Building on the blockchain since 2013 - Mason has built custom wallet infrastructure from the ground up, and helped scale BitGo’s multi-signature wallet platform up to $1 Billion in transactions per month. In 2016 he launched the world’s first multi-signature web wallet on the Ethereum platform, Ether.li. While at BitGo he architected and prototyped the cold storage infrastructure for the blockchain launched by the Royal Mint of England.
Tokensoft is a technology platform that enables small businesses, enterprises, and institutions to meet compliance requirements for blockchain-based securities at issuance, distribution and exchange. The TokenSoft platform enables its clients to meet banking, securities and tax requirements in over 50 countries. Current and past clients include Hedera Hashgraph, The Tezos Foundation and Andra Capital.
Hi, I’m Adam Chapnick with The Security Token Academy. Today, we are pleased to bring you a corporate member interview with TokenSoft. The company is a Gold Corporate Member of The Security Token Academy. TokenSoft is a primary issuance and compliance platform enabling the issuance and distribution of tokenized securities. In this corporate member interview, we’ll be speaking with none other than Mason Borda, the CEO of TokenSoft. Mason joins me now in studio. It’s great to have you here today. Welcome back.
Thanks so much for having me.
First of all, for everybody who either has forgotten since the last time you were here or hasn’t had the opportunity yet to hear about it, just give us an overview of, what is TokenSoft? How did it come to be?
We’re a technology platform and we help issuers of security tokens, issuers that are seeking to tokenize real estate funds, equity, get through the primary issuance process and we provide technology that helps them get through the ongoing management and compliance of the security token as these tokens go to transfer out into the world. That’s what we do our focus on. Cybersecurity, compliance, as well as scalability.
Amazing. Let’s pick one of those and kind of drill into that. You talked about compliance. How do you handle compliance at TokenSoft?
I think one thing that’s really interesting about security tokens is we’re taking existing financial infrastructure and financial instruments and rebuilding them up on the blockchain. One of the primary pieces of enabling that is compliance and making sure that your following all of the rules and regulations that you’re supposed to as an issuer of a security. We do that by speaking with our clients’ in-house compliance teams, perhaps we’ll have to speak with their law firm, their professional service firms. We have clients that work with Deloitte, PwC. We capture all of those regulatory requirements, whether they are banking regulations, securities regulations, or tax regulations. We package that into our platform, and then it’s automated from there out to a certain extent.
Incredible. You guys recently coined a new term, I think it’s new, KYB. Why don’t you give us the big reveal of, what is KYB? Why is it important? Why did you guys sort of roll that out?
I think most people are familiar with KYC, and so why do we have to do KYC? There’s a regulator out there called FinCEN that’s enforcing a regulation called The Bank Secrecy Act, which requires banks to collect a certain piece of information when they’re onboarding individuals as clients. When you go sign up for an account at Chase, they’re going to ask for your driver’s license, maybe a utility bill, just so they can ensure that they know who you are and that you’ve got your money through legitimate means, like by working at Security Token Academy.
That’s KYC, Know Your Customer?
Yeah, and that’s very individual based, and so recently FinCEN amended The Bank Secrecy Act with something called The FinCEN... The Final CDD Rule, and so what that says is that if you’re taking money from a financial institution, you also have to perform similar diligence on that institution. You do have to make sure that it’s a real entity that is valid, that is up and running properly, and you have to further ensure that you know who the beneficial owners of that entity are, and so you have to KYC the beneficial owners of that entity. It’s very complex, it’s very manual. It takes a long time to do. When we went out and did a survey and looked at what services are out there, because initially we didn’t want to build it, we found that on average it takes 10 days to process an entity through due diligence procedures and to do that verification.
We rolled out a service, and actually initially in July of last year when the rule went into effect, to streamline and automate some of the procedures that come into play when onboarding an entity and verifying those documents.
Got it, and so you called that in general KYB, and that’s stand for?
Know Your Business.
Know Your Business. You got to know your customer, you got to know your business. Good. TokenSoft has a new, I think it’s new, unique feature. It’s your TokenSoft Consulting Services. How is that related to what you do?
Before we engage with a client, we have to know exactly what they want, so we have to know their compliance requirements, their regulatory requirements, we have to know the timing and structuring of their sale. That’s information they provide to us. When we started working with larger financial institutions, we found that process to be a lot more complex, and so what our consulting services are a set of services that we provide where we go a little bit deeper with a large institution. Understand their requirements and take into account the various different departments that they have. We speak with all their folks internally, capture their requirements, and then package that into our services.
