Aubrey Chernick is a philanthropist and entrepreneur. He founded Candle Corporation, a software company that built software to manage the new IBM Operating System. IBM would go on to become a customer of Candle, and eventually acquire the software company. Now, Chernick’s key interests include supporting education and the arts, as well as helping the next generation of start-up companies.
I’m Adam Chapnick. I am the programming director and a host of Security Token Academy. Has anybody seen our videos? Raise your hand. Okay. So, I’m really excited for the rest of you, because you get to enjoy our videos freshly for the first time. I encourage you to check them out at SecurityTokenAcademy.com, or on our YouTube channel.
I have a fantastic gig. So, the way I got involved is I was a principal at Indiegogo, which is a rewards crowd funding platform. Then I also was involved with an equity crowd funding startup in the commercial real estate space. But we’re all here because of democratizing access to capital. That’s how I got involved with Aubrey and the Security Token Academy, and I have what I think is the best gig, which is I get to talk to all the smartest people that I’ve ever heard of and learn about what they do, and kind of bring all that information to you guys and anybody else that’s interested. It’s super fantastic.
So, I’m really excited today to introduce you to a specific leader. If you want to learn about the leaders in this space, check out the videos, come get interviewed. I’m going to be outside of the room about 1:00, right? And we’re going to be interviewing anyone who wants to talk about what they see as the future. What you guys are up to. If you have a company or a focus you want to spread the word, I want to learn about it, because it’s what I do, and share it with the world. So, find me, find anyone with a badge from the Security Token Academy, and we’ll hook you up with a time slot, and we’ll interview and get on one of our shows.
And right now I’m also excited, because I get to introduce you to a particular leader, who I’ve grown to know and respect a lot. He’s been mentioned a few times already. He’s the guy who founded the Security Token Academy, and I’d like to give you an opportunity to hear how he came to the idea of starting it up and bringing it all to you. And his name is Mr. Aubrey Chernick. Please help me welcome him to the stage.
Good morning, Adam. How you doing?
Welcome, please. Great. I have the best seat in the house for you.
Terrific, and I thought maybe before we begin we should thank David Weild, the father of the JOBS Act. And why is that relevant? Well, there’s 650,000 new startups created each year in the United States. And as you may know, access to capital for them has been really difficult. VCs fund 320 each year. Angel investors fund 3,000. Not enough when there’s 650,000 startups each year. So, important points, and thank you, David, for your comments.
Alright. So, we only have a few minutes together, but we ... the video that we saw kind of teased a few concepts, the idea that there are these three waves of a financial internet. But your story is so interesting, and I’m excited that I get to kind of bring it to people. Because Aubrey is not one to toot his own horn. He’s a relatively private man, but your story sort of emulates this three-wave structure. I mean, your first wave, to just impose that structure on the conversation, really I think is one of success despite lack of access. Why don’t you tell us, what was your first wave, so to speak?
Sure, well these three waves that we talked about: bitcoin, number two, ICOs, three, security enabled financial internet. We all bring our own waves of experience, enthusiasm, to the table, because all of us have been through things where there’s been a new era. Or sometimes we’ve looked back, and maybe we’ve had regrets, fear of missing out aspects of, “Gee, there’s a wave I wish I could’ve been on.” So, but I’m sure all of you are very excited, because here we’re talking about getting on board a new wave that’s just starting, and you haven’t missed out. The window of this wave, security token enabled industry, is just starting.
So in terms of my wave that you’re asking, so when I was around 26 or so, I was able to start a software company. Software was alien to my background. I grew up in a farm town of 900 people, but I got to be involved in what were called mainframe computers as they transitioned from batch to real time. It turned out to be a big phenomena, but it was not clear that that was goning to happen. This had been tried before by this company, IBM, but they ... it hadn’t worked out well. So this was like the second time or third time they had tried this, around 1976, et cetera. And it turned out to be really, really fortunate, because all these large Fortune 500 companies wanted these machines to work in real time, and sadly, they were breaking.
So I wrote this product, and I sold it to companies in the defense industry and Wall Street, SAIC, DTCC, and other great companies here, because when they had a big dependency on real time computers they didn’t know why it stopped. And so I had a product looked inside, monitor that, et cetera. I was very fortunate in that.
Yeah, well, yes. Fortunate, true, but I think you were not just in a farm ... you were in Manitoba?
Okay, Canadian farm town.
But you’re in the middle of nowhere, and you have the ability to see this interlaced need in a sort of emergent trend that’s technologically driven, and you acted to solve this need and be a part of it. And you obviously had a very handsome exit later. God bless you. Good on you, and I know you’ll never say it, but I like to say it.
So, but then that’s totally to your credit, but you all these barriers that you had to overcome that a lot of this ... today, what we’ve been talking about today hopefully will remove. And I think I’ve noticed how your passion for being a part of this, now I’m not going to be Sigmund Freud here, but I think it may have sprung from a lot of what you had to overcome in that journey. Is that accurate, or am I totally projecting?
