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Security Token Exchanges and Trading Organizations Take on Wall Street

Institutional Security Token Trading

Juan Hernandez, John Wu,
Ralph A. Daiuto, Jr. & Stephen McKeon

Juan Hernandez - CEO of OpenFinance Network

Juan Hernandez

CEO of OpenFinance Network

Juan Hernandez is the Chief Executive Officer of OpenFinance Network. A serial entrepreneur and business strategist with over 14 years of business technology and strategic management experience, Juan has built multiple startups including PeerRealty, Endurance Commerce, and the Pop Stock Exchange.

Prior to entrepreneurship, Juan spent his career designing and developing financial exchange platforms, algorithmic trading systems, and healthcare security networks.

Juan received his B.A. in Computer Science from Northwestern University and his Master of Business Administration degree from the Kellogg School of Management, with concentrations in Entrepreneurship & Innovation, Finance, and Marketing.

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John Wu - CEO of SharesPost Digital Securities Group

John Wu

CEO of SharesPost Digital Securities Group

John Wu is the CEO of SharesPost Digital Securities Group. Prior to SharesPost, John launched the SEGO fund to invest in digital currencies and securities; its predecessor fund, Sureview, was backed by the Blackstone Group. He was also previously a portfolio manager at Weiss Multi-Strategy Advisers, Kingdon Capital and Tiger Management. John is on the Advisory Boards of multiple blockchain companies. He holds an MBA from Harvard University and a BS from Cornell University.

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Ralph A. Daiuto, Jr. - General Counsel and COO of tZero

Ralph A. Daiuto, Jr.

General Counsel and COO of tZero

Ralph Daiuto, Jr. is an accomplished attorney and business leader with over two decades of experience in the securities industry, managing several broker-dealers and innovative technology companies and overseeing their daily operation, including legal, compliance, and regulatory matters. Ralph is currently the COO and General Counsel of tZERO. He is admitted to practice law in the states of NY and NJ, as well as the U.S. District Courts in the Southern and Eastern Districts of NY and the District of NJ.

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Stephen McKeon - Chief Strategy Advisor, Security Token Academy

Stephen McKeon

Chief Strategy Advisor, Security Token Academy

Stephen McKeon is an Associate Professor of Finance at University of Oregon and Chief Strategy Advisor at Security Token Academy. His research focuses on cryptoassets, security issuance, and M&A and appears regularly in top finance journals and major media outlets. His professional experience includes six years as a chief financial officer and involvement with several venture backed start-up firms and token projects as an advisor and board director. He has co-founded a venture fund, a real estate development firm, and Skyward, a commercial drone software company, which was acquired by Verizon. Prof. McKeon teaches valuation, FinTech, and venture capital at Univ. of Oregon, as well as blockchain regulation in UC Berkeley’s Blockchain Unlocked program.

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Steven McKeon:

I would like to welcome to the stage, Ralph Daiuto, Juan Hernandez, and John Wu. All right so, I think we’ll start by just letting each of the panelists introduce themselves and give us a little bit of their background and what they’re working on today. So we can start here with John.

John Wu:

Right, so I’m John Wu, the CEO of the Digital Securities Group at SharesPost. I came from the investing world. I was a technology investor at hedge funds like Tiger Management, Kingdom Capital, and then I ultimately ran my own hedge fund, Sureview Capital, that was seated by Blackstone.

At SharesPost, what I’m creating for them and for all of us here is a platform where I consider it’s a full-stack solution for security token trading. And using that as our first node, I want to create and enable other exchanges to be able to trade security tokens in what I call the global equity and settlement system.

Juan Hernandez:

My names Juan Hernandez. I’m the CEO of the Open Finance Network. We are a trading platform for alternative assets including security tokens. We’ve been operational since 2014, largely working within the crowdfunding industry, crowdfunding 1.0, as I like to call it, and I see how security tokens are crowdfunding 2.0 now.

So we’ve been active in this space, working with a lot of the major issuance portals in the crowdfunding and in the alternative assets sector. Now that we’re that expanding into security tokens and distributed ledger, here, again, we’re striking partnerships with a lot of the major players in the space to bring a more collaborative industry together to create standards, to create a new level of interoperability that benefits the entire industry.