Due to the complexity, some of our services turn out a lot more complex or a lot more... they end up looking a little bit different than what we have today. We do have to take those requirements, repackage our technology so that we can deploy in these larger institutions. That’s what it’s about. It’s just making sure that we can meet the needs of these larger financial institutions just because they’re a little bit more complex.
It’s important to be nimble when you’re dealing with these sort of massive, immovable objects. I think you’re going to need to be a little bit flexible to do be able to help them do that. I think that’s great. There’s something called an ERC 1404 token. What is it? Why do we care? Why do you guys support it?
If you go out there and buy a stock in a company today, when you purchase that stock, it feels very simple and seamless, but in reality, there is about 10 different vendors in the back that enable that procedure to be seamless and they do that with a focus on compliance. The transfer of that security has to go through a bunch of compliance checks, and if it passes then you’re the rightful owner. When we started putting these securities on the blockchain, we ran into similar problems. The token needed to follow all of these compliance requirements, but there was no real way to do it.
At the time, there were a couple of standards out on the market. This was 2017. They were being talked about. Our token in early 2018, POLY and ST-20, and so we took a look. We did a survey. We took our clients’ compliance requirements. We looked at the standards. Realized we needed to do something slightly different. Something that spoke to the clients’ regulatory requirements. We made ERC 1404 and all it does is it helps us enforce the compliance requirements of our clients and to do that through technology, and that’s whether it’s banking and securities tax regulations and whether it’s domestic, international.
One interesting thing that it can do is for our clients that are launching on ERC 1404, we can help them enforce the requirement that Reg S securities do not transfer into the U.S. and to a U.S. person’s hands. That’s some of the interesting things that it can enforce.
That’s great. When people hear you talking about the ERC 1404 versus this other token, versus this, versus that, some of the people that watch are very versed in the regulations. They know about FinCEN. They might know about Reg S, but when it comes to the tokens or the blockchains, it’s a little bit new for them. Do you guys support any blockchain? Are there certain chains that you guys support? If there are certain ones, why?
Yeah, so we’re very client driven. If we get certain demand for certain blockchains, then we’re happy to help figure out how to make that happen. We really see our role as sort of a technology layer in between blockchains and regulations, and so as long as we can help provide that mapping and provide that confidence, then we’re happy to do so. In terms of supporting different blockchains, this is still sort of an art and the reason is the technology is still very young. When we started offering Ethereum services to our clients, we had to evaluate the blockchain and build a lot of the infrastructure to help make securities on the Ethereum blockchain possible. That meant things like building Knox Wallet, our cold storage custody solution for security tokens. That meant building out the ERC 1404 so we could have basically a permission network on a public blockchain because when you issue tokens you have to make sure that you KYC every person you’re giving tokens to.
That’s one of the things we look at is infrastructure there, and if not, can we build it? Another thing is the broader adoption of the blockchain. If we as a company are to support a certain blockchain, we’re basically putting our stamp of approval on it, and so it’s very important to us that this blockchain is also well received by the major infrastructure providers out there, and there is broad support.
It’s amazing to see. From where we sit, we see a lot of guys like you who are here at the dawn of an age, and you’re really sort of building the off-ramps from the highway. You’re building the side streets if you need to get to where someone lives. You’re building the actual roads to let people do what they need to do. It’s exciting to watch what you guys are doing and others.
You mentioned the Knox Wallet in that process. How has that gone? You talked about it when we spoke last time. How has that been received? Is it what you wanted it to accomplish?
Yeah. That’s something we deploy with all of our clients. I think out in the market it’s still very unique in that there still... if you look broadly at the market, there is no way to securely deploy these security tokens, so using Know Wallet is still the only way to deploy your token with the highest level of security in cold storage with multi-sig, with proper procedures and controls around it. I think that’s something our clients and our prospective clients really appreciate about us is that we provide that level of cybersecurity.
Do you want to mention, just sort elaborate on the things that you listed there? Like why they are better or important? You talked about cold storage, you talked about multi-sig. Can you explain why that’s important-
For a user of Knox Wallet, for people who might not understand it?
There’s some industry best practices that just came into play from the general blockchain space the past 10 years. Some of those pieces are multi-signature wallets, and that’s simply a wallet that requires multiple people to sign off on a transaction. You can think of it as for example a check with three owners and two signature lines. Two of those owners on that bank account that have to sign off on the check to authorize a transaction. We built similar technology on Ethereum. Actually built one of the first, or the first wallets that could enable multi-signature transactions on Ethereum. That’s similar technology that we’re bringing to security tokens, and the reason is if multiple people have to sign off on a transaction, now you have proper checks and balances for moving funds, or you have proper checks and balances for the movement of a security.
