll join me in cheering. The cameras are on. If you got a token, take selfie. Four, three, two, one.

Bravo to all of you and to all of us for making this happen. Thank you all for joining me on the stage. Thank you all for joining us here today. Please help us spread the word. As we spread for you, you spread the word for us. Let’s make this all as exciting as it can be for the rest of the world.

Lyndsi Stevens:

In June of this year, we were here at the Conrad to host the first Security Token Summit in the United States. We loved it so much and had such a great time, we decided to do it again. So here we are.

Aubrey Chernick:

So third wave, security tokens. That’s why we’re here today. So these charts show that over the last year, 2017, to where we are now, about $13 billion has been raised. Peaking, as you can see, around the end of last year, January, etc. 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’re very risky. That’s why in your asset allocation portfolio, that’s only a small amount, 5 or 10% of risky types of investments.

The next box, securitization of real estate. Real estate is a little bit more secured. You invest in commercial residential real estate, the building burns down, you’ve 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 24/7 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. 24/7 trading, buying and selling, etc. There’s other benefits such as efficiency. Some estimates have said that Wall Street could save over $5 billion a year utilizing blockchain and other related technology. Speed. The compression and reduction from a trading and settlement time of T plus two to T plus zero is one of the aspirations and realities of this industry.

Jeremy Allaire:

About a year and a half ago, with Ethereum’s production readiness, we got very excited about the idea of taking existing assets and tokenizing them. We had built, originally, a payment system that directly converted between, say, dollars and euros and bitcoin, and allowed bitcoin to be the settlement network. But Ethereum made a huge improvement in what was possible. We wanted to rebuild what we did around that. One part of that was, basically, creating Fiat tokens. That was something we launched last week, which is US dollar coin, which is a ERC20 token, but it’s a whole asset-backed token model which, obviously will relate to security tokens as we talk about it in a minute.

The growth in ICOs were really a pivotal moment because it was this concept of how can businesses issue digital investment contracts directly over the Internet and allow individuals, and institutions, but individuals from all around the world to invest in those. So, it was an incredible experiment in crowdfunding. It was an incredible experiment in how do you apply tokens of smart contracts as a new capital formation model. We got very excited.

Our belief was that the technology was getting close to a point where we would see what we like to say is the tokenization of everything where, essentially, all kind of assets, whether they be existing assets like a dollar, a share of stock, a piece of physical property, but also newly, truly digitally formed assets.

So an investment contract written entirely in code that doesn’t have an external, say, share agreement or something that truly digital native assets would be born. That there’d be market places for those, and that those market places would create platforms for businesses to form capital, to grow. Obviously, that would create significant opportunities for people who want to invest.

We acquired Poloniex in February of this year. They were really innovative in being one of the very first market places for all these alternative assets in the United States and grew very, very fast. They needed help scaling and growing the business, but that was the first key step in building a token marketplace that can support a really broad range of digital assets from currency assets to commodity assets to, ultimately, what we’d like to see is the trading of security token assets as well.

So that led us to Ryan and the SeedInvest team and really wanting to have a primary issuance platform for raising capital for businesses to form capital, but to marry that with the crypto infrastructure that we’ve been building out to be able to allow business and ultimately even individuals we hope to issue digital securities over the Internet; and allow investors, both accredited and unaccredited investors, to invest in those; and ultimately, to provide global secondary liquidity platforms for those as well, which is a really tremendous opportunity that crypto makes possible.

Daniel Doney:

Here’s what’s so significant about it. We’re actually bringing decentralized investment banking services as an industry to the parts of the world that have never had access to low-cost finance and sophisticated financial services. So it’s really the power of the blockchain, our ability to reach anywhere. The kinds of services that are typically limited to cities like this and other places like London are now available anywhere. Today is the day for that. This is the kind of thing that can change people’s lives.

So to know where we’re going, it’s helpful to actually look back quickly, to where we’ve been and hey, the secret’s out. Blockchain is a pretty cool thing. It’s got a lot of power to it. It’s not the only thing, but it certainly can change paradigms. So of course, you’ve seen earlier the first wave. Bitcoin was prominent as we saw a transformation of the payment space. I know it was prominent because when I ride in a cab, the cabbie will ask me how I’m like bitcoin and how we’re different than bitcoin. He knows about it, my mother knows about it, and asked me the same question over and over. So it is, in fact, a pervasive technology at this point.

Next up, we showed through initial coin offerings that we could actually transform the way that capital is formed. There was a new model out there for capital formation that could affect folks and could reach innovative new models that weren’t previously reachable. But there was a problem with both of these models. Frankly, a lack of identity in the services. Unanimity was a point of emphasis in many cases. This is simply incompatible with compliance models. When you don’t embrace compliance models, you end up doing very good things, but also being a safe harbor for traffickers and evaders and launderers, etc. Frankly, societies cannot tolerate that behavior. So they must come down on this. What if you could get all of these benefits that we’ve seen and uncovered and extend them even further by instead of avoiding compliance, actually, incorporating it and extending it, and making it an even greater, easier more accessible solution.

So that’s, in fact, what we’ve done. What you see we and our industry partners doing is really unlocking what has been known and has been documented to be trillions of dollars-worth of illiquid assets. Through this industry, we expect to really unlock the liquidity premium in this and make sophisticated services available to folks everywhere.

David Weild:

You are going to want to have a token that’s listed that enjoys the preemption of State Blue Sky. Right now, there are only two national stock exchanges in the United States that confer that advantage there, the New York Stock Exchange and Nasdaq. The significance of that is, is that if you don’t preempt State Blue Sky, then you have to register in each of the 50 states in order to allow folks to solicit trades. What you find is that, in this country, that most of the big firms, by policy, do not allow their brokers to solicit trades in the aftermarket if those securities are not enjoying a National Securities Exchange exemption. Those securities have to be listed.

Fabian Vogelsteller:

It’s very important to understand how this works because all of our discussions, they’re based on that, on understanding this. What is a token? A token is a smart contract. It’s a piece of code deployed in the blockchain sitting at an address. In this case, it’s a smart contract, which itself has an account balance. It’s kind of like vertically having an account balance of other addresses who own whatever number right now. That’s, in the simplest form, is what the token is.

What makes it so interesting is not that this is now a new form of Excel sheet, which is now a distributor or something. The most interesting part of this is that this runs on a blockchain where it’s not alone, but where it’s surrounded by a lot of other smart contracts or other programs running on the same virtual computer. This can be, for example, a voting system. This can be a decentralized exchange, this can be a prediction market, that can be whatever we can come up with.