Ralph Daiuto:

Hello, my name is Ralph Daiuto. I’m the chief operating officer in general council at tZero. tZero was formed in late 2014. It’s really blockchain meets capital markets, the trade, the settlement, hence the name tZero.

And so we have been very active on the regulatory side and the technology side. We did the first public issuance of a digital security in December of 2016. And our mission statement, really, is to build the first regulated security token exchange.

Steven McKeon:

Thank you very much, and I, of course, am Stephen McKeon. We met earlier. So let’s talk about ... So the title of this is Institutional Security Token Trading. Let’s talk about what are some of the concerns that institutions might have, or what are the things that they’re thinking about when they’re engaging with your exchanges? Maybe Ralph, we’re start on the end and come back this way.

Ralph Daiuto:

I think you see a lot of institutional players sitting on the sidelines waiting for that safe haven of regulatory compliant, exchange-level trading venue for the secondary liquidity of this new asset class, these tokenized assets.

I think it’s really incumbent upon us is, in the industry, to build out that venue and do it, I think, with guidance from the SEC certainly and CFDC and others that they want to see a regulated token environment. And I think once that’s there, and once there is viable liquidity in a secondary trading arena, I think we’re going to see far more institutional players get involved.

Juan Hernandez:

Yeah, to echo some of that, it’s certainly clarification. Clarity is the first thing that’s needed, clarity from the regulators, and they’re starting to provide that. And you’re starting to see more regulated entities start to develop technologies that meet and conform to that regulatory clarity that’s being given now.

And so as more and more of these players start to put out the building blocks, you’ll start to see more participants and more institutional players start to partake.

John Wu:

That’s right. As we get more clarity in terms of the regulatory environment, the rails have to also be built, the infrastructure. Institutions right now, obviously, I think there’s a panel already about custody. Institutions want to see liquidity, as Ralph just mentioned.

They want to see issuers that are worthy of buying in a security token fashion, and they also need to be, I guess, educated in some sense in terms of why they need to this versus a traditional security or why not just invest in private market shares.

So there’s a lot that needs to be built out. And luckily, there are great companies like ours all here and like some of you in the audience all working on the same goals.

Steven McKeon:

So high-quality assets. And I heard you mention custody. And I know this has come up on some of the previous panels. How do institutions think about custody? Is it different than the way a retail investor would think about custody? Are there other requirements? Happy for anybody to jump and who’s got thoughts on that.

Juan Hernandez:

Yeah, I mean, most retail player participants right now are just self-custody. You hold it in your MetaMask or some other wallet that you use. But for the institutional players to be able to actually partake in a real meaningful way, institutional custody needs to be resolved.

Ralph Daiuto:

I think when you look at custody, I think the regulatory oversight of custody probably ties into, eventually, how the institutions will look at custody. Certainly, in our public issuance, one of the issues is custody control of digital assets.

In our case, FINRA , for example, they wanted to see 15c3-3 accounted for. So that’s the customer asset protection of 15c3. And so from a good control location, I think if you look at it ... If a civic trustee were to go into any of this environment, where would he point to where are those wallets, and where are those assets held?

And so solving forward in something that literally is in the FINRA rules is really the day two step of getting an SEC-registered venue, like an alternative trading system, being a FINRA member firm and then getting the approval and the specifics of exactly how trading would occur on that ATS, for example.

In our case, it’s then taking that ATS and now looking with our recently announced LOI with Box, so Box Digital Markets. It’s really then taking the ATS, first acting as a facility of the exchange, but then literally putting an exchange wrapper on top of that.

And so I think that will go a far way of answering the question of custody and eventually just the regulatory oversight.

Steven McKeon:

Great. Go ahead.

John Wu:

The custody solution is ... Obviously, Ralph just talked about how they’re solving it. There’s many players out there who are trying to provide custodial services, obviously, for funds that are now above 150 million in a UN, and these are companies that created trust banks and created the necessary security, from a technology perspective, behind it in order to have segregated accounts and what you would traditionally call a good custodian.

Another way to do it would be the way we’re thinking about it. If you have a settling and clearing broker-dealer, you can create a private brokerage account. And with a private brokerage account, if you can show good control and what the beneficiaries of the security tokens are or the securities, you can be a big guy on the cap table as the one player, the street name guy, and then show the beneficiaries and provide custody in that way.

