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Security Token Exchanges and Trading Organizations Take on Wall Street

Asaf Meir & Praveen Kumar, Solidus Labs

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Transcript


 

Adam Chapnick:

Hey everybody, it’s me again, Adam Chapnick with the Security Token Academy. Thanks for being with us here today. I’m excited because we are joined by the guys who I love from Solidus Labs. We have Praveen Kumar and Asaf Meir. Thanks for being with us.

Asaf Meir:

Thank you for having us, Adam.

Praveen Kumar:

Thank you for having us.

Adam Chapnick:

Yeah, alright. So, you guys do a lot of interesting things. You had talked when we were talking before about some of the specific problems that you solve on a technological level from your experience at Goldman Sachs. Can you drill down into those two things a little bit and what they are?

Asaf Meir:

So, I started saying earlier about front running and how it’s a problem is occurring today in financial markets. So, taking the knowledge we have from the Wall Street traditional eco system, and then understanding how Blockchain works, that’s how we basically provide a new market surveillance system that is able to accommodate into itself smart contracts, blockchains, E-wallets. All those things that today’s surveillance systems don’t know how to interact with.

Adam Chapnick:

Mm-hmm (affirmative)-. So, the other thing was?

Asaf Meir:

Regulatory reporting. So, it’s trading day at Goldman or wherever it is, in any trading house for brokerage dealer, you have to identify ... each day there is a big batch processing going on that he’s able to collect reportable data on and then sent off to regulators. So, if we’re already doing the surveillance for different companies, for us it’s relatively a low hanging fruit to also do the regulatory reporting portion of the thing.

But what I want to emphasize here is that, today the regulatory landscape is still forming and not many today can say even the regularists themselves can’t say where things are heading exactly and how the regulation is going to be reportable, but that’s why surveillance is so critical. That’s something that we can do today. That’s something that companies can show to regulators in good faith. Here, we’re monitoring their system. We know what’s happening underneath our hood. We can say, whether or not, there’s any malicious activity that is being manifested. Whether if it’s front running or spoofing, or other ways that malicious activity can abuse the system.

Adam Chapnick:

I mean, it’s so right on the cutting edge. You’re on edge of the wave. I think it was this week in the Wall Street Journal, there was some crazy stat with like 80% of offerings are spoofed. It’s like crazy. And, of course, I’ve never heard of spoofing until I read the article, but it was an amazing stat. Maybe you want to tell people what spoofing is?

Asaf Meir:

Yeah, the statistics are enormous.

Praveen Kumar:

Yeah, that’s just one of the things that we are dealing with. But, I would like to go back to our traditional surveillance that we provided in Goldman Sachs. Which is basically ... and I know that in crypto world, the rules of broker/dealers exchanges, as well as market makers are still taking a form. And, the responsibilities that you get with it are going to come.

So, the surveillance you have to provide, for an example, you are a broker/dealer and you’ve got a customer order, you have to treat the customer order first. But if you put your own capital before the customer order, and basically, that is front running and you profit from the customer order. It’s knowledge that the customer wants to buy a big order, in let’s say, Bit Coin just for an example, and raise the price up for the customer, that is something that you’re not allowed to do. And we can detect it in Blockchain world. Be it centralize exchange or decentralize exchange.

Be it a broker/dealer hedge fund. So, this is the kind of stuff that we’re building currently at the moment. That is also market manipulation that goes on with the pump and dump schemes, if you’ve heard of them. That is also, if you’re trying to manipulate prices to gain certain advantage. Again, going by like knowing what customers are doing at the moment in the market. So, all this is bread and butter. When it comes to a broker/dealer trying to prevent finds from the likes of SEC, FINRA and so this is what we want to provide to-

Asaf Meir:

I would say that eventually what we’re trying to do really here, is to promote a healthy eco system. And to reduce risk in risk transparency and lower costs for those market participants.

Adam Chapnick:

That’s fantastic. I think a lot of the invest ... I mean, obviously on the institutional side, I’m sure obviously, they’re super familiar with this and that’s why you are doing this at an institutional investor. But is that keeping them out of this game right now? Because there’s no institutional level activity of what you’re doing?

Asaf Meir:

Imagine, right now ... not too long ago, Jim and I announced that they are going to partner up with SMART, the surveillance system with NASDAQ. That only goes to show, a) How much there is a need for it. One of the most regulated exchanges in the U.S. is saying, “Oh, wait a minute, we actually need a surveillance system to help us monitor things.” And again, I would argue that possibly, SMART, right now can’t accommodate for Blockchain, the way that we’re building it.

