- Welcome everyone,
thanks for coming tonight.
We've just met, just before
the big (mumbles) (laughs)
That's what they say--
But we're blessed to
say we'll be protected
because we're crypto hands.
So welcome and everyone's really
looking forward to this panel tonight
because I think it's gonna be
an interesting conversation
with three leaders from
the industry about STO
so I'm gonna pass it over to John,
but first of all, Colleen
is hosting tonight.
She is an attorney at Sheppard Mullin,
a Structured Financial
Partner at Sheppard Mullin,
so if you've got any queries
or questions after the event
please grab her and also there's some of
her cards out there on the
table at registrations.
So I'm gonna pass it
over to you now, John,
and you can get the panelists
to introduce themselves.
- Yeah, sounds good, yeah ladies first,
let's have you introduce yourself,
and go ahead and start talking.
- Okay, hi, welcome everyone, nice to see
a good turnout tonight,
notwithstanding the
river of rain that's coming apparently.
So, yes, Colleen McDonald,
I'm a partner here
in the San Francisco
office at Sheppard Mullin.
I have been working in the securitization
area for 20 plus years.
I started back with autos and
credit cards and, Hi Robert,
and now I'm doing a little
bit more with Fintech clients
but still a lot of the tried and true
securities products, the asset batch.
But I'm fascinated to hear
from the guys tonight.
It's three leaders in the
industry and me, (laughs)
so welcome and look forward to
talking to everybody tonight.
- Thank you Colleen,
good to see you again.
So I'm Jamie Finn, President
and co-founder of Securitize.
We offer a primary assurance
of digital securities
and then we have a compliance protocol
for managing those
securities as they trade
on secondary marketplaces.
- Joshua Stein, CEO and
co-founder of Harbor,
similar to Securitize,
we're software to platform,
for primary assurances and then we're
blockchain protocol to make sure they
compliantly trade every time everywhere.
And then we also have registered reps
who work with a local broker dealer
and we also do some distribution.
I think it's interesting
that Hasselback securities background,
I think at some point we should
address that in the panel.
I think that's a particularly
good application,
Hasselback securities, in
fact our in-house counsel did
10 years of securitizing
Hasselback securities,
it's pretty awesome.
She got hired because she
gave us a great presentation
on how we should be tokenizing ABS's--
Her name's Liz Cain, she
was at SUNY Oxford as a kid.
And she gave a great
presentation on it, and we said,
"Okay, that's awesome, you're hired."
So, looking forward to it.
- Hello, my name's Mason, so
what our company does is we
help issuers of digital assets comply with
the relevant regulations when it comes to
banking securities and tax laws,
whether it's domestically or globally,
we help them comply
generally on a jurisdiction
per jurisdiction basis.
So we help them treat
their investors uniquely
based on where they're coming in.
And yeah, that's what we do.
- Which company?
- TokenSoft. I'm with Token Soft.
- Good job, good job.
I'm John Boitnott, I write
for Kink and Entrepreneur,
which I've been doing
that for about five years,
been working with (mumbles)
for the last year and half
doing the monitoring for
some of these panels.
Also do PR and marketing consulting,
so let me know if you need content or
anything related to PR.
Alright, so let's just sort of,
for those people in the
audience dipping their toes
into the securities
waters for the first time,
let's talk about, what are they?
How about that, what
makes them so special?
- So everyone's familiar with Bitcoin.
Bitcoin is a asset on
top of a block chain.
At some point people start
putting a Bitcoin address
on a website, raising money,
and giving out their own coin
that represented their company,
and it became a very
popular form of fundraising.
Over time people learned
that that was illegal to do
and they learned about securities laws,
and so people in that
industry learned over time
that that asset that they were issuing
was to be treated as a security,
and over time, today, people
are now issuing a secure coin
that is backed by things
like real estates,
things like L Peterson funds,
and we're seeing more and more assets.
So secure tokens, digital securities,
are digital assets that
are generally backed by
some sort of entity and they can go
trade settle on the block chain.
- I should also ask, what
are some of the differences
between the different asset classes there?
Are some easier to
tokenize earlier, later?
Go for it John.
- Sure, the different asset classes are
most of the same ones you
get in traditional finance.
There's real estate, there's
companies with private equity,
there are asset backed securities.
I think what's sort of
interesting probably
to some people in this
crowd is you start to get
either digitally made assets
or new types of assets
that live only on the block chain,
so you can create revenue bonds or revenue
classes of equity that
a share of the revenue
is coming off of these
block chain protocols.
How easy or hard it is to tokenize
really has to do with
what are the rule sets
and the rule sets depend
on the securities laws
underlying the type of security.
So a reit is gonna have
a different set of rules
and look differently than
a funded GP open structure,
there's a (mumbles) by country.
It also depends on the tax rules,
and the other things that
you're trying to control for.
I think if you step back,
what are all the things you
have to look at when you're
tokenizing a set of securities
is all the rules centering around
the who, the what, and the where.
Rules around who the
buyer and seller can be,
rules around what that
capitalization table
or ownership structure needs to look like,
and rules around where
the trade can occur.
- [John] Yes, Jamie.
- No I mean, (mumbles) (laughs).
- [John] Okay, Colleen, you?
- Well I'll just back up a little bit and
talk about historically,
what was going on with the ICOs,
I'm sure everybody lived through it,
but for a long time there was a hope that
the ICOs, the coins, could
be offered without having
to be registered under
securities laws, right?
And so, I think that the
securities regulators
got out in front of it pretty quickly,
I mean it was probably about
a year, year and a half,
of a whole bunch of ICO
offerings and then the
securities regulators
came out and said no,
that's not happening, it's a security,
and the reason why it's
a security because of the
Howey test which is a Supreme
Court decision from the 40s
that has a very common sense approach to
what is a security, what
is an investment contract.
It dealt with orange groves in Florida,
(mumbles), but orange groves.
But the basic takeaway is
that it's not the asset ...
Or the asset that you're
looking at the determines
whether or not something is a securities
or an investment contract, it's
what you do with that asset.
So an orange grove isn't in
and of itself a security,
but when you offer to
allow people to participate
in the profits from that orange grove,
then it becomes a security.