And I think a lot of institutions will, at first, create a private broker account, maybe on our platform, and custody it that way.

Steven McKeon:

Yeah, thanks, so…you wanted to say?

Juan Hernandez:

Just one last thought, I mean, one of the challenges that we’re all facing right now is that a lot of these rules were written way back when, when rules around custody or street name trading are defined in things like the Uniform Commercial Code, which is this tone that’s this fact is written back in the ‘50s when none of this was even imagined.

And so a lot of the challenge of the industry right are adapting the current-day technology back to that older infrastructure and getting back to a baseline. What’s exciting to me is once we’re back at that baseline, then it ... When we can innovate from within that framework, I think, in the coming year or two, you’re going to start to see a lot more innovative solutions around custodianship than just taking physical, doing cold storage, digging things in your backyard to maintain proper custody. I think you’re going to start to see a lot more innovative solutions in that space.

Steven McKeon:

Might it be that one of those innovative solutions is around recovery, so, I mean, do you ... How are people thinking about potentially, like a cancel and reissue feature or some sort of recovery feature that would maybe set it apart from some of the cryptocurrencies, where when you lose your key, you have to go cold source because if you lose your key, that’s it? Will security tokens be different in that respect?

Juan Hernandez:

One of the challenges there is in that model, at least the way it’s imagined today, is that you still need that centralized entity to serve as that safeguard, if you will, which somewhat kind of goes against the spirit of the industry, if you will, though, if you know decentralization.

But I think that’s one of the balancing acts that the industry as a whole has to do to be able to honor the spirit of the technology and the movement but still maintain that level of compliance and regulatory assurance.

I mean, at the end of the day, a regulation is really for investor protection. It’s not there to ... It’s not meant to be onerous or just kind of slow everyone down. It’s meant to protect people like your grandparents from losing all of their retirement savings in some sort of Ponzi scheme or a scam.

And so regulation’s meant for investor protection. It’s that fine line that you have to walk between pushing the envelope and protecting the end investor at the end of the day.

Ralph Daiuto:

I think he’s addressed really ... If you have a permission to ledger, in the system. In our ecosystem for our public issuance back in 2016, for example, introducing broker or clearing firm, we had a transfer agent. And we had our ATS, Pro Securities, as an alternative trading system.

If you look at all the books and records, each of those registrants had their own separate books and records and requirements. [I think that if you gave 00:10:22] FINRA and the SEC comfort in that ecosystem, you could always roll back and have a historical record.

So I guess, from a decentralization point of view, yes, that is not optimal of what the technology could do. But it certainly is an incremental step, I think, as we take steps forward of what the regulators are looking at and what the solutions will be and how we get there.

Steven McKeon:

Great, so just following up on the comment about ATS and broker-dealers. So that’s something that I know all of your entities are pursuing or have acquired. I’ve heard different opinions on whether an ATS is required or for what sorts of things it’s required. John, maybe you could start and speak to ... Do you have an ATS, and what was the motivation for owning one?

John Wu:

So yeah, so we have an ATS. And the history I’ll share, I suppose, is they’ve been around for nine years. And we have had been one of the largest market places for private market shares, so Lyft, Airbnb, Palantir, SpaceX, those types of stocks. And it’s our belief that it’s safest, if you want to do digital securities, to have an ATS.

If you look back at the history of trading private market shares, they’re very similar to digital securities in a sense that they’re unregistered or uncertificated securities. So if you use that as an analog for digital securities, which they are also unregistered, uncertificated securities, it’s our belief that it’s safest to have an ATS. And matching a trade is best done with an ATS to be compliant.

Juan Hernandez:

Yep, and so for us, we’re been operational sense 2014. Initially we were just with a broker-dealer license, performing the listing and matching mechanisms for alternative assets. As we’ve grown in scale, to John’s point, certainly best practice is to have the full set of licenses.

And so we have upgraded our broker-dealer to an ATS as well. And what that does is a lot of the additional mechanisms who provides the sauce is that ability to do inter-broker-dealer quotation services. So effectively feed our data feeds to other broker-dealers in the space.

Still early days, still not a lot of broker-dealers and brokers participating in this market. Everything is very much direct consumer still. But for us, is we see the more longer term potential of the market. We know that that ability to feed out automated data quotes, receive the automated data orders in, that that’s the path to growth for any platform out there.

