Hey, everybody, it's me again Adam Chapnick with the security token academy. We're here at the Crypto Invest Summit in Los Angeles, and I'm joined by a very special guest we have today, the founder and CEO of BitFinance, Eli Blatt. Thanks for being with us.
Hey, thanks for having me.
Alright, so, before we get into the STO stuff that we love to talk about, tell us a little bit, for those who are watching that haven't encountered you guys yet, what is BitFinance?
So BitFinance is a robo-investment platform that makes it easy for investors of all classes to build a diversified portfolio of institutional-grade alternative assets literally in minutes. And, in doing so, we're going to massively expand the already $15 trillion market for alternatives to the 95% of investors worldwide that are currently prohibited from participating in that asset class due to a combination of regulatory factors, administration costs, and high minimums for participating in those kids of funds.
Right. So how are you doing that?
So we're leveraging both block-chain economics and block-chain technology to make this happen. So we have this magical new form of capitalization that has not been available previously to most investment companies that is a non-dilutive sale of tokens, which we're going to talk about soon. And so, we're going to use the capitalization proceeds from our security token offerings to fund the regulatory compliance which can be as much as $1 million or more to register a security for public offering, which is, ultimately, the main reason that 90% of U.S. investors who are not accredited investors are not able to participate in alternative funds because virtually all of those funds are offered under a Reg-D exemption and a Reg-S exemption for foreign investors. And so, we've incorporated as a public benefit corporation, which will help enable us to use those proceeds from our STO raise in order to register these funds for public offering. And that will expand the market to unaccredited investors.
But the reality is that even most accredited investors are not able, as a practical matter, to participate is because these Reg-D 506C, which most funds are issued under, have a 99 investor limit. And being limited to 99 investors essentially forces these funds to set high minimums for entry into the fund. Never less than $100,000, and the really good funds will have minimums in excess of a quarter million or $500,000. The average net-worth of an accredited investor is $2.4 million, and that's the mean. We all know how wealth is distributed in this country, so the mode is actually way lower. And so, as a practical matter, most accredited investors can't meet the minimums required to even participate in one of these funds, let alone create a diversified portfolio. And so, we're going to address that issue as well.
That's great. And just speaking anecdotally, I think even people who can meet those, that's just a scary number. They just don't want to. Especially in the new world that we talk about, let's wait and see.
Especially because in the world of alternatives, there are no financial advisors, there's no RIA unless you are a $10+ million wealth management customer, in which case your RIA can sell you private equity or hedge funds, you have no guidance. So even if you did want to make an investment like that, you're literally on your own, especially with the proliferation of all the scams and funds with high fees, you don't have the knowledge necessary to make an investment decision in an informed manner.
That's another issue we're addressing by curating the best funds by asset class and then packaging them together into one product for that asset class and set low minimums, which we'll be able to do because we've built our own funded ministration architecture using block-chain technology, we call it the Smart Fund Protocol, that will help us reduce the administration cost for funds, and that's another reason for the high minimums. Because you might think, "Well, why couldn't they just clone out ten funds instead of just having one fund with high minimums?" Well, it's because funded ministration companies, which are, invariably, outsourced, and of which there is actually a monopoly. One company has 90% of the back-end funded ministration, and then it is middle men administrators that actually handle the client relationships and do the reselling, but don't actually have the core technology that does the administration. They charge, typically, a minimum $30,000 a year per fund to do administration, which then goes to 25 BIPS after $100 million. So if you look at that math, you can't have a fund of 99 investors at $25,000 per investor, because at $2.5 million, $30,000 a year, the math doesn't make sense.
Right, interesting. We have never heard someone game that out for us here on the show before. So, this is great. Now, for the caveman, are you talking about creating a scenario where I, or User, would invest in your tokens, and those would, in turn, own parts of things? Or am I going through you to invest directly in all of the other funds?
That's a great question. So, we are actually not tokenizing assets right now, it's not talked a lot about, but in the United States right now, tokenization of assets is not really recognized by relevant authorities as a transfer of assets. And if you look up most of these tokenized offerings, they're all available only to foreign investors. In the United States, if you tokenize real estate and I sell you my token, it's not clear from the standpoint of U.S. ownership law of assets that I've transferred that underlying asset to you. So it's a little bit of an important wrinkle in asset tokenization.
