Building on the blockchain since 2013 - Mason has built custom wallet infrastructure from the ground up, and helped scale BitGo’s multi-signature wallet platform up to $1 Billion in transactions per month. In 2016 he launched the world’s first multi-signature web wallet on the Ethereum platform, Ether.li. While at BitGo he architected and prototyped the cold storage infrastructure for the blockchain launched by the Royal Mint of England.
Tokensoft is a technology platform that enables small businesses, enterprises, and institutions to meet compliance requirements for blockchain-based securities at issuance, distribution and exchange. The TokenSoft platform enables its clients to meet banking, securities and tax requirements in over 50 countries. Current and past clients include Hedera Hashgraph, The Tezos Foundation and Andra Capital.
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Hi, I’m Adam Chapnick
And I’m Amy Wan. Coming up on today’s episode of Security Token Insight, in your security token investing news details on a new partnership involving Securitize and Japan Security Token Association. Plus, we’ve got an expert interview with the co-founder and CEO of TokenSoft, Mason Borda, and highlights from our security token meetup in New York City. That and more is coming up on this episode of Security Token Insight.
Now, it’s time for your security token investing news. Crypto currency exchange operators Coinbase, Kraken, and Circle are teaming up to create the Crypto Rating Council. It’s a new organization, which seeks to assist financial services companies in determining the legal status of various digital assets. The new scale rates tokens from one to five, with one indicating an asset has little to no traits of a security, while five indicates a token that shares many traits with a security. The new rating system would also help to determine whether or not a digital asset qualifies under US securities law by incorporating guidance from the SEC.
In other news, FINRA has approved Harbor Square Investments, a subsidiary of Harbor, to receive their broker dealer license. Harbor is a tokenized securities platform. Harbor CEO, Josh Stein, said now that Harbor has secured their broker dealer license, the company intends to become a one-stop shop for digital asset issuers.
And finally, security token management platform Securitize has announced it raised $14 million from a group of investors, which include Banco Santander, Mitsubishi UFJ Financial Group, and Nomura Holdings. The recent raise by Securitize reflect a heightened interest by banks in the digital securities market. In addition to its latest raise, Securitize has also partnered with Japan Security Token Association in order to further educate Japanese investors on digital securities. By the way, both Securitize and Harbor are gold corporate members of the Security Token Academy. To learn more go to our website, securitytokenacademy.com, click on the directory tab, and then select corporate member.
Have you listened to our latest podcast? Episode seven of Security Token Stories is out right now. In this episode with STA’s Derek Edward Schloss, Douglas Pepe talks about how he approaches teaching blockchain topics to new students at the GW School of Law, the current state of securities guidance from the SEC for new and existing token projects, and much more. To listen to this podcast, and many more go to our website, securitytokenacademy.com, click the interviews tab, and select podcast.
The Security Token Academy is proud to present an expert interview with Mason Borda, the co-founder and CEO of TokenSoft. TokenSoft is a primary issuance and compliance platform, enabling the issuance and distribution of tokenized securities. The company is a gold corporate member of the Security Token Academy. I sat down with Mason to discuss TokenSoft’s new feature KYB, and it’s ERC-1404 token, and more in this expert interview. Take a look.
What is TokenSoft, and how did it come to be?
Yeah, so we’re a technology platform and we help issuers of security tokens, issuers that are seeking to tokenize real estate funds, equity get through the primary issuance process, and we provide technology that helps them get through the ongoing management, and compliance of the security token as these tokens go to transfer out in the world. So that’s what we do. We’re focused on cybersecurity, compliance, as well as scalability.
Amazing. Okay so, let’s pick one of those, and kind of drill into that. You talk about compliance, so how do you handle compliance at TokenSoft?
Yeah so, I think one thing that’s really interesting about security tokens is we’re taking existing financial infrastructure, and financial instruments, and rebuilding them up on the blockchain. And one of the primary pieces of enabling that is compliance, and making sure that you’re following all the rules and regulations that you’re supposed to as an issuer of a security. And so we do that by speaking with our clients’ in-house compliance teams. Perhaps we’ll have to speak with their law firm, their professional services firms. We have clients that work with Deloitte, PwC, we capture all of those regulatory requirements, whether they’re banking regulations, securities regulations, or tax regulations. We package that into our platform, and then it’s automated from there out to a certain extent.
