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Expert Interview: The Future of Security Tokens

Expert Interview: The Future of Security Tokens


Adam Chapnick: Hey, everybody! It’s me, Adam Chapnick, with the Security
Token Academy where we explore all things related to the exciting new world of security
tokens. Today we’re covering the future of security
tokens, so please stay tuned at the end of the show for a special announcement. You will not want to miss it. Okay, before we get started, we wanna take
a moment to thank the sponsors of today’s expert interviews, verifyinvestor.com and
Inventus Law, as always, we appreciate your support. Alright, I’m here in LA for today’s show,
now let’s bring in today’s guest, Carlos Domingo, CEO of Securitization, who joins us from San
Francisco. Carlos, thanks so much for helping us out
today! Carlos Domingo: Hi Adam, how are you doing? Thanks for the invite to the show. Adam Chapnick: Great, yeah, it’s good to have
you. So, let’s start with regulations. There’s been a lot of excitement around security
tokens, obviously, lately. Do you view the US regulatory pressure on
ICOs and utility tokens, do you think that’s driving the move to regulated security tokens
in the US? Carlos Domingo: I think yes and no, I think
that the security tokens is a broader concept than just selling a utility token as a security. I think security tokens have broader applicability,
and of course part of the market is moving to security tokens because they realize that
the US regulator has basically said that all utility token ICOs are securities. But, I think the interesting thing that we’re
seeing is when they think about security tokens, they think about it differently, and try to
create other models for fundraising securities that are not necessarily utility tokens but
things like equity, revenue share dividends, et.cetera, which then have a broader applicability
than the world of utility tokens for, basically a way to run a decentralized protocol on the
block chain. Adam Chapnick: Right, okay. So, beyond those regulatory pressures, to
what degree do you think the benefits, like the efficiency, the speed, liquidity; what
do you think that’s gonna drive … Is that gonna be part of the drive that makes companies
use security tokens? Carlos Domingo: Yes, if you think about how
traditionally private placement has happened in the US, it’s all very manual, it’s all
not automated, it’s not done in a global way if you want, it doesn’t offer liquidity, obviously,
it doesn’t have any good secondary market trading. The settlement periods are long, and there’s
very low liquidity. But, that market is a huge market. Last year, in the US, according to a recent
article from Wall Street Journal, there was 1.6 trillion dollars of private placements
only in the US. We think worldwide, there’s close to 3 trillion,
and that’s done in a very inefficient way, that the issuing of security token on the
block chain can actually solve many of the problems. It can actually create- facilitate a better
capital information by running a worldwide process, it can automate and reduce the cost
and the friction of dealing with a large cap table, potentially in many different countries,
and it can also provide liquidity by integrating with all the upcoming security tokens changes. So, we think that that’s gonna be the main
driver for people to move to security tokens from traditional private placement, and not
just necessarily as a replacement for the guys doing utility tokens today do security
tokens tomorrow. Adam Chapnick: Yeah, well we here, certainly
agree with you, so that’s super exciting. Alright, now what about Securitize? Walk me through how I … let’s say I’m a
new issuer and I wanna create Adam Coin, how do I use Securitize? Do I use your coin? Do I use your code to build my coin? What- How do I do that? Carlos Domingo: So first, we don’t have a
token for Securitize, we think that creating a utility token for a security issuance platform
adds unnecessary friction and not necessarily adds any value. So, we’ve taken the decision to not to issue
Securitize utility token to use the platform. We are a software service business, we enable
and ensure to basically, within two weeks, get their own entire website with all the
tools they need to manage the investors and manage the issuance process already ready
there. So, basically people come there; investors
can register, can pass KYC, can pass AML, can pass the accreditation process in a number
of jurisdictions; major ones-primarily. Can then submit payments, can sign subscription
agreements online, can submit tokens, wallets sorry to get their tokens there, et.cetera. And that is what the investor sees. And then the other side of the business is
what the issuer sees; so the issuer has basically all the admin tools to basically manage the
process; know how many investments come on board, where they are in the process, how
many have passed KYC or not, they fail, if they manually need to go on intervene. They can know how many they’ve sent money
by having them sign a subscription agreement, or how many they’ve sent money but haven’t
submitted a wallet. And then we have the token issuance power
bid where we basically will create the security token that the customer is telling us, we’ll