The very interesting part here is that this can talk to each other. The token can inter-operate with all of the other smart contracts. The other smart ones can inter operate with it. It mainly works because we have standardized it. In this case, it’s the ERC20 that what brings me in the picture here because I was the one who did that.

Guatam Gujrals:

How do your roles help an issuer with maintaining that process?

Scott Purcell:

It generally starts with the companies who are helping them write the smart contracts because you can build Rule 144 restrictions into the smart contract. If you’re doing it as a Reg S, a lot of people run a Reg D and a Reg S concurrently, so the Reg D for US investors and the Reg S for the rest of the world, and there’s a lot less restrictions on the Reg S. So you’d have to write that logic into and who might want a transcript and where is it going.

The reality is that, obviously, if they’re using a custodian, then we’re in change of enforcing those restrictions that are on the securities. If they’re using direct registration with the transfer agent, then the transfer agent will enforce that, and I don’t want to take words out of these guys’ mouth.

Oscar Jofre:

Yeah, the only thing I was going to add, all our business is private. I don’t do public companies. If I do, that’s where I draw the line at the private companies. So I am all about the private world. My Reg A-plus clients are private, they want to be private, but guess what, shareholders can trade. Shareholders can trade. They can start trading the minute it closes. That’s the Holy Grail of the regulation. The nice thing about this regulation in the United States, it’s available to Canadian and US issuers or domicile corporation. They can sell their securities to anybody in the world.

Amy Wan:

To view all of the videos from Security Token Industry launch week, go to our website, securitytokenacademy.com and click on the Events tab and select Launch Event video library. The best part? It’s free and contains a wealth of information.

Adam Chapnick:

Another big event was the StartEngine Summit in Santa Monica. The event was held at the Fairmont in downtown Santa Monica, just steps from the ocean.

Amy Wan:

Adam and I were there speaking with attendees. Hundreds of people packed the venue to learn more about security tokens and more.

Howard Marks:

Right now, we see about 15% of our customers.

Adam Chapnick:

15?

Howard Marks:

15, 1-5, who were issuing tokens with their offerings. These are entrepreneurs that have companies that are related to the blockchain as applications or related applications. With ERC-1450, we’re going to be announcing soon that every company that we launch, every share we issue, will be tokenized.

Adam Chapnick:

Oh, wow. That’s a big deal.

Howard Marks:

Regardless whether your company is a blockchain company or you are a restaurant looking for a capital, an apparel business, a wine making business.

Adam Chapnick:

Electric car company, maybe.

Howard Marks:

An electric car company, absolutely. We believe that tokenizing securities from the launch, at the beginning, will be very appealing to investors.

Scott Purcell:

If you think about cash, your dollars, you probably have some in your wallet. It’s most likely you rarely open your wallet and use them. You use your debit card, you send by Venmo. You log on to your bank account and electronically send a check to somebody. So, our money is 95% electronic as it is now. It’s not physical. Banks, you walk into a bank, they don’t have all of the bank’s cash in a big vault. They send it to the Fed, where the Federal Reserve keeps it in electronic records as to what bank has what records. So dollars are already electronic. They’re already in digital form. So a token is just another way of taking electronic dollar and using it in commerce or for anything else, like Venmo. You could send point to point. Well, with Stablecoin, which is a tokenized dollar, you can send point to point. You can use it for anything.

Marty Tate:

We’ve had clients say, “Well, is it a security, is it a commodity, is it a currency?” The fact is it could be all of those things or not.

Amy Wan:

So it’s not mutually exclusive, right?

Marty Tate:

Correct, yeah.

Stephanie Hurder:

When we think about security tokens, one of the big things we like to emphasize is that you need to be really clear about the rights that the token gives you. A great example I like to think about, for example, suppose you wanted to tokenize a piece of art. You have fine art. Art isn’t just about the financial return. It’s about enjoying the art. Then if you own a token, you would probably also want some input in to what happens to the art. Who does it get sold to? When does it get sold? How much does it get sold for? So, just issuing a token isn’t enough. You have to think about the rights and the governance and the other pieces of the platform in order for your token to be useful and valuable.

Marc Boiron:

Yes. 2015 got interested in the technology, and I’m of those nerds who just got obsessed with the technology.

Adam Chapnick:

We love nerds that are obsessed with technology.

Marc Boiron:

It’s just the grandiose idea of what it’s going to change. Then when you get down to it in a technical level, and I do not understand cartography, but I understand every other part of it. It’s like this is the coolest thing in the way it works. The decentralized nature of it, the fact that you don’t need an intermediary, it’s just where else do you see that? And the answer is nowhere.

Jamie Finn:

Global capital formation and the ability to sell a security to anybody in the world is a humongous world changing thing. This hasn’t happened yet. You haven’t had the ability in today’s markets for somebody in Japan to buy an investment in a venture fund in the US with cryptocurrency. Today, you can do that. It’s a whole different ecosystem. Then the promise of liquidity. That’s happening, it’s coming, it’s going to take longer than whenever you want, but this promise of the marketplace and the exchanges is really going to be the two major areas that we’re going to see change the world.

Marty Tate:

I think we’ll just see tremendous growth in the industry. You’re already seeing a lot of private placements of tokenized offerings. You’re seeing the tokenization of real assets of real estate, of oil, of ... I’m working on a solar deal. So you’re seeing that movement, and I think that will only grow once those flood gates open.

Rob Nance:

I think a couple things are missing. One, clarity on regulation. A lot of funds, like ourselves, issue out of Cayman because that makes it a lot easier for us to work with non-US investors. So, I think there’s still a lot of questions there around some regulation and working through that. I think the other part is just regular investors getting comfortable with the space. I think that will be the driving force is when people that write $50,000 checks into normal, smaller micro venture funds, say, “I want to move into this space. I feel comfortable owning this asset.”

It’s like email. When email came out in the ‘90s, people were like, “I don’t know how to deal with this. I don’t know how this works.” Today, we can’t imagine living without it, right? Certainly, today, there still this traditional, we call it now snail mail. There still will be assets in the future that are traditional assets, that are built on paper instead of this. But I think long term, the adoption will be driven as the mass public starts to become comfortable.

Stephen McKeon:

I think the important part is developing the buy-side. Most crypto investors are looking for venture-like returns. So they may be less interested in real estate, although, I think they should be. But if you look at a lot of the traditional real estate investors, they’re not yet comfortable with the platforms, digital wallets and so on. So, I think bridging that gap is going to be the big effort over the next 12 to 24 months.