I hear the therapy right now, but no, I mean, there’s a lot of merit in what you’re saying. It’s interesting to look at industries when they incur obstacles. And you’re right, it was very fortunate. I had a large customer. One of my largest customers is this company called IBM. And isn’t it weird that they didn’t understand how the $100 million computers they built ... they didn’t understand how they worked or didn’t work. So they came to me and my company to figure out how these machines worked. And I sold my company to them ultimately.
But this issue of looking at certain trends where an industry’s trying to get going and isn’t, I mean that’s an exciting time.
I mean, I didn’t know what the word ICO meant, but really, Dr. Freud, last September was déjà vu. I mean when China said they’re shutting down ICOs, I said this is fantastic. I don’t know what an ICO is, but if China’s shutting it down then there’s a path to respectability. I mean, to me it was obvious, right? And so, I mean what I could see happening is what I called a regulatory journey. And country after country, about 20 or 30 countries, they went through their own, and they still are going through their own struggle to figure out how much do we close it down or leave it open. Because all countries around the world are insanely jealous of the US, the internet, Silicon Valley, et cetera. So they go through this struggle in terms of how to control it.
So that’s what happened. That’s what this video is reflecting. That’s the moment that we have right here. That just like the mainframe computers stumbled, didn’t get anywhere, we’ve been through that. Isn’t that fantastic? That stumble is the ICO phase, that wave two. We’ve seen that. We’re not through it. I mean, there’s the regulatory hurdles, and there’s going to be other technical hurdles. We’ll talk about cybersecurity later today. But that’s why this is so exciting, because if it was just ringing the bell for a brave new world, well that’s a little problematic. But when you can see some hiccups along the way, and you can see regulatory moves changing, and the ICO word is quickly pivoting.
As we speak the attractiveness of that word in the United States is quickly moving. I think a lot of companies will want to distance themself from the ICO terminology. So it’s not just a legal issue, it’s a brand issue. It’s an industry issue. Right? And the industry is moving on, so we’re moving on. That’s why we’re the Security Token Academy. Last year we were the ICO Investor, but now we’re Security Token Academy. Because this industry, we know, is not immutable. Elements are supposed to be immutable, but this industry, business models, messaging, isn’t immutable.
So, we all have our journey, and I think we’ve all seen inception points before where something’s going to be really great, it stumbled, and when it stumbles, like yeah, that’s a time to celebrate because that’s when there could be a new opportunity.
So your view-
If that makes sense, Dr. Freud.
It does. Yes, yes. Just lie back and relax and tell me. No, so you had a second wave, I will call it, which was you’re putting together this company NC4, which I see that as your ability to see the specific kind of application. Cybersecurity, obviously you didn’t invent cybersecurity, but you saw the specific application that was necessary of cybersecurity across all of these disciplines, industries.
Yeah, what’s so exciting about all these industries: mainframe computers, cybersecurity, security tokens, there’s so many brilliant people. So, it’s very simple in the cybersecurity area there’s what, 10,000, 100,000 people that will protect individual fortresses through hardware, software, consulting services, and service ... management services, et cetera. So why do that? They’re doing all that stuff. But the ability to, what’s called CTI sharing, cyber threat intelligence sharing across companies. That’s not often done. And there’s a reason for that technically, it’s because most ... if you look at the statistics of styles of thinking, only 11% of the public are synthesizers. I mean, you have analytical groups like cybersecurity groups. Most of them are analytical. Only 11% are the synthesizers.
So, therefore, just by human nature the intention and interest to have horizontal sharing is a big problem. And that’s why some of the federal regulators have really nudged elements of the financial services industry to share horizontally. That is a need that’s going to happen within the security token exchanges. As they become operational later this year, they’re going to have the regulatory pressures to, not only protect their individual house with respect to cyber issues, but also horizontally. And we have a panel later this afternoon with Linda Lerner ... Linda, wave your hand ... that’s going to talk about cybersecurity.
So the company that I created, NC4, through an acquisition, we helped enable this horizontal sharing, which is not, I mean technically it’s like this amount. Most of it is a cultural challenge. And so we helped cybersecurity sharing cross some big industries like financial services, the defense industry, energy, healthcare. And we’ve been doing this for up to 10 years, so this is a big lift. It’s some technology, but a lot of it’s cultural. So we’re going to try and bring, through a working group we’re going to talk about this afternoon, a cybersecurity working group to the security token industry, because it’s easy to see that need is coming.
That need is coming.
And you have a really unique position to be able to, I think, forecast and appreciate what’s coming around the corner, because you’ve seen it from two different perspectives that sort of magically have converged.
