Kepler Finance talked to Patrick Campos of Securrency to discuss the future of security tokenization, barriers and advice for issuers and investors and the most exciting achievements and goals of Securrency.
Q: The companies that are launching security token offerings on Securrency, what should they know before launching an STO on your platform specifically, what kind of difficulties may they face?
A: I would say that first and foremost, they should understand that they are selling a security. This isn’t a new kind of financial instrument, it’s a traditional financial instrument delivered in a new digital format, right? So, as such, what they really need to do is make sure that they have structured their deal properly, whether they are doing it in-house or they are working with financial advisors, and that they have worked closely with their lawyers to structure it legally and understand that the compliance requirements not just in the jurisdictions in which they are issuing but also those in which they are marketing the securities.
And the final thing is, in almost every jurisdiction, there are very, very well-defined regulations that govern how you can market securities to investors. Most of these issuances are going to be exempt offerings, meaning that you can market them only to professional investors, and in almost every case, you are going to need some sort of broker-dealer or another authorized person to represent you, to do the marketing.
So, that’s a really, really important thing to bear in mind, and so a lot of times we have issuers that come to us and they’re just coming to us straight as issuers, and we ask, “Do you have a broker-dealer?” and they say, “No, we think we need one.” So, you do need one. Unless you can do all the marketing on your own as an issuer, you do need one. We are not a broker-dealer, an authorized person. We are a technology platform, we don’t do the marketing for these issuers, we simply provide them with the tools to allow them to do an end-to-end compliant token issuance and to manage those tokens in a compliant manner after issuance.
Q: Are there any specific tips and hacks that you would offer to issuers to launch their STO?
A: Well, no, I mean other than that the platform itself, the technology itself, is, in our opinion, far more efficient than the traditional ways of doing it, of conducting an issuance. Because, of course, you’ve got to onboard your users and conduct your KYC, your AML. All of that is going to be automated, and the issuance itself is going to be automated. But again, I really want to emphasize that we are a technology platform. In terms of tips to issuers, I think it’s the same as the answer to your first question, which is “make sure you know what you’re doing”.
I’ll do a little sidebar here: I think too many people think that a security issuance in a tokenized format is an ICO dressed up in some compliance. And it’s not. In fact, that’s exactly the wrong way to look at it. The correct way to look at it is to say, “What I’m trying to do is issue a traditional security, but use a new technological means of doing it, a new more efficient technological means of doing it.” And if you begin from that perspective, you’re probably on the right track. If you begin from the perspective that you’re going to issue a token that’s going to immediately list up on an exchange and millions of people around the world are going to want to buy your token not for the value of the underlying asset but for its speculative value so they can trade it like they did with ICOs, I think you’re probably on the wrong track.
Q: What about the investors, the ones that are willing to invest in an STO? What requirements are there for the investors, and what should they be aware of?
A: Well, again, most of these offerings are going to be exempt offerings because of the disclosure requirements. These are not going to be public offerings. So, because there are more limited disclosure requirements, as I said, in almost every jurisdiction the regulators say, “Look, you can offer these securities, but you can only offer them to professional investors.” So, if you’re a retail investor and you’re trying to figure out a way to invest into a security token, well, it’s just not going to work.
So, to go back to your question, you said, what tips do you have for investors, my suggestions would be around understanding and trusting the technology. What you’re receiving as an investor is no different than what you would’ve received if you had invested in a company in a traditional sense except that the format, one: makes it more efficient, two: because it’s blockchain-based, records transactions immutably, and three: the format makes it easier to trade the token subsequently, so the prospect of liquidity is much greater than it would be with private equity or private debt instruments in the pre-blockchain world.
So, that’s the summary of my advice, because for investors, the advice is the same as it would always be in the traditional world. Read the documents. There are disclosures, there are offering memoranda, there’s required information; the regulators say you must provide these disclosures to investors. So, as it would be in the pre-blockchain world. Read the documents; know what you’re buying. That would be it.
Q: Except for the knowledge of the technology that you mentioned just now, what do you think are the other barriers to enter the market for both the issuers and the investors?
A: For issuers, I don’t think that there are any barriers to entering the market that didn’t exist before. You know, before the development of security token technology. In fact, the barriers may be lower; we intend for them to be lower in that the ability to use the technology will help reduce costs and truly streamline the process of capital formation. It’s so much easier for issuers to do it; it’s so much easier for their financial advisors, you know - broker-dealers, or other authorized persons to use the technology to raise the capital, that now, unlike in the past, where if you want to raise 10-20-30 million dollars, you really needed to work through an investment bank and the fees would be high. Now, the ease, and the efficiency of the technology really should reduce the fees and make it easier to bring these types of smaller offerings to the market.
