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Introduction to Security Tokens

Vincent Molinari, Chris Housser, Igor Telyanikov
Andy Bromberg & Adam Chapnick

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Vincent Molinari - CEO of Templum Markets

Vincent Molinari

CEO of Templum Markets

Vincent Molinari is the CEO of Templum Markets, (FINRA Registered Broker Dealer and ATS) and Co-Founder of its parent company, Templum, Inc. He is a Founder of 5th Element Group, PBC. He is also Co-Founder and Co-Chair of the Blockchain Commission for Sustainable Development, and is a Co-Founder and Co-Chair of Blockchain for Impact. Mr. Molinari has nearly 3 decades of experience as a licensed person in the securities industry where he began his career at Lehman Brothers and later at Janney Montgomery Scott. He is a globally recognized thought leader on the modernization of securities law and the intersection of breakthrough innovation and technology solutions. He is an active Global Speaker on Market Infrastructure, Capital Formation, Blockchain, Digital Assets, Impact Investing, and The JOBS Act. He is he the host of the Digital Assets Report filmed at the NYSE. He has been invited to testify before the U.S. House of Representatives Committee on Financial Services, Subcommittee on Capital Markets, and Government Sponsored Enterprises. Mr. Molinari has also testified before The Securities and Exchange Commission's Advisory Committee on Small and Emerging Companies regarding secondary market liquidity. He has participated in authoring 16 Comment Letters and Petitions for Rule Change to the SEC and Finra. In addition, he consults with members of Congress and Senate on these issues.

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Chris Housser - Co-founder and COO, Polymath Network

Chris Housser

Co-founder and COO, Polymath Network

Chris Housser is the co-founder of Polymath. He is a former litigation lawyer and Afghanistan veteran.

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Igor Telyatnikov - Co-Founder, President and COO of AlphaPoint

Igor Telyatnikov

Co-Founder, President and COO of AlphaPoint

Igor has over 15 years of experience in building, operating, and investing in financial services, security, and media technology firms. Prior to AlphaPoint, Igor served as Managing Director of Cvetlo, an early stage venture firm making investments in fintech, adtech, and online media. Prior to Cvetlo, Igor led West Coast Business Development for LiftDNA, a digital ad exchange platform focused on managing online publisher ad revenue by making real-time pricing predictions for over 10 billion Ads Per Month. LiftDNA was acquired by OpenX, a global leader in digital and mobile advertising, in 2012. Previously, he held multiple roles over 5 years in the Security Technologies and Systems Integration divisions of Ingersoll Rand (TICKER: IR) / Allegion (TICKER: ALLE), where he drove adoption of new security technologies.

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Andy Bromberg - Co-founder and CEO of CoinList

Andy Bromberg

Co-founder and CEO of CoinList

Andy Bromberg is the Co-founder and CEO of CoinList, a platform for deeply vetted tokens to run their ICOs. CoinList also provides compliance services for many other token sales. Previously, he was the Co-founder and CEO of Sidewire, and before that, he studied Mathematics and Computer Science at Stanford University. While there, he also co-founded the Stanford Bitcoin Group.

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Adam Chapnick - Programming Director at Security Token Academy

Adam Chapnick

Programming Director at Security Token Academy

Adam Chapnick is a globally recognized serial entrepreneur known for disrupting long-established industries with tech-supported new-model approaches. He’s an active consultant to tech founders on strategy, operations, and financing.

Adam founded Distribber.com, the flat-fee VOD distribution service that empowers content creators to distribute their work like a major studio. Filmmakers keep all rights, and get all their revenue.

Adam has proudly served on the Board of Directors of the International Documentary Association since 2009.

A prolific thought-leader on rewards-based and equity crowdfunding, Adam has presented on the subject at hundreds of events around the world and in dozens of verticals since 2010.

He was a Principal at Indiegogo, which he helped build into the world’s largest crowdfunding platform, with over 200,000 campaigns, users in over 175 countries, operating in multiple languages and 5 currencies.

Adam is an advisor to the Los Angeles Area Chamber of Commerce’s Technology and Innovation division, and is embedded with their Entrepreneur In Residence program.

He lives in Los Angeles with his wife and two daughters, is an avid sand sculptor, and sings when others wish he wouldn’t.

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Transcript


 

Adam Chapnick:

We are going to talk today about security tokens, obviously what they are but I’m going to do my best to do an introduction of each of you, having only met one of you before. Immediately to my left is Vincent, Vincent Molinari of Templum. Templum is a … They are a former registered BD and you are an ATS, correct?

Vincent Molinari:

Correct.

Adam Chapnick:

There you go. That’s the introduction. The next one is Chris, Chris Housser. He’s from Polymath. Polymath helps you create security tokens. You guys have the ST20 standard, right? That’s basically what you do. Boom, he’s introduced. Andy Bromberg is from CoinList which is a platform where some of the biggest ICOs are listed and some of them we’ve had on the show. Thank you for coming as well. Finally, we have Igor from AlphaPoint, who you may have said a quiet thank you to as you ate your breakfast today. Thank you to AlphaPoint. He helps you, they help you digitize assets and launch market places, is that right?

