Security Token Academy Expert Series Webinars: The Tokenization of Global Assets: An Overview
The Tokenization of Global Assets: An Overview
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Expert Panel


EXPERT SERIES: The Tokenization of Global Assets: An Overview


 

Adam Chapnick:

Hey everybody, it's me, Adam Chapnick, with the Security Token Academy. Now, welcome back.

Today we're covering an advanced topic of security tokens called, the tokenization of global assets. And if you need a refresher on the basics about security tokens, make sure to check out our video called "Security Token Overview, ICO's and STO's" this will provide you the background you will need for today's show.

Here at the Security Token Academy, we see the security token industry as really being born in 2018, and having a major impact on the global financial system. We think it will be a fundamental foundation of a new financial Internet.

Now today, I'm here in our Los Angeles studios, and I'll soon be joined by two of the leading experts in the security token industry to discuss the tokenization of global assets. But, before we get started, we want to take a moment to thank the sponsors of today's Expert Panel Discussion, VerifyInvestor.com and Inventus Law. We appreciate your continued support.

To help us further explore the future world of security tokens, we welcome Joe Cammarata President of tZERO, who joins us from New York, and Chris Houser, Co-Founder of Polymath, who joins us from Toronto.

Now in this first segment we're going to review how ICO's and even IPO's can use security tokens. And in the next segment we'll get into tokenization of global assets.

Okay. So, Chris, let's kick things off with you. Thanks for being here. Before we get into ...

Chris Housser:

Happy to be here.

Adam Chapnick:

Yeah. Good to have you.

Before we get into the topic of tokenization of global assets, what role do you see security tokens having for ICO's and IPO's?

Chris Housser:

I think ICO's really are going to start disappearing, and it's really going to start being a lot more of these STO's, or security token offerings. So, the Wild West was these ICO's that represented utility tokens, but going forward, rather than these self described utility tokens, it will be a lot of securitized assets, or securities, that are offered on the block chain, rather than these utility coins that we've seen in the past.

Adam Chapnick:

Right. Joe, there's a concept that digital tokens can make the trading process more efficient, less expensive, also faster. Can you, for everybody, explain what T plus three means, and the significance of the tZERO name?

Joe Cammarata:

Sure, Adam. Yeah there's quite a bit of efficiencies that can be gained by utilizing the block chain, and digital securities in general.

First off, starting with traditional Wall Street T3, and now recently, in the last year or so, is going out to T plus two, means it's the trade date plus three days to settle, and now, like I said, two days to settle. And in that time, we found that there was a lot of expenses, there's a lot of inefficiencies, and might even say games that we play between securities lending, and what goes on in those two or three day periods while securities are settling.

On the digital side, tZERO, is the trade is the settlements of same day we're settling the trade on the block chain. So it's settling in near real time, and you avoid the three day settlement process. You don't have cash tied up for three days. You can't have people naked, short selling your stock.

There's also the ability for the issuer to know who's holding their stock, who their token holder, in the traditional sense shareholders, are instead of them holding their securities at DTCC, which is centralized clearing in street names, and they don't know who their holders are.

Adam Chapnick:

Got it. So we'll talk some more about some of that later. This is very exciting.

Chris, you guys had stated that ICO's were the past, and STO's were totally the future, What do you mean by that?

Chris Housser:

I think you've seen, recently, there's been a lot of regulations and enforcement, subpoenas handed out by the SEC, because there's been a lack of clarity so far about what's happening with these ICO's, what's happening in the block chain space. People are raising a lot of money, billions of dollars, on white papers alone. There's a lack of financial disclosure, and I think that's going to end soon. And traditional shares that you see now, shares in equity funds, shares in VC funds. Those will be coming to the block chain with proper disclosures. And, yeah, the ICO's are ending, and we're looking to create a new trend, where compliant offerings take place on the block chain.

Adam Chapnick:

Joe, the big news about you guys is that you're going to be compliant. Now, what makes your company compliant that differs from other marketplaces?

Joe Cammarata:

So, Adam, just to start off where we came from, tZERO was founded from traditional brokerage. My background has been 27 years in FinTech building trading systems and, obviously, in the regulatory environment with FINRA and the SEC for years.