So, SMART is an amazing system that can work with traditional training systems but not necessarily the way training is manifesting itself with Blockchain. Things are different, the way smart contracts with another decentralize exchanges, E-Wallet. So, things are not seamlessly. You can’t just use SMART, and there we go. We’re good. We have a surveillance system that does it all. So, that’s ... it’s definitely needed and it’s happening and-

Adam Chapnick:

So, you’re the CTO. So what kinds of things have you built that sort of accommodate the things that Asaf Meir is talking about? Don’t go under the hood too far.

Praveen Kumar:

Without going into the details of implementation but being able to look at the market data. Being able to see what kind of orders coming into the market. Analyzing how system, trading systems, are built. How customers’ orders come in and how you actually send them to the market. And all this traditional knowledge that we’ve gathered, we’re utilizing that. Having blockchain technology experience from our projects that we’ve done for clients. We’re trying to use blockchain technology and the financial knowledge. Combining that together to build the product that we are presenting.

Adam Chapnick:

Amazing. So, do you think that ... now as we talked about how from an institutional perspective, maybe they’re waiting ... Obviously, you said Gemini starting to accommodate this to get more institutional capital but, there’s some tiny percentage of the overall available capitalism Gemini. Do you think that from the other side, maybe from the retail investor, they don’t even have any idea that most of these schemes are ... that they’re the victims. Do you guys have any intention of being retail focused to sort of let people know that you solve their problem? Or are you ignoring that as a business practice?

Asaf Meir:

It’s a business proposition we ... right now, concentrating on other businesses. And being able to help businesses that then service other clients. So, if we know that there’s a broker/dealer that we helped that broker/dealer to protect investors, that’s for us ... we’ll be able to sleep better at night. And also, in a way, just very much the logistics of the business, it’s easier. We come from that background. We come from a bank. We know what they expect to have and seeing what they’re used to. Serving this to clients, which is what I think you’re eluding to, would be considerably harder to make it like a client facing paying for-

Adam Chapnick:

I was thinking, not so much like, you would serve the client. But more that if you had some ... it makes perfect sense what you’re saying. But the thought was, maybe if the vast majority of the retail investors are even unaware that there’s a problem, and they’re getting their asses handed to them ... maybe it would help if they knew, and then-

Praveen Kumar:

Part of what we want generally, I guess is a company to really be advocates for a healthier ecosystem. And to make sure people are aware. People are aware that there are malicious participants in this market. Just as in any market. And that they should use cautionary steps whenever they are purchasing, selling, buying any tokens. Even securities.

When I used to work on Wall Street, I always said to my friends, “Do not enter the stock market exchange unless you know someone who can safely walk you through that path.” So, even it goes the same way for this token of securities economy and probably with more scrutiny. You need to be more on your guard, these days, at least. But what we want to do is to bridge the traditional Wall Street to Blockchain World and make sure there’s a healthier eco system.

Adam Chapnick:

So, your ideal clients are:-

Praveen Kumar:

Brokers, hedge funds and exchanges.

Adam Chapnick:

Got it. Great. And do you imagine having the Better Business Bureau stamp that like a safe exchange will have-

Asaf Meir:

That would be the ideal case for us having a solid slab stamp, means that you can be audited any time and then you will be fined. You won’t have to pay any penalties if you were audited at some point. And, it is possible with any of the financial institutions that there are discrepancies that are front running. That is any malicious activity that’s not detected or controlled from or not in place. If you have solid slab stamp, then you are fine. And that’s like ... also the industry has to go and take the step first before even regulators go there to show good faith that we are taking steps. We are going there. Gemini, I’m not sure anybody asked them to go and seek out this surveillance but that’s what shows a responsible organization would do. Go and actually take this step and show to the regulators, look, we actually want to make things better. And just work with us. And regulators also get an idea of where industries moving and where the regulation should be. To promote healthy Blockchain environment.

Adam Chapnick:

So, in a bigger picture, what do you guys think about the general shift from ICO mania to security token and ... I think I would guess what your thoughts are. But what do you think about that?