Igor Telyatnikov:

Yeah.

Adam Chapnick:

Look at that. Today we are going to answer the questions about security tokens. Before we say “What is it?” I think it’s helpful to ask, why do we need security tokens? Why, why is that even important? What will that solve? Vincent.

Vincent Molinari:

I’ll hop in right back to David’s opening comments. I think if we remove cryptocurrency for the moment, maybe that’s a revolution but in the world of security tokens or tokenized asset offerings, this isn’t evolution. How do we foster capital facilitation for economic growth, job creation in a more efficient way that is fully transparent, that has a defined pathway to secondary liquidity? The challenges of the IPOs as David talked about these and many things that we worked on together going into the JOBS Act, a tremendous shortfall in the IPOs and I’m not sure they are coming back any time soon for the small to medium offerings. Tokenization of securities and pathways, I think is the next generation of how we close that gap.

Adam Chapnick:

For sure. You mentioned there is … You said “Efficiency,” you said “Liquidity.” There’s a whole bunch of things so why don’t we have that now? What is now, Andy?

Andy Bromberg:

I think there are a couple of stages here. The first is that a lot of assets, they are not digitized. There are two steps here to tokenization. The first is should we take assets that are handled on paper physically and move them into the digital world? Then there’s the next step which is, should we tokenize them as that path to digitization? The digitization does a lot of these things. It allows for 24\7 markets. It allows for fractionalization. Then you have to ask why should we actually tokenize these assets? Why should we use tokenization as the method to digitize them?

Actually our co MC, Steve McKeon over there wrote a great article on this the other day, The Security Token Thesis. I recommend you read it. The most compelling argument there for me is the interoperability, that by building these things in a tokenized manner, we actually allow the assets to be traded for each other in a liquid and compliant manner. This digitization steps needs to happen. It’s been inevitable for a long time but the tokenization step of allowing for interoperability between these assets is one of the things that are really compelling to us. It just doesn’t happen if these technologies have been there. We talk about securities token. There’s only a half dozen out there today and we really need to get more and so now the technology has been developed. We are all here to learn about how we can move forward in that ecosystem and start to make this happen in the coming months.

Adam Chapnick:

That’s great. We are pretty burned. It’s very interesting because even when I think … I talk to everyone all the time and I think I totally get this and then someone I talk to explains some other aspect. I don’t get this. Let’s start. There’s the compliance aspect. There’s ICOs and then suddenly everybody … As Aubrey was mentioning, that ICO … Everybody needs to get in. Everybody needs to get out. Why, why will compliant ICO or STOs or whatever we want to call them, why are those going to be so important and how will compliance actually live inside of the token, Chris?

Chris Housser:

With security … Securities Act from 1933 and 1934, the Howey Test from the 40s. There are all these old regulations and we are not trying to break what these rules and regulations are. We are trying to … How do we fit and comply with these regulations within the new token economy? Really what we are doing with Polymath and what I think a lot of other companies are doing, is we are creating tokens with identity and embedded in. You need to go verify yourself, demonstrate that you are, let’s say a credit investor if that’s what’s required under the offering terms. Then only those people who meet that criteria, who are on the waitlist, are then able to hold these security tokens. I think that’s really the next step forward to bringing this security market place and the token environment forward, is how do we restrict the trading of tokens to only those people that are allowed to do so? That’s really what we are working on at Polymath.

Adam Chapnick:

How does someone who is of the old world supposed to feel confident enough? You said there are six security tokens but how does somebody go from …? Maybe I have an actual market cap and it’s in hundreds of millions. How am I going to feel confident that I can digitize, make a security token and do this without screwing everything up, let’s just say? Igor is there … How does that happen?

Igor Telyatnikov:

I think one of the important pieces has been to see the technology in action and to see it, to see it occur with … Bitcoin really is where the industry started, right? At AlphaPoint, we actually five years old today.

Adam Chapnick:

Mazel tov.

Igor Telyatnikov:

We’ve been in the space and we’ve really seen the evolution. One of the early pieces that really excited us as a company coming from capital markets and seeing what the new technology could do, was really this transition of natively digital assets like Bitcoin, Ethereum, other cryptocurrencies and applying the technology to securities and other types of asset classes. The piece to give comfort, one is the comfort in the technology which I think the experiment has succeeded in the actual code not being compromised for many years and really the evolution of new types of blockchains that can enable smart contracts.

The evolution of smart contracts is what’s giving that comfort to Wall Street and other issuers that are looking to bring these assets on to the chain. Also giving the comfort to regulators to reduce frictional costs, to increase the velocity of transactions and liquidity. Regulators also don’t want that to be an open free market. They want the same securities laws that applied to be applied in the new technology. We have ways now to, via smart contracts, enforce the regulations in real time. You can drastically reduce the compliance cost of Wall Street which is a huge cost in the industry today.

Adam Chapnick:

That touches on one of those … The benefit, efficiency. What else? What are the other efficiencies?

