Dan is the former Chief Innovation Officer at the Defense Intelligence Agency and 2014 Fierce 15 awardee as a top government change agent. He has 20+ years of experience in emerging technology development and finance across government and private sectors. Dan is a software developer and innovator in artificial intelligence, cybersecurity, process automation, dynamic asset pricing and enterprise architecture. Dan holds a B.S. in Systems Engineering & Economics from the U.S. Naval Academy and a M.S. in Nuclear Engineering from MIT.
Hey everybody and thanks for joining us here at the security token academy. I'm Adam Chapnick and we are talking today to Dan Doney, CEO and Co-founder of Securrency about the future about the security token industry. Bow quick note, if you want to see our in depth interview with Dan check out securitytokenacdamy.com, just look around for it and it is there. And it is awesome.
Okay Dan thanks for being here.
Okay so let's talk a little bit about the industry but first in short tell everyone what is Securrency?
Sure Securrency, a company, were a tech company that set out to layer compliance and security, over block chain networks to be able to tokenize securities. So we provide a one stop shop for issuers to walk through their token offering, to build in and bake in the compliance frame work, to issue their token to allow them to trade, and then ultimately to do the government reporting required for a securities offering.
Amazing and it is amazing and I was saying check out all you can check out about on the other interview with Dan. But for now were going to talk about your views sort of on the industry. So last year which was 2017 there was a big sort of frenzy around sort of ICOs. Now how do you see the STO, the security token industry as different from that, I mean there's obvious ways but what's yours?
Oh yeah well so look if I'm honest and I don't mean to cast assurgent here but the Ico industry was largely about avoid security laws and there was a thought that it was a new world and that compliance didn't matter. Along with that approach unfortunately the laws are there for a reason. Investor protection is a key component of the regulations, you saw a lot of abuse in the system. The key issue with ICOs largely across the board was lack of investor protection and lack of sufficient risk disclosure. So that's an important part of offerings are that folks are required in a securities to properly disclose risk.
There was a lack of common security standards. So we've for example, we've subjected our platform to PCIDSS certification. PCIDSS is a robust financial services auditing protocol with independent auditors who come and verify the security posture of your system. It rigorous. It takes a long time to get through this. It's required for a credit card industry in order to do it. The crypto industry has no parallel to this.
So some folks might be very smart to get into the industry without sufficient protection and it's estimated that 10% to 20% of value contributed to ICOs gets utterly stolen. So the track record of ICO, again cause of lack of investor protection you see many frauds. Again an estimated 8 out of 10 being insufficiently vetted or just all together bad offering.
The security token model is very much a different frame work. It is a model that emphasizes the good things that we know about securities. The regulation are there for a good reason, namely investor protection, fraud prevention and by embracing those rules, where many folks in the ICO world where looking for ways to avoid them, we embraced them. We ran right towards them and we figured ways to automate those specific rule sets. You get an environment that is safe for investors, that healthy for issuers because they have a frame work to get to market. That issuers that can actually come in and help to de risk the model as we are working with so many insurance companies to-
The same basis. And ultimate what that means is that institutional money can come into the space. If you're a pension fund manager, you can't go in to the space where 20% values the stolen and 80% of the value is not ready for prime time.
So by creating an environment that embraces the rules global, you create a place where the big money, the value from the institutional investor, as well as the little money from mom-and-pop can come in to a safe place to invest.
Yeah that's clear. Now that's the STO versus the ITO now what about versus the crypto currency market. How is STOs differ from that in our world?
We came into that market with the observation and this remains true unfortunately bitcoins price is down significantly. We are hoping for a rebound here shortly. But crypto currency have been quiet volatile. And the reason for this is fairly straight forward- their value is their utility and that's somewhat subjective. So you see speculators in and out and you see prices go up and down. What that means is it's a great way to transmit value but it's not a great place to put your money at rest.