We took that package and we made it a little bit more secure, and so you could either sign these transactions online, and you can do it offline. The major reason that you wouldn’t want to do it online is because if your computer is connected to the internet, now you’re a suspect to malware, hackers can get to you, and the attack service is much larger. You take that signing completely offline and now the threat of malware is not there. The threat of hackers to a certain extent is not there-
Reduced for sure.
And so that’s sort of the mindset and ethos that we wanted to bring to security tokens, and that’ what’s possible with Knox Wallet.
It’s amazing. You guys have, like I said, have been kind of involved since the early days, the nascent days of the whole industry. You’ve had a really unique insight into what this has become, and it’s really starting to heat up now. What kind of trends are you seeing in the tokenization of things? Are you seeing anything from where you’re sitting?
Starting in 2017, we started to see a tokenized equity, we saw fund of funds, and we saw a lot of different style of funds enter the market. Now, we’re seeing up for registration a few 40 Act Funds. That’s been a consistent trend. One thing that also started trending was interest in real estate. Whether it was actually being tokenized or not, there was a lot of activity and talk around tokenizing real estate. I think the first phase of the security token space is going to be people tokenizing primitives, things they see out there already, equity funds, real estates, the basics.
The second phase that we’re not seeing quite yet but will probably happen within the next year is taking these primitives and packaging them up into more complex financial instruments. I think that layering is going to start to happen hopefully next year once these security tokens get out on the market. That’s what I see as the second phase and I think that’s where all the fun stuff is because that’s where we’re creating things that were not possible before because the technology is completely different than traditional financial markets.
Interesting. Well, the next time you come back you’ll have to tell us how the derivative market is going, whatever it is that becomes a more complex instrument. You mentioned real estate. You said that there’s been a lot of interest. If and when that starts to get uptaken, how will tokenization of real estate impact that industry do you think?
I think fundamentally what tokenization does is it enforces a shared set of business rules that are open source and anyone can see. When we put a token on the ERC 1404, we’re also defining all of the rules and requirements for the transfer of this token. Any paperwork that’s involved of a transfer of a security from one person to another or the transfer of ownership in real estate from one person to another can now be automated with things like the ERC 1404. I think that’s going to be one of the big reasons that people start tokenizing and it pulls people in. Not because of things you’ve heard out there like that enables liquidity, but I think the primary driver is going to be that it does drop the compliance cost involved in a transfer by a significant amount.
Interesting, so sort of the back office benefits are going to lead as opposed to the kind of sexy consumer supposed benefits. That’s interesting. Other than real estate, what other sectors or industries do you think could benefit or that you think will benefit from tokenization?
I think the banking industry in general, even apart from the tokenization aspect of it, will benefit just as a result of entering the space with modern technology. We’re streamlining a lot of the processes and procedures and making it a lot easier to enforce certain requirements or to obtain certain data. I think that the financial services industry as a whole is going to see a significant drop in compliance costs as a result of tokenization, and that’s just a result of moving from a paradigm of discretionary compliance, where everything is very paper based, very manual, and someone has to review a document before making sure it is signed, to moving towards a paradigm of preventative compliance.
If you can actually through a security token prevent a transfer from one person to another based on a shared set of business rules, I think that’s a lot more powerful than just directly tokenizing an asset. I think that’s where the value is for larger financial institutions.
I like that. Preventative compliance really says what it does. I like that a lot. You had mentioned Reg S a little while ago, so you guys are operating internationally. What are the challenges that you have discovered? I’m sure there are some.
Yeah. That’s just sort of the nature of the space. The technology inherently is very peer-to-peer, internationally globally accessible, and so as we’re putting financial instruments on top of the blockchain, it’s just the nature of it that we have to operate internationally. Even with our first client, we launched in 20-plus countries, helping to enforce the securities requirements. Make sure those countries-
It’s sort of only gotten more complex from there. Not only is there the country-by-country aspect of it, there’s also a conglomerate of banking, securities, and tax regulations that we have to help enforce. The banking regulations are fairly streamlined. That’s just things like KYC and KYB now, and then the securities regulations are slightly nuanced country by country, but they are generally the same rules just because it’s the same types of things they are trying to prevent. Then, with tax regulations, that’s the stuff that’s very different per client, and so that’s sort of the most complex thing that we help enforce, and then sometimes things can happen, like regulations can change.