Chris Housser:

I’m sorry.

Adam Chapnick:

Yeah, sure Chris.

Chris Housser:

If I can just interrupt there for a second. The efficiency is awesome. Technology today could do many things that make our financial service market more efficient but in many instances, the regulation is not up to speed.

Adam Chapnick:

How so?

Chris Housser:

Right?

Adam Chapnick:

Yeah. We get that a lot.

Chris Housser:

It’s the modernization of security law that intersects with the most innovative technologies and that really was a large part of the JOBS Act, the revisions for 12(g), the removal of general solicitations so you can advertise, the increases of Reg A+. As much as we may have technologies that can blow things away, you can’t pretend that we are not clearing, settling or depository or doing a trade. Therefore, you have to be licensed and regulated. It’s great if you could drive a car and you can drive really fast but if you don’t have a driver’s license, guess what? You shouldn’t be driving. If you get pulled over by the police, you are in a lot of trouble.

If you get into an accident, you are totally screwed. We are at this inflection point in the market place although it is very early and we are inflecting. We are an ATS for the past two and a half years. We are actually approved to conduct digital assets and securities and ICOs. We are in 50 states of the Unites States, so blue-sky requirements for that. We build provisions as David said, to preempt and think about 12(g). How do you intercept and collaborate with regulation as it exists today, not where it’s going to be potentially in a year or three years and with the best technology that we can implement for that today?

Adam Chapnick:

Do you think 2017 was an example of people selling cars to kids and saying “Go and drive 150 miles an hour?”

Chris Housser:

Selling cars to kids that probably had…

Adam Chapnick:

Punch it, no license.

Chris Housser:

I think there’s going to be lots of speeding tickets coming and maybe some others and that’s a transition in the market place. We are taking the best of what we learned from the great cryptologist who put this on the map and collaborating with regulatory frameworks to holistically expand this so that we have that comfort. Institutional large pockets of capitals say “Wow, they are saying no. KYC suitability requirements.” There’s reporting practices. There’s validation of these assets and that holistically is going to build this space extraordinarily large.

Adam Chapnick:

This is fascinating because that is definitely the compliance part. We need compliance but we are talking about deficiency and so around those at odds? Is it that-?

Chris Housser:

Not at all.

Adam Chapnick:

If I have to be compliant here, can I go to Malta and just say “Screw it, I’m going to do this in Malta?”

Andy Bromberg:

Yeah. To jump in there, I think … To go to what Vincent and Chris are both saying, the efficiency … People are acting like there’s a whole entirely new regime and we need to figure out new rules for every little bit and piece. A lot of what this technology can do is make compliance more efficient. We look at things like ST20 that are building these compliance layers on top of tokens. That’s actually not a new, brand new concept. Historically, we’ve had transfer agents and when you traded a security, it goes to a transfer agent who checks and makes sure that the trade is legal, that the counterparty is allowed to accept that trade that the person trading is allowed to sell it and that’s an important function in the ecosystem.

What a compliance layer on top of the token can do is make that more efficient by automating that compliance and saying “Wow, are these two parties actually allowed to make this trade?” For us, we look at that and say … The compliance layer has existed before. It just happened to be a human and a process that was sitting in between this trade and stopping it from moving as quickly or efficiently as possible and perhaps even taking fees on top of that in a meaningful way. Let’s see if we can use this technology to make that whole process more efficient and allow those trades to be conducted in an automated manner, perhaps even peer-to-peer.

When we look at a compliance like this, we are saying “It is a matter of taking these existing regulations, these existing rules and these existing processes and making them more efficient through the use of things like smart contracts” like Igor was saying, or other technology that we can build in the middle rather than having humans in the middle of every single transaction.

Adam Chapnick:

That’s a great point. It makes it super clear that we are just digitizing transfer agents. There we go, boom. Sorry transfer agents but that’s great. What about this idea of there’s all of this activity happening in places like Estonia or Switzerland, wherever? Are we … By the security token phenomenon, is that giving a predictable access for those activities to access US market or is it just going to become … There’s the US and then there’s everybody else? What do you think about that?

Chris Housser:

It all goes to regulatory frameworks. If we are looking at Reg A+, Reg D and Reg S, there’s going to be cybernation issues, currency flows that have to be dealt with depending upon those jurisdictions but put into perspective there’s $2.4 trillion of unregistered security issues in United States alone, compared to our aggregated public markets that were 1.4, 1.6 trillion. If you think about the trajectory … Again I’ll go back to the JOBS Act. The ability to efficiently access capital, the education that went on from the JOBS Act till today and the ability to capture.

Alpha early in this cycle of private security has created evaluations, ls modified, prelisted under New York, of that public company evaluation in the billions. We have a huge market and there’s plenty for everybody here in US alone and that’s why we see there’s much collaboration that’s going to happen with other folks and do we collaborate with them? Pointless, all for that holistically Harbor and AlphaPoint Securitize as we build common standards and best practices to help this space grow. How that continues globally, it all depends on the cross border functions and regulatory frameworks.