We already have an existing execution routing business called Speed Route. We do about two and a half percent of the U.S. exchange volumes on a daily basis. We have very high throughput, and our clients are existing broker deals and exchanges. We're one of the only U.S. firms that only deals with broker deals and exchanges. We don't have retail or buyside customers of any kind. So, we're very familiar with the regulated space.

And one of the other broker deals we have is called an ATS. It's called a Pro Securities ATS. We've been operating that, also, for quite a few years. And one of our challenges was that ATS's are very common in the U.S. equity markets. We didn't want to compete with our other broker dealer clients. So we started about three years ago doing overnight trading. We bring it up at 8 p.m. Eastern and shut it down at 4:00 a.m. to issue the first ever 24 five U.S. equity trading. So that's what the ATS was doing before digital securities, and still is today. In fact, we have two of the three largest online retail broker dealers, trading through the ATS overnight today. Reason I get into all that is our regulatory background. We're also integrated into all of the major auto management systems, Bloomberg, Fidessa, SS&C. So, we have all of the compliance components, we're already in a regulated environment, so it was not a difficult migration to move over to security tokens.

So, while ICO's were coming out in 2017, we sat there wondering, "When is the SEC going to step in and realize that these are securities?" And they finally did in June of 2017. And that's when tZERO really became noticed because we have the only ATS, or alternative trading system, that's actually approved as an ATS, and traded digital securities, which was Overstock, were the first public companies that did a digital security offering, that settled away from Wall Street entirely on the block chain.

Adam Chapnick:

Got it. Okay. Well, now let's talk about ICO's that were launched in 2017. Many of these were locked via regulation D, which meant that investors couldn't sell them for about 12 months. And soon, many of these lockups are going to be ending during 2018, which is going to allow investors to sell and trade. So, Joe, what does this mean for the security token trading platforms and exchanges?

Joe Cammarata:

So, we personally are very excited about it. In fact we're talking to a couple of companies. One of the challenges though, Adam, that we do have in looking at these. Some of these, as you mentioned, that they filed for Reg D, and they went the right way. The challenges some of them are having is, if they traded on an exchange, Bitfinex and some of them had, in fact, traded briefly on an unregulated exchange. They may have, in fact, lost their exemptions.

That's one of the challenges that we're looking at tZERO, to make sure any company that we take on to trade through the ATS, must be in strict compliance with federal securities laws, Reg D, Reg S, Reg A, Reg A plus. So, that's one of the challenges we have, but looking at the coming months, in fact, our own security token offering, the Reg S, or the tokens in general, are going to be issued in about May. We're looking at mid to late May. And then, we have 90 days in which the Reg S participants can trade those. So we're looking, in the worst case, having our own tokens trading in August, and we're hoping to have some participants potentially trading in May.

Adam Chapnick:

Terrific. Okay. Well, we'll keep an eye on that for sure.

So, Chris, will we see a number of companies appearing to help with the security tokens for regulated ICO's or STO's and IPOs? And how will that ... Do you think ...

Chris Housser:

That's exactly really what Polymath, our platform, is doing because right now if you want to launch a security token there is a legal hurdle, there's a tech hurdle, and there's a number of steps that need to be taken that's just really difficult for a number of these companies to compliantly issue a token. So, Polymath, what we're doing is we're really putting all those steps together and we're creating an ecosystem that can get these issuers, especially through the tech process, to be able to create a token that's, then, only tradeable to the parties or the authorized investors that their legal counsel has guided them to allow to participate in their offering. And then, as well, for secondary trading, we're looking at partnering with companies like tZERO to provide that additional liquidity for those authorized participants to, then, trade those tokens amongst each other.

Another party that's instrumental in this is the KYC providers, or the identification partners, that make sure the users, or the investors, are who they say they are, and they're allowed to participate and transact with these securities.

Joe Cammarata:

And just to add on to ...

Adam Chapnick:

Yeah, Joe.