There’s ... I mean, all these issues, you can see over and over again the need for interoperability that David was taking about, integration, interoperability. I mean, it’s the same thing over and over again. People talk about interoperability problems as if it’s a technical problem. We’ll go through that phase in security token infrastructure I’m sure, but at the end of the day these interoperability problems, technical people think they’re technical. But the dirty little secret is there’s something underneath it, which is every group has its own culture: mainframe, mid range, this group, that group. And so underneath technical interoperability is something that people don’t look at explicitly unfortunately, which is cultural interoperability. The interoperability of technical cultures. That’s the root cause, and that’s going to happen again. Do you love this block chain or that block chain or this wallet or whatever. So that’s going to be a big problem as we operationalize some of these systems.
So what do you see as how do you break down what’s happening? You’ve talked about the three waves, is there ... what do you see as the most important thing for people to understand around security tokens right now?
Well, we look at five dimensions. It might sound like this is really organized in some orthogonal box of all these things, but the industry, as the Security Token Academy ... we try and take a broad look at the industry. And you’re going to hear the details from amazing people that are here talking about the details, but the industry is very difficult to understand. So these five dimensions are ... they’re all a little loose internally. So let’s just go over it.
Dimension one: what is a security token? There are two definitions you will hear over and over again, but you won’t typically hear that there’s two definitions. We’re going to explain there’s two definitions. We call it security token 1.0. It’s security tokens that are regulated, meaning they follow a regulatory exemption, often Reg D, sometimes Reg S in the United States. Rarely will they use an exemption such as Reg A or Title III or Reg A Plus, et cetera. So that’s simple. By that nature, those types of security tokens, the security token industry one can say, “Well that started in 2017.” You know, Filecoin, all these others, Coinless, they had a lot of these Reg D based offerings.
But there’s another dimension of security tokens, which is based on some enhanced technology, KYC, AML, there’s other little attributes in there, that might be called security token 2.0. A new generation. Now, Adam, people will argue if they have an analytical mind. They’ll, “No, no, wait. That is an overstatement. That should be called 1.5, not 2.0. And secondly, there’s other things in the 2.0. You’re not talking about dividend payments, lockup management.” Well, yeah, of course. But the issue is, we can’t overanalyze things. In terms of broad strokes, there’s like a generation one, started in 2017. Generation two is starting now. KYC, identity management enabled, mechanisms for cross-border investment, et cetera. That’s happening now. Expand over the next several years. So there’s two different definitions that are out there, but we try and formalize them in terms of the…
So, for the ... that leaves a couple more dimensions, and we’ve got a couple minutes. What can you sort of tease those for us?
So one dimension is ... yeah, one dimension is what’s the background? What motivated these things? It’s pretty obvious. In the short-term risk, being risk adverse in terms of regulatory concerns. So that’s the first wave. And then trying to seek alpha. That’s the promise in part of the wave two. The applications. David mentioned those. If you have an operating company, do you want to raise money for a company? IPO, ICO, STO, security token offering. Or this new world if you want to securitize assets. Gold, silver, real estate, et cetera. That’s a mechanism ... now securitize means tokenize, means fractionalize. So to crypto, fractionalize an asset.
Yes, one of the biggest people talk about for sure.
And then people ask about the benefits. Typically the industry talks about three types of benefits. One is efficiency. Let’s exchange all the paper for digital types of components, which is great. Second is can we speed up things, make it faster? Is that inherently valuable? For some, they would say that if you reduce the settlement time from T+2 or T+3 to same day, then maybe you kind of weed out some of the naked short selling. So there are some issues there that are not just efficiency. And finally, the issue of liquidity. That’s important in terms of cross-border liquidity. There might be flight capital from different people around the world, or people that have EB-5 visas that want to come in, or maybe they want a piece of the American Dream through investing in the Empire State Building.
And the last thing I’d just say is that we need to look at the ecosystem of the industry. There’s different types of players, and basically this industry in my mind is going to happen sometime this fall. Because the $5.6 billion of lockups, mostly Reg D lockups, that happened last year through the ICOs, most of them happened the latter half of last year. They’re going to expire this year. Means a lot of these tokens are going to be available for trading. So therefore, we need trading exchanges and ATSs et cetera, and that’s why we’re here.
So, before we leave I want to thank you.
Oh, okay. Well-
And give you something, Adam.
And this is something that we have, which is a ...
It’s better than a T-shirt. Because you’re here, and we want to give you a memento that you can remember. We’re going to have other events like this. The industry ... Wall Street has an opening bell, as you know.
Every morning at 9:30. Well, this industry needs an opening bell. And Lindsay, maybe over lunch we can talk about that and see if we can do an opening bell for the industry. But this is something that I want to present to you.
Oh, thank you. Yes.
It’s got my personal fingerprint on it. And it’s been infused with a little crypto types of things in there.
Yes. Nice, yes.
This is ... it’s for validation. Not for parking, but to validate the industry, because this industry is about to take off. And it’s appropriate that the industry be validated through some type of lot. So we want you to remember this. Because you were here all of you should have the same memento. Thank you for holding yours up, but not necessary. But thank you for being here. It’s an iconic event, as Lindsay said. And have a great day. Thanks again.
Thank you for sharing your story with us. Yeah, thank you Aubrey. Thank you.
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