So with that fundamental basic test,
when you apply that to ICOs and
what was going on with the ICOs,
because there was an
expectation or a hope of profit
from the efforts of a third party,
which is the party that's
developing the enterprise
that's issuing the token, that became it,
it was pretty clear I think
for the regulators anyway,
that that was a security
and had to be registered
or had to find an exemption
from the securities laws
in the United States.
So that's the background.
- That's great, yeah, good.
You guys are obviously
helping companies tokenize,
what are some of the
biggest problems related to
that whole ICO process that you're seeing?
- Well, I mean I think that
one of the biggest problems
we see is when people
think of it as a good way
to raise capital in ICO.
So we deal with a lot of
companies that come at it,
and they're like, "Oh
well it's like an ICO,
"we're just gonna put it out there,
"raise a bunch of money,
it's gonna be great."
The reality is these
things are complicated,
they required real securities
lawyers to be involved,
putting together the offering
documents is complex,
and then taking yourself
through the whole process
will take, it's not a few days
to get all these things out.
And so as companies go
through that process
and understand how it all works,
they'll really start to understand
the complexity of what they're doing.
So that, for me, is the biggest
difference in the market.
- [John] Any thoughts
from you guys on that?
- Yeah, I do think it's the,
getting out of the ICO mindset.
So there was a time where,
you know, token, token, token,
and hot dumb money would
just rain from the skies,
and for good or for bad
those days are over.
So it's much more about the
investment fundamentals.
Tokenization is a great marketing angle,
you're gonna be able to talk to anybody
and get anybody to look at it.
It is a great format, particularly
for overseas investors.
You wanna be able to invest
to a software platform,
they don't wanna be faxing documents or
talking to some attorney a continent away
who's language they don't
speak on a different time zone.
And the liquidity is very attractive.
The ability to get in
a smaller check size,
to be able to trade, to structure it,
to get margin loans against
it, to use things like
dy/dx or Dharma or Blockport or
some of these other great technologies.
But fundamentally at the end of the day,
it's all about the investments.
So if you have a crap investment,
you tokenize, you have more liquid crap,
and any parent of a young
kid knows that's a bad deal.
God, you guys are a tough crowd,
I got two laughs off of that.
(crowd laughing)
I'm gonna end on a low note.
- I think the biggest
problem today is that there
is no infrastructure for these securities.
The problem is that we've
had the traditional markets
with the traditional
infrastructure and that's been
very well baked and has been
working well for a while,
but what we're doing now is
we're completely rebuilding
this infrastructure from the
ground up on block chains.
And so, I think one of the problems is
as we're building up we're
realizing a lot of those
core pieces that make the
financial markets operate
smoothly today, don't really exist.
So it's sort of like we're
building an infrastructure
underneath us as we move forward
and I think that's one of the
challenges with this space
is we did move really fast last year but
we're realizing there's a
lot more pieces that need to
come into place before this
can become a real market.
- You're saying we're kind of
in the proselytizing phase,
who said that, one of you guys said that.
- We were chatting earlier.
- Yeah, for sure, you guys are just
laying the foundations as you go.
So is there a time or
a preference, you know,
when a company is looking to tokenize,
that they should want to or need to
absolutely hook up with a
broker dealer or exchange?
What are your thoughts on that?
- So, the issuer does not
have to use a broker dealer,
they can sell their own securities.
It's a question of, if they
think they've already got
the investors largely lined up,
they probably don't need a broker dealer.
They may still want one for
some additional extra tease,
but if they need distribution,
they need to get this out for investors,
then you need someone who can sell it.
Most investments are sold not bought.
Somebody's gotta go out there and actually
counsel somebody and sell it to 'em.
What I do think, if you're
a company and you're gonna
tokenize equity in your start-up,
if you're a block chain
company, you oughta be,
you oughta be talking to the
assurances platforms early,
and figuring out, "Do
I need a broker dealer
"or can I do it myself,
what all is involved,
"what are the legal issues
I gotta think about?"
It is not rocket science,
but it does take some
forethought in terms of,
Okay, do I wanna sell this
widely and let it trade widely?
Okay, do I really wanna have
strangers on my cap table
and have access to my books and records?
How can I limit that?
What sorts of corporate
rights or pref rights
would I give them or not give them?
Do I wanna restrict a
group that can trade?
Okay, now I feel more comfortable about
having these folks on my cap table,
but on the other hand I'm
restricting liquidity,
how important is that to how I sell?
If I do reg D and I'm
raising a lot of money,
the ticket size is really high to get in.
If I do reg CF cause I
wanna drive engagement
with a bunch of retail investors,
I can only raise a million bucks,
which a lot of it's gonna
get chewed up on fees,
and then I gotta publish my
financials for three years.
Maybe I don't wanna do that.
If I'm a e-sports team, I probably really
wanna look at a reg CF
because it's less about
the capital I'm raising,
it's more about getting
an ownership mindset,
and driving some real fan
engagement with my team.
If I've got a successful series A and
I'm raising a series B, then it's about
tokenizing it to enable liquidity
amongst a much more
limited group of investors
and trying to get outside
of my traditional channels.
- Yeah, we see a variety
of different companies.
I think it's a product that's
suits series B companies.
It's not really a great
fundraising mechanism
if you're a start-up.
We see a lot of real estate
projects coming along as well,
and then we as a company
have done a lot of funds.
So I think of it as, the reason I got
into this space in the
beginning is because
a tokenized BC fund just made sense to me.
As an investor, I was like,
oh this makes a lot of sense,
because I don't normally have
access to that asset class.
And so in that process of learning
and getting that out there,
I think that's a really great
type of product in the space.
- Great, I wanted to go
to possibly talk about
something that, Colleen,
you and I talked about,
that's kind of about these three guys,
so it's gonna get a little unorthodox,
but help me out here.
So we talked earlier about
sort of laying the foundations
as we go and so, alright,
TokenSoft is starting its own
broker dealer kind of exchange
type of a thing, right?
Or is it associating, how does that work?
And then also, before you talk,
Securitize is doing something
sort of similar as well.