Howard Marks:

The more players that are available to help companies raise capitals, the better it is for everyone. For economy, for job creation. So I find this a strong positive. I don’t look at competition as they have to lose for us to win. I look at competition more of a competition where we work together. That’s why at our summit here today, we’ve invited all our competitors to come. Most have chosen to come and speak. We have done that with no strings attached, absolutely wanting to collaborate and have an open dialogue.

Amy Wan:

StartEngine is a gold corporate member of the Security Token Academy. You can find more information on our website, securitytokenacademy.com. Just click on the Directory.

Adam Chapnick:

The Security Token Academy team attending Crypto Invest Summit in downtown Los Angeles, in October. The event attracted thousands of people. I was there doing interviews with some of the big movers and shakers in the STO industry. Take a look.

Randall Crowder:

I’ve talked a lot about this, R.I.P ICO, Hello STO. The world that we lived in over the last 18 months is gone. This gold rush mentality. Let’s be honest with each other. Cryptocurrency, right now, for most people is online poker. If you’re being truly honest, as what I call a lot of these crypto projects being a wantrepreneur, you just didn’t want to deal with the SEC. You’re going to argue this financial autonomy or the rise of blockchain is going to disrupt demand. But the reality is, going through the SEC and doing things regulated is hard, it’s expensive, and it’s long. You got to have a lot of wear with all the do it properly.

The SEC has no problem with cryptocurrency. So because we’re actually trying to take Phunware public, and we have a registration statement filed with the SEC to list on Nasdaq, we have to make sure that our cryptocurrency is 100% buttoned-up and compliant. So it’s a security token, because that’s the only thing that you should be launching right now if you are raising money. Let’s be honest, the idea of a utility token is a little stupid.

Adam Chapnick:

It’s dead.

Randall Crowder:

Thank you. Thank you. Now, you have-

Adam Chapnick:

Well, obviously, you’re preaching to the choir here.

Bryce Weiner:

For a long time, especially in hip-hop, there has been a discussion, I believe it was even started by another artist, KRS-One, about monetizing fan bases using their own forms of currency. This was before cryptocurrency was ever invented.

Adam Chapnick:

Interesting.

Bryce Weiner:

So these sort of things, in fact, in other than hip-hop, the Grateful Dead is great example. Inside the Grateful Dead is this entire captive economy that goes on between their fans. Everybody knows about it, right? It’s iconic. But it’s a barter system. If we introduce a cryptocurrency into a barter system, even if it has no market price, it naturally attains value through all of those Austrian economic mechanisms that we all love about cryptocurrency to begin with. So these fan-based economies are what formed the foundations for the monetization and the value of these cryptocurrencies. We set them at $1. But what the fans do with them afterwards is what actually gives them value. The only intrinsic value in these cryptocurrencies is the brand that they carry because the brand has value outside of crypto already.

Anna Cox:

Everybody, a year ago, was focused on the issuance of ICOs, and most of the projects have failed, and they have failed to maintain their value. I’m not talking, specifically, about the projects, but most of the ICO coins have simply failed to maintain their value because there is no liquidity provision. The issuer doesn’t step into the process. What I’ve explained in the very beginning, the market runs, can kill or devalue most of the coins.

So, without liquidity in the market, without all the market participants understanding the need and the means to achieve such liquidity, it’s never going to be a widely accepted mechanism. The same thing for security token offerings. In order for this mechanism to become as widely accepted as the traditional one, and certainly, it has a lot more advantages than a traditional IPO, there definitely need to be a liquidity mechanism post-STOs.

Moshe Joshua:

It’s a no brainer and it’s inevitable that private companies are going to raise capital using security tokens. The thing that’s been missing all along is enforceability rules. There are a lot of thought leaders that have been screaming through their mouth piece of their blogs that, “Hey, what is the story with this ICO market? You don’t need it. The JOBS Act exists. crowdfunding exits, right? The laws are there, just follow the rules.”

I think that the industry, at large, has taken its time to learn what that means and has slowly come to the determination that, “Oh, we can do this.” As a token, it works. The advantages are obvious.

Speaker 46:

There was a report that came out a few weeks ago where there’s over $5 trillion worth of equity locked up in people’s homes. The only way, right now, to unlock that is through taking on additional debts.

Adam Chapnick:

Yeah, refi, yeah.

Matthew Sullivan:

So, we want to change that. So we figure that California is a nice big place to start, and that’s the place where we have all of our experience historically.

Adam Chapnick:

Amazing. What phase are you in? Have you launched? Is this pre-launched? What are you doing now?

Matthew Sullivan:

We are a few weeks away from launch.

Adam Chapnick:

Oh, wow!

Matthew Sullivan:

So we launched our initial MVP, which is our minimum platform just to show the world to put our flag in the ground. That was a couple of months ago. We start offering our security token to the members of the public at the end of November. So, literally, a few weeks away.

Adam Chapnick:

Wow.

Matthew Sullivan:

So, we’re going to start by offering to US accredited investors, but meanwhile, we have our filings busy cooking with the SEC. As soon as they’ve popped out of the oven, which should be sometime next year, hopefully, the early part of next year, then we will be able to offer out tokens to accredited and non-accredited investors in the US and beyond.

Inna Bogdanova:

We plan to launch the MVP by December. So, we need this money to expand. Basically, to put it on the blockchain with a more comprehensive system because the MVP is only basic functionality. To expand for marketing, for legal, and also, we need to register our stock in order to our investors to receive these tokens. Our tokens will be attached to the dividends of the company.

Abel Cuskelly:

So, the JOBS Act is what enabled a lot of this innovation to happen and what enabled the crowdfunding movement to really start. So they are the really early pioneers. I know Ryan Feit with SeedInvest was instrumental in drafting some of that legislation as well as many others. It’s basically an evolution of that. So crowdfunding, raising under SEC registration exemption, Regulation CF, last year raised up to just over $1 million. Some of the regulation exemptions that we’re utilizing are Reg D 506(c), which unlimited amount of raise for accredited investors; Reg S, which is-

Adam Chapnick:

International.

Abel Cuskelly:

... international and with smaller minimums. So opening up this global capital pool to real estate sponsors in the U.S and at smaller minimum sizes. Then also Reg A plus, which an interesting one. It has a lot of opportunities, kind of combination. You can do non-accredited and accredited up to 50 million. Although they’re looking to try to raise that to 75 million. The only downside with Reg A plus is there’s some traditional reporting requirements which aren’t necessarily bad if the sponsor is willing to take them on, and if we’re able on the back end with our smart contract technology to automate a lot of that reporting for them and automate the report filings and all that kind of stuff. So we can see real time who all the token holders are, exactly their ownership, and then all of the information on them that we need the sponsor. We need to report.

