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Episode 34: An interview with Juan Hernandez, CEO and founder of Crypto Disrupted https://www.openfinance.io _Episode 34: An interview with OpenFinance Network CEO Juan M. Hernandez https://www.openfinance.io_www.podbean.com Tokenizing the Financial World with Juan Hernandez of OpenFinance Network Also . available on iTunes For more episodes of , or . Crypto Disrupted subscribe on YouTube subscribe and listen on iTunes

Tokenizing the Financial World with Juan Hernandez of OpenFinance Network

How to check if a transfer of Security Tokens between wallets is valid Thanks to the , investors can now hold their securities ownership records in the form of tokens (also known as “Security Tokens”), and these tokens . This brings with it the advantages of fractional ownership, the ability to move those assets between different marketplaces , and direct access to trades between individuals by the simple mechanism of transferring those tokens. Digital Securities technology can be kept in any wallet that allow 24/7 trading But Digital Securities are different from other digital assets. Cryptocurrencies like Bitcoin or Ether can be transferred to any wallet in the world without any additional control, but , and as such ownership can only be transferred under certain circumstances. These circumstances will vary from one security to another, because they will depend on the specific kind of asset involved (for instance, equity in a company has different properties than a limited partnership in a venture fund), the way it has been registered (or is exempt from registration) and the current ownership structure (since some limits may have already been reached). securities are regulated instruments The way to ensure that only transactions that are consistent with the applicable regulation, or the constraints that the issuer has, is for Digital Securities to implement . Transfer restrictions are coded as part of the smart contract implementing the Digital Security, and are executed for every transaction requested, like transferring tokens from one wallet to another. In Securitize’s Digital Securities Protocol, these rules are part of the Compliance Service, transfer restrictions which I covered in some detail in a previous post. The result of these restrictions is that when a token holder tries to transfer their tokens to a new wallet address, the transaction may fail, and looking at the details in some block explorer like will show an error like this one: Etherscan A reverted transaction in a DS Token (note that the error is marked as Reverted. Different errors may have a transaction fail, which does not mean that it was restricted by the smart contract. An example for this is the “Out of gas” error, which means that the gas limit set for the transaction was too low for it to complete, and that provided more gas the transaction could have been completed). While the error above shows that the smart contract did not consider the transaction valid, a limitation here is that it is unclear why it was not approved. To improve this situation, provides a mechanism to allow for validating the transfer of tokens before attempting any specific transaction and without having to spend any gas. This is based on the preTransferCheck() method exposed by DS Tokens, which allows it to simulate a transfer between wallets, returning whether that transfer is valid, and if not a specific reason. Securitize’s DS Protocol How can we use these checks? The DS Protocol mechanisms allow these checks to understand immediately whether a transfer of tokens between wallets will be possible without having to spend any gas, and there are two main points in which its usage will improve the interaction with Digital Securities: , to facilitate the trading of Digital Securities, they manage the process behind the scenes. They only present orders that are available to be executed, and they perform all the checks (including using the preTransferCheck() method) so that when you try to sell or buy your tokens the process is executed smoothly. That is the case, for instance, with , a regulated marketplace that allows the trading of several DS Tokens and . In regulated marketplaces OpenFinance Networks has recently opened trading for US investors . Since the DS Token interfaces are public and preTransferCheck() can be used without any cost, we expect that wallet providers will integrate this into their experiences, so that when dealing with Digital Securities they will be able to inform users about the potential issues with token transfers before they are executed, and even suggest options that will facilitate transfers to be completed (like transferring a different amount of tokens or checking if the destination address is correct). Directly on wallets But even without these players, anyone can actually invoke these checks in the DS Tokens. This involves calling the preTransferCheck()method in a smart contract, which may sound like something very complex for someone not familiar with these concepts, but let’s look at how this can be done in three (relatively) simple steps. 1. Go to the “Interact with Contract” section in MyEtherWallet Use a browser to go to . https://myetherwallet.com/interface/interact-with-contract The first thing you will see is that MyEtherWallet requires access to a wallet to allow you to interact with a contract. For checking the validity of transfers, you don’t need to use any specific wallet (it is not necessary to check using any of the wallets involved in the transaction) so any wallet will work, even a completely new wallet you can create in the MyEtherWallet site. I usually use for this, but this is not mandatory. MetaMask Give access to a wallet in MyEtherWallet After giving access to your wallet, you will see something like this (and if you don’t, make sure to go to Contract > Interact with Contract in the left-hand menu): Interacting with smart contracts using MyEtherWallet 2. Set the token address and the DSTokenInterface ABI Once you have accessed the “Interact with Contract” section, you will see a form with two fields: . This is the Ethereum address of the token you want to check for transfer restrictions. If you don’t know the token address, you can search for the token in and look for the “Contract” information. For instance, in the case of the token, their address is available : Contract Address Etherscan SPiCE VC here The contract address for a DS Token The ABI, or , is the way for a software component to indicate how to interact with it. In the case of a DS Token, it is the way to show that it has a preTransferCheck() method and how to use it. So in order to interact with a DS Token, we only need to provide the DS Token ABI, which luckily is available , and you simply need to copy and paste the code on that page. some weeks ago, and as part of that, the ABIs were also made available precisely to be able to work with the smart contracts, as shown in this post. ABI/JSON Interface. Application Binary Interface here Securitize’s DS protocol interfaces were published Once the contract address and the ABI have been provided, you will see a screen like this that will allow you to continue: Filling the contract address and ABI 3. Use preTransferCheck Once you hit Continue, you will be presented with the following screen, which allows you to select one of the methods offered by the DS Token to interact with it: Selecting the method to interact with the contract From the “Select an item” drop-down, you can select which of the DS Token methods you want to use. We will select preTransferCheck() which will present this screen: preTransferCheck() parameters The dialog allows you to provide the parameters that will be used to invoke in preTransferCheck() , in particular: which is the wallet address that will send tokens _from, , which is the wallet address that will receive tokens _to , the number of tokens to send _value (but bearing in mind decimals, so if a token has decimals we will need to add zeros to take this into account) Filling this and then hitting “Send” will invoke preTransferCheck() in the contract and will let you know of the result. But remember, , it will only perform the checks to determine whether the operation would be approved if the tokens were actually sent. So you can test this without fear, because no tokens will be moved and no gas will be spent by trying this. this will NOT send any tokens For instance, we can try to send one token (in the parameter we see 100000000 because this is a token with 8 decimals, so we have to use that value to represent 1 token) between two addresses as shown here: _value An invalid transaction The code response shows that the transfer would not be approved, with the ‘additional reason’ information stating “Wallet not in registry Service”. This is because the destination wallet has not been registered to any known investor, and one of the main restrictions imposed by Digital Securities is that all holders must be known, so this kind of arbitrary transfer is not allowed. If instead of checking with preTransferCheck() the sender wallet owner had directly tried to transfer the tokens, the transaction would have failed with a “Reverted” error as we saw before. A different test, with a different destination wallet (this time one that has been registered to be able to hold security tokens) would give a different result: A valid transaction In this case, the response is that this transaction would be “Valid”, so if the wallet owner tries to do the actual transfer of the tokens, this would be approved and the transaction would be successful. So, what next? As we have seen, the DS Protocol allows us to immediately check whether a transfer of tokens between wallets will be allowed — without having to spend any gas. The process described in the sections above is not very complex, but can clearly be a bit cumbersome, which shows that we still are in the early days of Digital Securities. As wallets integrate these mechanisms, and there are more improvements happening both in the experience and capabilities that this technology brings, little by little we will be making financial transactions more flexible and powerful. Securitize delivers trusted global solutions for creating compliant digital securities. The Securitize compliance platform and protocol provide a proven, full-stack solution for issuing and managing digital securities (security tokens). Securitize’s innovative DS Protocol has the highest adoption rate in the industry and enables seamless, fully compliant trading across multiple markets simultaneously. Multiple Securitize powered digital securities are already trading globally on public marketplaces with many more in the pipeline. You can learn more about Securitize at our website: www.securitize.io And you can join the conversation about the Digital Securities revolution in our Telegram channel .

Understanding transfer restrictions for Digital Securities

A Primer March 20, 2019 Last updated on - It all began with an investor-directed venture fund called . In May 2016, it set the record for the largest crowdfunding campaign in history, with a participation of 18,000+ stakeholders that raised 11.5 million Ether (ETH) or US $150 million. It was enabled by the Blockchain technology where the or at least it was until some bad actor(s) exploited a vulnerability concerning recursive calls in smart contract code, enabling them to divert one-third of the funds to a subsidiary account. The stolen funds were put in a 28-day holding period and the Ethereum community debated about possible solutions which resulted in a split of Ethereum network: where the hacker still has the funds and; the one in which they do not - .[1] The DAO Code is Law The DAO (ETC) Ethereum Classic (ETH) Ethereum Later on July 25th, 2017 - the ( ) concluding Tokens as securities. So, a computer code behind a decentralized autonomous organisation, essentially became a security in the eyes of SEC and government agencies around the world started taking note; issuing statements which resonates with those of SEC, and at times more generic resulting in a unclear stance on cryptocurrencies and tokens for the public.[2] US SEC SEC from here issued an investigative report The DAO We must understand that was a special token. It was and not tied to any particular nation state or country and embodied specific claims in its structure and that the code itself was the . The questions of how to deal with the governments was really hard to answer and it still is. Professionals in favor of cryptocurrency regulations are welcoming the stance of SEC to consider most tokens as security while still exploring exemptions (e.g. ) to raise funds for their businesses. provides a from US securities regulation if there are no direct selling efforts within US to US residents/companies. The DAO stateless prospectus SEC Form D Regulation S safe harbor to issuers A research paper entitled proposed two policies to mitigate legal uncertainty concerning token sales - Crypto-Securities Regulation First, we suggest tailoring disclosure requirements to the code-driven nature of token sales. Such an ICO-specific safe harbor would offer a clear and less burdensome path to EU law compliance for token sellers who suspect that their tokens may qualify as securities. This only requires the Commission to amend its delegated 2004 Commission Prospectus Regulation. Second, we propose that, on an international level, governments form a compact to bestow certainty about the application of their respective securities regulation regimes to token sales. This is, first, to avoid regulatory overkill on the one and regulatory lacunae on the other hand in online-mediated, global token sales. Second, overlapping, and partially contradicting, securities regulation regimes can even undermine each other. In the end, only a joint international regulatory regime can efficiently balance investor protection and investor access in the face of the novel generation of decentralized blockchain applications. [3] The paper also calls for an International Convention for crypto securities to help provide the investors and issuers a clear understanding of regulatory landscape. provided a nice summary of the STO Market in her which tells us that geographically, Tatiana Koffman article Due to the nature of complex regulatory environments, US is in the lead for total STOs in the market, with Switzerland taking the second spot. Additional activity is noticeable in European countries, while Asian markets, although leaders in ICOs, are yet to catch up to STO activity. We expect untapped markets to continue to be curious about STOs, following the regulatory lead of the US. while the securities on offer lead by with revenue-share, tokenized funds and asset-backed deals, equities and bonds trailing behind. So to summarize… STOs allow projects to raise funds in a regulated manner, provides investors with rights over assets, profits or revenue in a company and reduces legal risk. Security Token Standard The call to extend the popular and the has been in work for months resulting in describing it as having many of the characteristics of both fungible and non-fungible tokens . Security tokens are designed to represent complete or