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Security Token Insight: Expert Interview with Benjamin Tsai, president and managing partner, Wave Financial

Expert Interview


 
Benjamin Tsai, President and Managing Partner

Benjamin Tsai

Former CEO of Merrill Lynch Singapore Commodities and alternative investments at AllianceBernstein. Benjamin holds a BS from UC Berkeley, and an MBA from UCLA..

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Transcript


 

Amy Wan:

Welcome to Security Token Insight brought to by the Security Token Academy. The security token industry is here and will provide a key foundation for the evolving financial internet. The Security Token Academy provides insights about this new era for security token enthusiasts, investors and issuers. The security token industry is here and you can get involved. Hi, I’m Amy Wan. Adam Chapnick is on vacation. Coming up on today’s episode of Security Token Insight in your security token investing news, details on a new STO involving tokenized real estate debt. We’ve got an expert with Benjamin Tsai, the president and managing partner of Wave Financial.

Amy Wan:

Plus, a look at our new series Global Capital Markets and Security Tokens with David Weild and highlights from our first meetup in London. That and more is coming up on this episode of Security Token Insight. Now it’s time for your security token investing news. The world’s first regulated security token on a national stock market is coming to the Seychelles Security Exchange. According to a recent article from Bloomberg, the security tokens will involve tokenized shares of merge exchange and will be traded alongside existing stock of the company. The merge exchange has also received regulatory approval to launch its own security token exchange.

Amy Wan:

More details are expected to be released shortly. In other news, Smartlands, a UK based security token platform, has joined the European Crowdfunding Network. The partnership will allow growth of emerging technology across Europe and help speed up mass adoption of the asset tokenization process. Smartlands’ latest live STO involves a new student housing project in Nottingham. You can learn more at Smartlands.io. Finally, Boston-based OpenLTV has announced an upcoming STO involving tokenized real estate debt. The STO is expected to go live this summer and will be available to accredited investors in the US through a Reg D offering.

Amy Wan:

It’ll also be available to foreign investors through a Reg S offering. Investors will earn income through fractional debt secured by US real estate. Returns on investment are expected to be in the rage of 8 to 12% annually. Now back in April, the Security Token Academy attended Crypto Invest Summit in Downtown Los Angeles. The event attracts security token and crypto enthusiasts from around the world. The Security Token Academy team was there interviewing some of the biggest names in the security token industry and that’s where we met Benjamin Tsai. He’s the president and managing partner of Wave Financial and co-founder and CFO of the LA Blockchain Lab.

Amy Wan:

In this expert interview, Benjamin sits down with our own Adam Chapnick to discuss everything from derivative trading to whisky barrel fractionalization. Take a look.

Adam Chapnick:

You guys do a ton of interesting things. But for people who haven’t frequented Brentwood, the beautiful confines of Brentwood, maybe tell us what is Wave Financial, what do you guys do, and how’d you get started?

Benjamin Tsai:

Sure. We’re an asset management company. In terms of my background, I spent 15 years in finance across Asia, Tokyo, Hong Kong, Singapore and Taipei. My focus has always been on the finance side, buy side, sell side and so forth. Six months ago, I got up together with David Seimer, who’s our founder, and we put together an asset manager. He’s had a crypto blockchain focused venture cap fund that he’s brought over as part of our firm. We’re now also creating other asset management products there, asset management products and also investment strategies.

Adam Chapnick:

Very exciting. Okay. Now, you and of course David are very familiar with the space. Stretching back into the ICO shall we say, but maybe we won’t focus on that for the purposes of today, but what is it about... I’m going to stick to the security token space. What is it about that that holds promise in your mind?

Benjamin Tsai:

From my perspective, I come from a very regulated space. In my 15 years as a banker and as a buy side person, I was regulated in all of the countries that I named plus the US.

Adam Chapnick:

You feel comfortable. You’re comfortable with this.

Benjamin Tsai:

I’m very comfortable being regulated.

Adam Chapnick:

Right.