Alex Wearn:

We kind of look at where is this space going to be heading. It seems that tokenize the world is a reasonable strategy to follow and a reasonable assumption. In that case, there’s going to be a lot of assets that are tokenized, that are going to have different regulatory requirements, security tokens being just broad basket of equities, commodities, bonds, whatever. It’s kind of a traditional financial instrument that comes onto the blockchain. So we would love to trade that.

There’s two questions around that. The first one is regulatory. So we, as a decentralized exchange, we don’t hold anyone’s funds. We don’t have that custody element, which means we’re in a slightly different regulatory basket than some of the other exchanges. We’re more akin to a very advanced wallet. We’re working with the legal team to explore and understand if we start bringing in these assets that are clearly securities, as the assets themselves claim to be, how does that change our regulatory burden and requirements?

The other piece is talking with the issuers and understanding the technology that they’re creating with their security tokens. So one of the cool things that I think is resonating with regulators is the idea that the tokens themselves can have complacence built in to it. So just how our smart contract is limited in terms of the functions that users can do, deposit, trade withdraw, you can have the same thing with the token where it’s limited in who can possess it, how often it can move, when it can move.

If you combine those with a smart contract, where all of the rules are on the blockchain, you really have this nice system where it’s actually self-regulating. So anyone can actually peer into the contract or into the tokens and understand what are the restrictions here. Is the token acting in a compliant manner and actually abiding by the off-chain compliance process that needs to happen for this thing to move?

Adam Chapnick:

Right. Sure. Why did you guys decide to work with security tokens in general? Why is that the space that you work with?

Franky Hu:

Because we believe security token is next generation of ICOs. Yeah.

Adam Chapnick:

Where do you think they’re going to go in 2019, do you think?

Franky Hu:

I think, mostly it’s startups.

Adam Chapnick:

Startups?

Franky Hu:

Yes. Startups, take startups or like some startups with a good idea about they have a hard time to get funded by a tradition or venture capital or something. We believe the other good things for security token is they can let institutional investor tap into the token market.

Adam Chapnick:

Yeah. Are you seeing interest from institutions that you work with at all or not yet?

Franky Hu:

Yeah. There are lots of institutional investors, like token fund in China, in Taiwan, in Singapore. There are lots of fund manager is look into security token right now.

Carlos Domingo:

I think what we’re seeing is that we started getting the first batch of institutional investors and institutional projects that are moving into security tokens. That’s the important thing because I actually don’t like the concept of security tokens are a way to fix ICOs or to make ICOs legal. That’s a very short-sighted thing. I think security tokens are a bigger thing. It’s about digitizing securities on the blockchain to provide a lot of efficiencies that come with real-time settlement, traceability, availability, and automation of digitized securities.

Adam Chapnick:

Absolutely.

Carlos Domingo:

I think that saying that we’re moving towards that direction and away from like, “Oh, we’re going to make ICOs legal” is a very good sign.

Speaker 52:

We actually started the company, originally, to work with one client, in particular, and that was Slice.

Adam Chapnick:

Oh, okay.

Henry Elder:

Slice was tokenizing LP equity interest in commercial real estate all over the country for sale to international investors, which we thought was an incredible use case. 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.”

Adam Chapnick:

Of course, right.

Henry Elder:

“We don’t really care so much about the blockchain side of it.” That was why on the DAA side, for digitalized advisors, we were like, “Okay, we need to get more into educating these intuitions because everyone is tackling ... All right. Let’s tokenize the world. Let’s move all securities under 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?”

There’s still a little bit of that association with the dark days of crypto when bitcoin was a dirty word and people were like, “Oh, it’s just money launders and whatever.” 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. In the world at large, the public-

Adam Chapnick:

Of course, people don’t understand. Yes.

Antonio Brasse:

I know everyone’s going after the private/unregistered securities market right now, but I think what we’re going to see is a number of them that are playing in that space, they’re going to go for full registration.

Adam Chapnick:

Yep. We’ve already talked to some today, actually. Yeah.

Antonio Brasse:

Yeah. So, it’s going to happen and then it just opens the flood gates at that point. So, a ton of money out there. People want to see that, they’ll feel more comfortable investing at that point. So I’m looking forward to that.

Adam Chapnick:

Right. Interesting. Very wise.

Amy Wan:

Security Token Academy was invited to attend World Crypto Con in Los Vegas. The securitized monster security token event took place there and featured some of the biggest names in the STO industry. Here is more from the Aria Resort in Los Vegas.

Adam Chapnick:

So what happened today, when you said you tested some of the protocols successfully, you were able to trade one of their tokens, essentially, right? Wasn’t that what happened? That was an executed trade.

Khurram Dara:

Correct. Yes, it was a test trade, it was an executed trade on Mainnet, a test token using their protocol. So that was very exciting.

Adam Chapnick:

Yeah. That says a lot because everybody is holding their breath, waiting for that to become widely employed. One of the problems, or potential problems, was this whole thing doesn’t work. What if we try, and it just fundamentally doesn’t work yet with the technology? And sure enough, today is the day.

Khurram Dara:

Right. I think that’s one of the exciting things. As a lawyer in the space, it’s exciting and also terrifying at the same time because you have this technology that can improve the way assets transfer, the way you track assets. But there’s a little bit of a paradox or a Catch-22 in that even though it’s easier, technically, to transfer some of these assets, because you’re talking about real-world assets, you’re talking about securities, you’re talking about regulated products, it’s not any easier legally.

Adam Chapnick:

No.

Khurram Dara:

So, threading the needle and finding the points in the transaction life cycle, where you can make improvement without running afoul of securities laws, making sure that you comply and work with market participants, I think all of those are really important to the ecosystem as we move forward. I think that’s part of the reason, when you look at Securitized and their DS protocol and kind of putting these tools together, you can start to build an ecosystem where you know what, maybe a year ago, it looked like it would be a long time or a very tough road ahead for this type of industry to thrive, but after months and months of work, you start to see some progress, proof of concept, and I think that will help drive adoption.

Juan Capello:

There has been a lot of static or bad advice out there. So, you still have people making mistakes that are very predictable. It’s very difficult to predict who’s going to be successful, but it’s very easy to predict who’s going to crash against the wall. The people who are, today, US-based, the minded management is in the US, and they’re trying to go to Switzerland to create a foundation to do an ICO or they’ll tell me, “Oh, I’ve been talking to this amazing lawyer in Malta who says we can just do it there.”