Adam Chapnick:

Yeah, Igor.

Igor Telyatnikov:

I mean we have customers in about 35 countries. We have close to 80 customers now in almost half as many jurisdictions and so we see what’s happening jurisdictionally globally quite a bit. There is going to be a bit of … The US has … US investors are always going to be under US regulatory jurisdiction, regardless of where they exchange and that’s providing illiquidity. Exchanges globally are quite mindful of that and most of them have to date taken a stay away from US investors point of view, which is going to happen until there’s a lot more clarity in the licensing.

There’s also a bit of regulatory uncertainty of how to define a securities token, which I think is the theme for this panel, where the SCC here initially took a pretty broad stroke of saying “Well we haven’t seen an ICO that isn’t a securities token.” That’s been walked back since where Bitcoin, Ethereum, maybe those are a different type of token. Maybe other types of tokens can exist. Israel had a different framework where they actually are defining what a utility token is because you can go quite far. You can say “An Azure … A license key to Azure could be a token.” Is that a security? Probably definitely not. There’s still some space here of securities token that represent underlying ownership rights or underlying coupons, dividends, interest payments. Those are clearly securities, probably anywhere globally.

Adam Chapnick:

Right, those are the easiest ones.

Igor Telyatnikov:

Globally. Those around the easy ones but there are some that are in between which are yet-

Adam Chapnick:

Lots.

Igor Telyatnikov:

Lots that are, that are yet to be defined.

Adam Chapnick:

That’s fun. I don’t know if this is too caveman but as a caveman, I’m going to go there. Chris, I think you mentioned the Howey Test, Just in case people … We all know what we are talking about, can you off of the top of your head can you list what the conditions in the Howey Test were to determine what’s a security? Do you know?

Chris Housser:

The investment of money and you could definitely define Bitcoin or Ether as money to satisfy this test. Two common enterprises. A company is doing an ICO, that’s a common enterprise with an expectation of profit. Are you buying into this ICO, are you buying this token because you expect a return or because you expect to use that token on a network or for some other purpose? Then based on the work of others. You are giving this common enterprise money. They are going to grow their platform and then are you going to use that token or are you going to foot that token and make a profit? If you pass all four of those criteria, then you pass the Howey Test and it’s not a test you necessarily want to pass because you’ll be defined as a security.

Igor Telyatnikov:

Can I just jump in?

Adam Chapnick:

Yeah.

Andy Bromberg:

I do think the SCC has made an interesting, very precise statement here a few times which is they haven’t seen … Igor mentioned this. They haven’t seen an ICO yet that isn’t an offering of securities but I think what’s interesting there is that they did not say “We haven’t yet seen a token that isn’t a security.” They just said “We haven’t yet seen an ICO that isn’t an offering of securities.” That suggests that perhaps … David in fact said this, albeit in informal conversation later. That something could transition from being an offered security to a non security at some point in the future. Perhaps it begins to fail one of these prongs of the Howey Test that may not have failed earlier.

Adam Chapnick:

That’s interesting.

Andy Bromberg:

The idea that these ICOs have all been offered as securities, at least in SCC’s eyes but that at some point something like a Bitcoin or an Ethereum perhaps could become a non-securities interest in perspective. Obviously not true for these things that represent ownership and underlying assets but for these broader set of tokens it might be possible for something to transition in.

Adam Chapnick:

Vincent, yeah.

Vincent Molinari:

I think that’s great and it’s clear but I think if we look at Chair Clayton’s statement just Friday, they are not going to change any security law to accommodate anything in this framework of security token. I don’t know if they are pumping to the courts to make decisions as they are going down the path but there’s not any mechanism in current security law that allows us to move from a security offering to convert to a utility token or something else in the future. Could that be a great thing and very healthy for file storage, for app development, for machine to machine, to SANbase where a utility token is awesome? Absolutely but when we start in the beginning that it is a security, I’m not quite sure how you extinguish that security and end up with a utility token just yet.

Adam Chapnick:

I mean on the show, we’ve been more certainly in the last month. We’ve been talking to companies that have decided to start with two. They said “Here is our security token to raise the money and here is our utility token to do what we do.” That seemed so clean. I mean is that the future?

Vincent Molinari:

That or the commission is certainly giving guidance where there is an ability, a bond, a dividend to have the option of the holder to accept Crypto as payment so you can be creating as they give their guidance much more Bitcoin. There’s an activity associated with that. I think there’s going to be lots of … Whether it’s the dual token strategy or some decoupling but you can’t just extinguish the security token, becomes the key portion.

Adam Chapnick:

This I think is also interesting for the cavemen. It’s hard to wrap your head around what exactly is this thing and how does it work? If I were starting a company and I needed to do … I was convinced, oh this is the future let’s do a security token offering. We need security tokens. How do you guys help me become a successful issuer, having raised the money I need? Maybe Igor, you want to start?

Igor Telyatnikov:

We are more of an infrastructure provider so we won’t be the one typically working directly with the issuer. We, we provide the technology by which it can be issued multiple-

Adam Chapnick:

I see.