do the smart contract and they’ll have a console where they can actually manage all the process
of how tokens are being issued. And to home on what are the lock-up periods
depending on the regulatory framework; or depending on the country of the investor,
et cetera. And then finally, the most important thing
that people tend to miss is that once you finish the issuance the job is not finished
because you need to first manage the cap table. And in some cases you might have to do governance-implement
governance too-so you might have to issue dividends in a periodic way…And monitor
that person to understand what is working or not working, et cetera. And you need to, basically, integrate with
these changes to be able to make sure that all tokens, the security tokens, or one particular
issuer are all within the regulatory framework of the countries where those investors are. And for that it requires a lot of work and
integration with the changes; which we are now in the process of doing as well. Adam Chapnick: That is staggering, and the
amount of work that you are putting into that! So, you’re gonna handle all of that, including,
the compliance from country to country? Carlos Domingo: So, our platform is enabling
a platform for the issuers. So, compliance at the end of the day depends
on the issuer. What we do is, we provide a number of tools
and a number of things built into the platform that enable them to basically manage the process. Adam Chapnick: Tremendous! Okay, so Carlos we like to ask about prediction
here. So, people speculate about the use of security
tokens compared to utility tokens, when do you think this brave new world of security
tokens- the security tokens will be used more than utility tokens. When is that coming? Carlos Domingo: I think in terms of number
of ICOs; if you look at the volume of ICOs vs. STOs, I think at the end of this year
you’ll probably have a good chunk of the ICOs that are security tokens, probably somewhere
between 20-30%. I think there’s been already, very large,
utility token ICOs like Telegram that already will make it difficult for security tokens
to bigger. But I think that 2019-
Adam Chapnick: Mm-hmm (affirmative) Carlos Domingo: Is the year where I believe
that we’re gonna see that the volume of issuance for security tokens is going to be much bigger
for security tokens cause also, importantly, the second part of this year liquidity is
coming to the market with all these changes that are coming life. And that’s gonna make people realize that
this is a very good way of doing private placements or of tokenizing real world assets. And when that kind of dynamic happens in the
market you will deficiently become much bigger than what you see today with utility tokens. Adam Chapnick: Right. So, how do you see that liquidity- you mentioned
the liquidity that is coming this year; last year with all the ICOs that went live under
Reg D the lock-ups are ending this year. Are you talking about some of that, or you
look at that as a good thing as an exciting thing? Carlos Domingo: So, first the liquidity is
not necessarily US only. So, so a lot of the Reg D offerings don’t
have the same restrictions when they do Reg S in other countries, in most countries there
is no lock-up there for one year. So, I think you’ll see that many recent issuance
get liquidity-not from the U.S.- but from other countries. Of course, in the U.S. you don’t have to wait
one year for the lock-up period. We also working with Bank Corp. in creating
the version of the Bank Corp. Protocol for security tokens which then investor
is basically trading against the issuer. And in that case, there is no one year lock-up
period for Americans because you are not trading it to another investor. So, I think that will help as well to bring
some liquidity to market but certainly, as you will see, fifty to hundred of security
tokens being issued and most of them will actually come to market with full liquidity
next year. Adam Chapnick: Got it. How, for our viewers, is there a differentiation
between a credited and unaccredited investor’s ability to participate in the security token
platforms in the market that’s coming? Carlos Domingo: So, that depends on the jurisdiction
where the investor is. Every country has different rules for who
can invest and register security. Let’s say a security has not been registered
and it also depends on where the security is being registered or no. Because if you register securities you can
then go to retail investors in the U.S. Most of the security and tokenizing they use
Reg D, one of the exceptions, The Reg of 546B or 546C, and in that case you’re only allowed
to sell to a credited investor and not to retail investors. But I’ve seen some people already started
doing a small race, racers using Reg CF, which allows you to raise up to one million dollars
from retail investors. I think soon we’re gonna see some people filing
for Reg A+, which allows you up to $50 million, including also, retail investors. So, as the U.S. situation but if you look
at Europe in Europe the regulation is different. Some countries you can actually bring a small
part of retail investors for registered security and then these people they’re like the crowd
funding sites, they have licenses that actually allow them to bring millions of dollars from