So, I would say that if anything, the barriers are lower. With one exception, and that is that the traditional investor market doesn’t really know and doesn’t really understand this new technology. So, that is to say that if we go back ten years, and I was going to put a hundred million dollar offering on the market, my investment bank would likely talk to a collection of professional investors like funds, insurance companies, high net worth individuals or family offices and that sort of thing and would probably try to place that issuance in large blocks, meaning that they’d want to sell in blocks of five, ten, twenty million dollars, as opposed to smaller blocks.
And so, those traditional investors, those big pension funds or insurance companies, to them, tokenizing the security is not really an important thing, not yet. So, this technology doesn’t yet make the security more attractive to them.
So what this means for is that for issuers and their financial professionals, they really need to understand that they’re going to have to do a better job of two things: number one, explaining to those traditional investors that the fact that its tokenized is not a scary thing, that it’s actually better for them, and two, more importantly, that they need to understand that they need to reach out to a wider investor base.
That is to say that if you look at the definition of professional investor, now I’m talking about individuals – and institutions, but, really, I’m focused on individuals in just about every country – that definition includes a whole lot of people who have historically not participated directly in the capital markets. Maybe they invested in some sorts of funds, mutual funds and things like that, but they are not the target market for investment banks, investment bankers are not calling them and saying, you know, let me show you a new security. Those people are the ones on whom issuers should be focusing. They should be calling these folks and really reaching out and creating a new market of investors, a broader market of investors. That would be my advice.
For investors, I really don’t have much advice other than understand that the technology doesn’t change the underlying instrument. It’s the same thing that you’ve always invested in before, it’s just in a new form that offers the potential for real liquidity that didn’t previously exist in the private and alternative assets markets.
Q: What about the future, though? In 2018, at least three STOs were closed, and many more were preparing to launch, but we still don’t see the boom of the STOs. Do you think it will happen 2019, or, what is your forecast for the development of the tokenized securities market in the upcoming year?
A: It depends on what you mean by ‘boom’. I’ll take a step back, before answering your question directly. As I said at the beginning, it is a mistake, a tremendous mistake, to think of Security Token Offerings as a new version of an ICO. I think that the problem, that problem – it hurts all sides of the equation. So, I think issuers who are not really market ready, who are saying, “Well, let me just create a token. I’ll call it a security token, but what I really want to do is issue something like an ICO and hope that I can very, very quickly raise capital, because people are interested in buying something they can trade, and they’re really buying it for the speculative trade value, just like it was in the ICO world.” Those issuers are going to be very disappointed, because, number one, unlike a token typically issued via an ICO, which in many cases had very little, if any underlying value, these securities are backed by actual assets, and so the value is the value of the actual asset, so your market is totally different. Number two, there aren’t yet places to trade these tokens. You know you’ll see a lot of security token exchanges that are coming online, or people are talking about it, but there isn’t really a big secondary market, or a big network of venues yet for these things to trade. That will develop over time, and it will develop in a different way, but it will definitely develop. Number three, the way in which it will trade is different.
These things are, just like traditional private equities, largely going to be traded OTC. It’s not going to be some dynamic market like a crypto exchange. And so, the marketplace is going to be very, very different. So, I think those types of issuers who really believe that it’s still an ICO in a different dress, I think they’re going to be disappointed; that market is not going to materialize. Investors who think that Security Token Offerings are, again, just ICOs in a different disguise, and who are trying to figure out, “How do I get into the game, where I can buy this token like it was in 2017, you know, when I buy it for a dollar today and I sell it next week for two hundred dollars” – they’re going to be disappointed. Because that’s not the type of asset that we’re talking about. And I think that issuance platforms and technology companies who are focused on that space, who are appealing to the old crypto crowd, I think they’re going to be disappointed.
So, 2019 is not going to be the year for those people. And what that means is, you’re not going to see the crazy spike like you saw in 2017 with ICOs. What you are going to see is the market grow in a much more meaningful way. It’s not going to look like a super hockey stick spike, but it’s going to grow in a much more meaningful way, what I would call in a much more mature way.