Igor Telyatnikov:

Issuances. Then also we provide the technology to launch the secondary markets, so whether that’s ATS license exchange in the states, if it’s … It could be international exchange under a different jurisdiction, whether it’s both for securities tokens as well as non-securities tokens. The general process is … This is a new vehicle by which issuers can, can bring in capital for their project. We do believe there is room for both utility tokens and securities token but if it’s a securities token … We have one customer, investment partners up in Boston. They are a PE firm. They are currently investing in real estate.

They are doing a $200 million issuance for a securities token that will represent the underlying interest in an LLC that holds real estate investment properties. The token, the token holders will be accredited investors, Reg D, Reg S and they purchase the token. They store those in their wallet or buy another third party custodian that will store that token for them. Then coupon payments can be made directly on the chain. If you have a secondary trade, if you trade to another accredited investor, they’re … We have a concept of a regulated asset back token framework so you actually have these Oracles that do the KYC on the users. Accredited investors, once they’re certified through the KYC process, they can always do secondary transactions.

They can do it on an ATS for more liquidity or if they know other parties that are holding, they can go to that party, purchase the tokens and then when a coupon payment is made, it is made out on the chain and a smart contract just pays it out to the current owners of that token. You can start to see some of the efficiencies of the token holders. You may want to invest in this more because you have transparency. You can see all the historic token payments. You can see the entire life cycle of the asset. You can see all of the associated paperwork with that asst essentially buy, via Block Explorer, permission of Block Explorer seeing that entire history of the asset. That maybe why an investor would want to get access to this, this asset class because it’s going to be easier for them to get secondary liquidity down the line.

Adam Chapnick:

For sure but here’s … This is going to be interesting. Raise your hand if you own a hardware wallet. Oh shit, all right. I was totally wrong. I thought it would be one in 10 but we … This is the Security Token Academy conference. I guess I set myself up for that one but I think that isn’t one of the problems that …?

People get it, like “That’s going to be the future” and then when it comes to going into their home office with their dog, they go “Okay, how do I start? Oh God this is overwhelming and I don’t have a wallet. Can I lose my key?” Then you read the stories about the guy who left his hard drive on this airplane, whatever. What is the actual mechanism that …? We know that the token can do KYC and AMF but what does that literally look like in the real world to me in my office with my dog? You need to know … I’m the customer you need to K. I’m the Campaign that you need to K. What do I do? How does that happen?

Chris Housser:

Custody is a major issue and problem in the whole … In the block chain space in general. Let’s say you own a security token and you own 1% of a company and then you go and you lose your private key. You can no longer transact in this equity of the company that you own 1% of. It’s gone.

Adam Chapnick:

That’s a big, big problem.

Chris Housser:

There needs to be solutions created for that and how can you prove the loss, create new tokens to recover that loss? That’s stuff a lot of people are working on to figure out, as well as custody solutions so you don’t have to hold your own private key with your dog in your own home office. There are a lot of companies that are working on custody solutions as well.

Getting to your question about KYC and verification. The way we see it working with Polymath is if you want to invest in a security token, the issuer says, along with their legal counsel that you need to be an accredited American investor. You’ll go through all of the process to demonstrate that you meet that criteria. You will provide them with your Ethereum address, 0X123, whatever it may be and they will add that address to the waitlist and now you are able to transact that security with anyone else on that waitlist, including ATSs and exchanges that also transact that particular security.

Adam Chapnick:

Great. It doesn’t perform KYC? It waitlists those who have been confirmed to comply.

Chris Housser:

Right, with those rules. It restricts trading to only those who are-

Adam Chapnick:

It restricts the traders.

Chris Housser:

Are verified.

Adam Chapnick:

There you go.

Chris Housser:

Whereas with the current blockchain, you can send any Ethereum token to any Ethereum address. Now what we see with security tokens, you can’t just send them to anyone you want. They have to only go to verified people or authorized people.

Adam Chapnick:

That is, again that’s a great efficiency and it saves a lot of people a lot of time. Were you going to add something Vincent?

Vincent Molinari:

Yeah. I’m sorry, I haven’t gotten to know Chris as well as Andy and Igor so I know we have lots of common things.

Adam Chapnick:

You can still interact in here. I endorse that.

Vincent Molinari:

At the end of the day, all these processes are great but you have to be able to execute. What are we doing at the end of the day? You are investing in a security, you are trading a clearance, settlement and depository. This is about new market infrastructure. It’s the great think I think about Templum market is because we started as LiquidM three and a half years ago, is the fact that we can raise capital and we have done today under Reg .. This was a Reg AR frame … I’m sorry, a Series AR frame of a tokenization to mean one token equals to one share of common equity, so very simple to understand. The beauty of this smart contract is you can create new security instruments, profit participation, yield instruments, revenue participation or a combination. You can really create dynamic instruments and it could be around real estate. It could be around other really illiquid traditional assets.