They’re missing the big point, which is in the United States, the Securities and Exchange Commission is a bit old-fashioned. They have the Securities Act of 1933, the Securities and Exchange Act of 1934. Those acts have not needed giant amendments in the last 90-plus years. They’ve been in ... or the 80-plus years. They’ve worked just fine. Anyone who thinks today that the SEC feels that there needs to be wholesale changes to their rules hasn’t dealt with the SEC.

So, what I’m seeing from entrepreneurs is smart entrepreneurs that are working with platforms, like Securitize, and understand compliance, etc., are really able to take advantage of this market. The people who are trying to position themselves too much as pioneers, they’re going to keep getting the arrows. Those arrows are going to be increasingly painful, whereas the settlors, the people who are going to do things at a compliant way, they really are going to get the land, and they’re not going to have to worry so much about the arrows.

Ira Erokhina:

I do think that some countries, for example, countries in Europe, I’m not sure about Asia. I’m still skeptical because they’re the ones who keep moving and moving the deadline on the issuance of the licenses. So in Europe, 100% sure, we’ll start having licenses to be able to trade security tokens. So if we have the licenses in Europe, the rest of the world can also participate.

I truly believe that security tokens is the future because, I mean, think about share. If you have Apple stock, you can’t go to Apple and buy iPhone. You cannot go to Apple’s website and vote for the next product or feature you want to have on your MacBook Air unless you’re a majority stakeholder. Your stock, it’s nice to have. It brings you money, but you don’t feel the value. You don’t feel like you contribute to the society.

With security tokens, you can vote on the platform. You can be a part of the management of the company. I think that brings so much excitement to people to be a part of it. It also opens doors to retail investors. So many people can participate in security token offerings instead of IPOs. It’s really hard to get there. Also, it’s really expensive for the company to hold your IPO, STO, and other side. It’s not easy. It’s not like utility tokens, but it’s much easier than IPO.

Adam Chapnick:

There is it.

Ira Erokhina:

Access to the capital is crucial for the company.

Adam Chapnick:

Absolutely. Awesome.

Ira Erokhina:

So I do think it’s the future, it’s really hard to know will we have everything in place next year? I think, the next year is going to be the starting year, like the movie year. We will get here and then we’ll go way up. I honestly, truly believe that.

Adam Chapnick:

Okay, the launchpad, 2019.

Ira Erokhina:

I remember, I saw presentation of Polymath, and that they showed the line like, “We’re going here and here.” I was like, “Whoa!” So, I do think that 2019 is going to be moving.

Adam Chapnick:

A hockey stick.

Ira Erokhina:

Because we’re already here. There are already a lot of competitors, there are a lot exchanges. There a lot of custodian services, compliance services, not enough. Definitely not enough. I really think there are more going to appear in the market. There are a lot of people coming from traditional markets, coming with compliance, coming with banks doing crypto fiats. So I really think that more people will come to the industry, more competition will be here. Competition is always good. So, we’ll have that move.

Adam Chapnick:

Okay. So, where do you see the future of security tokens, I guess, as the most exciting place? Is it going to be in the tokenization of assets, like my house? I’m going to be able to sell my neighbors 50% of my-

Eric Gravengaard:

No one wants your house. Sorry. or half of your house.

Adam Chapnick:

Okay. Then, where is the exciting application?

Eric Gravengaard:

I think we’re in such early innings right now that it’s very hard to say. That said, I think there is a real use case for things that have fewer than 200, really fewer than 2,000 investors, where they can build a community around the ownership of stock or something else, and that investors can get some liquidity for that security. It’s not going to be great liquidity.

If you’re talking about tokenizing maybe a 100-unit condo building in Florida, you might have 300 investors. Most of them are retirees, they don’t need to sell. Except for that one guy that really does want to sell. So what does he do right now? He has to go to his attorney and say, “Okay, you put me in this thing. How are you going to get me out? Do you have any other clients who want to take my place?” The attorney is like, “Yeah, I’ll find somebody,” and that might take six months.

This tokenization allows that investor to go to an ATS, a broker dealer, prove to them that he owns this asset. That attorney knows he owns the asset because he helped him get into it, but no one else really does. The token will help him to prove that he’s the owner, and then he can put up an offer to sell it. These are not going to be heavily traded. I can’t imagine us saying, “Look, we just moved in. Now, we need to buy” ... or there was really good foot traffic at a rental office today. So, therefore we should be buying this development.” Those things aren’t going to be happening.

Adam Chapnick:

That’s interesting. Yeah, that’s a good observation.

Eric Gravengaard:

You’re not going to get market makers to come in and say, “Yeah, we’re a penny wide, 10% of the building up.” There’s no market for that.

Adam Chapnick:

So, you guys are also a market maker.

Eric Gravengaard:

We also-

Adam Chapnick:

That’s a great term also that we hear but nobody knows what that means. So, maybe they know it just a liquidity creator, but how, why, where, when?

Eric Gravengaard:

Right. They think of market makers as those guys with the colorful jackets that sit in Chicago. We used to be the colorful guys that sat in Chicago. We’re still in Chicago with less colorful jackets now. A market maker is simply someone willing to stand in a crowd and say that there’s a price that they’ll buy something for them, price that they’ll sell it for.

In the case of digital assets, or really just any electronic market, it’s people who have computers that can make up those same decisions. They’re indifferent to whether they buy next or sell next. They’re going to make a fair price, no matter what. Sometimes, they have obligations to make prices and sometimes they don’t. It really depends a lot on the market and the market micro structure. That was our industry for a long time. It mostly in equity derivatives. Then it was in bitcoin and digital currencies across different markets where our computers stood in and said, “There’s a price to which I’ll buy 10 bitcoin and a price I’ll sell 10 bitcoin.”

We thought those were fair prices, and people would trade with us.

Adam Chapnick:

It seemed to work out alright.

Eric Gravengaard:

It seemed to work out alright.

Adam Chapnick:

How do you go about sourcing both sides? Where do you find all these investors and how do you find all these issuers?

Kyle Sonlin:

So the issuers, it started with me and my team just putting the information we could find online and putting it on our platform from their websites, from whitepapers and things like that.

Adam Chapnick:

That was interesting.

Kyle Sonlin:

Then reaching out to that team and saying, “Hey, here’s what we were able to find. If you’d like to add more or change it, please feel free. We’d love your participation.” That’s how we started because the ideas was that we needed to provide some use cases. As we found, since our launch, a lot of issuers have directly reached out to us and have filled out our forms to provide their information line.

Adam Chapnick:

Oh, that’s great.