So what we have, is we actually have two tokens that we're using, which I think is going to be an increasingly popular route. The first token is the capitalization token, it functions like a utility token, but I don't use that term because there's a misconception that a token is either a utility token or a security token simply because the word "utility" or "security" comes before the word "token", but they are not, in fact, a mutually exclusive dichotomy. Most utility tokens have been securities in the eyes of the U.S. government. In fact, the former chairman of the SEC was quoted as saying, "Everything I've seen is a security." So we call it an access token. It is a token that has no underlying value, you can't really do technical analysis on it because it doesn't correlate to any hard-fixed assets behind it. We can discount it, we can give some to the team, and that is our access token that allows users to unlock the products and services that they want. So it's a licensing token, essentially. You want to unlock our cryptocurrency asset class? You stake a certain number of those tokens. You want to unlock our real estate class? Stake a certain number of tokens. If you're a fund and you want to use our Funded Ministration Protocol, stake a certain number of tokens. That token is always staked, never spent. It's essentially maintaining an investment in that token.
And then we have a second token that's a payment token that is the currency of the BitFinance ecosystem. So say you unlocked real estate with the access token staking it, and then you wanted to purchase $100,000 of inventory in the real estate fund, you would use the payment token for that, and we will offer a frictionless fiat route to do that where we'll charge you the exchange fee, we'll buy the token for you, and it's totally black-boxed, so your grandmother could do it having no idea what tokens are. Or if you're savvy and you've got Bitcoin, you've got Othera, then you can just transfer it into our platform, exchange yourself fee-free into the token, and then use the token to purchase the product you want.
And it's an interesting model because each of the tokens has fundamentally different tokenomics that I've actually designed. I have a longstanding interest in behavioral finance, I'm an anthropologist by training, but becoming an investor, I got very interested in the behavior of financial decisions. So the first token is purely supply-demand-scarcity model. There's a fixed number of tokens and each time we introduce a new product or service, there are now fewer number of users that can unlock each of our products and services because now there's an extra service and the same number of tokens. So this creates forced scarcity in the supply relative to the demand. So as long as you assume fixed demand for our products and services, we should have upward pressure on the price of the token as we introduce new products and services.
The payment token has a totally different economics. We are not giving any away, we are not discounting it, although we are encouraging early purchase of that token by incentivizing them with airdrops of the access token. We're not discounting with cash the payment token, 100% proceeds of the payment token sales go into what we call our investment endowment, and then that endowment purchases the fund inventory that then becomes our products which we resell. And so, therefore, one would imagine that if you're an investor and you're looking at what's the right price for that payment token, you're going to look at what's the net asset value of that investment endowment, how many tokens are out there, and just like you would value a traditional security with fundamental technical analysis, you could basically say, "Alright, $100 million of inventory, 100 million tokens, the token should be $1 plus or minus my speculation on future pipeline, etc.."
And so this creates an interesting wrinkle because it sort of behaves like an asset token because people are going to look at the amount of product that's available for redemption with the token, but the token doesn't legally represent a claim against BitFinance as the issuer, which is what defines an asset token. And so there's two ways you can actually use our payment token, you could actually use it as the currency to buy investment inventory, in which case, essentially, you're making a bet on that asset class, I'm making a bet on real estate or I'm making a bet on alternative energy. Or you might say, "I'm just going to make a bet on BitFinance's performance across these asset classes, and I'm going to hold the token, retain total equity," and the token should correlate with the net asset value of all of our products. It's a really innovative model.
It is, wow, okay. So, let's shift gears a minute to how you've decided to finance your company, you're using something that we love here at the Token Academy, why did you decide to go that route?
Well, I think in the current market, it's not so much a decision as it's an inevitable forced function. I think it's technically possible to launch a token that the government would consider to be not a security, so for example, if American Airlines decided to tokenize American Advantage Points, it wouldn't automatically become a security. But, given that companies mostly want to use these tokens as some form of means of capitalization, and that that typically involves a quid pro quo with the purchaser of the token, where by that purchaser the token is going to expect some type of appreciation or gain under the terms of the Howey Test, that pretty much backs you into a corner.