With the regulatory framework you can do that so regardless of the regulatory compliant processes that we have with tokens, which are awesome but you still have to execute through a broker dealer in large case. You largely still have to execute through an alternative trading system to have secondary liquidity. We’ve conducted our first, what we think is the world’s or US’s, first security token on a regulated platform. The processes are built. What them we are doing now is the backend, it is the transfer agent and why is the transfer agent so important?

Aside from 12(g) as David talked about, it’s the ability to have redundancy so maybe not as efficient as we would like but if somebody lost their key, we have backup at a transfer agent. It’s not … We have lost whatever it is. Okay, we can replace. We put unique identifiers on our tokens so they can be tracked and audited through the life cycle. Going back to … I hate to keep going back to David but he is the Oracle.

Adam Chapnick:

He’s the Oracle.

Vincent Molinari:

When we look at cyber terrorism and we look at cyber fraud, if you can reduce the incidents of hacking because you have tokens that have unique identifiers, then they can’t be used for various things. They can be extinguished if they are stolen. It’s really holistically looking at new market infrastructure. How does that play with the best technologies and how does it execute through current regulated broker dealers and ATSs? Peer-to-peer could be awesome. I think we still may have some challenges as we evolve. Are they Swap Execution Facility platforms? We just … I don’t know yet what the regulatory framework of that is yet. Very efficient but you still have to clear and trade that. How does that process happen?

Adam Chapnick:

It’s fun for me to have these conversations because it always feels like we are talking about taming the tiger because this whole thing started back with anarchist philosophies and these about total anonymity and distributing everything. In practice in the huge upside, the market with the T, the trillion, the quadrillion, you have to put a saddle on that beast and make it work for you.

I think it’s exciting to see how everybody is doing it in different ways. There’s … We talked about efficiencies, Andy but I think there’s … The whole other part of the application of security tokens is this fractionalization of … The tokenization of global assets. How is that different from some of the things we’ve been talking about? I know it’s certainly going to be the same in some ways but what, either opportunities or concerns live there? Andy, do you have thoughts about that?

Andy Bromberg:

Yeah. Fractionalization is a really interesting trend. It’s happened to other asset class. I think tokenization is going to allow it to happen in many more. I look at one of the biggest advantages of fractionalization as a decrease cost for structure and products. I hate to go back to the efficiency point but higher market efficiency in structured products. You look at RIT and the way that’s built is someone buys up ownership of a bunch of different properties and bundles it together and sells you a fraction of that total ownership by creating this vehicle that you can purchase.

In doing so, they are charging you a fee because they’ve done work there in buying those properties, structuring the product and then selling it you. They are charging you a fee on top of the underlying asset value that you are actually buying. If you buy 1% of the RIT you are buying 1% of the stakes and all the real estate in that RIT and they are charging you more than that because there is a fee on top of that for them doing that work. What’s so interesting here to me about fractionalization, is if we imagine Laundromat Manhattan, someone-

All the buildings at Laundromat Manhattan are tokenized and they are tradable on these liquid and compliant markets. Perhaps I can go out and automatically buy a millionth of a percent or whatever of all of those buildings and effectively create my own Laundromat Manhattan RIT without someone needing to structure that product for me and charging me fees on top of that underlying set of assets. When you start to look at that for all these different products, it allows for both more efficient structuring of simple products but also bespoke products.

That if I think I have some marketing intelligence that a certain building here is overvalued, I can build my RIT without that building in it, without needing to go and have someone structure that product for me. By fractionalizing all these different assets, we allow individuals and different firms to create their own products at dramatically reduced costs with increased customization, something that just hasn’t been able to happen in the market so far.

Adam Chapnick:

That’s exciting. When David spoke, and I know we have to keep talking about you David but you mentioned something about … You just threw in there the liquidity premium idea. I forget which thing he was talking about … You threw out the number 6% just by creating tokenization. Is that something we can expect? Is that going to vary across asset classes? What is a liquidity premium? Yeah, Igor.

Igor Telyatnikov:

We’ve seen some studies and we look at it as an illiquidity discount. We’ve seen studies that show that there’s an illiquidity discount of 20% to 30%.

Adam Chapnick:

Whoa.

Igor Telyatnikov:

It’s a substantial, substantial amount for … Certain asset classes, they may trade over the counter and they’re just not inherently as liquid. The, the opportunity to take 11 trillion worth of assets and eliminate even a part. I don’t think we are as optimistic to say “This is going to eliminate that entire discount” but even half of that discount-

Adam Chapnick:

That’s huge.

Igor Telyatnikov:

Coming back into investors, is a huge opportunity.

Adam Chapnick:

Are there … Can you give an idea of which classes suffer that more than others? Do you have an idea?

Igor Telyatnikov:

Even bonds, even, even asset classes that you would traditionally think are quite liquid commodities, gold, silver, they are actually quite opaque markets and there’s big spreads that are charged on both sides. If you make those markets more efficient, it’s going to, it’s going to take some of that discount away. Even something like gold, you got a question of what is fundamentally different in this asset class.