Kyle Sonlin:

It’s totally free for any issuers. So it doesn’t make a lot of sense if you just stay away from our platform. We don’t take any fees from your listing. It’s just a way for you to get more exposure for investors. So, we found that we haven’t had much issuer pushback, and we have not had much issuing platform pushback. We actually are in discussions with some platforms that want to just mass list all of their deals on our platform.

Adam Chapnick:

Yeah, why wouldn’t they?

Kyle Sonlin:

Because again, yeah, why wouldn’t you? So, we have some marketing and promotional services that can be purchased to provide more of that branding space on homepages and things like that. But it’s totally free as the initial package to list your offer.

Then for investors, they’re interested in finding out this information as well. So, we’ve started by reaching out to our own network through the blockchain space, who are people that either are interested in security tokens, or people who have participated in utility tokens who want to learn more about security tokens, but don’t really know where to go. This is a great spot to direct them.

So, we’ve started to direct them that way as well as working with STO and other algorithms to work with that as well.

Rob Nance:

So, I think when we started this process, we envisioned thousands of investors, internationally, that would be interested in this. There just really wasn’t that strong of demand as we initially thought.

Adam Chapnick:

Interesting.

Rob Nance:

Maybe that will come as the market continues to evolve. I think that the liquidity is more limited today than people think, right?

Adam Chapnick:

Interesting.

Rob Nance:

So, when I think of liquidity and markets, there’s really two things that bring liquidity to markets. It’s high-frequency trading, and the derivatives market. None of which exists for private assets today.

Adam Chapnick:

Right, not yet. Right.

Rob Nance:

So, liquidity will be very, very limited. Again, because we’re a venture fund, we don’t really want liquidity right away. Meaning, if you buy this asset, you should buy it because you think we’re investing in great companies.

Adam Chapnick:

You like it, you believe in it. Right.

Rob Nance:

Maybe, at some point, several years down the road, you want to sell it. That’s how we think about it. I think that liquidity is going to be much more limited than people anticipate for the next couple of years.

Adam Chapnick:

Interesting.

Rob Nance:

But it doesn’t mean it’s not a good reason to build one. So it’s a better form of ownership. I think the people should think about that when they’re building one is, “This is how I believe all assets will be structured in the future.” So, if every assets become a digital asset, why not start now and have a better way to own your assets?

Dana Farbo:

It’s really an interesting time because we are seeing companies and exchanges like the Nasdaq is looking at how they can become more of a player in the token world. So that’s naturally going to be a security token. It’s unlocking a whole group of investors that are institutional investors, coin bases, custodian capabilities. We just see there’s a massive movement, and that money will flow in because the security token, or I should say digital security side, gives a lot more liquidity to a position with a company. It might not just be the equity of the company. It might be specific offerings like where ours isn’t the equity of the company, ours is against a specific area focus that investors can come in and benefit while the company increases in value and participate as more of a community, but then have that liquidity side. So we think security area is just going to explode.

Adam Chapnick:

Are you noticing any kind of trend in terms of the kind of companies or people that are coming to you to do an issuance?

Jed Halfon:

I think the people are getting better. I think the quality of people are getting better. I think people are coming to us who have more visions of companies than ideas of the past. The number of STOs and people who are accepting that the thing they’re going to launch in security has definitely increased.

Adam Chapnick:

They’re not resisting saying, “Mine’s a utility, it’s a utility.”

Jed Halfon:

When we say STO, we really mean a token that is intended to be a security for its entirety of its life. That’s the true STO.

Adam Chapnick:

Got it.

Jed Halfon:

We’re seeing two token models where there’s revenue or dividend pay to a security token holder of a utility token which serves as purchasing power in some kind of network.

Adam Chapnick:

Interesting.

Jed Halfon:

There is tokenized assets, tokenized real estate, as you know, there was a East Village condo at $30 million that was recently tokenized. I think we’re going to see a lot of this-

Adam Chapnick:

That wasn’t through the public.

Jed Halfon:

That wasn’t through the public.

Adam Chapnick:

But it’s an indicator.

Jed Halfon:

It’s an indicator of ... so these tokenized asset markets are really new. There, effectively, no legal place to exchange these tokens. Liquidity is not necessarily there. This is just the beginning of it.

Adam Chapnick:

That’s right. So also, the Aspen St. Regis was another sort of bellwether.

Jed Halfon:

Right. Aspen St. Regis was another big one.

Adam Chapnick:

Something I think that’s interesting is I get to ... I often say, “I’m a caveman among geniuses.” It’s fun because everybody I talk to is generally an inch wide and a mile deep. You guys are doing one thing incredibly deeply. I get to sit an inch deep and a mile wide. But most people in this ecosystem know nothing about something in the ecosystem. So, I wonder if this might even be the first time that we’re getting the whole lifecycle together in a room and try to say, “Oh, that’s what you do? Oh, we could work together on that or we need that,” or something. I think it’s exciting. Is that what you’re thinking.

Jamie Finn:

Yeah, we definitely. We brought a bunch of partners here, but we expect a bunch more partnerships will come out of it. We’ve invited folks who other people might see as our competitors to come and join the event.

Adam Chapnick:

Yeah, I think that’s great.

Jamie Finn:

It’s very encompassing and inclusive. That’s where we need to be to right now.

Adam Chapnick:

Great. So once this has happened, how do you see that benefiting the space, let’s say six months from now?

Jamie Finn:

Well, hopefully, we’ll have a much more robust market where everybody’s roles will be clearly understood, and so we’ll be able to work more quickly to get these things going.

Adam Chapnick:

Right. Now, looking into the thin crystal ball, let’s say, 12 to 18 months, is the security token, the ecosystem going to be $1 zillion? Is it going to be exactly where it is today? Is it going to dry up and go away because of overbearing regulation? What’s going to happen.

Jamie Finn:

No, I think, realistically, it will probably be in the billions of dollars. Just with the issuances that we’ve been working on, get to those types of numbers. I think what will be interesting in that window, that 18-month window, is how much liquidity gets created and how people create new, really, creative ways for liquidity. We had a conversation, recently, with a company that’s doing a ... They want to basically lend against securities, which makes sense, right?

Adam Chapnick:

Oh, absolutely.

Jamie Finn:

Because in the real world, today, you can borrow against a real security, why wouldn’t you be able to borrow against a digital security?

Adam Chapnick:

That’s a huge industry. Yeah

Jamie Finn:

Exactly. So, that’s something we think we’ll start to see happen and that’s another type of liquidity that maybe people aren’t thinking about.

Adam Chapnick:

Amazing. Well, you heard it here first. Thank so you so much, again, for joining us, and keep coming back and let us know what you’re seeing.