Benjamin Tsai:

Have a license. Be registered. The first thing we did when we put together our organization was we went and registered ourselves as a RIA, a registered investment advisor. We’re regulated under California law. As we grow bigger, we’ll get to the SEC level also. This is something that I think as asset managers we should be doing. Very recently I think Andreessen Horowitz...

Adam Chapnick:

Yeah, that was the big news.

Benjamin Tsai:

They announced that they were going to do that. We did that four or five months ago. Just putting it out there. Just putting it out there.

Adam Chapnick:

Just saying. Just saying.

Benjamin Tsai:

Yeah, just that.

Adam Chapnick:

Wow.

Benjamin Tsai:

With that, we’re using qualified custodians. We’re using auditors and so forth. We’re very careful in what we do with our funds, our assets under management, and how we look at how we manage assets.

Adam Chapnick:

That being said, security tokens just sort of fit hand in glove with that because the entire process from issuance to secondary all has to comply.

Benjamin Tsai:

That’s right. That’s right.

Adam Chapnick:

You guys that’s no problem. That’s how you role.

Benjamin Tsai:

That’s right. I think right now people feel like it’s a very burdensome and onerous process with many, many layers to get security tokens working. I don’t think people feel that in the traditional equity space or in opening bank accounts and so forth because it’s already set up. All the interface, all the infrastructure, all the UX, it’s all optimized, simplified and so forth. People don’t feel the stress there. They’re feeling the stress because we’re doing it for the first time. There’s also a bit of fragmentation in our field right now in security tokens where there are a lot of different platforms. You have to onboard with every single one of them.

Benjamin Tsai:

As you move to trading platforms, you got to onboard with all of them and so forth and so forth in many cycles. Where in the traditional finance world, a lot of that is simplified. You onboard to a brokerage account somewhere and they’re connecting you to all the exchanges for example and so forth. I expect that consolidation or that simplification or even just simply partnering up to happen a bit more as time goes.

Adam Chapnick:

Yeah, that makes total sense. You guys also have some interesting vehicles that you’re toying with let’s say.

Benjamin Tsai:

Sure. Yeah. We’re exploring a number of things. We’ve launched an investment index that looks after the large cap to try to give clients a feel for what a beta exposure would look like. We’ll be launching a series of different indexes which hopefully will give the client a better feel for looking at cryptocurrencies. I think a lot of people look at just Bitcoin. Where is the market going? Just Bitcoin. That may not be necessarily the right exposure. We’re going to try to find different angles to be able to show clients what the crypto market is going. We’re also looking at derivatives. That’s a new market. That’s up and coming. We’re seeing people trade derivatives in Bitcoin right now.

Benjamin Tsai:

We’re starting to see nascent marks in ETH derivatives. Of course, you can call up an OTC counter. They’ll make you a derivative in whatever fashion you want and whatever token you want. But overall, I think we’re starting to see that. The third series which I think we had discuss yesterday that was interesting-

Adam Chapnick:

Yes, this is my favorite.

Benjamin Tsai:

Yeah. We’re looking at real assets that we can tokenize that would make a lot of sense. It would take advantage of the tokenization process. I believe that there are lot of cash flows and yield curves that could be liberated using the token format so more people can have access to it. We can talk about things which are not boring, things that I do all the time, which is real estate and so forth. We could talk about things that are interesting which we talked about yesterday. We’re looking at whisky, potentially doing something with whisky in terms of tokenization and so forth. I’ve spoken to people about brand new whisky, the aging process. The interesting way of talking about it is we would hold barrels.

Benjamin Tsai:

The boring way to say it is we’re basically providing balance sheet to distillers for them to make their business more efficient. The other direction is more on the collectible side where I’ve talked to friends who are going to Scotland to buy 20-30 year old barrels and aging it for another 5-10 years to try to pick up the gain and value from that perspective. That smaller volume-

Adam Chapnick:

Like Series D barrel.

Benjamin Tsai:

That’s right. Like much, much later than that barrel. Obviously, the starting point is high, but the theory is that the ending point is even higher as long as nobody goes and drinks it beforehand and doesn’t all evaporate away.