Joe Cammarata:

Chris brings up a very good point there, I think it's worth noting. In 2017, when the ICO's were a hot commodity, and people were just jumping in. Because they were not regulated, they were not security tokens, people can invest crypto coins into them, or crypto currencies, willy nilly. What we found, when we launched our security token in late 2018, was that it's a very detailed process, and to Chris's, point KYC, AML, enhanced accreditation are very important, and it causes quite a bit of delays. You can't raise the same types of 50 million dollars in hours, or days, because you have all these requirements. So doing it the right way is a little bit more challenging, but in full compliance there's a lot more.

Now, the flip side of that, which is, again, worth noting, is of the first 100 million dollars we raised, about 70 percent of it was institutional players. So this was a big change in the market, where ICO's were not invested by any real institutions, and a security token now, that's compliant, and in, I guess, compliance with the SEC and FINRA, all of a sudden we had institutions coming into play in the space.

Adam Chapnick:

Yeah that is a really interesting development.

So, Chris, how can tokenization help liquidity of offerings by startups? Can you help viewers understand that?

Chris Housser:

Yeah. Right now, especially these exempt offerings, the private offerings, the ones under Reg D, there's very, very little liquidity. There's some OTC trades that can happen, but if you invest in a venture fund, you're looking at three to 10 years for some sort of exit.

But now, at tokenization, it creates the ability for, let's say, an accredited investor to be able to transact, or get out of, that VC fund a little earlier, and sell to someone else who's interested, who missed the initial offering, but they can participate at a later stage. And I think that's really what these tokenized assets represent. They provide liquidity for a lot of participants, and now people are able to exit positions that they want to, or get into positions that they may have initially missed, a lot more easily than in the traditional model that we see today.

Adam Chapnick:

Right.

So, Joe, do you think we're going to see more companies that are similar to Polymath and tZERO kind of popping up and working together? And if you think so, how do you think that would work and sort of an ecosystem?

Joe Cammarata:

Yeah, I mean, we're seeing them already. I think between tZERO and Polymath, we're kind of the first to are spaces, respective spaces. We welcome additional companies to come in. There's multiple exchanges, as there are 13 U.S. exchanges. And we know, for a fact, that many companies have applied for ATS's, to participate in digital securities, and security tokens. So, we're trying to help build a community. We don't mind competitors, in fact, we welcome it. We want to build out a compliant marketplace and avoid a couple of bad apples ruining the market for the rest of us. So, we welcome it. And Polymath has been great in working with us, and trying to create the new protocols, and advancing from the traditional ICO and ERC 20 protocols, to the new security token protocols, which we believe in a changed Wall Street and capital markets, in general.

Adam Chapnick:

Yeah.

Chris Housser:

I'll add to that, that I agree with Joe.

There are competitors, if you will, but I see it more as collaboration, and for all these parties to be able to work together, to really bring the securitized, or tokenized, securities to the world. And I think it's very important and ourselves, we can't do it alone, tZERO I don't think can do it alone. So, it's going to require the effort of a number of parties to work hand in hand with the regulators to bring this to fruition.

Adam Chapnick:

Well, we certainly agree. We're excited for lots more players, but especially about you guys.

So, Joe, a few more questions about the security token trading organizations. Okay. First, what's the difference between, you were talking about how ATS, the term with alternative trading system, what, for the viewers, is the difference between an ATS and an exchange?

Joe Cammarata:

So, in the U.S. markets, an ATS is an alternative trading system. An exchange is a place that buyers and sellers match. The primary difference is, they both have bids and offers, a book, if you will, of bids and offers. The primary difference is in U.S. regulation an exchange is allowed to display quotes. An ATS is typically referred to as a dark pool, where they are not allowed to display quotes, or any prices. So, the way they work is, you send their order to an ATS, and if there's a match, you get an execution, if there's not, you get a rejection. Whereas with an exchange, you can see what the price is, when you route an order there. And the reason people use ATS's, they are typically lower cost than an exchange.

So many firms, including Speed Route, in our smart order router, we try to intelligently look for the dark pools, the cheaper execution cost, before going to the LIT markets or the exchanges.

Adam Chapnick:

That is super helpful. I know a lot of people didn't understand that.

So, second question, Joe, still. This one's very fundamental, but confusing, people hear about the New York Stock Exchange, other groups, they talk about crypto trading, but what they really mean is crypto currency, or bitcoin like, trading, which that's not what we're talking about here today. It should be noted, as an aside, let me just note that China, and other countries, banned crypto currency exchanges back in September.

