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Expert Interview


 
Eric Gravengaard: The Importance of Blockchain in the Security Token Industry

Eric Gravengaard

Eric has fifteen years of buy-side experience in the financial industry. These experiences have included: prop trading, market making, and long-short and cryptocurrency hedge funds. He has completed his series 7, 27, 44 and 63 license tests. Eric attended MIT for his undergraduate degree and the University of Chicago for his MBA.

Transcript


 

Adam Chapnick:

It's Adam Chapnick with the Security Token Academy, and we're here with Eric Gravengaard, the CEO of Athena Blockchain. Thanks so much for being with us.

Eric Gravengaard:

Oh, thanks for having to me.

Adam Chapnick:

Alright, so Athena Blockchain is a company, maybe has fallen under the radar for some people watching. So, what is it that you do? You do a lot and it's very important. But, people may not know you.

Eric Gravengaard:

Yeah, within the Athena brand we do a lot.

Adam Chapnick:

Okay.

Eric Gravengaard:

I'll talk a little about Athena Blockchain does and then I'll tell you what other things I'm interested in.

Adam Chapnick:

Oh yeah, please. Even better.

Eric Gravengaard:

So, Athena Blockchain, was started earlier this year to be a boutique investment bank for blockchain companies. We looked at what was happening last year. We looked at all these companies issuing tokens. Did they represent equity? Did they represent income?

Adam Chapnick:

Right.

Eric Gravengaard:

Did they represent something wholly new? We didn't know. But we did know that if you're talking about securities, you have to be talking about broker dealers in the United States. So we very quietly started to enter the space. Bought a minority interest in the broker dealer and then started hiring bankers to do traditional banking work. So we're boutique investment bank and our main thesis is that paper stock certificates make no sense.

Adam Chapnick:

Right, I can say from experience.

Eric Gravengaard:

Right, we want everyone to issue digital tokens in leu of stock certificates. Why? Because there is a lot of benefits in terms of record keeping and everything else. I bought Facebook stock about a year before they went public.

Adam Chapnick:

Wow.

Eric Gravengaard:

You think, "wow" but like, so, yes.

Adam Chapnick:

I think wow. I think wow.

Eric Gravengaard:

I got 30 dollars a share.

Adam Chapnick:

That's fantastic.

Eric Gravengaard:

It was fantastic when it debuts at 40, but not so great when I'm still locked up and it's trading 25. But going through that process, and learning what Barry Silbert was doing with SecondMarket, helped to explain to me, like oh, there is a role for Blockchain. It's not settling trades on the Nasdaq. It's for settling these private securities with rooms full of lawyers, who don't really care, but they have to care because Facebook is paying them you know, whatever minimal wage they are, to sit in this room with an excel spreadsheet to say yah, this person does own these shares and now we're going to say he doesn't own them. And now Eric does. Erase those two lines and everyone fill out a lot of paper. And it's nonsense. So we don't believe in paper stock certificates. We believe in digital certificates. So we want to be the investment bank that helps companies issue those type of securities.

Adam Chapnick:

Great. Okay, Amazing. So now, that's Athena Blockchain. So as an investment, there was a lot of terms that came out of that and from where we sit, there's people who are fairly new to the regulated part of the market. So it's always fun to talk about some of the things that people take for granted. Like, what is a broker dealer? What is an investment banker? In terms of this; when you're making an issuance. What are those to roles? And obviously, they're not the same.

Eric Gravengaard:

Right, so very broadly broker dealers were created with the 34 Act. That sets up exchanges and says who's allowed to transact on exchanges and who is allowed to face the public on certain types of transactions. And so you have to register with the SEC. You have to be a member of a self-regulatory organization, which right now, the most important one is FINRA. Which is not a government agency, but it is a quasi-governmental in their role that they play writing roles. And that's what a broker dealer is. And within a broker dealer, you can have many different functions. From your traditional stock brokerage or your discount brokerage where you don't talk to a person, you just click on a website.

Adam Chapnick:

Right, E-TRADE.