Ralph Daiuto:

So for us, tZero was one of the first, if not the first, to file a Form ATS to match the buying and selling of digital assets for Pro Securities. That was in March of 2015.

I think, certainly in our public issuance of overstock shares in digital form, the ATS was a pivotal component in order to match those buy and sell orders for secondary trading in that environment.

I think the DOW report on July 25th of 2017 certainly outlines not only the issuance must be in compliance with federal securities laws, but they dictated that secondary trading must be performed for security tokens in one of two ways.

One is on a national securities exchange, of which there is none today that’s doing it, although I’d like to think with our Box DM joint venture that we will be a pioneer in that endeavor. And then secondly, presume to a proper exemption. And Regulation ATS is listed in that DOW report as a proper exemption and venue.

I would point out, so there is a race now of people to, say, taking that report and saying, “Let’s go out, and let’s go get a FINRA broker-dealer and apply to become an ATS.” The ATS is a way to trade these digital assets or at least to match the buying and selling of orders on an ATS.

I think there are some limitations on an ATS, and that’s certainly something that we’re looking to expanding upon. And really, by that, when exchanged, can set listing standards. And so for us, it’s about building that regulated security token exchange to give institutional and other players that comfort level.

So not only listing standards, but then listing fees, market data, all things that are associated with an exchange that you cannot do on an ATS. And more importantly with an ATS or as importantly, right, is open access to broker-dealers that subscribe to the ATS.

In short of disabling a participant for violating US federal security laws, the ATS is limited in what it can do in policing the function, both on people who ultimately trade there and such.

Steven McKeon:

Great, so I want to come back to this idea of order routing you mentioned and the idea that when we look at traditional securities, they might be listed in one place, like NASDAQ or NYSC. And then orders are routed out potentially to other electronic ECNs and what not, whereas in digital securities, particularly cryptocurrencies, you might see them listed in different places where the price is getting dislocated in different exchanges.

You mentioned a settlement network earlier, John. Maybe you could speak to how you think order routing or listing might work in this space.

John Wu:

In terms of ... Excuse me. In terms of order routing, in the crypto space right now, there are individuals or traders or institutions that actually create their own algos and plug into APIs of the various exchanges and have accounts at the various exchanges.

So they’re kind of creating their own second layer of order routing, even though it’s less sufficient and definitely not as flexible a true, smart routing mechanism. But that’s the best there is right now.

I think, ultimately, over time, we’re going to see things that are more like a compliant, fast, decentralized exchange, but that’s really down the line. And especially with security tokens, I think when we go back to Ralph’s first point was that we need liquidity first before we even can worry about order routing.

Juan Hernandez:

And then certainly, there’s a need for standardization. Right now, there’s a lack of structure in the space, and you see a lot of these early security tokens all have very differing interfaces, if you will, and they’re smart contract players and makes it very difficult to actually trade them in a compliant fashion because there are no rules around them. They’re out there in the wild, and once these things get out in the wild, it’s hard to pull them back in.

And so there are several firms working on, effectively, smart security standards, our firm included. We have a S3, the smart security standard form that they were putting out, but we’re working with our partners who are also developing their own standards. And we’re trying to create a standard of standards, if you will.

These are things that the SEC and FINRA want to see in terms of allowing for additional types of securities to be issued. Things like Reg A+, which, in my opinion, are very well suited for security token ICOs, have a lot more freedom, a lot less limitations, like the Reg D stuff has, but there needs to be that control mechanism at the smart contract layer in order for the stuff to be compliantly issued and compliantly traded.

And so we still need a lot of that along with the liquidity aspect to really get to a level of maturity in the market where institutional and larger-scale mass adoption can come into play.

Ralph Daiuto:

From a pure, smart order routing, right, and building liquidity transparency, true, in-depth look level to window or view into this market place, it’s one thing when you have unregistered crypto exchanges trading outside of US federal security laws.

What we’re looking to do is build that security token trading exchange, and on there, we have ... One of the assets within tZero is SpeedRoute, LLC, which is a SEC registered FINRA member firm that specializes really in routing and execution of US equities today, but all of the technology then enables that, right?