fractional ownership interests in assets and/or entities. While utility tokens have no limitations on who can send or receive the token, security tokens are subject to many restrictions based on identity, jurisdiction and asset category. [4] The token is believed to have incorporating differentiated ownership, error signalling, document references, gate keeper (operator) access control and issuance / redemption semantics. ERC-20 non-fungible ERC-721 ERC-1400 Supported by participating organisations and individuals including but not limited to - , , , , , , , , . The efforts for a standard will bring uniformity in its structure for the issuers to tokenize and issue various kinds of tokenized assets (securities on blockchain) easily. Polymath OpenFinance Tokeny.pl Vertalo ChronoLogic Scott Purcell Goldmoney Securitize.io celebrus strategies According to a report published in , the securities token platform and recently that tokens can be compliant on a decentralized exchange. CoinDesk Polymath Loopring demonstrated hooray! Recent STOs auctioning US $66 million building on Ethereum Blockchain; a occupied property in downtown Miami, Florida. The company is said to tokenize some US $260 million in four private real estate and debt transactions[6] Invenium Capital Partners WeWork - A real estate investment trust (REIT); single-asset REIT intends to only own the St. Regis Aspen Resort raised funds_[7]_ Aspen Digital - A late stage, pre-IPO technology growth fund; an effort to democratize investment [ ] Andra Capital AndraCapital - Fine Art - Andy Warhol’s 14SEC through dutch auction bidding on platform Maecenas sold Maecenas - Real Estate; investors offered to receive either analog or digital interests in the property in partnership with using 436 & 442 East 14th St, Manhattan propellr AirSwap Ltd - Gaming/Gambling (revenue share token structure) [ ] Lottery.com Lottery.com - STO Exchange (offered equity with revenue participation) tZero - Venture Capital Fund (allowing investors to own up to 10% equity) [ ] 22x 22xFund , , , , , , , , , , , are also worth looking at. SPiCE VC Blockchain Capital Neufund Monetizr (MTZ) INDX Capital BlockEstate TrustToken Corl Gainfy Leaseum Partners Vertalo Hypd Securities Agencies’ crackdown on crypto crowdfunding , a bitcoin futures firm which got its domain seized by US authorities back in September 2018 recently announced -“ Funds of the investors will be returned and founder Patrick Brunner would also be required to pay US $26,000 in disgorgement fees. [9] 1Broker registered in Marshall Islands We are pleased to let you know that we settled the two lawsuits without admitting or denying the factual allegations of their complaints on March 4th 2019.” SEC did not bring any charges against (or ) but made it clear that federal securities law applies to anyone who offers securities in the US or to US citizens.[8] The DAO Slock.it [ ] ICO planned on August 1, 2017. Harbour not Harbor cancelled ether raised after SEC’s investigation several days after the ICO. Protostarr refunded ICO that promised 13x profit was . PlexCoin halted by SEC **Munchee’**s MUN Token was described as multiple times in their whitepaper, but it to be a . Munchee stopped the ICO ( ) and returned the proceeds while cooperating with the investigation. utility SEC concluded security which raised US $15 million In Conclusion Yes. Startups and Small & Medium Sized Enterprises (SMEs) are often facing cash crunch barriers for them to access capital markets doesn’t help. Young and innovative firms should not be restricted by existing system. Should STOs exist? Security tokens can have a huge impact on the financial system and society at large, as they combine the elements of blockchain technology, especially transparency and security, with the legal certainty of traditional financial instruments. This allows firms of any size to securely enter this new evolving ecosystem. Security tokens promise to provide startups and SMEs with an alternative form of financing that gives rise to a new capital market with 24/7 trading that obviates the need for brokers and bank custody of securities.[5] Perhaps. STO projects are usually registered entity which add to the legitimacy of the project and have the issuers accountable for their actions. Are they better than ICO? Does regulations mean Security Tokens will see upward-only growth ? Not really, but sure they are a regulated form of crowdfunding and have tremendous potential to change the securities markets. A on tells us that even the highly regulated traditional market is also driven by hype. is still feared among the investors. should be a lesson that even though the businesses are at times legit, the valuation should be accessed with utmost care. Just because the offering is now called ICO or IEO or STO - it still is risky, and being informed is important. Netflix documentary The China Hustle Financial crisis of 2007–2008 Dot-com bubble There is an old joke that the biggest lie on the Wall Street is that - This Time, It’s Different. — [Disclaimer] This article is not a legal advice. The views are personal and the ones that refer to external sources belong to them. Sources The DAO (organisation), wiki - https://en.wikipedia.org/wiki/The_DAO_(organization) Cryptocurrency Regulations - https://medium.com/@rahulmanuwas/cryptocurrency-regulations-a-complete-summary-912e6de0c7a4 Hacker, Philipp and Thomale, Chris, Crypto-Securities Regulation: ICOs, Token Sales and Cryptocurrencies under EU Financial Law (November 22, 2017). European Company and Financial Law Review Forthcoming. Available at SSRN: or https://ssrn.com/abstract=3075820 http://dx.doi.org/10.2139/ssrn.3075820 The Security Token Standard - https://thesecuritytokenstandard.org Ante, Lennart & Fiedler, Ingo. (2019). Security Token Offerings on the Blockchain: Capital Market Access for SMEs?. 10.13140/RG.2.2.21378.94408. Invenium Capital Partners - https://www.coindesk.com/66-million-building-to-be-tokenized-on-ethereum-blockchain-in-record-deal Coindesk report on Templum hosting token sale — https://www.coindesk.com/regulated-trader-templum-hosts-security-token-sale-for-luxury-resort Sean Au & Thomas Power (2018) Tokenomics - https://www.packtpub.com/big-data-and-business-intelligence/tokenomics Coindesk report on 1Broker - https://www.coindesk.com/sec-cftc-charge-bitcoin-futures-firm-1broker-with-securities-law-violations

Security Token Offerings (STOs)

OVERVIEW: A tokenized version of assets should be able to demonstrate three key properties on the blockchain: the underlying asset: the virtual representation of the asset; the ownership of the asset: the identity of the asset owners; and the compliance rules of the asset: the set of regulatory and compliance rules governing the ownership and transaction of the asset. Currently, privacy and compliance seem to be the major challenges in launching STOs. Depending on the jurisdiction, investors have to go through strict Know Your Customer (KYC) and Anti-Money Laundering (AML) processes to be compliant and eligible to invest and trade securities. However, due to the borderless, peer-to-peer, transparent and decentralized natures of cryptocurrency, some frictions exist between tokenized assets and compliance. These challenges will have to be solved for the legacy system to transition into a tokenized system. Currently, a few issuance platforms are offering solutions for tokenizing securities. We have divided them into 3 categories: Protocols on Ethereum, Side-chains on Ethereum, and a Security Token blockchain. We then analyze the pros and cons of these different type of solutions, and discuss how the space could