Adam Chapnick:

That’s fantastic. In those kinds of instruments, those would be security tokens or not?

Benjamin Tsai:

We’re envisioning all of these things basically in fun format and we would issue security tokens and what we call digital funds around these things. They’re token representations of funds and the funds would have these different types of investments. We haven’t launched any of these yet, so we could talk about it to our liking.

Adam Chapnick:

I love that part.

Benjamin Tsai:

The concept is that these tokens would then be tradable on security token exchanges. We have a very close relationship with the top three in the US and many others. Overseas also. We would like to list them, have them be available. Just back to the whisky example, we can have the 2018 vintage. We have the 2019 vintage. You could trade fractional barrels with other people thinking certain barrels are better than others and have all that debate. I’m not a big drinker, so I’ll leave it to the experts to trade those tokens.

Adam Chapnick:

Yeah. Amazing. Well, I’m excited by that because I think a lot of the fun in discussing the possibilities about tokenization is trying to game out what are people going to fractionize. Here you are on the cusp of the actual execution of whisky barrel fractionalization which I love. Today, whisky barrels. Tomorrow, Pokemon cards.

Benjamin Tsai:

We can do many things. People have talked to us about race horses.

Adam Chapnick:

Race horses. Yeah.

Benjamin Tsai:

Well, with the race horse business, as far as I know, a lot of it is really for fun, for hobby. People pay to play. It’s very much a vanity sport.

Adam Chapnick:

But isn’t that already fractionalized in sort of the real world?

Benjamin Tsai:

In the real world it is to a certain extent.

Adam Chapnick:

Kind of in the real world. I didn’t say that. In the traditional world.

Benjamin Tsai:

In the traditional finance world, yes, it is to a certain extent fractionalized also. It is more of a vanity project rather than actual practical investment.

Adam Chapnick:

Yeah, they’re fundamentals.

Benjamin Tsai:

From us, we’re an asset manager. We’re looking at things that we can invest in. We’re doing whisky really because we believe that there is profits to be generated in whisky. 10 years ago, people didn’t invest in barrels of Japanese whisky and now we have a shortage. That could have been a great investment opportunity in retrospect. We’re trying to catch that on the way forward.

Adam Chapnick:

Interesting. Looking at Wave for the rest of 2019, what significant things can we expect? What are you most excited about?

Amy Wan:

We have the full interview with Benjamin on our website securitytokenacademy.com. Click on the interviews tab and then click STA video interviews. Now live on Security Token Academy’s website, a new expert video Global Capital Markets and Security Tokens with none other David Weild. Part one covers the state of the market. David is the founder of Weild & Co. and is the former vice chairman of NASDAQ. He’s also a 30 year veteran of Wall Street. In this new series, we cover the growing intersection of security tokens and traditional finance, as well as the benefits of tokenization. Here’s your preview.

Adam Chapnick:

In your mind, what are the application of security tokens? How do they fit in with today’s finance world?

David Weild:

I think first and foremost, I think we’re going to be able to strip out cost from the issuance of securities and the trading of securities in general. When you do that, you also enable certain kinds of securities that heretofore have probably cost prohibit. What I mean by that is I think the frequency of distributions can be increased very significantly. Why is that important? It’s important because retail in particular values higher frequency distribution. If you look at a traditional bond, it may pay twice a year. If you look at a closed-end bond fund, there are two forms, ones that pay quarterly distributions versus monthly.

David Weild:

The monthly ones that trade on the New York Stock Exchange and NASDAQ actually traded about a 4 or 5% premium to those that pay on a quarterly basis. I suspect that what we’re going to see is the tokenization of certain kinds of assets in a way that they will pay weekly distributions, maybe even daily distributions at some point.

Adam Chapnick:

That’s interesting. It’ll be interesting to see how that curve is shaped when you go from quarterly to monthly to weekly to daily in terms of the premium you were describing. What do you think about that?

David Weild:

Well, if you’re a retiree, you’re going to live week to week. You’re managing your budget that way. Having something actually hit your account, a distribution hits your account on a weekly basis is something that I think that retirees would really value. I think it will happen. I think it’s just a question of time, and I think that it will be highly valued by at least some subset of the market.