So, Joe, can you explain the difference in security token trading, that tZERO will offer, and how that's different from crypto currency trading?

Joe Cammarata:

Yeah. And I'm glad you brought that up. That's something that I try to do every time I speak to a group, is explain ... Really, I break it down a little bit differently, into three buckets. And the first one is crypto currencies. Everybody knows Bitcoin, Ethereum, Ripple, those are crypto currencies, more of a foreign exchange type of role. Then we get into ICO's and security tokens. ICO's and security tokens, again, are not crypto currencies and should not be confused. The ICO is more of the utility function, which, in the U.S., is proven to be potentially problematic for U.S. securities laws. So, security tokens are now kind of what I believe to be the next generation of utility tokens, or ICO's, but regulated, legal ICO's, where we're seeing institutional and retail investors coming into play.

Adam Chapnick:

Right. Now, who can use these trading platforms? Is it all institutional, Main Street, can they come in? What about American versus international?

Joe Cammarata:

So, from the security token standpoint, right now, depending on your offering. For example, tZERO has done a Reg D 506(c) offering, which requires accredited investors. These are private placements, which are typical private placement, requirements for accredited investors, so they need to be, either institution or accredited, and go through enhanced accreditation. As the restriction, maybe in Reg D one year restriction lists, then general public can come in, unaccredited investors could come in, and trade those after the one year old period.

Adam Chapnick:

Great. So finally, Chris, we've been talking about companies raising money through ICO's, but what about companies who are doing IPO's? That's a market of about 36 billion in the US. Do you see IPO's using security tokens, is this just going to be a total shift?

Chris Housser:

Eventually, I definitely do see that happening. I think the first movement for security tokens will be these exempt offerings, as Joe was saying, like a 506(c) or a 506(b), to accredited investors. Those types of offerings require less documentary disclosure, but eventually, once the tools are in place, I think some IPO's with full on documentary disclosure and financials prospectuses will eventually come to the block chain, as well, and we'll see these ICO's or STO's eventually become public offerings, that may even take over the traditional IPO that we've been seeing for a number of years.

Joe Cammarata:

And, Adam, I just ...

Adam Chapnick:

Yeah, Joe.

Joe Cammarata:

... want to expand on that for one second. What Chris said is very important, and it's worth noting. One of the rules, especially regarding Reg D, is if you get over 2000 investors you're required it to be a publicly reporting company. So, to ...

Adam Chapnick:

Good point.

Joe Cammarata:

... expand on ... Chris, yeah, we in fact certainly going to be publicly trading, but I believe all STO's are going to be publicly trading because of fractional shares of the tokens. You're almost, inevitably, always going to wind up with more than 2000 investors. So, there are going to be regulated instruments as we progress.

Adam Chapnick:

Yeah that's a great point. Okay. Well, thanks. This is a great discussion, so far, gentlemen. Now, a quick pause.

Today's broadcast is the second in our expert series of live online discussions on the new and fast moving security token industry. If you missed our first expert panel discussion on the evolution of ICO's to security token offerings, or STO's, you can watch that on our website at SecurityTokenAcademy.com. There, you'll also find even more videos and information about security tokens. And if you sign up for our website you can also join the conversation, by adding your comments and questions. And receive our newsletter 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 have a lot of exciting things coming up, including the first ever Security Token Summit on how exchanges and token trading platforms are taking on Wall Street. That is taking place at the Conrad Hotel in New York City on June 11th. You won't want to miss out on being part of that important conference. It's bringing together the major players in the security token trading and exchange industry including tZERO, CoinList, and StartEngine. Plus, David Weild, the former Vice Chairman of Nasdaq, will be a keynote. So, stay tuned for more information on speakers, tickets, and more.

Okay, guys. Now, let's move beyond the use of security tokens for ICO's and IPO's, and into an advanced area called, the Tokenization of Global Assets.

Now, Chris, I know this is really a key interest for Polymath, can you explain why?