evolve. Introduction: As the hype for Initial Coin Offerings (ICOs) is weakening, the attention is now shifted toward the Security Token (ST) industry. The ST industry is currently at its nascent stage, in which many startups are trying to revolutionize the traditional financial ecosystem. The transition from traditional assets to tokenized assets involves a set of requirements on both technological and compliance perspectives, making the tokenization process more complicated than simple tokenization through ERC-20 like we’ve seen for ICOs in the past. In my research, I will discuss the various components and challenges in tokenizing securities, evaluate the pros/cons of other solutions, and create a thesis around how the space could evolve in the next couple of years. From a fundamental perspective, a tokenized version of assets should be able to demonstrate these key properties on the blockchain: The underlying asset: the virtual representation of the asset. The ownership of the asset: the identity of the asset owners. The compliance rules of the asset: the set of regulatory and compliance rules governing the ownership and transaction of the asset. Other desired properties include privacy, programmability, governance, disclosure, liquidity, and scalability. Smart contract introduced programmability, allowing the implementation of more complex assets, such as bonds, commodities or derivatives. For example, Tokenized real estate investment trust (tREIT) involves a series of real estate debt and equity assets in a single tradeable unit. In this case, smart contracts can support for complex dynamics such as risk, rebalancing, debt defaults, in addition to just simple ownership on the blockchain. Currently, privacy and compliance seem to be the major challenges in launching STOs. Financial securities are currently regulated and controlled by centralized authorities, following strict regulations such as GDPR, SWIFT, and FINRA, who ensure the privacy and protection of investors. Depending on the jurisdiction, investors have to go through strict Know Your Customer (KYC) and Anti-Money Laundering (AML) processes to be compliant and eligible to invest and trade securities. However, due to the borderless, peer-to-peer, transparent and decentralized natures of cryptocurrency, some frictions exist between tokenized assets and compliance. For instance, cryptocurrency uses pseudonymization, in which the investors’ addresses are not directly reflecting their real identities. However, FINRA and SEC require that the identity of the investors are fully known and their transactions and holdings are reported periodically by the companies and exchanges. In the tokenized securities space, a list of eligible investors who passed KYC and AML would have to depend on third parties to connect their real identities to their public addresses. Only then, the investor addresses are valid for investments and trades as they are approved at the code level and automatically compliant. Another example is that German laws require the data of tokenized assets issued in Germany to be traded among German parties and cannot leave the jurisdiction, which contradicts the way data is currently stored across nodes around the world on public blockchains. Moreover, privacy isn’t completely available to the investors because all the transactions and token holdings are visible and traceable on public blockchains. These challenges will have to be solved for the legacy system to transition into a tokenized system. Currently, a few issuance platforms are offering solutions for tokenizing securities. We have divided them into 3 categories: Protocols on Ethereum, Side-chains on , and a Security Token blockchain. Next, we will analyze the pros and cons of these different type of solutions, and discuss how the space could evolve. ethereum 1) Protocols Built on Ethereum: Currently, the most advanced Security Token issuance platforms, notably , and , are building their solutions on the top of existing blockchains, with Ethereum being the most utilized blockchain. STOs are issued through their token standards, respectively DS-Protocol, ST-20, and R-Token. These projects are operating as centralized entities and working with third-party compliance validators for KYC and AML. Securitize.io Polymath Harbor Ethereum, released in 2015, is the first and most proven secure blockchain with smart contract capabilities, allowing for more complex use cases to be implemented on the blockchain. Issuing STOs on the top of an existing blockchain does have its benefits, such as having access to the interoperability among different protocols, existing tools, developer community, and smart contract functionalities. Smart contracts can be used to define trading and governance rules, as well as dividend mechanisms. Pros and cons of protocols built on Ethereum Figure 1: On the other hand, addresses on are under pseudonyms, in which the identity of the token holders is hidden, causing friction with compliance. To solve this problem, issuance platforms have to verify that the investors actually own the addresses themselves by 1) Asking the investors to submit their addresses and link back to their email 2) Create an address directly for the investors 3) Utilize an address verification tool (like the one provided by ), in which the ownership of addresses are verified by asking investors to conduct micro-transactions through . After all the investors are verified, the list of approved addresses (whitelist) is included into a smart contract for the token issuance, specifying the list of eligible investors for investing/trading as well as other trading permissions. For any new addition or subtraction of investors, the smart contract will have to be updated through various mechanisms. ethereum Vertalo MetaMask Additionally, Ethereum is a general purpose blockchain, which doesn’t have functionalities specifically catered towards the needs of STs. Ethereum can easily represent fractional ownership on the blockchain through ERC-20, as well as transfer restrictions and simple dividend mechanisms through smart contracts. However, adapting to the legacy system, standard securities laws and more complex use cases such as debt, derivatives, disclosures, and voting would require a significant amount of coding efforts to bypass the challenges from the constrained code-semantics of smart contracts. Moreover, smart contracts have limitation in size due to the higher cost of deploying larger smart contracts for more complex use cases and limitation in portability as Solidity cannot be carried over to other blockchains’ smart contracts. This could impact the overall scalability for conducting transactions, building new functionalities, and providing trust in the system. 