So all of your rules and compliance with BestX and all of that, as far as our smart order router and AI that’s attached on the SpeedRoute side, we have a team of technologists that are really integrating and looking where we will eventually take that technology and apply it to our exchange.

And so, what we really do and we’re looking to do is build the best of, not only the regulated exchange technology in our experience in running upwards of 3% of the national exchange volume through SpeedRoute, and taking that with our data center ... Our connectivity in the major OMS platforms are backboned at the major exchanges and dark pools for the US equity markets ... and eventually taking that into a security token trading market.

Steven McKeon:

So Ralph, just continuing on this idea of listing, many of the traditional exchanges, they have listing requirements or there’s certain thresholds you have to cross to get listed. You can get delisted if you, of course, fall below those.

How do you think listing requirements will work in this space, maybe as it pertains to tZero? And would be interested to hear everyone’s opinion on this.

Ralph Daiuto:

We are already in deep conversations with our partner in Box Digital Markets and setting that rule book and setting those listing requirements. So what I would say is stay tuned onto what that will be eventually. But that’s where it’ll be handled for us.

Steven McKeon:


John Wu:

It’s going to be interesting because we’re listing what type of securities, registered or unregistered securities. And if you look in the traditional world where a New York Stock Exchange or a NASDAQ, they have some very onerous rules as to how to list.

I mean, New York Stock Exchange, you have to have 10 million dollars-worth of profit over the last three years. You have to issue a million shares and 100 million worth of market cap. If it’s a private security, part of the reason why securities stay private instead of listing on a registered exchange is because they don’t want to disclose, and they don’t want to spend the money necessary to register. It costs anywhere from two to five million dollars, and then you have to hire internal staff. And then you have to basically file and disclose what you want to do.

When you’re a startup company, you don’t want to share all your secrets. You want to grow your business first, so the listing on our platforms here for secondary trading of private, digital securities is going to require standards that all of us are going to have try to put together because they’re going to be different from the traditional registered securities.

Juan Hernandez:

Yeah, so we trade Reg D, Regulation D, Regulation S, Regulation A+, and Regulation CF securities. And the first two are basically exempt. Regulation D and Regulation S are basically exemptions, private placements you don’t really have to disclose too much per se. It’s up to your investors, obviously, to convince them to invest.

The Regulation A+ and Regulation CF are interesting in that they are actually publicly ... They’re publicly registered security, so there are some requirements there already where you do have to file quarterly financials. There’s a process for you to file with the SEC. It takes several month. So just some of that there, we ride on top of to provide, to bring that investor protection later to the masses and to take advantage of some of those already established guidelines that are in place.

And what’s great as well, then, is on a secondary market trading, all of those entities have to continue to provide some kind of financial savings to the SEC. It’s filed with Edgar. Until now, that information is publicly available, so the everyday investor can participate and feel well informed as to when they’re participating with these securities.

Ralph Daiuto:

I think when it comes to listing standards, I think that’s part of the ... Certainly, the goal is to set those listing standards. The baseline is obviously compliance with US federal security laws.

And above that, I mean, once you set that, and once we can ensure that anyone trading on our exchange is in compliance, I think that will give the larger market place a comfort level as well, that that is a regulated safe environment.

Steven McKeon:

So just kind of continuing on this thread. So I’m guessing there’s probably some potential issuers in the audience, certainly the people watching the videos afterwards.

What advice or kind of at what stage would an issuer engage with an exchange? So sort how much work have they done in advance before they would come to a platform like yours and think about the idea of listing or being represented on your platform?

Ralph Daiuto:

Well, to answer that question, they can start as early as when they’re in the planning phase. I think where tZero is uniquely positioned is we’ve done our own security token offering, and I can venture to say that unless you’ve gone through that process ... We’re doing the Reg D, concurrent Reg S, 506(c), enhanced accreditation. That entire process has been an unbelievable learning curve.

We’re in a nascent industry overall, and so the understanding from A to Z of how to do an issuance and do it compliant, as a security token, is I think there are few and far between the number of players who’ve probably have done it in execution, or B, they can hold themselves out as experts.

Ultimately, we’re already at that last stage of saying we want to build that trading environment, but we’ve done a lot of leg work in order to educate ourselves and, really, regulators on all process all along.