Eric Gravengaard:

A trade happens. Now that trade might still happen because the computer calls down to the floor of the New York Stock Exchange and some guy's tablet says buy 500 shares of Google or Alphabet. And he types it into his screen, and it's like great, now you've bought it. Those are all the things broker dealers can do. On the other side of the broker dealer house are the investment bankers. And what we do as an investment bank is we help structure projects, we work with the issuer, we do due diligence on the issuer, so that everything we put out unto the street, we can stand behind. And then in some respects, we will underwrite. So we'll say this is a good security. We're buying some of it on our behalf and then we'll sell the rest of it to people on the streets. So we'll go out and solicit offers.

Adam Chapnick:

Got it.

Eric Gravengaard:

And we can either do that publicly or we can do that privately. It depends on the nature of the placement.

Adam Chapnick:

Right, so there is a ton of things that are happening there that are governed by the FINRA rules, the SEC rules, and I think a lot of early issuers are truly shocked to learn that they're not allowed to do any of those things unless a lot of boxes has been checked.

Eric Gravengaard:

I think everyone was a little bit confused because Bitcoin and Ethereum got out so quickly and quickly became, they're now considered, commodities. But there was no company behind, there is still no company behind Bitcoin.

Adam Chapnick:

Correct.

Eric Gravengaard:

And the extent that, the Ethereum foundation is behind Ethereum, like maybe even invested in the success in the Ethereum foundation? But a lot of the price run up in Ethereum had nothing to do with the Ethereum foundation's good work. So, I think you can make the case where that's not true. But a lot of these other projects, we're like well, you basically have to believe in me and my team, and if you like us, you should buy our token.

Adam Chapnick:

Yes.

Eric Gravengaard:

And that's a different offering. Well, you're kind of investing in this team. Even if it's not an ownership stake, if they all decided to exit scam, your token would be worthless because does that means anyone else is going to pick it up?

Adam Chapnick:

Right, and that's even sort of specifically eluted to and what maybe people haven't heard about but the Howey Test. In putting the faith in somebody else to make the value grow. So, at Athena you guys believe that the future is digital, obviously. Where do you see the biggest use cases, like at first? Or do you see it as a logical progression of use cases? Maybe not?

Eric Gravengaard:

I think there is a lot of things. So we got started and what our brand is maybe a little bit better known for is Bitcoin ATMS. And a Bitcoin ATM is exactly what you think it is. It's a machine. You walk up. 100 dollars goes in. Bitcoin goes to your mobile phone. And what we realized very quickly is that it's not for white libertarian nerds like myself. It's for people that want to transact in Bitcoin. Meaning they wouldn't want to spend their Bitcoin money immediately.

Adam Chapnick:

Yes.

Eric Gravengaard:

I want to invest in Bitcoin and I like it when I can have a pizza place will take a bitcoin for a slice of pizza but not very many pizza places are like that and it's honestly very inconvenient to pay with bitcoin.

Adam Chapnick:

Of course.

Eric Gravengaard:

What's really good for Bitcoin is when you're trying to do international eCommerce. So we were in Bogota last year at the Latin-American Bitcoin conference and we had a Bitcoin ATM setup and we very quickly realized, within the first hour of being there, that the sole function of that machine was for people to come in, out of the airport; They have no local currency, they realize they can't buy a cup of coffee with Bitcoin, they can't buy a cup of coffee with a dollar,be it's not accepted, and they were pouring bitcoin into our machine to get out 200 dollars of walking around money. And that's what Bitcoin is really good for. It's a universal currency that everyone could have. So whether, you are trying to buy a car part from a guy in China, or trying to get 100 dollars to walk around Columbia, Bitcoin is a great currency for that because it's decentralized and it lets you hop over all of those intermediary banks. Which in some cases just don't offer you access to your cash or don't offer you the functionality you want with your money.

Adam Chapnick:

Sure, or they're closed.

Eric Gravengaard:

Right, or they're closed.

Adam Chapnick:

That's the thing, right? Stores close, banks close, Bitcoin doesn't close. ATMS don't close. So, where do you see the future of security token's most exciting place. Is it going to be in the tokenization of assets like my house? I'm going to be able to sell my neighbor's 3% of my house?