2) Side-Chain Built on Ethereum: While we haven’t seen a side-chain focused on STs, some existing Ethereum sidechain solutions include , Loom ( / @mcu11inan), Skalelabs ( / ), etc. A sidechain is a separate blockchain that is attached to its parent blockchain using a two-way peg, that enables interchangeability of assets at a predetermined rate between the parent blockchain and the sidechain. POA Network 👽 Dilanka @ LOOM Jack O’Holleran Chadwick Strange Specialized side-chains on can be an interesting alternative, as it can offload specific sets of computation to isolated environments then reflect the results back to the main-chain. As not every process needs to live on-chain, components such as disclosures, compliance, voting/governance, and integration with external sources can be achieved with a side-chain, making transactions more scalable while utilizing the security of Ethereum. Additionally, the challenges around privacy can be solved on side-chains. The cost, time and effort of creating a side chain are also much less than creating a new blockchain. Side chains also allow cryptocurrencies to interact with each other. For example, an issuer can test out the tokens on the sidechain, before pushing them on to the main chain. ethereum Pros and cons of side chain built on Ethereum Figure 2: Some of the cons of side-chains are around the requirements for its security. Sidechains need their own miners, and without enough mining power, they could be compromised. Therefore, there’s an initial requirement for an extensive network of miners to help secure side-chains. Additionally, a federation needs to be assigned by the side-chain developers to serve as an intermediate point between the main chain and the side-chains. This designated centralized group has the power to lock and release tokens, creating a risk for attack or bribery. 3) A Blockchain Focused on Security Token: A Security Token focused blockchain can help solve some of the fundamental challenges around privacy and governance, as well as improve trust and scalability. The co-founder and managing director of , who also previously launched Securitize, , is a major proponent of the idea of creating a blockchain for Security Tokens. He recently introduced his new project, Ownerna, which offers a new blockchain infrastructure solely focused on Security Tokens. SPiCE VC Ami Ben-David The nodes are composed of experts who are financial and commercial entities (for example. SEC approved in the US), understand the legal ramifications of securities, and authorized to do ownership management, KYC (Know-Your-Customer), KYA (Know-Your-Asset) and transactions. In the proof-of-ownership system, the chosen primary node takes care of KYA, a full set of documents that legally define the ownership of off-chain asset and the rights of token holders, stakes its reputation, uploads the asset onto the blockchain and writes all the transactions to the blocks. In return, the primary node is rewarded with the asset’s lifetime revenues for helping validate its transactions. This way, only the primary node can access the details, allowing for privacy for the investors. Owners and assets can also manage their privacy level as needed. Additionally, having specific nodes validating transactions can allow for higher transaction speed, providing a more scalable infrastructure that can support a larger volume of transactions required in traditional exchanges such as . Nasdaq Ownera also plans on offering an open-source regulation repository containing regulation Add-Ons, each covering a specific regulation per country, asset type, etc. Any asset can choose which regulations to enable, saving the effort for different protocols that go through this process themselves. Additionally, exchanges can save energy from supporting different issuance protocols separately by directly supporting the Security Token blockchain instead. New consensus models can also be implemented to be optimized for Security Tokens at the blockchain level, instead of creating artificial consensus mechanisms on the top of existing blockchains. Pros and cons of Security Token focused Blockchain Figure 3: Although a new blockchain might sound to be the better solution, the creation of a new blockchain will take significant effort and time to be built out, meaning that it can take years before any applications are built out. A new blockchain would also require the design of a new native cryptocurrency to incentivize network participants, in which the token economics will have to be well defined to ensure sustainability. Also, once deployed, the viability and security of the new blockchain will also have to be tested over time. Furthermore, the development of the developer community, and tools would also have to start from nothing. Conclusion: Most of the current solutions are protocols built on the top of Ethereum, and some new projects are looking to develop an ST-focused blockchain. We believe that the privacy issue will take time to be solved in different phases, as we are in the early stage of the STO revolution. First, privacy will most likely be off-chain, heavily relying on trusted centralized authorities that have access to the investor information and keeping them stored locally. Next, privacy solutions based on side-chains could help segregate data into different sets, hiding them from the public network as a whole. Finally, privacy can directly live on-chain on a more specialized Security Token blockchain, which can allow owners and assets to control their privacy access level. Evolution of privacy for Security Tokens Figure 4: As of now, the issuance solutions offered are protocols based on Ethereum, allowing for simpler use cases of tokenization. Although we believe that a more specialized blockchain will eventually appear, it doesn’t mean that previous Ethereum-based protocols are not valuable and will go out of use in the future. For instance, the privacy issue in public blockchains might also be solved in the future if privacy solutions such as ZKP (Zero Knowledge Proof) technology, or Bulletproof are successfully implemented. Some of the companies who are exploring ways to implement ZKP on Ethereum include , and Ernst & Young ( ). The existing protocols can also transition to different blockchains if they prove to be better. For example, Securitize’s first protocol implementation will work over the Ethereum blockchain, but they also plan on transferring its architectural model to additional distributed ledger systems. Zcoin Project EY Ops Chain Public Edition prototype Evolution of Apps and infrastructure from Figure 5: Union Square Ventures On a side note, recently introduced an interesting relationship theory between infrastructure and applications. We think that the space will evolve in a similar way in which breakthrough applications in specific verticals, for example, real estate, will appear first to disrupt the space and inspire for a new protocol or blockchain to be developed to allow for similar applications to be built at scale. This process will be repeated among different verticals that are related to securities. Over time, the one size fits all protocol or blockchain will emerge as different use cases are fully explored and understood, providing a more powerful and scalable platform that would be the equivalent of AWS for securities. Union Square Ventures Hype cycle of the Security Token industry Figure 6: As of now, we are still in the early stages of the Security Token ecosystem, in which different issuance solutions are still being developed and tested. We believe that it will take at least another 4 years for the STO ecosystem to grow and mature from both a technical and regulatory perspective, allowing for a sustainable transition from the traditional securities system into a tokenized system. Until the space becomes more mature and viable, the majority of the early adopters of STs are going to be from the cryptocurrency space rather than the traditional players. As the different STOs and exchanges launch next year, we predict that the lack of liquidity and challenges around implementing complex use cases and securities laws will bring us closer to the reality and decrease the overall hype and expectations around STOs. Over time, more efficient technology and new regulations will appear and help drive the growth and adoption from the traditional players. Please let me know your comments, and feel free to reach me out at remi@8dcapital.com if you have any more questions about this