Jamie Finn:

Thank you.

Adam Chapnick:

Thanks, Jamie.

Securitize is gold corporate member of the Security Token Academy. You can find more information about the company on our website, securitytokenacademy.com. Just click on the Directory.

Amy Wan:

2018 ended with our final Security Token Meetup of the year. It took place at Maggiano’s At The Grove in Los Angeles. Here are your highlights from the event.

Adam Chapnick:

Hey, everybody. It’s me, again, Adam Chapnick with the Security Token Academy. We are here at beautiful Maggiano’s At The Grove in Los Angeles for the second Security Token Academy Meetup in Los Angeles proper. Technically, the third meetup in the greater LA area, but the second in Los Angeles. But most importantly, we’ve got a lot of great people here to talk security tokens. We’re going to meet them and find out why they’re interested. Come on with me. Let’s see.

What do you think is the future of security tokens?

Windra Thio:

Oh, it’s big. I think that people ... we think about all these different things that is possible. But I think once the space matures, there’s a lot of things that we don’t even think about that are actually going to be possible with security tokens and tokenizing assets. Things like that.

Adam Chapnick:

So, a year from now, how big is this group going to be?

Windra Thio:

Probably, I would say five times the size, at least. I think so.

Adam Chapnick:

Yeah. You think? Do you think people are going to get involved because they want to be rich or you think they’re going to get involved because it’s going to make life easier business-wise?

Windra Thio:

I think unlocking all the possibilities and opportunities that make things easier is definitely something that people are going to be looking into and saying, “Wow, this is actually possible now.” When I really think about it, I think that it’s a little bit of a mix of both, I would say. Of course, people are in it because they feel like it’s the next financial, I would say, opportunity for everybody to make some money. All the different abilities and opportunities. Basically, being able to engineer securities is extremely interesting. Immediate liquidity is extremely interesting. But then, all the different things like real-time markets and the real estate, that’s something that was never possible until now.

Amy Wan:

What do you think right now is the biggest challenge for the security token industry today?

Marc Boiron:

The fact that it grew out of ICOs. What that did was it created unreasonable expectations upfront for security tokens, whether it’s regarding liquidity, ability to raise capital, or simply an understanding of, I guess, non-legal community as to what it actually is. I think we’re starting to come around there where expectations are starting to be dampened a little, and we’re realizing we’re just selling a security, and so whatever you would have raised.

Amy Wan:

I would say rationalized maybe, not dampened.

Marc Boiron:

That’s a fair way of putting it. I like that as well. So I think that as we go into next year, I think, we’re going to start seeing a kind of reasonable expectations and some growth that’s going to be growth based on the underlying equity or the underlying assets, and not necessarily because there’s a token.

Adam Chapnick:

Have you noticed anything in the investors side in terms of an evolution maybe from where we had ... there was equity crowdfunding and after the JOBS Act? And then there was this hiccup which was positive and negative of the ICO explosion. Now, we’re in the security token phase. How have investors viewed that evolution?

Alon Goren:

I think investors that are really serious saw the ICO space as kind of ridiculous and what it was, speculative and just nuts. Some of them participated because within that crazy world, there’s a lot of gems and some really interesting stuff and killer technology. I think that they’re all pretty excited about companies doing it legitimately. I was just talking to a company on Security Token Academy, you guys broke when Circle bought SeedInvest, right?

Adam Chapnick:

Yes. Yes, we did.

Alon Goren:

So, I’m talking to one of the companies that’s about to launch a campaign on SeedInvest, and they’re a crypto company. In their documents, it’s going to say, “When we, or if we issue a token, you’ll get this amount.” That’s fully compliant security tokens that investors are legally allowed to participate in. Technically, nobody knows if they’re even legally allowed to participate before. Many funds completely avoided it because it would have made them default, basically, on their LP agreements. They weren’t even legally allowed to participate.

So this is now a real industry from a legitimate perspective, right? We don’t always want to follow all rules and say that just because the government says it’s okay, it’s okay. But now at least for the large majority of investors in the United States, the government says it’s okay.

Adam Chapnick:

Jeff, good to meet you. What do you do, Jeff?

Jeff Giery:

We work at a blockchain-based renewable energy company.

Adam Chapnick:

Wow. Okay. So you’re in the right place. Tell us more. What’s it called?

Jeff Giery:

It’s called ImpactPPA. We’re basically going out and setting up renewable ... distributed micro grids in the emerging markets of the world. We created a blockchain-based mobile application that allows our end users to pre-pay for energy and use it on a pay-as-you-go basis.

Adam Chapnick:

Amazing. This is operational or not yet?

Jeff Giery:

Yes. So, we have our MVP up and running. Our code’s working. We’re doing a fundraise right now to get the rest of the backend shored up and get the scalability issues figured out and run from there.

Adam Chapnick:

Amazing. Okay. You said you’re in a fund raise right now. Are you doing a security token offering or?

Jeff Giery:

We are. Yeah. We’re doing a Reg D and Reg S offering. We’re hoping to have it all figured out here before the end of the year, and issue the token and do the token sale in Q1 of next year.

Adam Chapnick:

Amazing. What do you think is the biggest promise of maybe blockchain in general, but if there is one for security tokens, what do you think?

Jeff Giery:

For blockchain, in general, we love it because it provides trust, transparency and reduces corruption in the emerging markets that we’re working in. Being able to have the immutable ledger and being able to show where every dollar that’s spent is going is very huge for us. It creates ... and most of the people that we work with in the emerging markets, they don’t have credit, and they don’t have bank accounts. So, now that they can access our mobile application, our mobile wallet, they can now essentially use that as a bank account for themselves to be able to transact not just for power, but you could do it peer to peer. If you can use the GEN credit, which is the in-market token to be able to buy goods and services from other people because it has its actual intrinsic value. It’s a stable coin. It’s pegged with the US seller. That’s where we see the grander vision for this being replacement for these very unstable currencies around the world.

Adam Chapnick:

Yeah, amazing. Well, thank you so much for sharing with us what you’re doing.

Matthew Sullivan:

How are you? Good to see you.

Adam Chapnick:

Nice to see you. I’m great. Thanks for being here. For all our viewers out there, can you tell us who you are and what you do? I already know him.

Matthew Sullivan:

Sure. I’m Matthew Sullivan. I’m the founder and CEO of QuantmRE.

Adam Chapnick:

QuantmRE is a new take on investing in someone’s home. Is that right?

Matthew Sullivan:

It is.

Adam Chapnick:

So, like if want to sell part of my home, that’s the game you’re in, right?