Chris Housser:

I really think tokenizing assets is what it says, you're able to, now, tokenize absolutely anything. If you have a Picasso painting, you can tokenized portions of that painting, and now people around the world can own, who otherwise couldn't own a Picasso painting, because they don't have enough wealth to do so, they can now own one tenth of it, or one fifth of it, or one one hundredth of it, if you break it down into tokenized form.

The same can be said for securities, and essentially anything, real estate, it can all be tokenized, and offer a Democratic, or a diverse asset holding, for everyone in the world. If you want to own a piece of something, provided someone is willing to tokenize the ownership of it, it allows a wide holding, or a wide base, of users that can have ownership, or a portion thereof, of that particular asset.

Adam Chapnick:

Got it.

Joe, what do you see about the future of tokenization? How's that going to benefit people?

Joe Cammarata:

Well, actually, that's how we started off in the business. We started tokenizing assets about two years ago, on the block chain. And it started by offering software to a Bermuda client of ours, the name of the company is PTN, Private Transaction Network. And what they were doing was they were taking our software, they would go out and buy chunks of private companies, such as Palantir, for example. They would deposit that with a custodian. We would then tokenize a share. So, for example, if they bought a million shares of Palantir for eight dollars a share, they would deposit them, we would create digital representations of Palantir in our trading environment, where accredited investors could come in and register, and start trading shares of Palantir, which are a private company, and fairly illiquid. Well, now we've provided liquidity events and allowed them to trade.

Adam Chapnick:

Wow. When were you doing that?

Joe Cammarata:

We started in July of 2016.

Adam Chapnick:

Visionary. I love it. So, question, Joe, how do you see the security token trading platforms adding value to issuers and investors, in the area of the tokenization of assets? Is there some special benefit that you guys can provide?

Joe Cammarata:

Yeah, there's quite a bit. I mean, again, another tZERO product, which we're not going to get into much today, is called DLR's, digital locate receipts. It's a securities lending product, which adds a tremendous amount of efficiencies to beneficial owners, such as pension plans and hedge funds, where they have not been getting treated the best by Prime brokers in the previous years.

That being said, there's many benefits. And what we're finding is, issuers today, when they do an IPO, again, it's held at DTCC and street names, so they don't know who their holders are. They've got the three day settlement cycle. They have naked short sellers, basically betting against their stock, in more shares and they're actually holding. There's quite a bit of detriment to that, and the cost, I mean, listing on a national exchange is very expensive.

Whereas, in a security token, listing fees are drastically reduced, it's full fully transparent, you know who your shareholders are, it's all on the block chain. You don't have the naked short selling issue because it's digital shares, they're not held to DTCC, the issuers know who their shareholders are. So, there's many, many benefits. In fact, we've gotten about 2000 calls, if not more, from companies, and some of them even public companies, that want to delist and issue a security token.

Adam Chapnick:

Wow it's exciting. Chris, it sounded like you said you concur.

Chris Housser:

I was just agreeing with what Joe said, that a number of public companies are looking to do exactly that, to delist, and offer a securitized, or tokenized, form of their security.

Adam Chapnick:

Amazing.

Chris Housser:

It's exciting and I just want to reemphasize, also, what he said about transparency. I think that's really the beauty of the block chain is everything's transparent and that prevents naked short sellers, and other forms of bad acting, because you can see, you can monitor everything that's happening, in real time.

Adam Chapnick:

Absolutely. Yeah. So I think ... Joe.

Joe Cammarata:

There's also other options, as well. I mean, in an IPO you're getting equity, the company gets diluted. In security tokens, what we're finding is that, there's new aspects, and new elements, that are very interesting, and creative, and exciting. For example, the tZERO token is not a standard equity offering. We're providing a dividend, if you will, on adjusted gross revenue, there's discounts on products and services, and people are actually hoping for token appreciation.

So, there's different nuances that you're afforded, as an issuer, doing a security token, instead of a traditional IPO.

Adam Chapnick:

Yeah it sounds like there's kind of a robust community building sort of element to it. That is exciting, as well.

Alright. So, let's take a look at the major asset classes. We have real estate globally, which said at 229 trillion dollars. We've got equity at 70 trillion, debt's at about 100 trillion, and gold is at seven trillion. So, Chris, looking at these macro categories, are some of these more well suited for tokenization, and the improved liquidity we're talking about, than others?