So let's just, sort of, hear about that,
and then I wanted to get your thoughts
on what that's about, too, Colleen.
- TokenSoft announced the
purchase of interests in
TokenSoft Global Markets,
and that's all I can say
about that right now.
- Okay, great, and then (laughs)
- So I mean (mumbles) we do
not have a broker dealer,
we don't raise money,
we don't participate in that part of it,
we don't have that type of business model.
So it's a very different approach,
we're just a pure software
to service business.
- Okay.
- Harbor, maybe.
- Harbor.
- Yeah, we're primarily
a technology platform.
We do have several licensed brokers who
hang their hat or when they're
selling they're doing it
as part of a different broker
dealer in the Bay area,
but we are not ourself a broker
dealer nor do we have one.
- [John] Okay, got it.
Alright, Colleen, our
idea, cradle to the grave,
do you think that it's not the real net,
or just to talk about
what I mean when I say
cradle to the grave as an idea.
Getting controversial here, oh my god.
- Well I think that one of the issues that
I've heard Jamie speak
of before and I'm sure
Mason and Joshua also agree that
liquidity is a problem,
right, in the market--
- [John] That was gonna be
my next question, but yeah.
- So if you think about,
how do you solve that?
If you have people who
love to sell the product,
you educate the market
about what's out there,
I think that some of the
securities exemptions
are great for trying to democratize and
bring more of the smaller
investors into the process.
So they wanna buy a piece of BC fund,
they could never do that if you had
an accredited investor standard, right?
You have to have so much money
to get in on the investments.
So I think that securities exemptions,
and then the fact that
some of the platforms that
are out there that are
bringing this compliance
so it makes it a little bit easier for
a company that wants to
go out and raise money
to comply with the tax law and comply with
other securities laws, et cetera.
For them to have an
exchange, I feel like that's
a natural progression of
availability for the market
and bolstering liquidity.
- Yeah, I mean, so, the
exchanges are coming.
We've already see Open Finance
which is a marketplace, not an exchange,
here in the US launch.
They have three or four
tokens trading already,
they're gonna be adding
bunch more shortly.
And then tZero is
actually launched as well.
And so one of the things we talk about is
when they continuum of liquidity,
so exchanges are definitely one place,
but as Josh mentioned, companies
like Blockboard or Dharma
offer debt, debt is
another type of liquidity,
you know, taking out loans.
So there's all sorts of this
kind of continuum of liquidity
that's enabled through
this, and I think that's
one of the most
interesting parts about it,
is you can have this securitized asset,
and then decide to trade
it, take a loan against it,
maybe sell it to somebody else directly.
So there's a lot of new things
that you can do very easily,
but like instant settlement,
not 40, 50, 60 days
with like 15 people involved.
It's literally, I decide it now,
I go to a website, and I can do it.
- I think it's worth clarifying,
how we think about these
block chains and liquidity.
Liquidity comes from buyers and sellers,
and just cause you digitize
a share in a company,
doesn't mean you have liquidity.
If people don't wanna buy it
or nobody wants to sell it,
you're gonna have zero liquidity.
What it's about is two things.
One, it's these software
platforms that allow you
to syndicate more widely.
You lower the check size, you put more
investors into a vehicle.
The lower the check size,
means more people can
trade in and out and they're gonna do so.
Secondly is, and more importantly,
the block chain aspect of it, is that,
you're removing all the friction to trade.
There are, I guarantee you,
private wealth managers
at Goldman Sachs and
JP Morgan and elsewhere
that haven't gotten
their clients into these
alt investments, these private securities
that are hard to trade or get out of.
They had a client that wanted to get out,
it's gonna take them months,
sometimes years to get 'em out,
they're phoning, faxing, and emailing,
you have a limited
group of counterparties.
When they do find somebody,
it's two to three weeks
of trading redlines, it's 10
to 20 grand to the lawyer.
Good for the lawyer's kids,
not good for the investor's.
Phew, tough crowd. (laughs)
And then finally take a
big hit on the valuation,
the liquidity discount.
The numbers I hear the most often for
high network individuals,
accredited investors,
is 40 to 60 percent.
So if you have $150000 investment,
you're lucky if you walk
away with 75 or 80 grand
six to nine months later.
It's not that you tokenize it and now
that stuff's trading in milliseconds,
it's not gonna happen that way.
If you look at the
investment that Harbor has
live right now, it's $21000 a share,
$21000 per tokenized security.
It's a single asset private reit
you're investing in a building,
so any $21000 ticket size,
people are not trading
that in milliseconds.
In a single asset, you
actually have to understand
the asset in the market,
that's gonna trade,
looking around the crowd
I think there's only
one or two people that are
gonna get this reference,
it's gonna trade like the
old NASDAQ pink sheets,
back when they were
actually printed on paper.
Dan Crestmen's nodding his head,
he knows what I'm referring to.
Those with the gray in their hair.
But what becomes really interesting is
other assets will trade more quickly,
so if you think of tokenized equity
in a block chain start up,
tokenized equity in an e-sports team,
that's gonna start to trade more rapidly,
that should trade on the exchange.
Stuff like tokenized reit,
most likely probably
trading over the counter.
But then what becomes more interesting is
a world in which you start
to tokenize a lot of assets,
you can think of the block chains,
like for the technical people,
it's like the DNS of assets,
the domain name system
in individual assets,
now you can start to get some
really interesting things.
So imagine a world in which,
I'll use a real estate example,
you start to tokenize on an
individual building bases
class A office around the
greater New York area.
I can then buy a token in an
individual class A building.
Okay, that's kind of interesting but,
I gotta know that building,
I gotta know who the leaseholders are,
there's a lot of due diligence,
it's not gonna trade that rapidly.
It's gonna be real estate professionals.
But now, I've tokenized
a bunch of buildings,
so I buy one token from each
of the class A buildings
downtown and I can use the set and
create one token that binds them all up.
I now have a microcustom ETF.
I have a downtown class A ETF.
You cannot do that today, period.
I can do the same for midtown,
I can do the same for uptown,
the same for the boroughs,
using dy/dx I can go long
downtown, short midtown.