You can actually structure the tokens to represent the underlying ownership in the asset. We have more and more issuers that are going to provide physical delivery of settlement on … For commodities, example gold, with The Royal Mint and SME group, which are customers of ours. Instead of buying an ETF or gold ETF and you just are really … It’s cash settled, you can actually have physical delivery in settlement of the underlying asset.

Adam Chapnick:

That’s interesting. Is there going to be …? The use case is the next thing I want to talk about. You hear … I always loved the outliers but obviously … Like you are talking about the Real estate RIT of your own. It’s like Adam RIT, yeah and I don’t like that guy so I’m not going to put him in my RIT. One of the things … You’ve heard about fine arts or that Eli Broad in LA has got some $20 million painting but he wants other people to have an opportunity.

Is that going to happen where I’m going to buy into some Picasso? Then even further out there, what about things like, and I might get this wrong but is it the ERC721 with the unique … Where there’s one thing of it? Now is it like baseball cards? Am I going to move it like fractional ownership of extremely valuable Pokémon card collections? What’s going to be included, David?

David:

That’s definitely very possible. I think I saw the other day there was an Andy Warhol painting that was tokenized.

Adam Chapnick:

Oh, already?

David:

Yeah.

Adam Chapnick:

Oh, look at that.

David:

I foresee a lot more art and other collectible assets becoming tokenized and now you can own a small percentage of it. The question is where is that going to … Where is the art … Where is the art piece going to be housed? I’m hearing ideas to put them all in a museum and now you own a piece of the art and you can also get fees as people come into that museum to look at the art. Your token can now give you a percentage of all the admission fees to that particular museum. There’s a lot of ideas out there especially around the art world, about how do we tokenize this and how do we now give people access to multi million dollar pieces of art that they otherwise would never be able to own themselves?

Adam Chapnick:

I love the tokenized art gallery museum. Yeah, Andy.

Andy Bromberg:

I do think that for a lot of these assets, art in particular and that category, the majority of the equity if you want to call it that, the object is not going to be tokenized or if it is it’s going to be held by a single party. You can imagine a piece of fine art, 51% being held by the original owner, tokenized or not and 49% being sold to token holders. They get economic upside in that piece of art but when you start to talk about the governance of a piece of a art and who actually owns it and where it’s places, I tend to think that that will remain decided by a single party because on-chain governance of a piece of art, what does that mean?

Where do you …? If you have people voting on where to put this, I think that’s a way more challenging problem and doesn’t really get at the core of the value of what we are doing here, which is democratizing this ownership and allowing people to gain upsides, something they might not otherwise have access to. If I own 1% of this piece of art and it appreciates 10%, I can sell my stake for 10% more. I’ve made money on it. I don’t really care about deciding where that piece of art goes. I do think that the majority of that equity will remain held in a single person’s controls so that they can put the art up in their house or out in the museum or wherever it may be and allow others to get access in the economic upside but not necessarily the governance.

David:

I hate to be the old guy in the room all the time.

Adam Chapnick:

Hey, be the old guy.

David:

I think if we make it relatable, this is very much akin to structure product or securitization of things we have done for along time.

Adam Chapnick:

Exactly.

David:

It’s a new asset. The beauty of tokenization is it is allowing it to again be more efficient. The other side of this great access to capital is wealth creation on the other side. I think that’s where the part of orb is if it’s a 20% or 30% discount or a 6% premium, that space in the middle, for more key assets. If you think about more key real estate holdings that individuals that didn’t have 10, 20, 30, 50 million to invest could invest a quarter million dollars.

They are willing to pay a premium to access that more key asset, whether that’s real estate art or the premium securities that they couldn’t get into typically because it was a bit of a club. I think tokenization in a structured format or structured product format is going to revolutionize many illiquid asset class that will drive them from discount to at least pour if not premium.

Adam Chapnick:

Are there any places where …? Andy you were talking about the challenge of governance. Is there anywhere where that becomes an opportunity where that because it’s different like that and all … Everybody has such a say? Is there any use case where that becomes an actual opportunity for something to happen that hasn’t been possible?

Andy Bromberg:

I think some people would argue that … I see it as a more of a philosophical debate that some people would argue, “Hey the Wisdom of the Crowd is really powerful. We should let this company, this entity, whatever it may be, be governed by the crowd.” Others will say “Let an experienced manager take control and decide what happens with this asset.” I don’t know that I would say there’s on the whole things that are objectively better governed by a democratized set of investors versus governed by a controlling party or something else but-

Adam Chapnick:

I’ve never seen-

Andy Bromberg:

The people that would make that argument.

Adam Chapnick:

It’s an interesting philosophy. Yeah, Igor.

Igor Telyatnikov:

I think the corporate governance models, that’s just an opportunity for firms and there are some that are staring to tackle and approach this already. It may be not for a piece of art but for another entity. Corporate governance and bylaws bring those into a smart contract where the majority of the token holders or the majority of preferred, etcetera, is going to have certain governance rights. That is very much going to happen. It may not be for that piece of art where I generally agree that it’s going to be one owner most of the time but for other asset classes are four. When you are tokenizing a company, private shares of a company, you may have subclasses of those shares and then governance rights, voting rights that are subject to the stakes in those, those tokens.