Chris Housser:

We've had a lot of calls lately about real estate, especially real estate investment trusts, that seems to be a primary first mover, that's where a lot of the interest is. But, ultimately, as I said earlier, in this interview or this talk that, I think everything can be tokenized, and it will be tokenized in the future, but from what I've been seeing early is real estate might be one of the first movers that starts to take up the token space. And right now, I think the total market cap of all crypto currencies, or crypto assets, is 350 million or so. If one institutional investor starts moving into the space of security tokens gain traction, I think that market cap can easily double or triple, just by the amount of wealth that institutional investors can start bringing into the crypto space.

Adam Chapnick:

Yeah. Well, let's talk about the size of that real estate class. We've got real estate assets show 169 trillion dollars, in just residential, and 32 trillion dollars in commercial, and then they even count 27 trillion in agricultural.

Joe, do you have any thoughts on the tokenization of one of those residential versus commercial? Or, do they have any relative merits?

Joe Cammarata:

Yeah, absolutely. In fact, we've also had some of the early, as I mentioned, doing the private tokenization for private companies earlier. We also have had a lot of interest in, not only real estate, oil, and gas, diamonds, films, it's really getting out there, but in particular, to back up what Chris is saying is, real estate, from an institutional standpoint, is similar to what we're seeing in the STO's. Small retail clients, or just general accredited investors, didn't necessarily come in strong for security tokens, it was 70 percent institutional. They're going to be the early adopters to this, to security tokens in general, whether it be equities or real estate.

So, I believe that the commercial real estate will move first, and we're already seeing that. I have yet to see any residential real estate do any fractionalization, or tokenization, of interest yet, but I think it will come eventually.

Adam Chapnick:

Yeah. Are all my neighbors going to start owning my house? Is that what I'm going to start doing? It sounds interesting.

Joe Cammarata:

If you want to sell it.

Adam Chapnick:

Yeah, right?

Joe Cammarata:

Okay. So, Chris, do you have any thoughts about the relative value of the real estate, before I move on? Like which types?

Chris Housser:

I agree with Joe, and I also think commercial real estate will come first, but, you're right, maybe if you want to sell your house, some pieces of it as well.

Adam Chapnick:

Alright. Also, Chris, since people can already invest in real estate fund, REITs, what's the benefit? We were talking a minute ago about how we're seeing movement in REITs, what's the benefit of investing via security tokens there?

Chris Housser:

I think, one, liquidity, and two, it provides just a greater class of people that are, or a greater group of people, able to invest in that particular REIT. Depending on the regulations in the jurisdictions, we'd like to see it where, globally, anyone can participate in any REIT. They'll have to go through an identity and verification process, but now you could have someone in Australia, who's interested in a REIT in South America, and participate that way. So, it allows people worldwide to participate in offerings worldwide, which right now is a little more difficult, than I think the block chain will end up offering.

Adam Chapnick:

Absolutely. Now, that's a great point. So, now let's take a look at Wall Street and the security tokens. Chris, we hear that Wall Street firms are actively exploring the use of block chain, you hear that all the time. Are companies like you guys going to collaborate with Wall Street? Or, will you be in more of a competition, do you think?

Chris Housser:

As I said before, right now we're definitely looking to collaborate with anyone and everyone and help grow the security tokens movement. Wall Street has been, I think, a little slow to pick up the block chain, but now they're scrambling, and they're starting to realize that the block chain could take over a lot of what their business is. I know a prominent Wall Street figure said, about six months ago, that Bitcoin was a fraud, and now they're embracing it. So, yeah we're happy to work with everyone, and I think block chain will end up taking over, and let's work at it together.

Adam Chapnick:

Yes. Even Jamie Diamond could change his mind.

Chris Housser:

There you go, I didn't want to say his name.

Adam Chapnick:

No, hey, friend to the show.

So, Joe, is there a point in time, you think, when the security token trading organizations might have a material effect on the business or revenue of other ATS's and exchanges? Or, is everybody in play kind of in the same sandbox?