So is it too ... I think it’s never early to reach out. We get a lot of phone calls and a lot of interest of issuers on every phase of where they’re at in the life cycle, if you will.

So we field those calls. We certainly look to help to educate wherever we can because, ultimately, we do want these issuers to be in compliance, and we want to provide the liquidity environment for them to actually trade these tokens eventual.

John Wu:

It’s such a nascent state, right now, and issuers need to stay up to date on the ever-changing, best practices. So they should definitely engage with all of us here in terms of having a place to land. But they should also engage, also, with guys who know the best practices at the earlier stage of the issuance level, like the guys you had earlier, like a Sadis or the players who have customer service basically for educating issuers what they need to do to do things in terms of the best practices.

Juan Hernandez:

Yeah, I like all of that. I mean, it’s never too early, and certainly, I think the folks up here on the panel would recommend a lot of the service providers who are out there helping guide a lot of the issuers folks, like Harbor, Securitize, like the Sadis Group, who can provide guidance and direction as to how to issue compliantly because that’s first and foremost.

If you’re not doing it as a Reg D, Reg S, Reg A, Reg CF right now, you’re out of compliance, and we get approached a lot by folks who have issued as utility tokens. And we just can’t touch them. We won’t work with them because there’s too much uncertainty there until there’s better guidance given in that space.

And so first and foremost, compliance and then afterwards, certainly working on some of the other aspects of the campaign itself.

Ralph Daiuto:

Just to touch a little more on that, right, the issuance is a big ... It’s all about investor protection, so from a regulator perspective, it’s about risk disclosure. It’s about guidance. It’s about protecting customers, that they make an informed ... Or investors, that they make an informed decision.

Obviously, our outside counsel was Jones Day, our security token offering we believe, really sets, and we’d liked to set the standard of which security token follow and the offerings follow. We work with Deloitte, all from a tax perspective and the consulting.

Our process flows as we ... As we sit with regulators, both FINRA and the SEC, it’s really about outlining exactly how the technology, together with the different registrants in our ecosystem. But, again, it starts first and foremost with the issuance. And the issuance itself is that private placement document in a Reg D or Reg S offering. And it’s about disclosure.

Juan Hernandez:

And beyond just a legal ... I’m going to chime in here with some technology insights. It’s beyond just obviously legal and disclosures and the proper filings and documents. Paying attention, then, to the tactical structure of the token you’re about to issue is critical as well.

I think a lot of the tokens that came out last year in the security token space are having to refile, sorry, reissue this year because the technology they went out with is very, more nascent than it is today, very, very early days.

But a recognition now that they’re trying to trade in the secondary market that there is severe limitations to the token structure, the technology structure that they went out with.

Now that there’s a little bit more development in the space, more mature players in the market, they’re aligning themselves with those players to reissue their token to make them eligible to trade on trading platforms like ours.

Steven McKeon:

So the word FINRA has come up a couple of times. And I’m wondering how is ... To the extent you’ve engaged with FINRA, how is FINRA viewing this space? Are they viewing it differently than the way they would interact with other exchanges, and do you think there will be ... Will there be other self-regulatory organizations, or is this all going to be sort of encompassed within FINRA? Happy to hear thoughts from anyone.

Ralph Daiuto:

I think purely from an SEC guidance point of view, right, to the extent that these are going to be compliant with US federal security laws, you have the SEC and to the extent that you have introducing brokers.

So anytime an introducing broker is introducing customer accounts on any level, they have to be a FINRA member firm. And therefore, FINRA will regulate these broker-dealers.

From an overview of where or working with FINRA, I can tell you that we started early on, right? So we filed the ATS in 2015. We filed an S3 registration statement with the SEC for the Overstock preferred shares in the summer of 2015. That was deemed effective in December of 2015.

FINRA immediately walked into our offices because we do run to FINRA member firms, and they really were very open to the idea of educating and understanding what we had planned, and we opened up a very good dialogue.

And so it was basically making sure that they weren’t reading about something in tomorrow’s papers, something we did today, keeping them fully apprised. And that literally opened up, really, an educational road show with offices from Rockville, Maryland to Washington, DC, and New York, all the way out to District Two in California.

And David Green, had a district too out there, was a very big proponent of what we’re doing, so I have nothing but ... I have nothing but good things to say overall with FINRA. Of course, would we liked it to have gone quicker? Absolutely, but like anything else on the business side, you always want business to drive.