Matthew Sullivan:

Well, the biggest challenge that homeowners face if they have equity in their homes is how do you unlock that equity without taking on more debts? It’s a big problem, particularly, if you are not able to borrow more money. If you’re a senior or if you simply in a position where you don’t qualify to borrow money, all that equity that’s yours, that you spent years paying off, you’re not able to tap into it.

So we’re using the blockchain and crypto currencies to enable homeowners in the US to unlock the value of the equity that’s stuck in their homes.

Adam Chapnick:

Amazing. So, there are some other companies that do that in a non-blockchain. What makes the security token, the advent of security tokens, why is that a better way to do it?

Matthew Sullivan:

There are so many people that want to be part of that real estate asset class. There’s a $5 trillion worth of equity in the US. The overall residential single-family owner occupied market is $32 trillion. Of that $5 trillion, 40% of that is in California. So there’s a multi-trillion dollar market that is very attractive to investors. We provide access to those investors, to that asset class. That’s the real difference that we bring compared to our competition. Our competition really only allows access to institutions of family officers. What we do is we open that market out. We democratize it, so that the man in the street is able to invest in fractionalized equity in the single-family homes.

Adam Chapnick:

Amazing. How did you stumble across this world of tokens?

Matthew Sullivan:

Well, the biggest question that we had going back a number of years was how do you value cryptocurrencies. If you’re searching for intrinsic value, there isn’t any. That’s really why, I think, we’ve seen such wild swings in the price of bitcoin, in particular. Our objective really was do you leverage the efficiencies that crypto currencies bring, yet at the same time, build it on top of something that has intrinsic value. We are really ... with blockchain, we had seen signals from the future. So having built companies in the early days of the Internet, you could see and feel that this is something really interesting that’s about to make some significant changes. We wanted to be part of it, but we had to find a way that actually creates to some that was real, that had real value and real longevity.

Adam Chapnick:

What do you do?

Hari Pottam:

Well, I’m an IT professional. I stumbled upon security tokens. I’m also interested in real estate investment securitizing it. Essentially, my goal is to let the investors create the securities and instead of getting locked up their investment for five years, 20 years as long as you own the property. I want to give that option to the investors so that they can create the securities for their own and not locked up with their investment.

Kelvin Dickerson:

See, I’m actually interesting in tokenizing a movie fund, so a slate of movies. I got into the blockchain about a year ago and was fascinated in the whole security tokens, fractional ownership. I’ve been trying to spread the word, education and awareness of my community as well as having meetups now, just in particular, issuers and investors.

Adam Chapnick:

Yeah. Okay. Great. Do you have a fund that you’re looking to tokenize?

Kelvin Dickerson:

Working with it.

Adam Chapnick:

Or you’re building upon then thinking about those.

Kelvin Dickerson:

Yeah. Trying to build a fund, like a slate of movies and break it into tokens and fractional ownership. So, it’s a process.

Adam Chapnick:

Absolutely. There are few examples of that already.

Kelvin Dickerson:

Yes, Movie Coin and what have you. Yeah, we’re a little different. But either way. I think realistically, we’re a year out.

Adam Chapnick:

Great. Well, you’re in the right place. Hopefully, we can help you learn, meet some people that might be able to help.

Kelvin Dickerson:

Yeah.

Luke Morgan:

I’m a reformed stock broker, so I’m used to the traditional security world. When I got into crypto through an incubator, I was working at called Plug and Play up in Sunnyvale where I met the Netki guys. Obviously, it sparked my interest having background in securities once this whole next wave came along.

Adam Chapnick:

Awesome. We have a Plug and Play now in LA. Where do you guys see this whole thing going? I mean, it’s early days. Certainly, you’ve been in a better year, you said. I know in the movie industry, it’s still been only one or two, three examples of what you’re doing. What you guys are doing is extremely relevant and timely. What do you think is going to happen with the security token field maybe in your world?

Kelvin Dickerson:

Right. Well, I think the key really is awareness and education. People need to understand what security token is. What it is, how it works, what have you. I think it’s a team effort. We all have to do that into the visual networks. I come to a lot of meetups and conferences, but like a lot of times, we were preaching to the choir. We definitely, which I have been trying to do, we definitely need to go into our respective industries, like in Hollywood and Hollywood meetings and say, “Hey, guys,” especially with Satoshi Roundtable and talking drill down, and answer all the questions. So, I think that’s really important.

Adam Chapnick:

Evangelizing, yes. Well, we’re all about that, obviously. If we can help, let us know. What do you think is happening? Where is it going with what you’re seeing?

Luke Morgan:

I mean, I think it’s going to be interesting to see the consolidation of the different platforms and see which one emerges, the best ones out there. Like who’s going to be the e-trade from 1998. Well, I could go sign up and trade stocks. The Polymaths of the world that we’re talking to and partnering with, the Vertalos of the world, and Securitize and New Alchemy, all these great groups. For me, it’s interesting to see which one takes the lead early first quarter, second quarter, with their issuances and which ones have actual up and running sales.

Adam Chapnick:

Amen. All right. Well, thank you guys, for sharing your thoughts with us. Nice to meet you.

Kelvin Dickerson:

What you guys are doing is fantastic.

Adam Chapnick:

Thank you.

Luke Morgan:

Thanks for having us.

Adam Chapnick:

All right. Good to meet you.

Amy Wan:

Mark your calendars for our next Security Token Meetup. It takes place Thursday, January 31st, inside Maggiano’s At The Grove, in Los Angeles. Freed food, drinks, networking and more. You can find all the details on our website. Just click on the Events page. You can also visit us on our Meetup page at the address on your screen. We had a great turnout last time. So be sure to RSVP to secure your spot to this free event.

Adam Chapnick:

Coming up January 16th, a special case study of the financing of the St. Regis Aspen Resort through tokenization. Tokenization enables fractional ownership of commercial real estate projects, with digital assets called, what else? Security tokens.

Amy Wan:

All right. That’s it for this special episode of Security Token Insight. Be sure to follow us on Twitter, Facebook, Telegram and Medium. Don’t forget to subscribe to our YouTube page so you don’t miss out on any of our videos and expert interviews. I’m Amy Wan.

Adam Chapnick:

And I’m Adam Chapnick. Before we go, a big thank you to our platinum corporate members Merrill Lynch and Securrency. We invite you to learn more about our corporate members by clicking on the Directory page of our website. For everyone here at Security Token Academy, thanks for watching.

Amy Wan:

Learn about regulations governing cryptocurrencies and security tokens from around the world with our regulatory review. It’s on our website, securitytokenacademy.com. Click on the Learn page so you can stay informed.