Joe Cammarata:

Well, I think there's a little bit of a conflict of interest right now. I mean, as we talk about STO's, it's really, what we're doing, and as we talked about earlier, between the DLR, we're disrupting securities lending, we're disrupting issuance, we're disrupting exchanges. Right? And these are, by far, the most profitable, and also inefficient, areas of Wall Street. So, part of the problem that we're seeing, as why Wall Street's not adopting this quickly, is it's almost corporate suicide to their securities lending business, their listing business, their investment banking business, and their trading businesses. So, they're kind of in a quagmire where they can't quite adopt it, unless they're going to kill off, or compete with, their other businesses.

Adam Chapnick:

That's fascinating. Okay, Chris, I hear you guys have some other things in the works. What can you tell us about the Polymath Venture Fund?

Chris Housser:

It's in the works. We're definitely looking at creating a fund that can, then, participate in a lot of these security token offerings. And we really feel that, we've been in a space now, well, I should say the security token space for a year, the block chain space for about five years, for myself, and we have a good grasp of what proper token economics are, proper offerings are, and we'd really like to create this fund that's able to really help support the security token network, and participate in some of these early movers that are looking to tokenize their securities.

Adam Chapnick:

Well, let's go. Let's move to a viewer question. We actually have questions from the viewers, which is exciting.

David B asks "How do you see tokenization affecting the securities exchanges, especially the requirements for B D regulatory compliance, and trading tracking reporting and record keeping?"

Gentlemen, your thoughts? Maybe, start with you, Joe? What do you think?

Joe Cammarata:

Yeah, I could take that one. It's actually something we've been dealing with proactively, and that's a big part of the regulatory environment. So, when we first went to FINRA and the SEC, back in 2015, and said, "Hey we'd like to issue, trade, clear, and settle, on the block chain." They said, "What's the block chain?" So, it was a nine month road show, with all the regulators, FINRA and the SEC, probably many, many, many people, many, many meetings throughout the country. And finally, they understood it. And the reason we got that, to the point of them understanding, was we had a parallel, all of the compliance. They wanted to make sure that we were following all the same rules, all the same broker requirements, compliance 15 C 35, recording requirements, custody control, utilizing and clearing from, the wallet at the clearing firm.

So, we've really paralleled almost all of the rules, and I think the fundamental difference, at the end of the day, for people to easily understand is DTCC is Wall Street's consolidated clearing, the block chain is Wall Street's decentralized clearing, or DTCC is centralized clearing, block chain is decentralized clearing, utilizing multiple trusted entities.

Adam Chapnick:

That's a great answer. Okay.

Our next question comes from another viewer, Jenny V. She asks, "What are the benefits of issuing security tokens, instead of traditional securities, if the issuer has to offer them, essentially, the same way?

Chris, do you have any thoughts on that?

Chris Housser:

It goes back to what I was saying before, it just allows them to offer their securities, and raise funds, from a wider group of people. Ideally, we'd like to see a world, or regulations, whereby anyone can participate in these offerings, given any jurisdiction. So, it lets people raise money from a much wider group of people. And also, I'll add to that, there's a lot of people who've been in Bitcoin and block chain since, let's say, 2011, 2012, and they have a lot of crypto wealth. They're not looking, necessarily, to convert it to Fiat, and then, just have dollars in their bank account, but they are willing to convert it and diversify into other crypto assets, and crypto securities. So, I think we would see an offloading of some of the generated crypto wealth, and have this group of people diversify into more secure assets.

Adam Chapnick:

That's great.

Joe Cammarata:

It's also ...

Adam Chapnick:

Oh, go ahead.

Joe Cammarata:

It's also much easier. It's a much easier process. I mean, you think about traditional, doing an IPO, and I'm going to use us as an example, we did a security token offering, and we've literally, within about 60 days, raised almost 100 million dollars. You would never be able to do that with a traditional IPO.

Adam Chapnick:

It's great. Alright.

Final question comes from Brad Johnson, who asks, "Will it be more common that investor distributions will be paid to token holders in the form of more tokens, like an ICO might, or that distributions will be made in Fiat currency, and the tokens simply instruct the sponsor who to send the cash distribution to?".

Guys?