Every few months it seems a different country passes a different regulation that pertains to security tokens in some form or fashion. Early on, we saw FINMA passed certain guidance for token issuers, that was February 2018, and GDPR went into effect May 2018 as well, and so we had to help get ourselves into GDPR compliance and help our clients get into GDPR compliance, and then the FinCEN CDD Rule went into effect and so that’s one of the challenges. By that same token, we also see regulators starting to ban security token offerings before they get out of hand so they can pass some regulations for them. As a company, we saw that in India, so one of our clients was offering in India and they had to stop doing so after the regulators said a few things that made the compliance team unhappy.
China also has banned security token offerings, and so that was another thing that we ran into that we had to help our clients enforce.
Since you have literally a global view of regulations, how is the SEC doing? Do you think they are right where they should be in terms of the amount of regulation? What they’re regulating? What they are choosing not to regulate? Or is there something missing? Or is there too much?
I think what we saw in Singapore and Switzerland was very interesting. Right as the issuances were heating up in 2017, they wanted to get ahead of it and passed... they worked to understand the technology and then they passed very clear and concise guidance for it. I think here in the U.S., I’m a huge fan of the way FinCEN has been regulating the U.S. markets traditionally, and I think that their guidance has been very, very concise, but at the same time, banking regulations are very binary. I’m either holding your funds or I’m not, and I either have to have a certain license if I am holding your funds or I don’t.
Securities laws are a lot more complex. I wish that the regulators had been a little quicker to sort of understand the technology and pass relevant guidance. I think it was February 2018 that Jay Clayton came out and said, “All ICOs should follow private placement regulations”, meaning that all ICOs should be done as security token offerings. That’s something that I wish happened a lot earlier because it would have slowed the space down a little bit and had them think a little bit and had them think a little bit more conservatively. I think maybe a little bit more speed would have been desired by the markets.
Got it. I think that’s definitely fair. Tell me about any news that you have coming up, any product offerings, anything you want to share about from TokenSoft. I can think of one thing, but I want to hear what you have to say first.
We have a few other pieces of infrastructure that we have built that we’ll be talking about soon.
There’s one major one that we haven’t built out yet that we’ll announce as well that’s a little bit different from what we’ve been traditionally doing, but we haven’t announced it yet. You’ll be the first to know.
We better be. My goodness, we are The Security Token Academy, for God’s sake. Tell us about what I want to talk about a little bit, which is, what is the significance of the Token Sail?
For our two-year anniversary, we’re really excited to be doing a Token Sail and that’s…
Token sail, S-A-I-L.
That’s right. S-A-I-L. To participate in the Token Sail, you do have to be an accredited investor because the Token Sail is only open to accredited investors.
That’s right. Accredited investors only, and if you do attend, I believe you will be giving out these exclusive hats. I’m not kidding, right?
Shop.tokensoft.io. Got it. I love it. Any goals the company has as you finish out the year 2019? Anything that you can talk about?
Yeah. In terms of what our clients are seeking to raise, we hit the 3 billion mark, so we’re very excited to get there.
We’ve hit some other milestones in terms of the size of our clients, so we’ll probably announce those soon, but the market is really picking up and we’re really excited to be here to help issuers of security tokens meet their goals.
Fantastic. What about for the industry at large? What does the Mason Borda crystal ball tell us all about maybe into 2020? Where is the security token industry headed?
I think there’s a lot of value in adapting our previous blockchain trends to the security token space, and so I think we sort of saw a lot of excitement early, 2017, 2018. Went quiet for a little bit, and so that’s when we started seeing financial institutions come in, experiment, see what value there was in tokenizing. I think not only are we going to see smaller outfits tokenizing like we have traditionally, I think we’re also going to see financial institutions being more vocal about what they’ve been doing. We’re also seeing a lot of very high-quality entrepreneurs enter the space, and that’s when you see the most interesting things. When more talented folks enter the space and try to see, “Okay, how can we package this to provide more value to the markets?”
Agreed. Well, as usual, Mason Borda, CEO of TokenSoft, it was great speaking with you today. Thanks for sharing with us all that is going on over there at TokenSoft and wish you guys all the best of luck.
Oh, thanks so much. Thanks for having me.
TokenSoft is a Gold Corporate Member of The Security Token Academy. To learn more, go to our website, securitytokenacademy.com, and click on the directory tab and select “Corporate Member”. For everyone here at The Security Token Academy, I’m Adam Chapnick. Thanks for watching.
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