But I will say overall, it’s been a good working relationship. I sit on FINRA’s industry FinTech committee. I have an open dialogue, and I welcome the opportunity to do that and be part of that process.

John Wu:

I think that’s the key, the open dialogue, and every time we speak to them, the conversation gets better and better and better. And we’re moving down towards the right area.

Juan Hernandez:

Yeah, the overarching direction that’s been provided has ... These are securities like anything else, right? The hey-day of utility tokens in 2017. The unregulated mayhem that had occurred that, I think, certainly, now, the direction’s very much that these are securities just like all other securities are today.

There’s existing rules. There’s guidelines. There’s frameworks that need to be adhered to. And again, at the end of the day, it’s for the protection of the investor, for the protection of all the folks in this room.

So it’s a lot of education and the ramping up. And the slowdown is just the regulator’s getting comfortable with ... Okay, so if this is a Reg D security that’s been issued, how do you ensure that the proper, restricted mechanisms exist around it, right.

The 99 shareholder limit, the 2,000 shareholder, the need to only transfer to a accredited investor in the first 12 months or ensuring that Reg S stays outside of the US or ensuring that Reg A+ only composes 10% of an investor’s portfolio based on their net income or income or net worth.

So a lot of those rules are still kind of being better understood as how they plan this new landscape and this new technology framework, that is blockchain.

Steven McKeon:

All right, so we’re entering about the last 10 minutes of the panel. I’d be interested to hear some of initiatives that you working on. You mentioned a partnership with Box. Do you see more partnerships like that occurring? Or maybe you could tell us a little bit about what tZero and Box are working on.

Ralph Daiuto:

Sure. I mean, obviously, there are some limitations because we’re in the middle of our definitive agreement and moving forward with our ... In an overview, it’s really just what an exchange can do, vis-a-vis an ATS and the excitement that we have or what we believe is really game-changing as far as blending the technology team that tZero has.

The experience in running US broker-dealers and then partnering with a staff like at Box where you have a seasoned staff of running an exchange, and I think when you look at the barrier to entry of people trying, it’s very difficult to be able to replicate all of the pieces that are in the ecosystem to really effectuate where we want to go.

And so we’re excited about that opportunity. We’re excited about the suite of technology, blotching technologies that’ve really been in development since 2014. We are blessed that we are a subsidiary of Overstock.com.

Overstock has 2,000 employees, and 800 of them are developers. And so we have the access to really cherry pick and pull the best of the different projects and different silos. We are in the process of doing that.

When it comes to smart contracts and token design, we’re excited about what a tokenized asset can look like as opposed to the limitations of a physical certificate and building in the equivalent of a digital legend, if you will, that can not only enable us to do the Reg D offering, a one-time transfer to a Reg S holder, for example, and all of the things in managing that cap table if you will and register that technology enables to do.

So we’re excited on that front. I can tell you, globally, the interest, as great outside of the US, if not more, certainly, we’ve spent a lot of time globally. And so from a pure technology play, everything that we’re building from a platform level with tZero, we think that there are exchanges around, globally, that would eventually want to use similar technology, if not licensed deals with us and partnerships.

So that’s our excitement. Our excitement is to focus on building that first regulated security token exchange in the US and then globally, to be strategic partners from a technology perspective.

Steven McKeon:

Great, and Juan, I know that OpenFinace is engaged in some partnerships with various compliance protocols. I’m very interested in this idea of interoperability. Maybe you could speak to how that works.

Juan Hernandez:

Yeah, for us, it’s early day still, in the whole market, and a lot of the different participants that are out are there still finding their path and finding that product market fit. And the customer base really bring security tokens to where we all think they can be to that next level.

So we’ve taken a very open and collaborative approach with partnering with initially a lot of the security token issuance platforms. Folks like Harbor, Securitize, Polymath, Token Soft, Sadis Group, the Argon Groups, some of the other players in the space.

And alongside with those folks, also working with custodians and transfer agents from more traditional alternative asset markets and bringing them into this new crypto-capital market, if you will, because there’s certainly a lot of excitement from other institutional players that’ve worked in alternative assets.