Chris Housser:

I think really what's great about the block chain is, if a company wants to make a dividend payment, they can say, "Dividend payment is happening on July 1st", and we'll take a screenshot, or a snapshot, of all token holders, prior to that date. And then, at the time of dividend payment, everything can be paid out proportionately on the block chain, and there's no need to interoperate with banks because it just happens automatically, and programmatically, on the block chain, which will allow those types of payments to happen much more efficiently, and at a much lower cost, and take out a number of middlemen.

Adam Chapnick:

Great. Well, we've survived the lightning round. So, let's talk about a timeline of the security token industry, and what the two of you predict for the industry, moving forward.

Joe, as you look to 2018 and beyond, do you have any observations or predictions about the security token industry, or the security token trading organizations, in the U.S.?

Joe Cammarata:

Yeah, absolutely. We're finally starting to see it accelerate here. In fact, I'm meeting with the SEC next week. We've been invited to collaborate with them. I'm sitting with about 40 regulators in Washington D.C. to, now, finally, start furthering security tokens. I think they realize it's happening, regardless of what they'd like, and they want to make sure it's done correctly. We're seeing a lot more interest, really in the previous couple of weeks.

And, as I mentioned, we're looking for, and I don't know if you saw that recent press release, that we have put a prototype out of our token trading system, to let people see it. There's a video, there's a movie, we're open for business. We're just waiting for the Reg D guys to free up, and be able to trade, or our own Reg S offering, which will be ready by August. So, we're potentially looking at a couple, maybe trading in May. In the worst case, we will start trading our own in August.

Adam Chapnick:

That's exciting. You mentioned Reg S, do you have any predictions about international security token, STO's, security token trading organizations?

Joe Cammarata:

Yes. So, that's something else that we've gotten a lot of interest from are international exchanges. And we're dealing with quite a few already, who realize that ICO's may not have been good, but they could start listing. Many international exchanges are very small, and have not had a real large amount of volumes, or issuances, in the previous years. They now see this as an opportunity. For example, we have an arrangement, or an agreement, with Colombia. Colombia Mercantile Exchange, Colombia stock exchange, with its many, many smart entrepreneurs, great businesses, that can't raise capital. Well, they can now go to the exchange and issue a security token, and get distribution through the brokers, and just treat this just like an equity in their local country.

Adam Chapnick:

Fantastic. Alright, Chris. Your turn. Any predictions you want to make about the security industry in 2018, or beyond?

Chris Housser:

Definitely. Yeah, I'm optimistic for sure. Right now, of that 350 billion dollar market cap, I think maybe 10 million of it is self described security tokens, that we're seeing traded on the block chain, at present. I think you will start seeing a lot more security token offerings coming out, throughout the rest of 2018, and by 2019, that the market cap of securities versus utilities, securities will start to overtake utilities. And by 2020, securities I think will dwarf utilities. And once institutions are involved, it will be hundreds of billions, if not into the trillions, of value of securitized assets trading on the block chain, compared to a much lower number for the so-called utility tokens that we're seeing today. So the movement is starting now, and it's going to grow very fast, I think.

Adam Chapnick:

Awesome. Now, Joe, I also had a note to ask you about the comments from tZERO this week, regarding the trading platform, and possible operations in May. Any other quick update? That's what you were just referring to, right?

Joe Cammarata:

Yeah. As mentioned, we're talking to a couple of companies about potentially listing their Reg D, and or Reg A plus, in May or June. But we're waiting on confirmation of those.

Adam Chapnick:

Great. Alright. Well, we're holding our breath. It's exciting. Alright. Well, that's a great discussion. I want to thank you so much, Joe Camerata with tZERO, for joining us today from New York. And also thanks to Chris Houser, from Polymath, for joining us from Toronto.

And a special thanks to our sponsors of today's show, VerifyInvestor.com and Inventus Law. And thank you for tuning in.

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.

Stay tuned for more information about our Security Token Summit on how exchanges and token trading platforms are taking on Wall Street. The summit is taking place on June 11th at the Conrad in New York City. You want to be there to join David Weild, the former Vice Chairman of NASDAQ, along with representatives from tZERO, CoinList, StartEngine, and many others, for what is sure to be a great conference.

That's it for today. Again, thanks to all our guests, and all of you, for watching. For Security Token Academy, I'm Adam Chapnick.