Using the Dharma protocol and Blockport
I can very efficiently get
loans against those assets
using Maker Dao I'm getting a margin loan
at Dai in a stablecoin.
I can tokenize real estate
becomes the gold standard
for multi-collateral
Dai Maker Dao contracts
because it is the most stable asset
you're gonna get out there as collateral.
You start to be able to do
things you couldn't do before.
People talk about
tokenizing individual loans,
that is way down the road.
These platforms, the ways
in which we're making
legal documents cookie cutter,
drive a lot of cost and friction out,
but there's no ways economic
to tokenize a $200000 asset.
Period, end of story for a while.
But now there are folks who
own lots of these homes,
residential homes.
You start to batch up
100, 200 of em at a time,
call it anywhere from 20 to
50 million dollars in assets,
you can tokenize it.
I can now make a bet on a zip code level
on residential real estate.
I live in Loren, I still
rent because I wasn't able to
get in at the right time and then
the value of the house I rented doubled,
I still can't get in, unless Harbor hits.
But I would have bought up something that
tracked the residential
real estate in rent
because that, I knew,
was the right investment,
and it would have hedged
my risk as a renter.
Similarly, if I bought a
home, I can hedge my risk
and lay it off with other
instruments against it.
If I'm a home developer and
I'm going big in an area,
I can hedge my risk, I can increase it.
If you think about what was
going on with HQ2 for Amazon
and where's it going, where is it not?
Is it still going to Queens, isn't it?
We have seen some really
interesting spikes in trading
in logistics and residential
and other buildings
around those announcements.
Fundamentally, what we're about,
is un-bundling and re-bundling.
Un-bundling things into smaller
bits, smaller check sizes,
what we call tokens, allowing
them to trade freely,
so that you can re-bundle
them in interesting ways,
to unlock financial possibilities
you couldn't before.
- Okay, so that's interesting,
but what this is all about
is unlocking more liquidity,
right, so over the next two,
three, four, five years,
what needs to happen in terms of,
how do we access liquidity?
- Yeah, I think we can
still probably point to how
the infrastructure still isn't there yet.
I think obviously if there was then the
traditional players in the
market would be able to plug in,
but I think two things need to happen.
The infrastructure needs to build out,
so we do need those traditional
pieces of infrastructure
to exist so the appropriate
people can plug in,
into the network.
I think the other thing is the
market still isn't there yet,
the market doesn't exist.
People don't know what
security tokens are,
they don't know why they're interesting.
And I think that will probably take about
three to five years to come to fruition.
But yeah, I think those two things need to
come about for this to work.
- [John] Let's get thoughts
from all of you guys on that.
Barriers that currently
exist, what needs to change.
- So I think that one of
the infrastructure pieces
that's missing is a custodian product
that makes sense for a
digital security, right.
So all of the products in the market today
that are designed for crypto,
like hard core crypto,
where you could lose your private key
and then all your money's gone,
that's not needed in this space at all,
so it's a very different product.
And then we need real
institutions, so Fidelity,
if they had a product that
would be really interesting,
but some of the smaller
companies that are doing this,
even great companies like Bitgo
who you guys are working with,
they're just no who these traditional
financial institutions work with today.
And so there's an educational piece
and then you kinda have to jump the shark
and get them engaged and
then bringing investors in.
Like right now, the word
token is a bit poisoned
thanks to ICOs and that
really really hurts
the capital formation side
because people think crypto,
they think Bitcoin,
and they see it in a very negative light,
and so that hurts the
sales of these things.
When as an asset, it's a better--
it's hard to argue that a
piece of paper that you sign
is better than a digital
contract that's visible
on a public budget, like
that you could lose,
it's just a piece of paper, right?
And you all refer to it like
email versus snail mail,
and so it's the same thing.
It's like, isn't email
better than mail in the post,
yeah absolutely.
So this'll get there but it's
gonna take time as it grows.
- Yeah, we were talking about,
you had mentioned about words matter,
that there's a miscommunication
between the people
who are trying to sell these products,
and the people who might buy them.
Can you talk a little bit about that?
- Yeah, I mean, personally
I'd love to see us
get rid of the word wallet.
I think wallets are the
wrong word, they're accounts.
You know, people have accounts,
that's how people think about investments
and so there's really
fundamental things like that
that we aren't incorporating
and we're trying to
bring these traditional
crypto words into finance,
and the finance guys just don't get it,
and guess what,
millennials are not running
hundreds of millions of dollars right now.
Once they do, those words will make sense,
but right now that's not the case.
- [John] Think about
some of that, Colleen.
I have a question about regulation
after that for you, too.
- You get the easy ones, right? (laughs)
- No, I was really thinking
as these guys were talking
about more of an international
conservation around
the different regulators
and them getting together
and how important that piece is,
and I don't know how
long that's gonna take.
- Yeah, I'd chip in on that one.
- Oh yeah, please.
- So we've been working
with some other countries,
so there was an
announcement recently around
some work we've been doing in Thailand.
So we've been working with
the regulator in Thailand
and our technology stack
to help them understand it,
help them understand what's
possible and what they can do,
and they're very engaged with it.
They have their own country-specific rules
they wanna implement now based on
understanding the technology,
and in a smart contract you could do it,
and so when you have a proactive country
that wants to do this, they can engage
and then all the platforms can support
those rules very quickly.
- [John] Yeah, as far
as regulators, I mean,
they're dealing with technology too,
what kind of a struggle is it for them,
what are some of the
problems that regulators face
when it comes to keeping
up with the technology?
- I just wanna make a
real quick comment cause
we sat down with a number
of high level folks
at the SEC and went over it in detail.
I had found them very pro-innovation
and there was a deep level of
technological sophistication,
even amongst folks,
like high ranking folks
in corporate finance
or trading the markets,
people, not just their
technical folks, they got it.
There was no, we went in on a deep level,
and I was just very impressed,
on a technical level,
on a regulatory level,
on how they thought it through,
they were very open, it
was very good conversation.
We had 14 folks from
deputy director level,
up to the deputy director level
and they were very engaged,
and we met with regulators in
a number of other countries,
often in Germany, folks from the Singapore
monetary authority and elsewhere,
and I'd say on the
whole it's very similar.