retail investors as well as unlimited from accredited investors. So, I think that yes, it depends on the country
basically. Adam Chapnick: Right, that is super helpful. Okay, so it seems that security tokens can
be used, generally speaking, there’s two different types of activities. In some cases, you got the new and emerging
companies that are gonna be using the regulated security tokens to raise money; and in other
cases people will be tokenizing the existing assets globally. There’s real estate, there’s all kinds of
others- whether it’s wine-you know, anything. Can you explain for the viewers the difference
in these two applications of security tokens? Carlos Domingo: So yes, so one way of-so I
think there’s kind of three things if you want-one is, some utility tokens or some companies
that are planning to buy utility tokens and they are legitimate, utility tokens, but of
course the problem is the moment they sell utility tokens to investors they actually-the
transaction is like selling security and they are turning the token into security and that
means this is what the regulator has said in the U.S.. I think those guys will still
continue doing the utility token but they will use a security token as a fundraising
mechanism on the couple-the two-which I think is a very good method and one of our customers
is already doing that. Adam Chapnick: Hmm… Carlos Domingo: Then you will see companies
that were doing traditional private placements and this could be VC funds like we have Spice
VC in our case that did it. Hedge funds or other type of businesses that
maybe they have nothing to do with block chain but they choose a security token offering
as a better way to do a private placement because of all the advantages that we have
with cash, right? So, less friction, lower costs, better capital
formation, liquidity, et cetera. And in the third one are people that are basically
going to try to provide liquidity to certain assets that are physical assets. By basically tokenizing and giving fractional
ownership to investors against the asset and then there is where you’re going to start
seeing real estate obviously. That’s a no-brainer because it’s a $250 trillion
asset class in the world with many trillions of dollars of transactions happening every
year. But that is traditionally difficult if you
wanna own a piece of a large building, an iconic building, or other things like that
is not simple to do. And then the other one that I think is very
interesting is Art. Art as an asset class is a multi-trillion
dollar asset class that has a very low trading volume, less than a hundred billion a year. And art, fine art especially, has been appreciating
in value overtime much better than stocks or Fortune 500 or other things. So, I think that the fractional ownership
that the security tokens bring to that space would actually be very interesting to allow
people to invest in the asset class. Adam Chapnick: Yeah, absolutely! So, when it comes to your company at Securitize.io
are you guys focused on one of these kinds of uses more than another? Or are you totally agnostic? Carlos Domingo: So, we are for a time being,
agnostic. But I will say that at the moment where we’re
seeing the highest level of activity is in funds and in companies that are just necessarily
small early stage to start-ups doing a small raise; but companies that are looking at either
they’re more matured hand in ongoing business and they’re looking at a bigger raise, let’s
say $20 million and above. I think that’s the large majority of our customers
are there. Then we have start working a little bit with
some real estate projects, we have a fund in New York that invests in Manhattan real
estate that we’re tokenizing. And I’ve just started working-I’ve been involved
in one project related to art. But the majority of our customers today come
from either funds or the start-ups. Adam Chapnick: Got it. Okay, so what about in the people talk about
the benefits of liquidity a lot. Do you have a sense of what the liquidity
premium might be on a lot of these assets? Just that have never enjoyed liquidity before
but well, you’re sort of bringing it to them. How will that affect their value? Carlos Domingo: So, that’s a very good question. We’ve been researching, actually just yesterday
I got a new report from someone else, we’ve been researching this to try to understand
it because, obviously, liquidity has a premium and that everyone agrees on that. But liquidity is not a black and white, right? So it’s a continuum. So, either you have no liquidity let’s say
full liquidity like the U.S. dollar has and they’re somewhere in between where you have
more or less liquidity. So, I think that for assets that enjoy some
liquidity but they’re not super liquid, let’s say real estate, they agree number in the
industries around 20-30%. But if you move into assets that are extremely
liquid-let’s say an investment in a company, in a private company-I think those guys can
enjoy a much higher liquidity premium because basically the liquidity they have close to
zero. So real estate, obviously, is not super liquid
but if you want to sell something, eventually you sell it, maybe you have to discount it
a little bit 20-30% and then it gets done. But for private investments or start-ups that
typically is very difficult to sell something on the secondary market. So I think that the liquidity premium there