David:

Proxy voting is something we are building into our tokens as well. The ability to pay dividends, the ability for token holders to vote, that’s definitely features that we are looking-

Adam Chapnick:

All built in?

David:

To build in, yeah.

Adam Chapnick:

Look at that. What about the idea … Is this all going to be accessible only to accredited investors? Is this going to be like Reg D? Are we going to see this ultimately investable by Main Street and where and how is that going to happen? Old guy.

David:

Look, it’s the evolution. I think part of this resistance today is Reg D because of … Without having to go through a common period and so forth with the SCC on Reg A+. The market place absolutely needs the retail engagement and further democratization from a compliance suitability requirement of a broker dealer and much harder but yeah, absolutely. I think Reg A+ is going to represent a wonderful opportunity. I think it’s going to hurry to get to market for most issuers so they don’t want to wait that 90 day period or it could be longer for the SCC approval. Reg D seems to be the path which is clearly locking out a lot of the, at least initially the retail environment.

Adam Chapnick:

What’s been eye-popping definitely going back to 2017, and for me is again the caveman, is just the insane amount of money available through a Reg D. You don’t need anybody to … Boom, everything is doubled, tripled and three weeks, done. It’s like … I’ve never seen anything like it. Obviously the appetite to get into this from accredited investors and institutions is obvious now but there’s so much, maybe from making a world better position. You need to have Main Street. I would hope … I guess maybe this is just me being philosophical again but when are we going to see that, when, do you think?

Andy Bromberg:

I think there’s a rush for brokers and wealth managers globally to provide access to this asset class as a whole, whether it be natively digital assets, cryptocurrencies or the securities tokens. There’s a wave of those institutions starting to integrate and we are working with many, some of which that are new, some of which that are not, around just providing that access to the retail investor.

For securities tokens, I think that’s the way it will go, is that the retail base will have their access via their traditional channels, their brokerage fidelity, etcetera. For asset classes that are commodities or digital currencies that fall outside of that severities tokens purview, there is a lot happening with decentralized exchanges, with lower friction market places globally to provide that access to democratize the access to these asset classes. We believe that’s going to continue to proliferate as well.

Adam Chapnick:

Back to my home office and my dog, am I going to sit there eating popcorn, looking through my E-Trade account and being like “I would like a piece of a Picasso and one 800 thousandth of the Empire State Building and my neighbor’s house because he’s tokenized his house so that he can get some 49% of his ownership to get liquidity?” Is that what it’s going to look like in my E-Trade account?

Andy Bromberg:

I don’t think that that’s an unforeseeable view into the future.

Adam Chapnick:

Amazing. When we look into the future, what do you guys see in the next, let’s say … I mean you can’t look too far. Everything changes every day but let’s just say 18 months just to make it far enough that you can go up high in the sky. What’s it going to look like 18 months from now?

David:

Security tokens will prove to be the most robust tradable asset class growing the biggest conduit of capital aggregation, job creation, economic growth within a regulatory framework that gives … Particularly as we get custody, clearance, settlement and depository will be the gateway to massive amounts of institutional capital flowing into the space and will forever change the paradigm of asset classes.

Adam Chapnick:

Not much?

David:

yeah, just a little.

Adam Chapnick:

Chris, what do you think?

Chris Housser:

18 months from now … If you look at the total asset value of all the Crypto assets, right now it’s about $300 billion and it’s represented 99.9% by non identified security tokens. It’s arguable for some of the security tokens but it’s not … They are not self identified as securities. I think going forward, one sovereign wealth funds. A few big companies tokenize their security. That number can easily triple in 10X. The utility token market cap, it may remain around where it is right now but the security token market cap going 18 months ahead, could easily be in the trillions.

Adam Chapnick:

Andy.

Andy Bromberg:

I couldn’t agree more with what those two said and I will just add that we’ll see a huge class of traditionally illiquid assets become liquid and we’ll continue this never ending march towards markets for everything, liquidity for everything. We’ll begin to see how those efficiencies start to play in these markets as things that have always been a liquid, only been accessible by a small set of investors become accessible to a much larger set of investors and see how those markets develop.

Adam Chapnick:

What do you think Igor?

Igor Telyatnikov:

I agree that Crypto assets as a whole will go above the trillion dollars. I’d like to point to a whole economic forum study that the majority of respondents responded that they believe that 10% of global GDP will be on blockchain by the year 2024, so that’s about eight trillion. 18 months, getting over a trillion I think is definitely feasible. I think the other piece that will be solved within 18 months is custody and insurance of these assets, is getting big name custodians into the space, providing traditional investors with that piece of mind that these Crypto assets are in good hands.

Adam Chapnick:

Great. Well you guys, thanks so much for clearing up this for everybody here and-

David:

Doing perfect.

Adam Chapnick:

It’s luck. That’s not my first rodeo, David.

David:

Wow.

Adam Chapnick:

Thank you all for listening. I hope it was helpful and let’s give it up for the panel.