There are a few pockets here and there,
in the US and elsewhere,
of some regulators who
sort of, their eyes roll and
they light their hair on fire,
and run screaming from the room,
but that's the exception of the rule.
- Yeah, one thing we try
to do really early on,
is just be very proactive about
reaching out to regulators
and being helpful.
One of my concerns was, if
more guidance is to come out,
if more enforcement
actions are gonna come out,
do the regulators actually understand
the technological risks?
It's very easy to pass
guidance that, perhaps,
increases diverse security risks.
One thing that the
money transmissions laws
did really well, whether it
was by accident or on purpose,
was it actually forced everyone to use,
what's called in cyber security,
edged security concepts.
So money transmission laws
actually helped enhance
the security of the infrastructure,
so the reason your metamask
wallet encrypts and decrypts
the key on the client side in the browser
is so the company won't have to comply
with money transmission
laws and at the same time
it enhances the security
of what they're doing.
So we started being very proactive
and reaching out to
regulators here in the US
and doing tech ops, and
so that accidentally
turned into us becoming
almost a consulting arm
and having to, sort of,
inform on various topics,
and we're very happy to do that.
So if you're a regulator
and you're listening,
always feel free to drop me an email
and I'll be happy to swing by.
- [John] Any thoughts Colleen?
- No, I would just say
from what I have read
recently on the SEC's
website, I think that
they have a new czar of digital,
you know, digital
currency and block chain,
I think I forget the title,
but they are very engaged,
and they invite people to come in,
not just to talk about, to educate them,
but also if you have a new product
and you want to, you
know, there's a little
bit of a push pull there in terms of like,
do you put your head into
the mouth of the lion?
I think that people are
concerned that they have
maybe that specific innovative product.
But I think that they are very engaged
and they want to learn the technology,
so that makes it a better
opportunity to really (mumbles).
- Talking to, I think you, Jamie,
I'm not sure, I could have it wrong,
but you said that there's
more of an appetite from,
I see you guys dealing with
a lot of smaller companies
that are attempting to
tokenize or what have you,
but there's more of an
appetite for innovation
than there is for regulation,
or there has been in the past,
but you're starting to
see a bit of a change,
and so I wanted to get you
guys to talk about what
you're seeing there and how
that's looking going forward.
Like, are companies actually understanding
regulation better or maybe
be able to handle it better?
- I think so, I think last year we had,
it was sort of like, phone
call after phone calL
with people trying to
get these offerings live
so that they could raise
hundreds of millions of dollars
overnight, and I think what's happened,
is the market's kind of calmed down,
and people are understanding
that, actually,
you can't just write a white paper
and raise a big pile
of money, you now need
to go to a real formal process,
and so that's been the most
fundamental ship we've seen,
and then in our business,
as you bring customers on,
learn and see what really
performs and what works,
you find the right match
of companies for the space,
so that's also good on our side,
understanding who's gonna
be successful with this,
and if they've got the right team.
Cause as you said, you
have to sell these things,
and it's not easy to sell securities
cause there's a lot of
great deals out there
and most of them aren't tokens.
- [John] Any other thoughts, guys?
So basically it's really
true, people are starting to
really comply with regulations and
it's having a positive effect?
- Yeah, it went from scorn to skepticism,
to grudging acceptance,
I think we're at the
grudging acceptance stage.
- [John] It sounds like the
stage is agreed (mumbles).
- I think at first it
was a lot of start ups
in this space that were
trying to take advantage of
this new form of fundraising,
and the block chain space
is probably one of the few
spaces where you can't really
move fast and break things.
And the reason is it's very
easy to do illegal things,
because now there's
money, there's securities,
it's really easy to move them around,
and if you approach it with
too much of a growth mindset
it's very easy to do something illegal.
So I think what we've seen this year
is more and more mature teams,
sort of, ironing the space
and most of our clients
are street entrepreneurs
or career CEOs and they're
generally familiar with,
they're referring to counsel on
a lot of these complex matters,
and I think the good thing is
we're seeing more and more of
these types of people entering the market,
and so they do bring
more mature perspective,
they do ask first, you know,
how should I be doing this,
what should I be doing,
and then going and doing it.
So I think that mentality
is good for the space.
- Any thoughts from you guys on that?
As far as a killer app, that's something
you and I talked about,
what is that rooted in,
what would it be rooted
it, how could it happen?
It's all pure speculation at
this point, but, you know,
something that would
come along that would get
a lot of liquidity?
What might that look
like? Pure speculation.
- Yeah, years from now.
So the space is so very new.
It was just the summer of 2017 when
law firms started figuring
out that these were securities
and they started helping companies
launch these as securities.
And then security tokens came about
around that same period of time
and I think one thing I keep
having to remind people of
is that the market for these
tokens isn't there yet.
And the reason is we still
haven't figured out that,
that killer app, we haven't figured out
what is actually great about these tokens.
And so in order to
achieve some sanity there
what I generally tell
people is there's two things
that are fundamentally possible today
that weren't before.
So one is, that these
digital securities came out,
settle 24/7, traditional
markets are nine to five,
maybe there's some after hour trading but
now you can actually
settle these things 24/7.
The other fundamental paradigm shift is
we've sort of, we've almost forced lawyers
to figure out global securities laws,
and so now we can actually
have these sales occur
on a much more global
basis, and so, I think,
if a killer app does come
to fruition at some point,
I think it's gonna be
from a rapid iteration
on these two concepts,
cause I think these are the two things
that are fundamentally different
than traditional markets
and where the innovation
actually does exist.
- [John] What about, say, a
company isn't able to really
find traction, or isn't in an
appropriate part of market,
that, for the United States,
but something in India,
it might work better in India.
One of you guys talked to me about how,
I think it might have been you, Josh,
about, no it wasn't you, it was you Jamie.
- Sure.
- [John] Yeah, I can't remember, but,
sort of like, there might be a situation
in three to five years where
there can be some companies
that can make this rapid shift.
and already there's an African wallet,
sorry to use the word wallet,
there's an African wallet
that just didn't work out.
Tell me the story of that
and how it may exist in the future
when we go in to a different country.