Incredible. Okay so, you guys recently coined a new term, I think it’s new, KYB. Why don’t you give us the big reveal of what is KYB, why is it important, and why did you guys sort of roll that out?
Yeah. So, I think most people are familiar with KYC, and so why do we have to do KYC? There’s a regulator out there called FinCEN that’s enforcing a regulation called the Bank Secrecy Act, which requires banks to collect a certain piece of information when they’re onboarding individuals as clients. So when you sign up for an account at Chase they’re going to ask for your driver’s license, maybe a utility bill just so they can ensure that they know who you are, and that you’ve got your money through legitimate means like by working at Security Token Academy.
Right, and so that’s KYC, know your customer.
Yeah. And that’s very individual based. And so recently FinCEN amended the Bank Secrecy Act with something called the final CDD rule. And so what that says is that if you’re taking money from a financial institution you also have to perform similar diligence on that institution. So, you do have to make sure that it’s a real entity that is valid, that is up and running properly, and you have to further ensure that you know who the beneficial owners of that entity are. And so you have to KYC the beneficial owners of that entity. It’s very complex, it’s very manual, it takes a long time to do.
When we went out and did a survey, and looked at what services are out there, because initially we didn’t want to build it, we found that on average it takes 10 days to process an entity through due diligence procedures, and to do that verification. And so we rolled out a service and actually initially in July of last year when the rule went into effect to streamline and automate some of the procedures that come into play when onboarding an entity and verifying those documents.
Got it. And so you call that, in general, KYB, and that stands for ...?
Know your business.
Know your business.
Okay, so you got to know your customer, you got to know your business. Good. So TokenSoft, it has a new ... or I think it’s new, a unique feature. It’s your TokenSoft Consulting Services. How is that related to what you do?
So before we engage with the client we have to know exactly what they want. So we have to know their compliance requirements, the regulatory requirements, we have to know the timing and structuring of their sale. That’s information they provide to us. When we started working with larger financial institutions, we found that process to be a lot more complex. And so what our Consulting Services are, are a set of services that we provide where we go a little bit deeper with a larger institution, understand their requirements, and take into account the various different departments that they have. So we speak with all their folks internally, capture the requirements, and then package that into our services.
Due to the complexity some of our services turn out a lot more complex, or they end up looking a little bit different than what we have today. So we do have to take those requirements, repackage our technology so that we can deploy in these larger institutions. And so that’s what it’s about. It’s just making sure that we can meet the needs of these larger financial institutions just because they’re a little bit more complex.
It’s important to be nimble when you’re dealing with these sort of massive immovable objects. I think you’re going to need to be a little bit flexible to deal with them, and this helps you do that. I think that’s great.
So, okay, there’s something called an ERC-1404 token. What is it? Why do we care, and why do you guys support it?
So if you go out there and buy a stock in a company today when you purchase that stock it feels very simple and seamless, but in reality there’s about 10 different vendors in the back that enable that procedure to be seamless. And they do that with a focus on compliance. The transfer of that security has to go through a bunch of compliance checks. And if it passes, then you’re the rightful owner. And so when we started putting these securities on the blockchain we ran into similar problems. The token needed to follow all of these compliance requirements, but there was no real way to do it.
So at the time, there were a couple of standards out on the market, this was 2017, that were being talked about. Our token in early 2018 Polymath ST-20, and so we took a look, we did a survey, we took our clients’ compliance requirements, we looked at the standards, and realized we needed something slightly different. Something that was a little more bespoke to the clients’ regulatory requirements.
And so, we made ERC-1404, and all it does is it helps us enforce the compliance requirements of our clients, and to do that through technology. And that’s whether it’s banking securities and tax regulations, and whether it’s domestic, international. One interesting thing that it can do is for our clients that are launching on ERC-1404 we can help them enforce the requirement that Reg S securities do not transfer into the US, into US persons’ hands. And so that’s one of the interesting things that it can enforce.
Yeah, it’s great. So when people hear you talking about the ERC-1404 versus this other token versus this versus that some of the people that watch are very versed in the regulations. They know about FinCEN, they might know about the Reg S, but when it comes to the token or the blockchains it’s a little bit new for them.
So do you guys support any blockchain? Are there certain chains that you guys support, and if there are certain ones why?