There’s a lot of excitement for them to come into this new market and figure out who they can play. So these are folks like PENSCO, Kingdom Trust that has already started stepping into crypto on the transfer agent side. There’s folks like V Stock who I believe is here today and several other transfer agents who, like Core Connects, who, again, want to figure how do they play in this new crypto-capital market?

How can they help build this collaborative network so that as a whole, collectively, the industry can take advantage of blockchain technology and leverage it to streamline and grow the market?

So that’s been our approach. That’s what we’ve been largely focused on, and our start was back in 2014, shortly after the Jobs Act started. And the whole intent of the Jobs Act was really to democratize finance, to make capital markets more accessible to small companies, and to make a unique investment opportunities more accessible to the everyday investor so that these private investment opportunities would not just be available to the accredited, 1%, 2% of the population.

So we’ve taken that same spirit, that same approach, and how we’ve gone to market. And we feel that that’s going to not only drive success for us but for the market as a whole as well.

Steven McKeon:

Great, so with just five minutes left, maybe each of you could just do a minute or so on and sort of where you see ... What’s the near term, as we’ve done on some of the other panels? Where’s the space evolving to in the next, say, 12 to 24 months? What will you see in terms of issuers, and since the title of the panel’s institutional security token trading to what degree will institutions start jumping into this market in the near term?

John Wu:

So I think in the next few years, you’re going to see ... And I guess we all believe this, otherwise, we wouldn’t be up here... is there’s going to be a flood into security tokens.

If we look at the issuance on traditional global securities, there’s about a trillion of issuance in dollars a year. And my prediction for the next couple of years is that if we just eat into 50 BPS of that, that’s five billion dollars of volume easily.

And the infrastructure and the rails are all being built. I think one of the things that we are all very excited to hear is not just that our focus in the US, but also, I think in the next couple of years, you’re going to see, globally, other jurisdictions decide on how to regulate and how to make trades compliant.

So the thing that we’re doing that I’m the most excited about is creating this global network of settlement and compliance by inviting not only our own ATS but the equivalent of settlement providers and compliance providers in other jurisdictions so that we have a network of providers so that we’re almost creating a settlement and compliance as a service, for any exchange, for any decentralized exchange.

So they don’t have to go out there and find the licenses and break this process up in two. So they can just worry about matching and finding liquidity and have a compliant trade.

Juan Hernandez:

Yeah, for me, it’s distinguishing the technology from the actual asset class, if you will. I mean, there’s a lot of conflation there, but I think once more education and more knowledge is spread throughout the industry, certainly, I think everyone who has done their research agrees that blockchain technology itself has a lot of benefits and implications for broader capital markets, starting down here with alternative assets and providing a structured clearing settlement process, all the way up to public equities and facilitating, removing a lot of the reconciliation process there and clearing settlement as well.

There, I think, it’s understood across the board that there’s going to be a massive, not disruption, but just a massive adoption at a wider scale. And then once you think about the asset class itself, that there ... I’m really excited there about the newer opportunities that can start to spring forward because a lot of what we’re seeing today is security tokens adhering to basically just what non-crypto assets are being, right? They’re just digitizing analog assets.

And so once we start moving past that and creating, surely, innovative security types, truly distinguishing opportunities for investors to participate in, that’s when I think there’s going to be a larger-scale adoption where institutional players can start to participate certainly. And we still have to solve the custodianship issue and the liquidity issue. But once you’ve kind of gotten past those basic building blocks, you’ll start to see a flourishment of innovation.

Ralph Daiuto:

When I’m asked for what a better vision of the next few years, I ... Bob Greifeld, former chairmen of NASDAQ, recently said a quote that 100% of the stocks and bonds on Wall street could be tokenized today. In five years, 100% of the stocks and bonds on Wall street will be tokenized.

I think that’s a very telling quote. I think it certainly serves as an indication of where this industry is headed. If you look at that quote and understand that the technology to enable that to happen, so many things, this world will look a far different place five years from now. And I think then, coupled with that, it’s really the tokenization of multi-asset classes.

We can talk about securities in one asset class, but it’s across the board of where blockchain will meet those asset classes. And for us, it’s literally still building out that liquidity environment, secondary trading of all of those asset classes.

Steven McKeon:

Great. Ralph, Juan, John, thank you very much. That concludes this panel. Let’s give them a hand.