And so the big difference for security token offerings is traditional investment opportunities can exists in this space. It can give investors with a growth appetite an opportunity to participate. For folks who have an income appetite, who want stable income over time, it gives them an opportunity to participate in this market. So it pretty different from the crypto currency world. They work together.
So of course we accept with securities bitcoin algorithm that they fit together but they're, but they all ride on block chain networks but they're very different in terms of their interest.
No that's great explanation. Okay so you guys have an unusual place in the ecosystem, where you actually work with and understand a lot of different block chains. Can you speak to how to some of the major ones that we've all heard about, how they are different? A lot of people don't even know that they are different.
So early on in as we began building our platform, we recognized that there was going to be considerable evolution in distributed ledger technology. As we saw even in 205 the core ledge, bitcoin, block chain, was a slow, powerful, very cool, brilliant model, but slow. And that for many transaction it was insufficient. Of course there is a theorem and on from we saw a need to be ledge agnostic and that was to build security and compliance over any distributed ledge technology such that we could engage on token offerings on any of those.
Now we have opinion certainly about which ones are most favorable. We love Ethereum of course because of the broad base of wallets it makes it easy when issue tokens with in the space. To get too many users on the Ethereum network, but it is slow and it is expensive. We love Go Chain. So Go Chain is a much faster version of the very same. We've shown that we have the ability to do token offering on the Go Chain network. We're exploring Eos. We're excited about where that's going and the potential to do things that aren't easy in the solidity in the Eos network.
What's the different between the Eos block chain and what it can and can't do versus lets say the Ethereum of the Go Chain?
So there's a couple key differences. The first is the way it's governed allows for more speed and it allows for faster adaptation in the model. The Go Chain and Eos are the same in this but the Ethereum being truly, purely decentralized it's hard for it to adapt. And it's model for consensus is different. And that limits its ability to be fast. They're working on that but because of the governments model it's going to take some time for that to be addressed.
By the way there are some really promising things we're keen on what Microsoft is doing with Ethereum there as they're moving to proof of authority. That significantly increases the speed of the Ethereum network, so were watching that closely as we think that that's an interesting development.
Eos the fundamental different between Go Chain and Ethereum from the Eos Network is the way the smart contracts are developed, which it is more traditional programing language. So and with data tables and more traditional ways so the trouble is that there aren't that many solidity developers out there and they're in high demand, they are very expensive. So it's much cheaper to find developers in traditional construct to build out more substantial DAPPS on networks like EOS.
Distributed applications just for the people following along at home.
Now were real excited... by the way we love Stellar. Now this is a very different kind of network from the Ethereum network. It's not smart contracts based but it has the ability to build in ledge controls directly in to the ledgers themselves. That allows for a very decentralized model for us to enforce very complex security laws on those ledges. They're noted both Ripple and Stellar are known for their speed as we can get transactions in less than ten seconds to clear. That has real value in terms of the transactions and trades that you can perform on the network. That's beginning in what camp you're in we use both of these.
I don't know if I got to this but we're really keen on Hash Graph.
We think that that is a tremendous new model. It can decentralize even further with the DAG model and that will allow for far greater speed in the long run. And the ability for us to pour some of our logic in to that network is something that's coming soon.
I want to finish on this, and it isn't meant to be an advertising piece but it's just a word of advice to folks. Don't bet the farm on any ledger. Things continue to evolve and as we see quantum computers come online you're going to see continued evolution or need for evolution in ledgers. Stay agnostic, don't be a purest on this. You know what's fun is, I say "one ledger or another" all the haters come out. We like them all. We are going to show the ability to do cross ledger issuances here. In just a few months we're going to do token issuances that actually span ledgers. That allow user to transfer their tokens across these ledges and that allows you to get the best of both worlds. Imagine issuances on Stellar and Ethereum. When I want the speed of Stellar I can get it when I want to reach the broad set of wallets on Ethereum I can get the same things together. That frame work allows you to not have to choose.