So, we’re very client driven, and so if we get certain demand for certain blockchains then we’re happy to help figure out how to make that happen. We really see our role as sort of a technology layer in between blockchains, and regulations. And so as long as we can help provide that mapping and provide that confidence then we’re happy to do so.
In terms of supporting different blockchains, this is still sort of an art. And the reason is the technology’s still very young. So when we started offering Ethereum services to our clients we had to evaluate the blockchain and build a lot of the infrastructure to help make securities on the Ethereum blockchain possible. And that meant things like building Knox Wallet, our cold storage custody solution for security tokens. That meant building out ERC-1404 so we could have, basically, a permissioned network on a public blockchain because when you issue tokens you have to make sure that you KYC every person you’re giving tokens to. And so that’s one of the things we look at is infrastructure there? And if not, can we build it? And another thing is the broader adoption of the blockchain. If we, as a company, are to support a certain blockchain we’re, basically, putting our stamp of approval on it, and so it’s very important to us that this blockchain is also well received by the major infrastructure providers out there. And there is broad support.
We have the full interview with Mason on our website, be sure to check it out. To learn more about our corporate member program visit our website securitytokenacademy.com, and click on the membership tab.
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. You can find out more information on our website, securitytokenacademy.com
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’s 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 costs from the issuance of 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. And 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 closed end bond fund there are two forms, one’s 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 did the security token 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 in 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 a tower, The Sears Tower. The old cliche, 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 to 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 new video series on our website, securitytokenacademy.com.
The Security Token Academy held another successful meetup this time in New York City, and we want to thank everyone who attended. We had a big crowd inside the Sunset Terrace at Chelsea Piers. Security token experts and financial services professionals were on hand for an evening of informative discussions, networking, food and drinks. I also moderated a panel discussion that included our professional and corporate members. Here are your highlights from that panel discussion.
Hi everybody. My name is Amy Wan, I am host of Security Token’s Insights. Hopefully, some of you guys have seen the show and I’m also CEO of Sagewise.
We have an incredible panel here tonight with regulatory and legal experts. They all know so much more than myself. So I am going to allow you guys to basically go down the row, and if you could give us 60 seconds about yourself and your company.
Yeah, sure. Aryeh Friedman, General Counsel at SeedInvest. We’re an online leading equity crowdfunding platform in the US. We operate through a broker dealer, so we help issuers looking to fundraise, raise capital through Reg D, Reg A, Reg CF, and various offering exemptions that are available here in the US. We have an investor base of about 275,000 investors made up of both of accredited and non-accredited investors. In accredited, including average angel investors, institutional retail and family offices. And we’re also very active in the digital asset space.
Hey, I’m Dave Adams. I’m a senior associate at Clifford Chance. Clifford Chance is an international law firm. We’ve got offices here in New York, also in DC, our main office is in London, and then we have offices throughout Europe, and the Middle East.
I think that the firm has realized what an incredible opportunity digital assets are, including securities tokens in particular, and that because you’re dealing in a digital medium that crosses borders all around the world that you need support all around the world as well in the form of legal advice and whatnot.
My specific focus is on broker dealer and investment advisor regulatory issues. I also do a fair amount on alternative trading systems, exchanges, et cetera, and then also a little bit on the enforcement side dealing with primarily, we’ll call them, ICO issuers who took a chance, took a gamble and it hasn’t worked out particularly well for them. So I think that that’s what the Security Token Academy here really brings to the table is doing things in a regulatory compliant way.
Hi. Well, first of all, just thank you so much for inviting me to be here tonight, Amy, to be a part of this spectacular space, and I’m really happy about the number of friends that I have in the room. My name is Robin Sosnow, I’m a corporate and securities lawyer here in New York City. I’ve had my practice for the last five years.
We work with issuers, broker dealers, and funding portals in an effort to help them raise capital or deal with regulatory compliance issues. I’m really focused on the JOBs Act, so we do a tremendous amount of regulation crowdfunding work, Reg D, 506(c) and Reg A+. I’m also the author of the Crowd Crypto News newsletter, which goes out weekly. If you’re interested, let me know, I’ll sign you up. And my firm is a joint venture partner in a law firm called Digital Securities Law Group that focuses on helping private companies tokenize ownership and sell it through private placements.