will be higher. Adam Chapnick: Yeah, I can attest to that
from experience. So okay, now about you! Can you fill in the history of how you started
with this VC called Spice VC then evolved to Securitize.io which you’re now in charge
of? Carlos Domingo: So, we started last year working
around April/May time frame with my partners Jaime and Tell to build basically a venture
capital fund to folks in these new emerging class of ICOs and block chain protocols and
distributor apps, et cetera. We thought it was fascinating thing to do
and we thought there was an opportunity because most of the traditional VCs were not focusing
in that space. So we started building that. And then the first question come up, is like,
well if we like tokens another company so much why not tokenizing our fund as well? Because then we can actually solve the number
one problem of venture capital, which is the lack of liquidity, right? So venture capital is one of the most illiquid
assets in the world. You basically put money for five years and
it takes seven to ten years to basically get any returns. Basically also because the underlying asset
is also very liquid. Which are stock tops. So, then in May we saw that here in San Francisco
a company, a venture capital called blockchain capital. They actually detokenize a fund that they
raise $10 million and very similar idea. And they were the first guys doing the security
token, so, this is great. This is exactly what we want to do. We want to do the same- the token in a different
way so that the token actually holds the direct economic interests on the fund. But basically it was the same thing and obviously
it became very clear to us why this is a security token. This is not a utility token, we cannot just
sell it on an ice hill like other people are doing in the market because we will be doing
something illegal. So we went out and started talking to a bunch
of companies that either were doing ICO platforms or they were signaling the market that they
were interested in security tokens. The one I mentioned-specific companies-I can
tell you we talked to a lot of the players that are in the market back then in major. And none of them actually either had a product
like we envision or had any product at all or even a roadmap in some cases that could
tell us when the product was going to be ready. So, my partners and I at the end of the day
we are technical entrepreneurs; I build products all my life. So I figure Okay, this is something we can
actually do for ourselves. Let’s invest a little bit of money and go
and build our own platform for Issuance of a security token for a Spice VC. So we hire a CTO, Shay, and then some engineers
and start basically building our own platform. And by the end of last year when we announced
to the world that Spice VC was open for investment and that this is how actually invest and this
is the platform where you come. And these are screen shots and a lot of people
start contact me and say, “this is pretty cool. So who’s in the platform for you guys?” I would like, “no one, it’s our own platform. We just build it.” I think at some point then we took the decision
that this was going to become another business line so I brought on board my partners in
Securitize; Jamie Finn and Tim Reynders, who were the first original investors in the Spice
VC and then we kind of agreed to separate it into two business and have Spice VC running
on its own without me and Tal living there. And myself with Tim and Jamie, leaving Securitize
and basically creating the company. Adam Chapnick: Got it! Okay, so…Amazing!How do you see Securitize
now working with these security token trading platforms, are you guys planning on being
a training platform working with both? Carlos Domingo: No, we’re not planning for
the time being, probably never, to be a trading platform. I think that primary issuance, enabling primary
issuance, facilitating primary issuance, this is where we want to focus. I think that there’s plenty of business there. I think that If a primary issuer becomes a
trading platform it’s gonna be in competition with it’s partners. So we don’t want to do it at the moment. We are talking to pretty much everyone that
has already announced that they’re gonna do a trading platform for security tokens and
trying to make sure we have an understanding of what are the listing requirements, so we
can make sure the customers will be listed there. We also integrate at the protocol level to
make sure that the tokens that we issue on primary issuance they are tradable on the
secondary market on their platforms. Adam Chapnick: Great! Well, thanks so much for joining us today
Carlos! Best of luck with all of your ventures! Carlos Domingo: Okay, thank you very much. Adam Chapnick: Today’s broadcast is part of
our expert series of online discussions on the new and fast moving security token industry. On our website you’ll find more videos and
information about security tokens when you sign up on our site you can also join the
conversation by adding your commenting questions. And receive our news letter to find out about
new videos and events from the security token academy. You can also follow Security Token Academy
on Medium, Telegram, Twitter, Facebook, and Meetup.com. And make sure you subscribe to our YouTube