So as a practical matter, if your goal is to capitalize a business in any way, you're going to be limited to being a security token, and frankly, I don't think that's a bad thing. You hear a lot of talk about the lock-up, but the lock-up is only for sales to non-accredited investors, and I think there's going to be plenty of velocity among accredited investors. I mean, just look at what I talked about earlier. The market for alternatives is all accredited and foreign investors, and it's a $15 trillion market. There are 12.4 million U.S. accredited investors, and no restrictions on resale to foreign investors. If you're itching for liquidity, there's going to be a market once the security token exchanges are online. Especially now with NASDAQ announcing that they are going to have an exchange for security tokens, I think that's a real harbinger for things to come.
Oh, absolutely. So what do you think is the friction that still exists? Where do things need to get oiled up? Is it in the regulatory clarity? Is it in the technical underpinnings? Is it just in people's comfort with this new weird thing that's called "tokens"? What is it?
It's a little bit of all of them, but I actually don't think it's regulatory so much. There's a misnomer that we don't have the regulations needed, we've been selling securities in this country for over 100 years, they've been regulated by the U.S. government since the Securities Act of 1933. So whether that security is a stock certificate printed on the back of a napkin or is a digital token is sort-of irrelevant.
The reason that there was so much hoopla and why the SAFT got such a bad reputation, and for the record, we're going to use the SAFT, there is nothing wrong with the SAFT...
That's a Simple Agreement for Future Tokens.
Cooley had been using that early on, and I believe something like 70 or 80 subpoenas got issues, and a lot of people are talking to me like, "Oh, isn't the SAFT taboo?" There's nothing wrong with the SAFT, the problem there is that they used the SAFT, but they tried to take the position that the tokens and the contracts to sell the tokens were not securities, and so they didn't follow the Securities Law. If you follow the Securities Law, you work with the securities lawyer who knows what they're doing, and we're using Dan Viola from Sadis & Goldberg who worked with T-0 on their $140 million raise, who knows what he's doing, there's no issue with using a SAFT or issuing a security token.
Right. If you believe what you just said a minute ago where the share or equity is the same as a token, it's just a digital form, the widely accepted SAFE agreement, which is what the SAFT is built on, everybody has no problem with that, so it's really literally the same thing.
And so to answer your question, I think the number one obstacle or remaining cause of concern that's depressing the market for security tokens right now is the fact that there aren't really any security token exchanges online, and there's basically zero trading velocity for the token. But I think with announcements like coming out of NASDAQ with T-0 not only raising $140 million on their STO, but closing $200 million on a billion dollar evaluation from Chinese private equity.
Yup, and it becomes tradable in January, which is a fairly short lock-up. I think we're going to see a major boom, actually. You just had the announcement, also, that Yale is making a $40 million investment into cryptocurrencies and digital assets. Harvard also, MIT. So the writing is on the wall. I think Fidelity also announced today that they're going to start offering cryptocurrencies. So, as Bob Dylan once said, "You don't need a weatherman to know which way the wind blows." And the wind blows toward digital tokens right now.
I love it. Okay. So, looking into your crystal ball, what's it going to look like at the end of 2019? Or, you could do it another way, when is it going to tip? When is it going to be that people are going to think it's very quaint that anybody ever issued equity without a token, that there was ever a system?
Well, I'm a scientist, and not a soothsayer, so I'll try to use the data and not the crystal ball. But again, I think it's once we hit the critical mass of security token exchanges that provide the liquidity. That's the real concern right now is, "Great, I buy one of these tokens, what can I do with it?" And so, I think that's going to be happening in the first half of 2019, and if I did have to venture a prediction by the end of 2019, I think, and I've stated this in some of my written pieces, that we will see a second wave of token sale boom that is going to actually dwarf the first one because it will involve institutional players: the big banks, the big funds.
If you look at the end of 2017, it was exciting for people in the crypto-community, the Bitcoin Bros were making out like bandits, but serious, savvy, and institutional investors were looking at that and saying, "Not me. Growth like that is not sustainable, it's scary, it's a sign of a tulip bulb type market." Now we're seeing a cryptocurrency market that feels less manipulated, there's still some manipulation going on, but certainly with the introduction of the future's trading and people being able to short Bitcoin, and having just more sophisticated means and processes in trading. And still volatility, but not at the level that we saw previously, nor with the hyper-growth that we saw previously. I think that's a big reason that you are now starting to see these blue chip financial institutions and universities making major bets. And that's a good thing for the industry.
Amen, I love it. Alright, well Eli, thank you so much for joining us, come back again soon more often.
Thank you for having me, great.
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