The amateurs are kind of pushed off the playing field, but not the professionals – and by that I mean not just the traditional banks, because I think there are going to be a lot of new players, but new and very mature, in terms of their view of the market, new and what I call ‘adult’ players, who say “I see what I can do here, I understand”. One other thing I should add, in most jurisdictions, when you issue a security token, when you issue a private equity or debt instrument, it’s not tradable for some period of time. In many jurisdictions, there’s a hold period. So if I buy that security, I can’t trade it for at least six months or a year. And so, again, very different from the ICO world.
But what that will do, is it will create a truly mature market. And the final thing I will say is that as these things trade, they won’t trade with the frequency that these cryptocurrencies trade. It will be a much, much less dynamic market, but it will still be rich and deep, and it will still create the kind of liquidity that’s necessary for these types of assets.
So, I think, again, what people are going to find is, they’re thinking that in 2019, they’re still partying with the fun younger brother, and they’re going to find that they’re not having that; what’s really going to happen is that they’re going to be invited to dinner at the sensible older brother’s house. It’ll be a nice meal, but it’s not going to be as exciting. That’s the way that I see it.
Q: OK, understood. What countries do you think will see the most STOs in the upcoming year? Do you have any ideas on that?
A: We see these happening all over the place, and people coming with great ideas. I happen to think, though, that most of the activity will be in the United States. People say, “well, look at all the regulation, this is going to hold people up, and this, that, and the other”, but no, because what I’m talking about is a traditional security and we’re talking about mature, traditional financial markets. So I believe that you’ll see more of these coming out of the United States, along with other mature markets. So what we’ll see is more real security tokens being issued out of the traditional financial centers like, initially, the US and the UK, Hong Kong and Singapore and places like that.
But that’s just the beginning. What we hope, and, frankly what Securrency is – our real mission is – to see capital formation move out to the very edges, so that you won’t say, “Well, which jurisdiction is it?”, it will be all over the world, because … there’s no community in the world that doesn’t benefit from efficient capital formation, from the ability to match capital to good projects, good companies, to raise debt from sources all over the world to fund these great companies and great projects. The real point of this technology is to allow what used to only happen in these traditional financial centers to happen all over the world, and happen in smaller markets with smaller financial professionals who are able to service their local community. But it won’t start there, I don’t think. I think it will still develop through the traditional markets and then it will expand from there. That’s sort of how I see it.
Q: What about Securrency? Would you like to share what are the most prominent achievements of Securrency in 2018, and maybe share your goals for the upcoming year?
A: Sure! I’d say that first and foremost, it was the announcement of our unique security token protocol. We are the first and right now the only company that has a truly interoperable security token protocol, one that is multi-ledger, one that can maintain compliance on-chain and off-chain and interact in and with legacy systems and DLTs. The CAT-20 and CAT-721 protocol that we announced this year, I think, is our crowning achievement of 2018.
But remember, that that protocol, it is the thing that makes our entire system work, unlike some companies who just have an issuance platform. We have an issuance platform. Some companies have just been developing a token protocol. We have a token protocol. Some companies were developing a means for secondary market trading. We support secondary market trading. We have the whole end-to-end thing, and that’s what Securrency is built for, and it’s not a closed-off system, it’s a system where we provide our technology to multiple venues, multiple players, multiple financial professionals and allow them all to interact on a global basis, so that’s really what we do.
So, 2018, the announcement of our security token protocol made the news, but all that really was, was an announcement of how robust our platform is. Where I think we’re going is that you’re going to see us continue to focus more on what I would call real assets, real securities, both equity and debt, the real business, taking what has been developed over the course of many, many centuries in terms of financial instruments, and matching them to this new technology, and then using that to push capital formation all the way out to the edges, as I said earlier, and so we think that for Securrency for 2019, you’ll see us collaborating with the really mature partners in the space.
So, let me put it another way: in 2019, I think all of the amateurs will be shaken off of the playing field. I think in 2019, we will stop using the word “ICO” in the same sentence as “STO”, in fact, the term “STO” might go away, because the focus is not so much on the token as it is on the security, on the financial instrument. And I think you’ll see that the better players, the more sophisticated players, come together. There are many, many people within this space, but we tend to know who the good ones are, the ones who really understand the business and the long-term way to bring the ecosystem together, and are not just trying to make a quick buck. And you’ll see us more and more partnering with those folks and those people coming together to really support the growth of the industry.