topic. Sources White Papers: , , , Harbor Securitize.io Polymath OpenFinance Dani Grant & from Union Square Ventures: Nick Grossman https://www.usv.com/blog/the-myth-of-the-infrastructure-phase from : Yogita Khatri CoinDesk https://www.coindesk.com/ey-reveals-zero-knowledge-proof-privacy-solution-for-ethereum of / : Sebastian Wurst Zcoin ($XZC) Cryptocurrency Zcoin Project https://zcoin.io/zcoin-implement-zero-knowledge-proofs-ethereum/ from : vasa Hackernoon https://hackernoon.com/difference-between-sidechains-and-state-channels-2f5dfbd10707 Owerna: https://ownera.io/wp-content/uploads/2018/10/Ownera-Presentation.pdf from : Jesus Rodriguez Hackernoon https://hackernoon.com/do-security-tokens-need-a-new-blockchain-benefits-challenges-part-i-48f281f5101e from : Jesus Rodriguez Hackernoon https://hackernoon.com/do-security-tokens-need-a-new-blockchain-benefits-and-challenges-part-ii-de480e54c12a from : Jesus Rodriguez Hackernoon https://hackernoon.com/do-security-tokens-need-a-new-blockchain-part-iii-the-building-blocks-7adfa7239bb0 from : Jesus Rodriguez Hackernoon https://hackernoon.com/do-security-tokens-need-a-new-blockchain-part-iv-how-about-a-sidechain-acd8686d8fae from : Jesus Rodriguez Hackernoon https://hackernoon.com/security-token-2-0-some-thoughts-off-chain-vs-on-chain-governance-2cba087389ab from : Jesus Rodriguez Hackernoon https://hackernoon.com/some-cool-protocols-to-consider-for-the-next-generation-of-security-token-platforms-98697f0c55e6 from : Jesus Rodriguez Hackernoon https://hackernoon.com/the-elephant-in-the-room-security-and-privacy-protocols-in-security-tokens-a6687af8d1d6 from : Julianne Sloane Hackernoon https://hackernoon.com/can-security-tokens-fulfill-their-promise-of-liquidity-938022e53133 from : Deepa Sathaye @Fluidity https://medium.com/fluidity/automatic-regulatory-compliance-with-ethereum-892f01ef9eaa from : Jesus Rodriguez Hackernoon https://medium.com/@jrodthoughts/about-disclosures-and-information-asymmetry-in-security-tokens-fc83c350548a from : Julianne Sloane Hackernoon https://hackernoon.com/can-security-tokens-fulfill-their-promise-of-liquidity-938022e53133

Should There Be a Blockchain for Security Tokens?

Overview: 8 Decimal Capital The evolution of digital tokens has coincided with a great deal of risk from being in the financial market ecosystem. But in the future with the development of RegTech, a compliance layer will be created to automatically ensure KYC/AML along with other compliance requirements. Then, the cross-border regulatory synergies will be likely to emerge. Although the Security Token industry is currently still in its nascent stage, many organizations and companies are debating how this new technology can be used. However, by investing early-on, investors can help to accelerate this process and help the industry maximize its potential. In the future, financial agents and regulatory agents will still exist. But the funds in the industry will provide more than just capital and there are more roles for them to fill. Writer: Ran Wei Translator: Zoe Qian Editor: Brian Hough predicts that the tokenization of assets will likely catalyze future adoption of cryptocurrencies and blockchain technology. With the development of this new technology, the regulations of different countries will be programmed into tokens, and regulatory collaboration between countries will also occur. 8 Decimal Capital This digital transformation is why 8 Decimal Capital is bullish on the Security Token space and investing across different segments of the market to help the industry grow. The Development of Security Tokens Overview The tokenization of securities will likely take place among more diverse types of assets. Some of these assets include mixtures of stocks and bonds, dividend rights, and non-traditional financial assets, such as real estate and art, which used to be difficult to trade. The evolution of digital tokens has coincided with a great deal of risk from being in the financial market ecosystem. This proves why more regulations must be built at the protocol level. But in the future with the development of RegTech, a compliance layer will be created to automatically ensure KYC/AML (Know Your Customer / Anti-Money Laundering) along with other compliance requirements. Then, the cross-border regulatory synergies will be likely to emerge. In China, the typical investor is familiar with public funding, IPOs and stocks. However, they are not used to, nor ever get the chance to, invest in the larger and more diverse market of private funding, private equity, debt, and alternative investments. Once the market is open to more participation from investors, then the liquidity of trade will provide investors with more opportunities to diversify their portfolios. Some people would argue that by mandating the KYC process for every investor and requiring only accredited investors in the game would initially raise the bar for participation and in turn lower the liquidity of cryptocurrency. 8 Decimal Capital will argue that this is not the case. The size of the U.S.’s private equity market is 22 times larger than the public market. Through being more compliant and including more institutional investors, the cryptocurrency market is opening up to an expanding market instead of a shrinking one. As PwC and Securitize highlight in the graph above, private funding (in billions) is 22x larger for private offerings than IPOs. Although the Security Token industry is currently still in its nascent stage, many organizations and companies are debating over how this new technology can be used. However, by investing early-on, 8 Decimal can accelerate this process and help the industry maximize its potential. The Security Token Offering Process and the Main Platforms The Security Token industry includes distribution platforms and rating agencies, payment platforms and stable currencies, exchanges, KYC, consulting services companies, and liquidity providers, among many others. The most important participants are the projects, the distribution platforms, and the ST exchanges. At 8 Decimal Capital, we believe a successful Security Token Offering (STO) requires a legitimate company to launch a compliant Security Token, which will be traded by whitelisted investors on compliant exchanges. Industry Segments Issuers Issuance Platform Investment Banks Smart Contracts to Track Spending and Revenue Payment Platform and Stable Coin Investing Exchange KYC/AML Governance Platform SaaS (Software-As-A-Service) Platform to Allow Investors to Vote Help with Company Charter Agencies Custodian Liquidity Providers Media/PR Agencies Rating Agencies Compliance, Law & Accounting Information Platforms Admin Consoles Moving from Pre-STO to Issuance (release) to lifecycle-management (full process management), we are finding the best projects that deliver the required services and invest in them. Beyond Capital 1.) Legal — Partnership with Tackett Bartlett Regulation drives innovation locally and globally. Within the global market, various “blockchain friendly” countries have emerged which boast government encouragement of blockchain and cryptocurrencies, while other “blockchain unfriendly” countries have more regulations for companies and projects to pass through before reaching the public. For example, the United States has exemptions Reg D, Reg A+, Reg S, and Singapore MAS also has similar regulations that require specialized efforts to remain compliant. Companies in China that want to conduct STO may need to set up VIE architecture. Under Section 5 of the Securities Act of 1933, all offers and sales of securities must be registered with the U.S. Securities and