Derek Edward Schloss is the Director of Strategy for Security Token Academy. In addition to his role at Security Token Academy, he is also an Oregon Attorney, having earned both his JD (2014) and MBA (2014) from the University of Oregon. His professional experience includes Co-Founder/CEO of a national apparel company, former Instructor of Marketing at the University of Oregon, and VC Fund Analyst. Derek received his Bachelor of Arts in Creative Writing from the University of Arizona (2008).
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Hey everybody, I’m Adam Chapnick. Coming up on today’s episode of Security Token Insight, in your security token investing news, open finance threatens to delist all tokens. We have an interview with Derek Schloss, Director of Strategy for the Security Token Academy. And, in our Security Token Stories Podcast, you’ll hear from Bruce Fenton, Founder and CEO of Chainstone Labs. That and more is coming up on this episode of Security Token Insight. Now it’s time for your security token investing news.
Up first, Open Finance has cautioned users that it may delist all tokens, in addition to suspending trading, unless operating costs are covered by users. Low growth levels of transaction activity have forced Open Finance to request token issuers to cover the costs with new contracts. If the new funds are not raised, Open Finance will delist all existing tokens and suspend trading on May 21st. Open Finance said via an email that, “We remain hopeful that existing listing agreements will be renewed and any delistings can be avoided.”
Up next, Securitize has announced the new peer-to-peer trading facility, which permits retail investors to trade security tokens quickly and efficiently via web links. The new facility built on Securitize’s digital security protocol increases the speed in what was a previously time consuming process. Securitize Co-Founder and CEO, and friend of the show, Carlos Domingo, said that instant access helped “Fulfill one of the core promises of digital securities, simple compliant and efficient transferability on a global scale.” The new instant access functions similarly to AirSwap, where users can communicate off chain. If a seller wishes to unload tokens privately to prospective buyers, they simply share a web link via text, email, or social media, which then buyers click to initiate the transaction. By the way, Securitize is a gold corporate member of the Security Token Academy. To learn more, go to our website securitytokenacademy.com and click the directory tab and select, you know it, corporate member.
And finally, Overstock has announced plans to airdrop millions of security tokens to its stockholders on May 19th. Overstock shareholders will receive OSTKO security tokens as a dividend. Receiving one token for every 10 shares of OSTK they own. In total, 4.37 million tokens will be distributed. The dividend is expected to incentivize broker dealers to participate in and connect with the tZERO platform.
Have you listened to our latest podcast? Make sure you check out our Security Token Stories, featuring Derek Schloss, as he sits down for one-on-one interviews with security token industry leaders. Derek recently sat down with Bruce Fenton, Founder and CEO of Chainstone Labs and owner of Watchdog Capital, to discuss the blockchain in digital securities’ industry in light of recent COVID-19 events. Take a listen.
It’s this idea of kind of the macro landscape shifting and changing. And you touched on this when you were describing Watchdog, with this idea that these are times where the systems for doing things are changing rapidly around us. I’m not sure if you saw this, but for the first time ever, this was earlier this week, the New York Stock Exchange mandated NYSE trading floor, where all trading systems and processes would be moved to a hundred percent electronic systems.
I’m curious, in light of this discussion and thinking through kind of how things are changing all around our markets, all around your business, Watchdog, I’m curious what you make of this. Do you see decisions like this as a stop gap based on the current crisis we’re facing? Or a larger sign that timelines for more efficient markets, ones presumably that eventually may be built using blockchains, that those solutions will be more aggressively pursued now? I guess my question is, is there an argument to be made that COVID is like the catalyst for a more aggressive pursuit of digital trustless systems to avoid future market meltdowns that may be predicated on things like physical infrastructure and an intermediated structure? Or, I guess, do you think this will eventually speed things up towards a tokenized feature?
I think it probably will speed things up. We look at, in the last two weeks schools have made five years of progress on distance learning. I mean, there’s nothing that has ever mobilized as many... I mean, if there was never a virus, Trump would have come forward and said, “Hey, we’re going to get the whole world on teaching. Before the end of the school year, everybody’s going to get homeschooled.” It would have never ever happened in a million years. They would have said he was crazy. And if he said five years, they would have said, “Okay, maybe a thousand, maybe you’ll get one school district. It can’t really be done. You’re never going to get other States to agree. Maybe some crazy State will do it.” You know what I’m saying?