- So I think we were talking about,
M-Pesa, which is a product
in Africa around payments.
So technology can
develop much more quickly
when it's designed, really, with the user,
and with the capabilities
they have in their hands,
and so M-Pesa was this
way to make payments,
basically using text messages,
which was super innovative
and way far ahead of
what the US or Europe had
at that point in time,
and actually in Africa
we've seen a few deals,
and in fact, one of the
countries has approached us
about land there, which
is really interesting.
But again, these are
exploratory conversations
that folks are having,
and they're trying to understand it.
I do think you can create,
it's not really a killer app,
it's just a way better product.
Like, the stuff Josh was talking about,
you know, packaging up
things is really fantastic,
but you can't do it today.
The ability to move things
around and settle quickly
is transformative, like
settlement and clearance
happening instantly is transformative.
The 24/7 markets, isn't
probably gonna happen,
like CZ Roch announced
they're only giving 95,
kind of a banker on this, but nonetheless,
eventually we'll see that and we'll see
kind of, multiple markets who
follow the sound and trade it.
- Sounds good.
If you could wave a magic wand,
it was the magic wand question.
So we'll start with you,
Jamie, and then you guys,
if you could wave a magic
wand what would you change
about the regulatory
environment currently?
- I'd like to see investor counts go up.
I have no problem with the
accreditation threshold,
I think that makes sense.
I think good investments
being vetted by folks who
spend more time on this
make a lot of sense.
But the 2000 investment threshold for
an operating business is
very small and unrealistic.
So I'd love to see that go up.
I have no problem with the, kind of,
the hold periods that are in force though.
- I would echo that, in Canada--
In US it's called the 12g limit.
You cannot have more than 1999
investors per class of equity.
Separately, on the fund side,
if you have accredited investors
you may have a limit of 99.
All that results in your check size
your reinvestment has to go way up.
Right, if you're raising
a hundred million dollars
and can only have 99
investors, check size is 1.1.
In Canada, for private placements,
they all have to be accredited,
but there is no limit.
You could have any number of investors,
which means you can take
your price per share,
price per token way down,
and I just think that's
far more effective.
The point is, it's a private placement,
there's certain limitations
on how it trades
and only accredited investors can buy,
what do you care if it's
2000 accredited investors
or 1000 accredited investors?
Separately I do think I would
have degrees of accreditation.
They try to do that with
the crowdfunding regs,
but those are so convoluted
they're impossible to deal with.
I would have degrees of accreditation,
and sort of have a sliding
scale of what you can do,
and then finally, on
the crowdfunding regs,
I'd take that million dollar
limit and take it away.
I think crowdfunding's really interesting.
I think it can be really viable
but at a million dollars a pop that's just
not enough money to be
meaningful to anybody.
- If you move it to five
like they did in Europe.
- I'm sorry?
- If you move it to five,
so they changed it in Europe
to five million a piece.
- Yeah, five, or ten.
I mean, I just don't ...
if you're raising a million dollars
and people are cutting $5000 checks
and its meaningful to them personally,
what's the difference whether you allow
somebody to raise a
million or five million?
It just feels like these artificial limits
designed to say, yes we allowed it,
but we're gonna make it so unattractive
no one's gonna do it.
- So if I had a regulatory magic wand,
I think, first off, I think
the US securities laws,
fundamentally, are almost 100 years old.
And I think one thing that's
really beautiful about our
securities laws in particular is,
we had this technology called
bitcoin and block chain
come about, almost out of nowhere,
and still there were some regulations
that this new technology
could package into.
So I think they've actually
served their purpose,
and fundamentally, I think securities laws
in particular, do protect
against the wrong mentalities
in the space, so I think
we found them to actually
have the right affect on the market,
and to actually achieve the
goal of protecting investors
and making sure the
right incentives exist.
But if I had a regulatory magic wand,
I would give myself a
banking and securities
license in every country,
that's what I would do.
- [John] Why, why would you do that?
- Because then I can launch more products
and services in every
country and have them be
interoperable across
all the jurisdictions.
- [John] How long before you don't
need a magic wand for that?
- I don't think that will ever happen.
- [John] Any thoughts
on that, too, Colleen?
- I'm a lawyer through and through,
so I think that any assymetry
of information is a bad thing,
and that making sure
that you have a little
playing field for people
whether they're investing $10
or $100000, is really
the most important thing.
I believe that the block chain probably
offers ways to make sure
that that information
is getting to the right people
and it's not being distorted,
so I think that's there's,
sort of, a ecosystem there
that will help flush out,
making sure that the
securities laws keep pace
but also taking advantage
of the block chain, I hope.
- Sure, okay, in about a
minute, we're going to take
questions from the audience.
So, some of you I told you
come up with questions.
You know who you are, and anyone else who
has questions too, so get
those questions ready.
Asset backed securities,
you had mentioned that
at the very beginning
you wanted to make sure
that we got a question in about that.
Talk about what that was
about real quick again for me.
- So asset backed securities are commonly,
pretty good examples of
them are sub prime debts.
You take a whole bunch of loans--
- [Colleen] That's a bad example.
- Sub prime loans, that's a great example.
If you can lower the cost of capital
by providing debt to sub prime borrowers,
you know that interest
rates are gonna pay.
And the fact that people only
lend to sub prime borrowers,
is not a bad thing.
The reason people are lending
to sub prime borrowers
is they need the money, right.
Just cause you're a sub prime borrower,
doesn't mean you don't need
a car to go to your job.
Auto loans are probably a
big source of sub prime debt.
What is really neat about it is the chance
to think about things in a different way.
So we were talking a
lot about the context of
tokenizing equity in start ups.
This is what we all know,
this is very close to home.
Or in some BC funds, that would
give us access to start ups.
Asset backed securities I
just think are interesting,
cause it's just a totally different space,
so if you take, say this
is the sub prime debt.
This get packaged up in tranches of
200, 300 million dollars at a time.
Only the largest
institutions, pension funds,
huge PE funds are buying it.
And some really liquid thereafter,
just waiting for the
term to expire on 'em.