Exchange Commission or qualify for an exemption: Regulation D, Regulation A+, Regulation S, and Regulation CF. In terms of legal services, 8 Decimal Capital is partnering with firms, such as Tackett Bartlett LLP, which is experienced in the cryptocurrency space. For example, Berkley Vice Mayor, , is an advisor to 8 Decimal Capital. He is also a strong supporter of the blockchain field and an advocate for the concept of Crypto Municipal Bonds. Ben Bartlett Ben Bartlett , Berkeley’s Vice Mayor and an Investment Partner at Octavia Capital, believes in the future of blockchain and the concept of Crypto Municipal Bonds. Ben Bartlett and Shane Tackett co-founded Tackett Bartlett LLP which consists of five service modules: Token Design, Global Taxation, Investment Fund , Corporate Structure, and Regulatory Compliance. For more information: http://www.tackettbartlett.com/ 2.) Investment in Securitize, Issuance Platform When it comes to Security Token issuance platforms, 8 Decimal is a strong supporter to Securitize. For more information: Medium: | LinkedIn: | Twitter: https://medium.com/@securitize https://www.linkedin.com/company/securitize/ https://twitter.com/securitize_io In the future, RegTech must be a combination of manual, legal, and technological standards. The Securitize platform will provide standardized templates and processes for creating Security Tokens for real assets. From a technical standpoint, ERC20 tokens are fungible. There are various securities in the traditional financial industry including partial stocks and ABS-type (Asset-Backed Security). Those securities are not fungible. There is a need to be a differentiation of characteristics between fungible tokens and non-fungible tokens. Examples include the ST20 standard for the Polymath platform, the SRC20 standard for Swarm, the R-token standard for Harbor, and the ERC-1400/ERC for the Ethereum community which are currently available, along with the 1410 standard and ERC-1404 standard. The existing insurance platforms include , , Securitize ( ) and , among others. 8 Decimal’s decision to invest in Securitize ( ) was largely based on its stunning track record of successfully issuing projects. Also, , , and 22x ( ) are all Digital Security Issuers that used the Securitize platform, all of which verify the success of Securitize. Polymath Harbor Securitize.io Swarm Securitize.io SPiCE VC Blockchain Capital 22xFund 3.) Trading Platforms: OpenFinance Exchanges that are prepared to enter the STO market can be divided into two categories: (1) cryptocurrency exchanges; and (2) traditional stock market exchanges. The above graph includes a portion of Coinbase’s current licenses. For more information and to see the full chart, check out: https://www.coinbase.com/legal/licenses?locale=en-US ( ) is one of the fastest growing crypto exchanges that dives into the ST market. Coinbase has successfully acquire a series of licensed financial institutions since last year, and now has multiple licenses such as BD, RIA and ATS. At the same time, tZERO and Templum ( ) are starting from scratch. Coinbase Coinbase Templum Blog On the other hand, traditional exchanges are also looking for ways to cut into the field of cryptocurrency, including the London Stock Exchange and Nasdaq, among other big players. However, 8 Decimal believes that some countries with strong policy flexibility, such as Malta and Gibraltar, may be more likely to issue compliance licenses to Security Token exchanges. The licenses required for the STO mainly include: ATS/ATLS (Alternative Trading System License), RIA (Registered Investment Advisor Licence), BD (Broker-Dealer Licence), RAE (Clearing and Transaction Execution Licence). Overall, the existing cryptocurrency exchanges are more familiar with crypto trading, but they often do not have the necessary licenses in place, while the traditional exchanges are the opposite. Private equity trading in secondary markets has already existed. Platforms such as Equidate, , and the SecondMarket, LP interest trading platform are making equity trading more flexible and smooth. The main pain points they are addressing are the liquidity of private company equity and other Alternative Assets. They are working to provide a more transparent, wide-spreading online trading and hosting platform for such alternative assets. EquityZen In terms of trading platforms, well-known projects to look at, to name a few, include , , , ( ) OpenFinance tZERO Templum Gibraltar Blockchain Exchange GBX We chose to invest in . OpenFinance OpenFinance was founded in 2014 to provide trading and clearing and settlement services. OpenFinance CEO, , holds a Computer Science degree from Northwestern University and an MBA from the Kellogg School of Business, and has many years of experience in financial exchanges. OpenFinance already has multiple STOs in the pipeline, such as SPiCE VC (SPiCE). It is available for Regulation D, S, A+ or CF exemptions, and can also be traded on ATS (Alternative Trading System). In addition, OpenFinance and Firecoin have also reached a deep strategic cooperation. Juan M. Hernandez For more information: Medium: https://medium.com/@openfinance | Twitter: https://twitter.com/OpenFinanceIO | Website: https://openfinance.io/ 4.) Investment in the Ecosystem In terms of information platforms, 8 Decimal invested in DappRadar and is incubating STO.review. For more information: Medium: https://medium.com/dappradar-com | Twitter: https://twitter.com/dappradar | Website: https://dappradar.com/app/676/fomo3d In terms of liquidity providers, 8 Decimal invested in ( ). AirSwap Ltd AirSwap Team For More Information: Medium: https://medium.com/@airswap | Twitter: https://twitter.com/airswap | Website: https://www.airswap.io/ Into the Future: In the past, people bought stocks and signed contracts based on paper documents and signed them manually. Now with ’s electronic signature tools, electronic signatures in the US are beginning to have legal precedence. The future trend is to further develop and digitize the process of information matching, contracting and transaction. DocuSign For example, allowing multiple witnesses (changing the notary’s model), on-chain data non-tempertable, and compliance standards (such as KYC/AML/qualified investor certification standards) to be turned into contract layers. To do this requires online and offline collaboration and the integration of regulations and technology. Code is Law. 8 Decimal also believes that in the future, the financial agents and regulatory agents will still exist. But the funds in the industry will provide more than just capital, there are more roles for them to fill. 8 Decimal Capital: Shape the Blockchain Future | | | | Medium LinkedIn Twitter Facebook Website Email: contact@8dcapital.com if you have any more questions about this topic. 8 DECIMAL CAPITAL is a multi-strategy investment firm focusing on token and equity investments. 8 Decimal currently has more than 40 portfolio companies with an AUM of 60M USD. The investment team consists of more than 10 venture capital veterans, researchers, and trading professionals. The advisory board comprises Fan Zhang (Former Founding Partner of Sequoia Capital China), Karen Chen (Former CEO of UBS China) and Ben Bartlett (Vice Mayor of Berkeley). Based on the professional fund index ranking agency Token Metrics , 8 Decimal was ranked second out of the 51 active crypto funds. 8 Decimal is also well-received in China, named one of the top 10 funds in the blockchain industry by both 36氪（36Kr.com） , Chain Capture , and Odaily , as well as named one of the top 20 funds by Tsinghua X-Lab and Youth Education Chain League.