Adam Chapnick:

Yeah, no doubt. Why is this a preferred method as opposed to issuance of traditional securities? What benefits do the security token have over a traditional security?

David Weild:

Well, you can hold it directly in a cyber wallet if you so choose as opposed through a traditional security account which would be held by a broker/dealer. But I think that the real advantage is that there are a number of... In certain markets, there’s an application layer that is wedded to the token. For example, you can automate all of the legal and compliance checks that are done in private markets to be able to trade securities and private markets stripping out a lot of the cost and some of the constipation from having tokens or securities if you will moved from the hands of one investor to another.

David Weild:

There’s a big uptick in ease and efficiency for certain kinds of applications. My suspicion is that’s where we’re going to see most of the early adoption.

Adam Chapnick:

What are some of the real world uses where security tokens offer an advantage over traditional securities?

David Weild:

Well, if I wanted to apply to it asset classes, if you drive down the cost of tokenizing or securitizing an asset for instance, we might be able to, we’ve already actually seen the beginning of this, tokenize a particularly building. It would have then allow instead of somebody having to buy a basket of buildings through a real estate investment trust, you might be able to actually say, “Okay. Here’s an interest directly in the Empire State Building or in the Sears Tower.” The old cliché which is location, location, location, it will actually allow investors then to put together portfolios that are very much location-based type of real estate.

David Weild:

For example, whether it’s warehouse facilities or multifamily residential or office properties. It’s a consequence. I think it will create greater overall efficiency of capital allocation to the real estate market. I think it’s the beginning or the dawn of a brave new world in certain types of asset classes as opposed to forcing you to buy a big basket of properties where you don’t have control over the actual building selection within a portfolio.

Adam Chapnick:

Got it. Now, when it comes to issuers, what do you generally recommended, that an issuer issue a security token or start with a traditional security and maybe tokenize later?

Amy Wan:

Be sure to check out this new video series on our website securitytokenacademy.com. Did you know that you can get the latest industry updates in our free weekly newsletter the Security Token Edge? The newsletter is packed full of insightful information about the security token industry. To subscribe and get your free weekly copy, go to our website securitytokenacademy.com. We also invite you to check out The Digital Wrapper on Medium. It’s our new behind the scenes series with the teams building out the security token industry. These are in-depth interviews covering a wide variety of topics. You can view these when you follow us on Medium.

Amy Wan:

You can find out more information on our website securitytokenacademy.com. The Security Token Academy held its first ever meetup in London in partnership with Fincross International. The sold out event took place inside the 12 Hay Hill Club. Our illustrious panel included none other than Daniel Coheur, co-founder and CSO of Tokeny, Henry James, Deputy CEO of Fincross International, Graham Rodford, CEO of Archax, and Breige Tinnelly, head of Europe for Securitize. The meetup was sponsored by Merrill Lynch Private Banking and Investment Group, Clifford Chance and Fincross International. By the way, all three companies are corporate members of the Security Token Academy.

Amy Wan:

To learn more about them, go to our website securitytokenacademy.com. Click on the membership tab and then the corporate directory. I want to remind our viewers that if you have any questions about security tokens, be sure to email us and we could answer them right here on a future episode of Security Token Insight. The address is [email protected] Be sure to include your name with your question and one more time, it is [email protected] All right, folks. That is it for today’s episode.

Amy Wan:

Be sure to follow us on Twitter, Facebook, Telegram and Medium and do not forget to subscribe to your YouTube page so you don’t miss out on any of our videos and expert interviews. I’m Amy Wan. Before we go, another big thank you to our platinum corporate member Merrill Lynch and all of our gold corporate members as well. We invite you to learn more about our corporate members by clicking on the membership tab and then click corporate member directory. From everyone here at Security Token Academy, thank you so much for watching.

Adam Chapnick:

You want to learn more about security tokens from the top leaders in the industry? Be sure to visit our website securitytokenacademy.com and click on the interviews tab so you can stay connected.