But everything changed in two weeks. In two weeks, you have teachers, our teachers in our school district are doing meetings with tech experts on how to implement this technology and that technology. So times have changed, call for times of better solutions. When everything is critical, you have lives at stake and economy is at stake, any efficiency is better. This isn’t a time where people are going to be luxury. They’re going to say, “Hey, if this saves me 15 hours on missed payment, then I need that 15 hours.” These are tight, tight times like that. So I think it is possible, particularly things where there’s a lot of friction, but the world is changing very fast. I mean, if right now, all these loans come out, start having government contracts that say, “Hey, we need this many machines here or there, whatever,” it may benefit to have something like a token.
You can spin off a token, I mean, for something important. If Lockheed said, “Hey, we have a government contract to fight COVID, we need a $1 billion token and we need it tomorrow and it’s going to help save lives and it’s a huge business thing and we need it.” I mean, boy, I’ll make 10 phone calls and that would be done, six hours. You get legal permission from a government. Government in UK says, “Hey, we need this right now for small businesses,” boom. I mean, Joe Lubin could do that in an hour. So that’s a powerful thing. You can’t do that in the old system. You can’t go into the old system and do that in an hour. It used to be three months and maybe they can trim it down to two weeks, but ain’t nobody got two weeks in an emergency.
If somebody needs to fund the whatever, firefighter boot company, they’ve got to be able to send that money. So I think it is possible that you’re going to see tokens, particularly as you also have another trend happening simultaneously with this, which is stablecoins and US dollar and other currency back stablecoins.
I was actually just about to say, just listening to you talk Bruce, one of the things that’s coming up for me is kind of the rollout of this stimulus that was just announced. And I’m looking through some of the documents and administratively, the receipt of some of these funds may be months. And you think about why that’s possible and really it’s possible because of these legacy systems that we have. You just think about the efficiencies gained, just having stablecoin on a trustless ledger, and being able to potentially distribute some of the stimulus using a digital dollar, I know there’s some discussion around that. You put it best, in times of crisis, every efficiency is a major, major win. Anyway, that certainly came up for me as you were talking.
Yeah. Yeah. And I think that it’s the kind of thing where you have, I mean, look at how radical things are. You mean, you have the governor of New York saying, “Hey, I’ll give you money, do whatever, do this.” And you’re going to have a lot of different governors and a lot of economics. It may just be a business, it might be McDonald’s trying to... They lost some revenue here, so they’re trying to change something [inaudible 00:08:47] it’s a priority. I was thinking, I had an idea the other day about if you had really high end like, a high revenue per person business, like you’re filming the Avengers. A hundred million dollar enterprise, and you got to shut down and filming, you could potentially self-separate, that was a key 50 actors, director, director of photography, separate them in a some kind of compound somewhere for a couple of weeks and then have them work together.
And for a hundred million dollar business, somebody may think, “Yeah, you know what, that’s a crazy idea, but that’s worth $2 million to us, so maybe it would happen.” So there’s crazy things that would happen where you’re going to see people say, “Hey, I’ll pay a whole bunch of cash or a whole bunch of this or that because I need something done.” And tokens are a pretty good way to have that stuff kind of more frictionless. And we need as little friction as possible right now to get the gears of the economy going. I mean, the whole economy had stopped. You were talking about projections of what it’s luck, but right now it’s kind of like zero. The whole economy is stopped. So it’s not just what’s lost, it’s a matter of restarting the engine.
Go to our website securitytokenacademy.com, click the interviews tab and select podcasts to listen to the full episode. The security token Academy is proud to present an expert interview with Derek Schloss director of strategy at Security Token Academy. I sat down with Derek to discuss him this new medium article, Security Tokens and The Formatting Revolution. Take a look. So, we’ve gone from Unamu now to 2020. What is the current layer look like for securities, contracts? Let’s say the US. What are some of the problems with it? What’s happening?
You mentioned digital, I assume that’s-
Yeah, so in the seventies, there was this massive push, and this was really as the result of personal computing and in corporate computing, where we were able to start taking the paper contracts that we made, the paper securities, and have them live as ones and zeros on electronic and digital databases. And so that’s what our securities and our contracting environment looks like today. If you look at our public markets, our public securities live on databases that are kind of centrally run by the DTCC and the intermediaries they’re in. And our private markets, they also live on ones and zeros and databases, but they’re usually in idle places like our law firms servers or our cap table software or on spreadsheets. But I guess the through line, if you just kind of zoom out and look at these things, they still live as ones and zeros, but just kind of in these siloed intermediary locations. And that’s where I think the next formatting layer is going to really be born out of.