Incredible. Incredible. So as far as, I'm not sure this will bialy my cavemanness again is what I want to do, as far as smart contract themselves. Is that the future or is that just one component of one ledger that is just going to be sort of a quaint thing we remember?
No many ledgers use them in some form or another. It is not a passing fad. Decentralized applications are a magnificent development that came from the Ethereum network. That is going to continue and certainly as a pragmatist for the next few years there is going to be logic that exists off ledger. And until the preforms of distributed ledgers gets put to par with transaction engines, had Hash Craft may actually get us there in this, there is always going to be the need to do certain work off ledger.
So what you want is actually logic that flows across on and off ledger model and frankly the whole financial system as it stands now, most of it, exists off ledger. So we've taken a stance that we work off ledger just as easily as we do on ledger and this creates a bridge between the old models and the new. And without a bridge, if folks have to cross an island and can never come back, this world is never going to get where it needs to go with respect to security tokens.
That makes a ton of sense. So now let talk about geography. Internationally, and obviously a lot of the talk here came from the shift from ICO to STO because it was who was being compliant with the SEC. Are security tokens going to be taken up globally? Is it just a matter of course and if so where? And is it everywhere or is it just in some places?
Well the bottom line is a security token by definition must follow the laws of the jurisdiction that it is in and as long as jurisdictions have different laws, you need frame works that are able to span jurisdictions so that's an important going in position. And it's likely to always be the case that different jurisdiction have different ways of governing their behavior.
So the way it can be address by the market generally, is the concept we call these recipes, is it allows you to map in global securities laws into basically reusable, shareable blocks. They can run across these ledgers and govern the behavior of tokens across these jurisdiction.
Now there's some fascinating thing. When you can move tokens across ledger, you can also move them across regulatory frame works. And so were able to actually issue duel jurisdiction tokens that behave under the laws in one jurisdiction and under the laws in another jurisdiction and where there's a very deliberate passage between those to. We're working with a company Quantum Real Estate to do an issuance that does just that.
So for example, in real estate transactions when an owner of a US real estate trust interact with a foreign owner there's certain laws where you incur certain tax event when that happens. You don't want to be holding a token and pass it on to someone and suddenly incur a major tax event without knowing you've done this and have to pay a 30% tax, say. In fact in have common denoted tokens with different counter parties, basically different rule sets, you know when you're crossing that boundary even though it represents shared interest in a similar entity. It trades with a similar beneficial ownership denoted in the same way.
That's a very complex topic but what I can say is that it's these rules sets that you could simple never do in the legacy financial frame work.
That are now possible. There is going to be a tremendous amount of innovation here and it will get to some that feels quite global, event though there's not parity in security laws.
Yeah no I mean again from a user stand point it's like of course that should be the case. Someone should make a thing that knows where it is. That makes perfect sense. So yeah I can see that. So now lets talk about when you think about when you think the industry is going to hit it's stride? There's been a lot of expectation put on it a lot of prediction but your deep in it. So what's your sense of the wave? How soon till it's really crashing?
Well many folks have said that 2018 is the year of the security token, that probably not true. 2018 is the year that people really start to understand how important the security token is. We can speak from experience, from the time we realized this was a game changing concept in 2015, took a while to mature. 2019 is undoubtedly the year of the security token as we as others bring these kind of offers to market, it's transformational in terms of the impact. There's an estimation that there will be two trillion dollars worth of value in securities by the end of 2019. That may or may not be, I think that's a pretty good estimate quite frankly. It maybe a little high, it might be a little low, we'll see. But certainly with in the follow year it will blow way beyond the two trillion dollar value.
Our specific target is the alternative market place, which is all hedge funds, all real estate trust funds, all private placements. That's a ten trillion dollar industry easily and beyond just in the US. We see that falling very quickly as these are so much more efficient so much more powerful as financial instrument as their financial predecessor.
