Dave Hendricks is the CEO of Vertalo, a connections, compliance, and cap table company for digital asset issuance. Dave started his career at Arthur Andersen & Co. where he built securitization and remediation databases for real estate and other clients. After Arthur Andersen, Dave led tech teams at a JE Robert-Goldman Sachs joint venture than securitized real estate assets seized by the Resolution Trust Corporation. Before founding Vertalo SEZC parent company SeriesX in early 2017, Dave was the cofounding CFO, President, Treasurer, and Corporate Secretary of LiveIntent, a $100 million ARR people-based marketing firm headquartered in New York, where he led the company through 6 major fundraising events, culminating in the company’s latest $35 million Series D.
Vertalo is a liquidity enablement platform that was founded by a team that was frustrated with the difficulty of complying with and managing wallet and KYC data for its own security token holders. So we decided to build the system ourselves. Informed by our own experience, and by our team’s knowledge of securities law, Vertalo built a platform designed to take the pain out of managing a crypto cap table.
The Vertalo platform is designed to be used by issuance platforms, issuers, broker-dealers, ATS’s, exchanges and the market participants that integrate with and depend on them, like Custody platforms and KYC/AML providers. Vertalo’s easy to use system makes managing security token investor data easy, and helps security token investors access the liquidity providers that they need.
Welcome to Security Token Insight, brought to you 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.
Hey, everybody. I’m Adam Chapnick. Amy Wan is on vacation. Coming up on today’s episode of Security Token Insight, in your security token investing news, Polymath launches its ERC-1400 security token standard. We’ve got the details, plus we’ve got an expert interview with Dave Hendricks, the founder and CEO of Vertalo. And learn about a new partnership between Archax and Smartlands in a special expert interview. And highlights from our security token 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. Polymath has made a big change to their protocol. Their security token 20 standard is now compliant with the ERC-1400 protocol. The ERC-1400 is a standard for security tokens. The new change creates tools for token issuance across multiple jurisdictions while remaining compliant. In other news, Walmart could be creating its own digital currency. According to a filing publishing by the US Patent and Trademark Office, Walmart could be working on and issuing its own blockchain-based digital currency that’s pegged to the US dollar, and could be available for use at selected retailers and partners. The filing also states the digital currency may remove credit and debit cards without requiring cash, and could be used for food payments.
tZERO has won a patent of its own for the Time Ordered Merkle Epoch methodology known as TOME. Is it a base-layer technology that uses digital signatures to record and verify time-series data such as trades, executions, and settlements. This technology enables low-latency systems, including traditional matching engines or private blockchain ledgers, to be anchored into immutable public blockchain ledgers. The TOME system will allow tZERO to record incoming trades quickly and efficiently in a time series, producing a hash at any time interval, which can be anchored on a public blockchain. tZERO, of course, is a Gold Corporate Member of the Security Token Academy. To learn more, go to our website, securitytokenacademy.com, and click on the directory tab, then Corporate Member.
Vertalo is a cross-chain platform for security token issuances that enables broker-dealers, issuers, and investors to visually manage portfolio data related to communications and compliance. The Security Token Academy is proud to present an expert interview with Dave Hendricks, the founder and CEO of Vertalo. Our own Amy Wan sat down with Dave at the GHV meetup in Los Angeles to discuss simplifying and broadening access to digital assets and tokenization. Take a look.
What do you think right now are the challenges towards larger or more mainstream adoption of digital assets?
Well, first there’s the quality of the projects. Investors are always interested in investing in teams, technology, businesses that they believe in. So, what we’ve seen early projects come out the gates, with maybe projects that weren’t fundable by venture capital, et cetera. So, I think that’s one of the first kind of hurdles to adoption, was just quality, and was it investible? Some of the projects weren’t so great. But I don’t think that that’s the long-term problem. I think that’s going to get sorted out. The broker-dealers that Vertalo works with, and we work primarily through broker-dealers, are starting to increase the quality of the offerings. But the broker-dealers have not been able to solve one thing, and this is the thing that Vertalo has really been working on, and that is getting rid of the technological obstacles for mainstream adoption, specifically the wallet.
Probably the hardest thing for a regular retail investor, or even a family office, is the notion of dealing with a crypto wallet. It’s just a hard thing. MetaMask is not easy.
Yeah, yeah, and it’s scary to do it too. Right? If you do something wrong, then who knows where your assets are?