Hi everyone. My name is Jason Gottlieb, I’m a partner at Morrison Cohen LLP, a mid-size law firm here in New York City. We are a full service law firm doing all sorts of things. My own practice focuses on regulatory enforcement and litigation issues. And these days, as many of you are aware, some of you perhaps more painfully than others, regulatory enforcement in the crypto space has been sort of a hot topic. So I, typically, handle SEC, or CFTC subpoenas, document requests, and even litigations. I’m lead counsel in one of the earliest actions that the SEC brought against an ICO issuer. So if any of you are in trouble with the SEC our conversations are privileged, no one else will know about it.
If you are in trouble, you might want to talk to him outside.
We don’t want to hear that conversation.
Well, thank you everybody. Thank you so much for donating your time and your knowledge tonight.
So let’s start off with this question, back in 2017/2018 there was a huge appetite for these, so-called, utility tokens that were not being treated as securities. And, as the space has evolved, the appetite for that seems to have decreased. And there’s this evolution towards now tokenizing equity as opposed to some sort of network utility token. Why has that been the trend, this tokenizing equity thing, and is there still even an appetite for utility tokens? Why don’t we start with Robin and then we can all jump in?
Sure. So in my practice, we’ve certainly experienced that shift in interest. I think one rationale, or argument would be that it’s a much safer route to take if you’re a non-blockchain business and you’re looking to raise capital, but you see the value proposition of digital asset securities than pursuing a capital raise in reliance on a traditional exemption like Reg D, if I was [inaudible 00:24:30], or even Reg CF is just a much more conservative approach to take while still bringing a blockchain element into your capital raising strategy.
Yeah, I mean I’m happy to go. I think that the biggest thing that I see is that basically regulators started to take notice and it’s not the wild wild West anymore. And so I think it’s not a bad thing. While it’s like in the short-term, everybody panicked and there was this downturn in the crypto space. But I think what’s happening is the market’s maturing. People are taking a step back and figuring out, okay, how can we do this compliantly? And so people in this space, as well as regulators, and the larger players take the digital asset space seriously. And so people are trying to figure that out and work with regulators, and the people who are thinking of it from a long-term approach, and trying to achieve long-term success versus short-term gains are taking that approach. And so some of that takes time, unfortunately, and it takes more time than people would like, but you can’t do it without getting some of the key stakeholders on board.
Yeah. I always found the concept of a “tier utility token” to be interesting because, at the end of the day, I think it was very difficult to distinguish a utility token just from an investment. And you weren’t getting much utility from some of these tokens that were out there. And you were also not really getting any sort of equity position. So I think that people started to think about it a little bit and they were like, “Wait a minute, this is not really ... Like what are we actually getting here?”
And I think that the SEC, as you noted, also started to take notice and started to say, “Well we haven’t really seen a token out there that isn’t a security because they all look like you’re building enterprises to us.” So I think that it’s less that there aren’t like utility tokens that people are still playing with. I mean you have some no action letters that have come out that would seem to be really pure utility tokens. I think the question has been ... like the narrative has shifted, the SEC has spoken and people have started to kind of take notice of that and say, “Okay well, we’re going to have to be in a regulated space,” which is what many people had been saying for a very long time, but I think sometimes got drowned out in some of the other noise.
Interestingly for a litigator and regulatory enforcement perspective, I’m actually going to take a business case on this one. I think early on a lot of people didn’t quite know what to do with utility tokens. People would introduce them and say, “Well okay, do we actually need this thing? It’s real estate on the blockchain it’s coffee, but on the blockchain ... It’s love, but on the blockchain ...,” and people were struggling with what the business use case was and some are very compelling, and some are not so much. But when you come at it from the other side, when you look at assets that may already exist, and the securitization of those in a digital concept it’s easier for conservative businesses who are trying to adapt to it to understand, oh, it’s a security, but it’s going to be in a slightly different form. And that may be easier to approach for institutional actors, and other bigger businesses than coming at it with an entirely new approach to businesses that were already existing.
You can view the entire panel discussion on our website, securitytokenacademy.com. A big thank you to everyone who attended the event. Be sure to check out The Tokenist for a great writeup on our meetup.
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 our YouTube page, so you don’t miss out on any of our videos, and expert interviews. And 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.
I’m Amy Wan.
And I’m Adam Chapnick. For everyone here at Security Token Academy, thanks so much for watching.
You want to learn more about our corporate members? Visit our website securitytokenacademy.com, click on the directory tab, and select corporate member.
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