Eric Gravengaard:

No one wants your house. Sorry. There's no equity for half of your house.

Adam Chapnick:

No, okay. So where is the exciting application.

Eric Gravengaard:

I think we're in such early innings right now that it's very hard to say. That said, I think there is a real use case for things that have fewer than 2000 investors.

Adam Chapnick:

Okay.

Eric Gravengaard:

Where they can build a community around the ownership of stocks or something else. And that investors can get some liquidity for that security. And it's not going to be great liquidity. I mean, if you're talking about tokenizing maybe a 100 unit condo building in Florida. You might have 300 investors. Most of them are retirees. They don't need to sell. Except for that one guy that really does want to sell. And so what does he do right now? He has to go to his attorney and say, okay, you put me in this thing, how are you going to get me out? Do you have any other clients that want to take my place? And the attorney's like, yeah I'll find somebody and that might take 6 months.

Adam Chapnick:

Yes.

Eric Gravengaard:

This tokenization allows that investor to go to an ATS broker dealer prove to them that he owns this asset. That attorney knows he owns the asset because he helped him get into it but no one else really does. The token will help him to prove that he's the owner, and then he can put up an offer to sell it. These are not going to be heavily traded. I can't imagine us saying, Oh, look who just moved in. Now we need to buy. Or there was really good foot traffic at the rental office today so therefor we should be buying up this development. Those things aren't going to be happening.

Adam Chapnick:

That's interesting. Yeah, that's a good observation.

Eric Gravengaard:

You're not going to get market makers to come in and say, yeah, we're a penny-wide, 10 percent of the building up. There's no market for that.

Adam Chapnick:

So, you guys are also a market maker? So that's a great term that we hear but nobody knows what that means. So, I mean, maybe they know it's a liquidity creator but, how? Why? Where? When?

Eric Gravengaard:

Right, so they think of market makers as those guys with the colorful jackets that sit in Chicago. We used to be the colorful guys that sat in Chicago. Still are in Chicago, with less colorful jackets now. But a market maker is simply someone willing to stand in a crowd and say that there's a price they'll buy something for and price that they'll sell it for. And in the case of digital assets, or really just any electronic market, it's people who have computers that can make up those same decisions. And they're indifferent to whether they buy next or sell next. And they're going make a fair price no matter what. Sometimes they have obligations to make prices and sometimes they don't. It really depends a lot on the market and the market microstructure. But that was our industry for a long time. It mostly in equity derivatives, and then it was in Bitcoin and just the currencies across different markets, where our computers stood in and said, there's a price at which I'll buy 10 bitcoin and a price I'll sell 10 bitcoin. We thought those were fair prices and people would trade with us and it seems to work out alright.

Adam Chapnick:

With respect to the Security Token world, how and why is a market maker incredibly critical. It's very, very important.

Eric Gravengaard:

When you own something, you want to know that there is a price you can sell it. And it may not be the world's best price, but you want to know if I need it to be gone tomorrow, there is a price. And that's natural part of price discovery. So now we can see prices. We can see it as their trading. Is the trading in between the prices? Is the trading only on one side of the prices? In which case, we may not be expressing the right value as a market maker. But in general, that's a critical role for markets to have. Otherwise you just say, there's a market for it, what price is it? No one knows. So everyone's disincented to be the first ones to make a move.

Adam Chapnick:

Exactly, they don't want to be in the wrong place.

Eric Gravengaard:

And so, you don't want to have the wrong probe. What would you buy that building for? Is a market of 10 million dollars at 20 million dollars appropriate? Well probably not. It's probably worth 200 million dollars.

Adam Chapnick:

Yeah, well you don't want to be the guy to make the wrong choice.

Eric Gravengaard:

You don't want to be the guy who made the wrong market price.

Adam Chapnick:

So, we would love to have you back and tell us more about all those things because they are so critical and we don't get enough people who understand the ins and outs of how that happens, why that happens, when It happens. So, definitely come back but thanks for joining us and telling us about what you guys do. We look forward to talking to you more.

Eric Gravengaard:

Thanks for having me for sure.