Praveen Kumar:

I think it’s a healthy shift in that today, I really ... this is where things get interesting. I think there’s so much assets that are currently locked in liquid and the possibility of making them liquid again, or not again, making them liquid on Blockchain and then to offer them to considerably a larger crowd. You’re unlocking here just truly a lot of potential avenues for investments that weren’t before open for anyone. So, things are moving in the right direction towards transparency, towards the market inclusion, towards the market capital creation.

So, I think, this is fairly healthy and I think that, using the Blockchain would be able to also make sure that, if done in the right way, that no one is being fraud. No one is doing any malicious activity. That everything is recorded well, audited and reported as it should be in today’s market. So, I also want to say that, we don’t think that things are going to shift in the sense that the world of trade is going to change the way we know it and reports are going to change, and all of a sudden regulators are going to be, “Oh yeah, don’t worry about it.”

Like this is ... this will be not as harsh on this industry, but we wish that things are going to remain the same, in the sense of your regulatory obligation, will remain the same. It’s only the now, there’s going to be a digital asset, that would represent other things that today aren’t represented in the market. And of course, they’re going to be streamlined through the blockchain.

Adam Chapnick:

Are there any characteristics of some of the other asset classes. Like you’re talking about the tokenization of global assets. Is there any reason why your job gets harder or easier in those different kind of asset classes or do people just try and game the system the same? No matter what?

Praveen Kumar:

It’s a great question. Yeah, things are getting harder when you’re dealing with a different blockchains possibly.

Adam Chapnick:

Oh, interesting.

Praveen Kumar:

It depends which blockchains you’re using to digitize your wallet. Today, there is ... when we’re talking about-

Adam Chapnick:

For example, what’s an example of a couple of different blockchains? You don’t have to tell me which is the hard wood, maybe if you can, I’m curious.

Praveen Kumar:

So, you know, if there would be one, that there’s different ways you could possibly play around with pending transactions on each block and kind of try and manipulate markets. While Dash, for example, work in a completely different way. So, you really need to make sure that whatever surveillance system we’re building is able to accommodate for different such things.

Adam Chapnick:

Wow, and are you guys kind of plugged into ... I wouldn’t even know they’re there ... the top 5 or something-

Praveen Kumar:

Today we’re with Ethereum and we’re also serving one hedge fund. We’re already working with them. We’re maturing the product. We want to completely have it nailed down so before we go to the market, we know that it’s spot on. We, I think again, as a company we like to make sure we’re grounded and practical. And delivering a product that’s robust and holistic. So, instead of hurrying and selling this to like an exchange and another hedge fund and another broker, we want to make sure that the product is matured and ready to go. To not disappoint anyone. And mainly, so it actually protects investors.

Adam Chapnick:

That’s the whole idea.

Asaf Meir:

That’s the whole idea.

Adam Chapnick:

We love it. So, looking ahead, let’s say, next year. Twelve months. Where do you hope/expect you guys will be?

Praveen Kumar:

Right. So, as I mentioned, we are maturing the product these days with a hedge fund. We are projecting, as people are talking to us and knocking on our doors and wishing to register to the bed of the product, we are projecting to be with additional hedge fund, probably exchanges. Exchanges are big. More and more are opening, more decentralize exchanges are opening, which is harder to do surveillance there. The opportunities, as I see it, to do malicious activity on those exchanges are also quite there today. So, we are also expected that within the twelve months will probably be venturing off from the hedge fund space on to the exchanges.

Asaf Meir:

And on the same time lines, I would think that regulatory landscape would slightly shift towards more…now that Wall Street is taking into account where blockchain and asset based cryptocurrencies are coming into picture, our colleagues or our partners are building these trading systems that are the standards of Wall Street.

And, more crypto-broker dealers ... hedge funds are already there, but crypto broker dealers are coming into play. And so, the roles of broker/dealers, market makers, will be defined clearly. And, so for us, our business becomes a little bit more oriented towards our clients, specific clients, and having more partners to help out and build system tools. So I think, within 12 months we’ll be at a much better place. Much clearer requirements. We will be seeing a very familiar structure to what we saw in traditional finance and so we’ll be in a much better position to help them as well.

Adam Chapnick:

Interesting. Well, great. Well, thank you guys for sharing with us what you’re up to and what we can expect in the coming year and we wish you all the luck in the world. Come back and keep us posted on how it’s going.

Asaf Meir:

Yes.

Praveen Kumar:

Thank you so much.

Adam Chapnick:

Thank you guys.