It’s this idea of unlocking these things from these databases and putting them on a trust list settlement layer. And then this is really the power of blockchains and why I believe blockchain based securities are the next format for the legal layer.
Great. So you mentioned the trustlessness of that layer. But that might not be immediately clear to people, why that’s better. Like if I have a cap table and it’s sitting in my law firm server, don’t I want it there? Why is it better if it’s in some public, well, maybe it’s not public, but a trustless layer? Can you walk us through the benefits of that?
Sure, sure. It’s a great question. And I would say if we look at the problems that exist with the current model, it’s probably easier to kind of grapple with. So I would say the problems that are born with the model of having these assets live in all sorts of disperse locations, I would say that when you try and move those assets, there’s certainly rent seeking from moving an asset from one location to a different location. There’s time between matching and settlement that exists today, that creates just an inefficient use of that asset in kind of in transit. There’s also less governance rights, and this has been written and articulated by attorneys. It’s this idea that as you have your assets that you own, that are now, there’s a ownership stack that now exists and you’re at the bottom of that, even though it’s your assets, there’s intermediaries that may have stronger rights to govern those assets than you just by way of how the structure has been formed over the last 30, 40 years.
And so in the aggregate, there’s all of these problems that really are stem out of inefficiency, it’s costly, less governance and rights associated with the assets. There’s the argument to be made that, idle assets aren’t the most efficient use of those assets when you think about them in the context of our markets. And so this database model where we have hundreds, if not thousands of these databases where our assets live, may not actually be the best format for them. And I see this very much as a formatting problem. I think there’s probably a way to have those benefits of ownership and asset management exist through ones and zeros while still having them move more freely, be more sovereignly owned. And I think this is the idea of blockchains as a formatting upgrade.
Fascinating. I love it. So there’s one thing that maybe I missed, but that comes to mind that has to do with the idea of tracking components of an asset as it moves and how obviously this new blockchain layer is just gorgeous for that, whereas the old version totally falls apart when you try to follow where the shares of something go, and who had that? Did you have Excel version one or two? Or is it mine the latest? Is yours the latest? I mean, isn’t that one of the improvements that blockchain is going to create for us at all?
Definitely. So this is really the beauty of not having to trust your assets on a ledger, but having them live on a trust list ledger. And it’s this idea that with blockchains, because we’re not trusting a central party to manage a cap table or tell us when A moves to B, and when B moves to C. Because that all lives on a ledger that we all can look at and agree through consensus that this is where the assets now live and are trading in real time, there’s all sorts of efficiency gained. And one of those benefits that you’re touching on is transparency. There’s no funny business when you know exactly where your asset lives and can move at any given time. And with transparency stems all sorts of cost savings.
If you know where your asset lives, you don’t need to have to trust the stack of intermediaries to help you get an opinion on how they can move, because maybe regulations are embedded in that asset or they’re calling to a white list that allows you to know who and where they can trade, instead of having to kind of get a costly legal opinion. Or to trust intermediaries to interact with each other to facilitate that exchange. So that transparency is really one of the key benefits that really makes and unlocks a lot of the possibilities here Adam.
We have the full interview with Derek Schloss on our website, be sure to check it out. Hey 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 behind the scene 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. You can find more information 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 can 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, the address is [email protected] You can also learn more by visiting the frequently asked questions page on our website, by clicking on the FAQ tab. Our frequently asked questions page is packed full of Security Token industry terms and concepts.
Today’s term of the day is rapid settlement. “Today, public market exchanges like NASDAQ and NYSE can execute trades quickly, but settling ownership of those trades is typically two days, trade plus two days. Alternatively, private market securities can often take weeks or months to trade or transfer. With security tokens ownership claims will have the ability to trade and settle in seconds or minutes.” Get it. 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 our YouTube page so you don’t miss out on any of our videos and expert interviews. Big thank you to all of our gold corporate members as well. We invite you to learn more about our gold corporate members and all corporate members by clicking on the directory tab and click, what else? Corporate member. I’m Adam Chapnick, from everyone here at the Security Token Academy, thanks so much for watching.
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