Right. So, asking investors who already have to figure out whether a deal is worth investing in, having them also have to figure out how to custody their own tokens, how to bring a wallet to a transaction, that puts a hurdle up, which probably knocks 80% of the investors out. So, that’s the first thing. The second thing is that selling a token first, investing in a token, is probably the first order problem. Okay? You’ve got a wallet, then a token. It may be little known, but some funds cannot invest in tokens. They actually have it in their bylaws. A lot of people don’t want to buy a token because they don’t know what to do with it. They don’t know how to operate a wallet. They don’t know how to buy a token. So, saying that we’re selling a token is probably also a barrier to implementation, to adoption.
Oh, it is off-putting. So, what Vertalo’s been working on is not only abstracting the wallet, but also abstracting the token.
So, we enable projects that want to issue a digital asset to use our technology through a broker-dealer or directly, to raise money without a wallet, and invest in a real company with the potential and capability to tokenize later. So, our technology enables any offerer to issue a token, even if they raised money five years ago.
They can upload their cap table into our system, and with one button they can produce tokens to custodial wallets that the investor does not need to know how to use. If our business, the thing that we’re in, is about expanding acceptance and adoption of digital assets, you actually have to hide some of the technology, because people are not... If they’re interested in infrastructure investing, well, yeah, sure, go invest in token companies. But people want to invest in the underlying asset. So, how do you knock the barriers down to investing in those underlying assets? You’ve got to abstract wallets, meaning make it so that anyone can invest, and they don’t have to use a wallet, and then make it so they don’t have to worry about custodying the token themselves.
We were actually talking a little bit earlier about this, but another challenge is just even the cost of issuing a token. Right?
Can you talk about that?
Well, asking a project that’s trying to raise money to front you a hundred-thousand bucks, or even $50,000, to build a token for an audience that is yet unknown, is probably also a problem that is getting in the way of adoption. So, imagine you are a company with a groundbreaking idea and an amazing team, and you’ve got this huge market, and you say, “Well, of course we want to have a digital asset, because we believe in self-sovereign ownership. We believe in direct listing,” which is what... Vertalo enables direct listing. If you want to issue one of those assets today, you’re being asked to front 50 or a hundred or more thousand to produce that token at the same time that you’re working on your product, at the same time that you’re doing a roadshow or trying to raise money. It’s a lot of stuff for teams that aren’t necessarily big, and it’s a lot for teams that may be cash-strapped.
So, we have been developing approaches since we started, and this was in early 2018, to make it so that any issuer could do a fundraise, and then at the end of the fundraise, they could issue a token if they so chose to do so. If they didn’t want to issue the token yet, our system allows them to kick that can down the road, and in a year-
When they’re ready...
... when they’re ready, they can issue the token. The key thing is you understand because you understand securities law, that you’ve got this thing called Reg D and Rule 144. Right?
Right, right, right.
So, you can still do this and maintain compliance with the long hold period, the restriction period.
Right. Right. I do want to return to your point about working with broker-dealers in a second, but it just seems like you have a very different vision of the security token industry from a lot of other players in the industry. So, then why are you working with broker-dealers? What advantage does that bring to Vertalo? What advantage does that bring to the broker-dealer?
I think that anyone who’s been selling anything, especially high-ticket items that have long implementation cycles, understands that trying to diligence a client that you’re going to go start work for is time-consuming. It’s very, very difficult to figure out and discern which project is going to succeed in its fundraise. So, rather than sign those projects up and then hope we’re going to get paid if they can raise money, we would rather take the diligence and have it be done properly by a broker-dealer who legally can take 5%, 7%, 10% of the proceeds from the fundraise as their fee.
Because they can get paid on a performance basis like that, which you can’t unless you’re a broker-dealer, they can also afford to do diligence up front. Broker-dealers due diligence so they can figure out whether the projects they choose can raise money. I want to benefit from that, so Vertalo works with broker-dealers. We give our technology to broker-dealers. They can while label our onboarding, cap table, and token distribution technology, and use it for their fundraises. It produces a beautiful cap table at the end of the process. We can syndicate broker-dealers so that five of them, 10 of them can work on the same deal, all ending up in the same blockchain-enabled cap table.
Yeah. By doing that, we move the risk away from us, and we get the client when it’s more mature, meaning it is actually... Someone else has decided it can raise money. So, we give the technology to broker-dealers to enable them to bring clients to us, and that way we get real clients that are capable of paying, because after you’ve done all the work, it’s opportunity cost. Right?
I can only have so many two-hour conversations. To your question before here, I can’t tell if they’ve done their proper filings. I don’t know whether their... I don’t want to go through their PPM. That’s not my business.
Right. So, leave that to the professionals.
You said that Vertalo started in early 2018. We’re now mid-way through 2019. So, over the past year-and-a-half, what is your opinion about where the security token industry is today, where it’s going?