Channel! We’ve got a lot of exciting activities coming
up, including, the first ever Security Token Summit on how exchanges and token trading
platforms are taking on Wall street! This even will be held at the Conrad Hotel
in New York City on June 11th! You won’t want to miss out on being part of
this important conference bringing together the major players in the security token trading
and exchange industry including; Alpha Point Coin List, Start Engine T0 Templem, and others. Plus, David Wheel, the former Vice Chairmen
of NASDAQ will be a keynote speaker. You can learn more about the event and get
your tickets at securitytokensummit.io! Recently, Security Token Academy caught up
with Jeremy Gardner from Awesome Ventures; we talked to him about the significance about
security tokens and here’s what he had to say. In terms of what’s going on, there’s a lot
of regulatory uncertainty, that is becoming a little more clear. And here everyone is talking about ICO 2.0,
the security tokens, STOs. Do you think all of that is significant? And if so, how? Jeremy Gardner: Oh, absolutely. So, with Augur I helped create the very first
utility token number. But at Blockchain Capital I helped them create
the very first security token ever. So, I’ve been down both those roads. Adam Chapnick: Which was the first security
token? Jeremy Gardner: The B-Cap token. And that represented a limited partner interest
in a venture capital fund. And you know, looking back on those two experiences
with Augur we effectively opened Pandora’s box to all these, just, pretty much undiluted
capital raisings that were effectively just unregistered securities offerings. The vast majority of ICOs that have occurred
to this state, especially in the past two years, egregious securities violations, horrible
ideas that don’t provide any utility and that kind of dwells with me. But security tokens are really very similar
to traditional equity but they’re more liquid; they’re more tradable, and in theory if we
can work with law makers in a constructive manner, what we can do actually create an
incredible way for boot strapping network effects. So, if you think about if you were an early
user of Facebook or Twitter, what if for positive participation in the network, you earned small
Facebook or Twitter tokens. That represents a small ownership share in
the company, as the company grow and increased in value and eventually went public you actually
saw the upside of your participation in these networks. Any product where you’re not paying for it,
you are the product. But there’s a way to flip that script that
to only make it both the product and the consumer can both be gaining value from their usage. Right now it’s just a one way street. Adam Chapnick: Looking ahead a year, not too
far, do you think that there’s gonna be just sort of a dropping of the utility token because
of what the SCC is doing? Is everything gonna be security or no? Jeremy Gardner: It’s not because of the SCC
is doing. I mean partly the idea of being able to raise
tens of millions or hundreds of millions of dollars without diluting your cap table. And being able to cash out instantly is amazing. But I mean, I was never supportive of that
but security tokens just make more sense for 99.5% of the teams that have done an ICO or
considering doing one, trying to force utility onto a product that doesn’t need this. But a security token makes a bunch of sense. The thing two years the security tokens will
be the largest crypto asset in the world. And possibly, within a decade will be the
largest asset class in the world because blockchain enabled the world to become the stock market. You can tokenize anything that has value and
scarcity. And that’s- there’s a tremendous amount of
potential that exists when you have this kind of decentralized mechanism for representing
value. Adam Chapnick: Right, a lot of people are
excited about the tokenization of gold or assets that nobody usually thinks about as
fractional. Jeremy Gardner: Real Estate, Intellectual
property. If it is valued and scarce in the real world,
in theory, you can tokenize it. Adam Chapnick: Okay, now for our big announcement! We are excited to let you know that Steven
Mckeon has been named chief strategy advisor of the Security Token Academy. Mckeon is a finance professor at the Run Quest
College of Business at the University of Oregon with prior experience including a venture
capital backed internet start-up. And co-founding a commercial driven software
company. As an expert in Crypto-Assets and Security
Insurance he’s appeared on CNBC and his work has been sited outlets including the Wall
street Journal, The Financial Times, and Forbes. So welcome Steven, we’re proud to have you
as part of our team. Before we wrap today’s show we want to give
one more shout out to our sponsors! Verifyinvestors.com and Inventus Law, thanks
again for tuning in to our view. And as a reminder, you can keep up with the
Security Token Academy on Telegram, Twitter, Facebook, Medium, and Meetup.com and by subscribing
to our YouTube Channel. You can also sign up on our website at securitytokenacademy.com
for updates on new videos and events! That’s it for today for Security Token Academy,
I’m Adam Chapnick.

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