No doubt. So something we talk about here, we are the security token academy, is the value of putting security tokens where they were available before making liquidity possible where it wasn't before. Which there is even a term or- liquidity premium- that's going to be added to a lot of these assets that you can apply them. What do you think, is it possible to say I think is there a liquidity premium of x when you put in a security token or is it going to very by specific asset or by class?
Well look so actually the liquidity premium varies over time. So I've heard many folks that we might face a liquidity crunch over the next couple years. Certainly when that happens and it's much more difficult to move your value, there's a significant premium. And in times like this, certainly in 2018, liquidity was more important than yield. Now that varies again according to market conditions in terms of that. If in fact we go through a crunch you're going to see a significant liquidity premium and asset that are not securitized, people are going to deeply regret the fact that they don't have the ability to move their value efficiently with in the frame work. So yep liquidity is one of the principal benefits tied to this.
I want to get to a different principle benefit, Adam if you don't mind.
Accessibility is another benefit of these models. So for so many people in the world, they don't have access to sophisticated finical tools. What this affects people in a very day to day operation. Our first issuance, our first security token is and was a micro leading pool for developing world farmers. Developing world farmers see interest rates anywhere from 80 to 200% based on very informal lending models associated with this. Bringing sophisticated, low cost, securities lending models all the way to end of the world changes lives, radically.
So when you can do these things with the global reach of blockchain we can transform economies in ways that people can't even imagine. That kind of things that affect that relief organization hope to do we think are going to be possible in the near future. So it's radically different sense about what is about to happen here.
Amazing, so given all these different things that security tokens can accomplish and places they can have an impact where do you see the industry going? Is it, what is your picture of it in maybe 18 months.
There's a lot of maturing to be done. There's a couple key issues that folks are going to need to address at scale, custody is one of those to reach full maturity in this. But you will see I'm confident with in 5 year probably with in 2, almost all private placements following this path. And obviously that's tremendous value. There's significant value to investors in this path. Another significant benefit that we didn't talk about is much lower cost operations. This automates because you're built on transparent immutable ledger, all of the government report functions, all of the transfer agent functions become very efficient and easy to do.
What that means is it drives substantially down the cost of doing an offering. So that allows a lot more innovation in the space. The big problem with securitization in 2008, aside from lack of transparency, was too big to fail mindset, where you had a hundred billion dollar value securitized interests. When they failed, it cause systemic issues. When you can drive down the cost of taking an offering to market such that you can have a mortgage back security offering at the 5 million dollar, 50 million dollar level and where folks can innovate in the efficient at the level at which they put together these portfolios cause you've made the cost so low you see a decrease in the total cost of capital and that's a big deal ahead.
Amazing. Okay so finally any comment on the security token Academy as we try to cover and facilitate the industry?
So look across the board, the folks that are engaged in security token offering are taking on an ambitious task here of revolutionizing the way that finance is done. It requires us all to work together. There are many players in this space, there needs to be many players. There's many complex problems that need to be addresses. We need to work together to address these. Major impact on everything we do, is quite possible if we work as a team. That requires folks like security token academy that are educating and just as much helping us all come together and find each other and find out about how we can work together. So we really appreciate the opportunity to use this forum to get our message out and we look forward to folks that are interested in partnering. To them coming our way and we'll certainly go to meet them as we look to change the world.
Fantastic well we're happy to help that process. So Dan Doney we wish you and everybody at Securrency the best of luck and can't wait to have you back.
Thanks Adam appreciate it.
Okay you can find out more about Securrency by visiting their website, Securrency.com.
SecurityTokenAcademy.com is a platform for information about the new world of Security Tokens. We are not a registered broker-dealer or investment advisor. We are not a Security Token or blockchain platform, nor can you purchase or invest through our website. We do not offer investment or purchase advice; nor do we endorse or recommend purchases or investments in any Security Token, and we don’t tell you if any purchase or investment is suitable for you. Additionally all investments entail risk, and investments in start-ups as well as Security Tokens involve a potentially greater risk.
Copyright © 2018 SecurityTokenAcademy.com®. All Rights Reserved.