We have the full interview with Dave Hendricks on our website. Be sure to check it out. By the way, Vertalo is a Gold Corporate Member of the Security Token Academy. To learn more about them, go to our website, securitytokenacademy.com. Click on the directory tab, and then Corporate Member. Now live on the Security Token Academy’s website, a new expert video series, Global Capital Markets and Security Tokens with 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 is your preview.
What are the applications of security tokens? How do they fit in with today’s finance world?
Well, I think first and foremost, I think we’re going to be able to strip out cost from the issuance and securities and the trading of securities in general, and when you do that, you also enable certain kinds of securities that heretofore have probably been cost-prohibitive. 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. So, if you look at a traditional bond, it may pay twice a year. If you look at a close-end bond fund, there are two forms, ones that pay quarterly distributions versus monthly. The monthly ones that trade on the New York Stock Exchange and NASDAQ actually trade at about a 4% or 5% premium to those that pay on a quarterly basis. So, 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.
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?
Well, if you’re a retiree, you’re going to live week to week, you’re managing your budget that way, so having something actually hit your account, a distribution hit your account on a weekly basis, is something that I think that retirees would really value. So, 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.
Yeah, no doubt. So, why is this a preferred method as opposed to issuance of traditional securities? What benefits do security tokens have over traditional security?
Well, you can hold it directly in a cyber wallet if you so choose, as opposed to 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, and so for example, you can automate all of the legal and compliance checks that are done in private markets to be able to trade securities in private markets, stripping out a lot of the cost, and some of the constipation from having tokens or securities, if you will, move from the hands of one investor to another. So, there’s a big uptick and ease and efficiency for certain kinds of applications, and so my suspicion is that that’s where we’re going to see most of the early adoption.
What are some of the real world uses where security tokens offer an advantage over traditional securities?
Well, if I was to apply it to 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 particular building, and it would 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.” So, you can then... 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. So, for example, whether it’s warehouse facilities or multifamily residential or office properties, and so as a consequence, I think it will create greater overall efficiency of capital allocation to the real estate market. So, 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 buy a big basket of properties where you don’t have control over the actual building selection within a portfolio.
Got it. Now, when it comes to issuers, what do you generally recommend, that an issuer issue a security token, or start with a traditional security and maybe tokenize later?
Be sure to check out this 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. These are in-depth interviews covering a wide variety of topics. You can view these when you follow us on Medium. You can find 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 top-notch panel included 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. All three companies are Corporate Members of the Security Token Academy. To learn more about them, go to our website, securitytokenacademy.com, click on the directory tab, then the Corporate Member homepage.
Save the date for our next meetup. It’s taking place Thursday, September 26th in New York City. The meetup will be inside the Sunset Terrace at Chelsea Piers from 6:30 until 9:00 in the evening. Join security token experts and financial services professionals for an evening of informative discussions, networking, food and drinks. Seating is limited. The event is free. To learn more, visit our website, securitytokenacademy.com. What is the current state of the security token industry in London? Find out the answer and more in this expert interview with the co-founder and CFO of Archax, Matthew Pollard. He’s joined alongside the CEO of Smartlands, Arnoldas Nauseda. Here’s more.
Before we begin, can each of you guys tell me a little more about yourself and our respective companies? Let’s start with you, Matthew.
Sure. So, I am one of the three founders of Archax. My main role at the company is the CFO, where I look after all the numbers and the budgeting and the treasury and the forecasting. Archax is a startup business. It’s been around a year-and-a-half, and we plan to obtain all the necessary regulatory permissions to safeguard client assets and to offer a priced discovery of regulated instruments in London.
Fantastic. Okay. What about you, Arnoldas? What can you tell us about your background, and also a little bit about Smartlands?
I have a background in several industries, basically. It range from real estate, venture capital, private equity, technology, consumer businesses. In the past five years, I was a full-time entrepreneur. Basically, I founded companies in technology and robotics and fintech, and now I’m fully based 300% into Smartlands. Smartlands, we are a tokenization platform, an investment platform, where we tokenize real assets. So, we are based on London. We also have offices in Kiev and Vilnius, and we have also FCA-regulated framework where we issue security tokens in line with the regulations, and we also have a number of partnerships. We can basically tokenize and commercialize this technology.
Terrific. So, both of you guys, Archax and Smartlands, you’re based on London. So, we talk a lot here about the environment in all of our cities in the US. Can you tell us a little bit about the state of the security token industry in London? What’s the current climate like there? What do you see, Matthew?