The promise of platforms like
Securitize and TokenSoft and Harbor is
you're democratizing assets,
you're not democratizing assets
down to the retail investor,
but you're several layers
down in class investors.
If its a 300 million dollar
tranche in sub prime debt,
you create 300 one million dollar tokens,
now all of a sudden you
can get a lot of people
planning in ways they couldn't before.
What happens when you
un-bundle these (mumbles)
is more people can invest,
lowering the cost of capital,
lowering the interest rates
for sub prime borrowers,
thereby increasing credit
availability to more folks.
That's a good thing, assuming you're
underwriting your credit.
But that's a formula that I wanna do.
The other is that by
having a secondary market
improving liquidity, that
also increases the value
of the investor, lowering
the cost of capital,
and what it does is it
allows people to get involved
even before to spread out west,
to spread out investment opportunities,
and that'll allow you to bundle
things in interesting ways,
so you can get really good bets against
deteriorating credit wall.
So their credit default
(mumbles) over a lot of bonds,
there's not a lot
available on some of these
asset back securities, you
can get those available.
It is in my mind, asset
backed securities are
a hyphenized version of a lot of what
we were talking about earlier today.
And I think it's interesting,
is it shows the applicability
of what we're doing
across different asset classes,
different levels of
sophistication and size
in the financial industry.
- [John] Alright, let's get a question
from the audience then.
- [Audience Member] I have a question.
I love the idea that there's this coming
democratization where
someone can buy a $1 or $20
worth of tokens in real estate investment
and now have a real estate investment
whereas maybe they can't
buy a house is Merin,
but they now have an opportunity to have
some kind of a real estate investment,
and I don't feel like this exists for
the average consumer right now.
With this democratization,
what are some risks
that a person with
their $20 token issuance
would encounter or should know about?
- Yeah, so a couple things.
One is that, it's not
gonna go to $1 or $20,
it's just not.
You'll get in at a 10 or $20000 check size
in a more targeted fashion.
So today, you can get in at
20, $30 a share into a polacre,
it's a huge basket of
properties across the entire US.
You cannot make that bet on
a zip code or a neighborhood,
that's what a (mumbles) bet you cannot do.
The risks are the same ones
you get with any investment,
only more so.
When you invest in a public
reit, it's all the company.
If I only miss one, you're
filing 10 case 10qs,
they got (mumbles),
there is a huge amount
of information out there.
When you start talking
private investments,
the quantity of information
available is much less,
the timingness of it is much less,
so you have to know a little bit more
about what you're doing,
or investing it in a way
that mitigates those risks.
- [John] Do you think
that, well, any other?
Oh go ahead Colleen.
- Well I was just gonna say that,
it doesn't have to be real estate, right?
So a reit is real estate.
The crowdfunding that
we talked about earlier,
or reg A plus, I guess
is really, maybe more
of another equity, so you're
buying equity, not debt.
Some of the other products
you can have debt,
and I think probably debt
tends to be in bigger chunks,
it seems like that.
Asset backed securities
are traditionally debt,
and they're loans that you get
from investors against assets
and the cash flows are gonna
come from those assets.
The equity can be structured the same way.
You can get down to the
smaller denominations
but you have different
regulations that apply
so there's a little bit,
sort of, trying to plug yourself into
the right bracket so to speak.
I think that the tokenization,
with the asset backed mentality, certainly
has something to offer
and I think it can go down
to a level where you're talking
about more availability,
more democratization.
- A good example, is think
of the risk in investing
in start up companies.
Most people that can't invest
in big LP and (mumbles)
typically go unchecked.
Maybe if they can cut a $250000,
they're going in through
an aggregator fund,
so they're paying one and ten on top of
the two and a half and 25
of these C fund charges.
If they can now go direct into a company
or through a tokenized
BC fund that's got a
much lower fee structure,
they have an opportunity
to get into things
that they couldn't' before,
at a time when the companies
are staying private
much longer and taking much
bigger economic real estate.
On the other hand, most start ups fail,
and it's a high risk investment.
It's not for mom and pop, generally.
It's a different type of investment,
there's accredited investor
rules in there for a reason.
They may not be structured correctly,
we may feel that they're archaic,
but people should not be
betting their life savings
investing in tokenized start ups,
just like they shouldn't
have done it in ICOs.
I mean, I knew we had peak ICO
when I started seeing buddies
of mine from high school
on Facebook maxing out their credit cards,
debating whether it's
lifecoin or bitcoin cash.
- And by the way, these
kind of scams still go on.
I had my brother in the law the other day
text me about this amazing new project
that he got information on,
and to check out this
kid called (mumbles).
He's a construction guy,
he doesn't know anything about this,
and it's like he's trying to vet (mumbles)
and I'm like, bro, this is not for you.
But this stuff is still
out there, so it's crazy.
- [Audience Member] I
just have a follow up
to the democratization credit thing.
We know millennials and younger people,
you know, people who are
still now in high school,
are gonna be adopting this
as investments for themselves
going forward when they hit
a degree of maturity and
when the infrastructure
and when technology is more mature.
So let's assume--
- They're probably gonna
build it.
- So let's assume,
I mean, we know millennials
are going to coasts,
they're going to major cities,
they're living in major cities,
they're not buying houses,
they're staying in apartments,
but we also know that real
estate is one of the best
possible investments that you can make.
Do any of you have a vision for the future
for as these things mature and evolve,
how will this go?
Because we know for a
fact that people aren't,
they're living in major cities and
they're not wanting to invest in
the same way that they would.
They're not buying cars, et cetera,
all the trends show that.
- Is that one for me?
- Sorry, yeah.
- Yeah, look, again, it's about finding
a really high quality product
that will suit that type of investor
that they understand.
One of the things is that a lot of these
investment products,
particularly the public reits,
are really hard to understand.
You don't know what's in them,
you don't really know how it goes,
so as an investor you
don't really understand
what you're buying,
you're kind of just buying
this broad stroke, so doing
much more specific things,
I think it's really interesting.
In an overall, I think we'll
see that type of product
evolve really quickly,
because real estate folks,
whilst they don't adopt
technology very quickly,
they are really into it when
it makes them more money,
and so this will definitely
work in that way.