Sure. So, Archax has been around for a year-and-a-half, and all three founders have spent the last at least 10 years on the buy side being regulated by the FCA, and so our experience in setting up Archax has been pretty positive. The city of London wants to be an innovative center. By lots of metics, it’s the fintech capital of the world. With Brexit coming up, there’s definitely an appetite for the innovation to stay in the city of London. So, we’ve seen the regulator, we’ve seen the Bank of England, we’ve seen treasury, we’ve seen companies in the city of London all take a massive interest in blockchain, and there was an FCA consultation paper that came out in January this year, and to see the regulator explicitly recognize cryptocurrencies and give them three classifications, three buckets, one was exchange tokens, so things like bitcoin, used to exchange value, utility tokens, and explicitly recognizing security tokens. So, for us it’s a really good sign that London and the regulator are properly looking at this space. Hopefully that answers your question.
Yeah. No, that’s exciting. What about you, Arnoldas? Are you seeing any kind of trends around security tokens? What’s the environment like?
Yes. I see a lot of, actually, a moment in this space as well. So, in addition to Matthew’s points about the regulator, the regulator is really very progressive. They have also the sandbox programs, so in sandbox there are many companies going and testing, basically, the blockchain products, technologies, et cetera, so that’s very positive in that sense. I see also a lot of confidences in the crypto and blockchain space, a lot of meetups as well, which is organized by lawyers, by financial people, basically financial institutions, so there is really a big attraction in one of the biggest financial centers in the world, and we’ve chosen this jurisdiction for our business, as well as one of the most reputable and progressive and innovative and friendly environments to do the business.
Yeah. It’s exciting to hear. Now, both of you guys, Archax and Smartlands, have been in the news recently because of a partnership. Matthew, why did you guys enter into this strategy partnership with Smartlands for their property-backed security tokens?
Sure. So, as I’ve said, we’re building a regulated venue that will list regulated instruments, and so as part of building that venue and building our business, we want to know that we have an exciting pipeline of quality assets that we will list on our regulated venue. So, engaging in partnerships with exciting companies like Smartlands is a very natural part of our strategy because we want to have the best quality assets on the venue to attract customers to our venue. So, that’s why we’ve done this, and we see the work that Smartlands have been doing in London. We see the attention to detail, especially around the regulatory framework of the offering, and we knew that they would be a great partner to sign up so that we can have the current offering and future offerings to be listed on our venue.
Arnoldas, can you talk a little bit about why Smartlands chose Archax for your STO?
Yes. So, as we all know, the tokenization is about liquidity. Liquidity is a key driver of this space. So, basically, we need a second market in order for this industry to move forward. So, we basically analyzed all the European exchanges, and we also basically explored what are the existing exchanges in UK, which FCA regulated with a good theme, with the execution, and we chose Archax as our partner to list our security tokens, and that’s a great, I think, fit for us, and we collaborate. We partner, and we move this space in London. The other reason was that we would like to have all the, basically, our foundations to the exchange to have FCA-regulated, which is one-stop shop. When the people go and invest in security tokens, they see the reputation, reputable companies from the whole value chain, and which is all compliant and regulated in UK. So, that was, again, one of the key decision criterias to decide to partner with Archax and move forward with the listings.
Yeah, great. Okay. So, Arnoldas, recently Smartlands tokenized, essentially, the first tokenized property in the UK, a $12 million student housing project. Can you tell us more about this STO? How much is it looking for? Who can invest, et cetera?
Yes. We believe that we are the first in UK to tokenize the property. So, the property is 12 million Pound Sterling property based in Nottingham. As you know, Nottingham has two universities, big universities, which were one of the best in the UK, I would say, and one of the top leading in the world. So, there are more than 60,000 students, and there is quite a demand from all over the world to go to these universities, and at the moment in the market, the situation is that in this city particular, there is a shortage of student accommodation a counsel issued that there is 6,000, basically, shortage of the student accommodations.
Also, we talk about student accommodations. We’ve chosen this alternative sector from real estate as one of the key sectors, which has the interest from the institutional investors as well. So, it’s the indication, and during the recession, it’s also been doing great, this sector. So, it’s kind of good business case to start from the business point of view, and also the location-wise. So, the people can go on our platform. They can go through the KYC in five minutes, and they can basically register and buy the tokens. So, the people who are willing, they can go on our platform, smartlands.io, and see more details about this offering, what is offered, and the documents, the investment memorandum, et cetera.
We have the full interview with Matthew and Arnoldas on our website, securitytokenacademy.com. 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. One more time, the address is [email protected] All right, that’s it for today’s episode. Be sure to follow us on Twitter, Facebook, Telegram and Medium, and don’t forget to subscribe to your YouTube page so you don’t miss out on any of our videos and expert interviews. Before we go, a 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 directory tab, and click Corporate Member. For everyone here at Security Token Academy, I’m Adam Chapnick. Thanks so much for watching.
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