- I think you'll see them adopt it
when they can get into
investments that they
can understand, that
correlate with their needs,
and it's been adopted
by investment advisors
or roadway advisor platforms,
so that people can understand it.
In essence it's merchandising,
you merchandise investments the same way
you merchandise clothes
and everything else.
It's gotta be merchandised in a way
that's understandable to folks, that one,
actually meets their needs, and two,
perceives to meet their needs.
What I think is interesting,
even before block chain,
it was a start up called
Neighborly here in San Francisco.
They're all about democratizing
access to annuity bonds.
Essentially what they
do is they are selling
direct to investor annuity
bonds in smaller check sizes
in the neighborhood, so that way,
your local school is
raising a two million dollar
annuity bond to finance renovations,
folks in the neighborhood are
investing in their school.
They did a number of things.
One is the school is a
lower cost to capital,
more people coming in,
another is you help to
build political support
for that school because
now you're an investor,
membership mindset.
You can do the same thing with tokenizing
equity in start ups,
sell that equity to
partners in your system,
sell it to your e-sports team,
sell it to the band so that
you have a membership mindset.
We're talking to a really
interesting company.
They own a bunch of real estate
in a downtown business district.
And already they're
talking gentrification,
we're gonna get pushed
out, so their idea is,
take a minority interest
in these buildings,
tokenize it in the same
glossary format that
we use in the investment live now,
and then sell that at a reduced price,
essentially their cost basis,
to the union pensions they're
involved in in building the place,
to merchants, to tenants, donate
some to local non-profits.
In other words, us as start
ups, we constantly grant
employees stock options to
create an ownership mindset
and buy incentives.
Do the same thing with ownership
equity in your real estate.
Do the same thing with
equity in your company,
with the wider ecosystem of
folks that you work with.
It's creating a line (mumbles)
and ownership mentality.
- [John] Talk a little
bit more about that.
Why is it so great?
It creates a lot of the
same ownership mentality,
talk a little bit more--
- So I'm a tenant in Willow, okay?
So landlord's going through
making improvements to the
building, rent's gonna go up.
The whole neighborhood's improving
so rent's gonna go up everywhere.
I'm a tenant, I have the
ability to buy into equity,
so the landlord's gonna raise funds.
I am contributing to the
overall economic value
cause I'm a good tenant, desirable tenant,
and I'm paying my rent, right?
The same way in which,
if I am a merchant in the
neighborhood, so I own my,
my little convenience store
that I've had for a while.
Now I've got someone who's
redeveloping the area.
You're concerned about
gentrification pushing you out.
Now the person that's
doing the redevelopment
sells me equity in the
development they're doing.
They're selling it at their cost basis.
I already have the paper okay.
I have a chance to
invest in my neighborhood
and an economic stake in
improving my neighborhood
rather than feeling I'm
being penalized by it
by gentrification.
The same idea as creating a lot of stocks.
You create increased economic value
in this downtown business neighborhood.
Let's give everybody a stake
in increasing that value.
Same way when you give
employees stock options
so that they work their
ever living butts off
to make a successful company.
Let's do the same thing
in a modern society.
- [John] More questions from the audience.
- [Male Audience Member]
Is there a need for
a universal token
standard that's adopted by
the majority of the exchanges
and issuance platforms
in order for the ecosystem
to really take off?
- Yeah, I think if we look at the history
of exchanges in the
space, bitcoin exchanges,
one thing that's interesting about them is
every company that is selling bitcoin
is built on the same infrastructure.
It's all using, it's all on
top of the bitcoin network,
and they're all using bitcoin
to service their clients.
And I think as this technology shifts,
the security token space,
the properties are the same
cause the technology's the same
and what we've seen with the
theory is the same thing.
All of the exchanges are
built on top of the theory
and because they're plugged
into one shared ledger,
now it's easier for them to
transfer trace between each other,
for people to move money
across different countries,
different exchanges.
I think in this space maybe
the standards will matter less,
but just the concept of
shared infrastructure
that everyone can plug into,
I think is a really big deal,
because that's something
that didn't exist before
that's now possible.
- I would say we have it, we have ERC20.
That's what you need, that's what you need
to interact with Dharma, with Blockport,
with dy/dx, with set.
Harbor issues ERC20 standard tokens,
and that is the standard.
There's a lot of other
proposed standards out there.
There is a possibility
of different standards
to be against the ball,
but I think it's premature.
Normally, industry tries a
wide variety of approaches.
People test them, and then
things start to coalesce
in a couple different options and then
everyone gets together to set a standard.
Setting a standard before
any sort of real adoption,
I think is getting the
cart before the horse.
We need that real experience,
you know, what works, what
doesn't, what's valuable,
in terms of having interoperability,
wallets, exchanges, everything else,
we've got it, it's in ERC20.
- Yeah, I agree, I mean what,
we've got a bunch of stuff trading
and as it's been out there
we've had to make adjustments
because the rules have
gotten a little bit clearer
as some things have changed
and if you had to back to
the standards committee
to get something approved,
it just wouldn't work.
So as we're building this stuff,
it's like flying the
plane while you build it,
type of thing, right?
It's just not ready, we're not ready yet,
and every time somebody choose a new one,
it's like, "Oh great, another standard."
I think that there's,
Carlos said the other day,
there's more security token standards than
there are issued security tokens.
- [John] We're down to our last minute.
Any other questions, in the back.
- [Audience Member] I was wondering,
how are stablecoins and such classified?
Are they integrated securities or
what space would they belong in?
- It depends on what the stablecoin does
cause there's some ideas people have where
the stablecoin is doing too much.
But let's say it's just
one dollar in the bank,
and one dollar in the token,
and so generally that, and
it depends on more factors,
but generally that's money transmission.
You're holding a fund somewhere
on behalf of someone else.
So any time you have the
ability to move or stop
someone else's funds, you fall under
money services businesses laws
and need to be a money
transmitter or trust,
but there's other ways to do that as well.
- [John] Alright, let's get
a nice round of applause
for our panel.
(audience applauding)
And, let's also have a
nice round of applause
for the person who planned
and executed this whole event,
Pamela.
(audience applauding)