From Research to Use-Case: How 8 Decimal Capital Strategically Constructs Its Security Token…

ICO’s Have All But Completely Exited Stage Left. Enter The Security Token? As the great cryptocurrency winter of 2018 extends its grip by yet another month, at various blockchain conferences worldwide has been rife that a is on the cusp of forming. This new breed of digital assets is one that seeks to comply with existing regulators, rather than to subvert. Security tokens are are programmatically designed to be compliant with relevant regulations. In the words of influential crypto podcaster and fund manager : anecdotal evidence security token wave Anthony Pompliano If cryptocurrencies like Bitcoin are considered “programmable money” then you can consider Security Tokens a version of “programmable ownership.” With recent examples of assets being tokenized ranging from the , to a , to a Picasso painting (facilitated by a certain ), to private shares of startups from and , momentum is clearly favouring this nascent development. Whisper it, but we may even be witnessing the first shoots of a transition from the wild west that was ICO-mania making way for a ‘Security Token Offering (STO) spring’. St. Regis Aspen Resort New York real estate fund John McAfee Germany Brazil Setting The Scene Before I proceed any deeper — and without suggesting that STOs will necessarily step in to fuel yet another market-wide bull run (out of scope for this piece), I would highly recommend that you revisit this great introductory piece on tokenization: _Not everything will be tokenized, but those that can be will be._hackernoon.com How does tokenization work, anyway? Followed by this other persuasive piece which lays out the full transformative potential for the security token space: _Last summer I wrote Traditional Asset Tokenization, in which I hypothesized that a broad array of assets will move to…_hackernoon.com The Security Token Thesis In short, there are a whole host of benefits driving the security token thesis for mainstream adoption, including 24/7 markets, fractional ownership, rapid settlement, automated compliance and asset interoperability. The purpose of this article is to provide the reader with an understanding of what we define as the — think of it as a series of production line steps which are necessary to create and trade a security token — and an overview on how the ecosystem is shaping up around these layers, especially in markets with more developed regulatory frameworks relevant to STOs such as the United States. security token value chain The Security Token Value Chain (aka Yet Another Stack) The following provides a layered structure of how we’ve classified the various security token ecosystem players today (from bottom to top): hamburger Deal Flow Origination Issuance Platforms Services Secondary Market Trading Defining The Security Token ‘Ecosystem Stack’ Today While the above provides some form of general structure around the process, do note that some of the activities (e.g. auxiliary services) may overlap across multiple other layers, and/or differ entirely in various other flavours as designed by the platform stakeholders. Deal-flow Origination We begin with the very bottom of the security token hamburger stack. Simply put, deal-flow origination refers to the process of matching the demand and supply of capital for investments. The degree of customer accessibility to these investments vary along a spectrum. On one end there are more open platforms such as Kickstarter where the average retail investor Joe may participate in funding the development of cool product ideas; while on the other end there are platforms such as where only accredited investors are able to join in on equity investments in Silicon Valley-based technology startups. AngeList As a rule of thumb, the general requirements for an aspiring investor to partake becomes more onerous as factors such as deal exclusivity, target capital raise, average cheque size and financing complexity increases. Said requirements usually entail attaining investor accreditation status, more disclosure requirements and sometimes higher fees. Current notable deal-flow origination platforms involved in the STO space include , and . Indiegogo — most notable among the examples for having been in the traditional crowdfunding space for about a decade — lent its credible reputation to back the ambitious by being the platform through which investors could participate in the initial STO. Most platforms have side-stepped requirements to file for traditional securities offerings by allowing only accredited investors to participate, while some such as Republic allows for regular retail participation via relying on an alphabet soup of ( ). Republic Crypto SeriesOne Indiegogo St. Regis Aspen Resort tokenization project SEC regulatory exemptions more on that later Fancy purchasing a fraction of a fancy ski resort? Issuance Platforms and Core & Auxiliary Services Moving along to the meat within the security token stack, we come to the issuance platforms. These players specialize in providing the technical smart contract know-how necessary for the primary issuance of programmable security tokens. They provide solutions that handle for things like investor accreditation, KYC/AML requirements, capital raising taxation, as well as the myriad of other more specific shareholder provisions (e.g. first rights to refusal, residency requirements, shareholder ownership concentration rules, etc.). They aim to address as far as possible the common needs of the majority of asset issuers. The goal for these solutions would be to automate compliance while maintaining immutability and process transparency. Implemented well, such solutions will ensure that situations such as the — whereby human error during various ledger reconciliation processes resulted in duplicate shares of Dole Foods being issued on various ledgers — does not wastefully occur. Dole Foods case Most issuance platforms come bundled with services aimed at meeting the common requirements of potential STO issuers in a bid to make up a full-service solution. This would include dashboards for token issuers, and functionalities to allow for them to easily conduct corporate actions such as shareholder voting, rights issue, dividends, interest payments, revenue share distribution and ESOPs, with the aid of document signature tools for token-holders. Examples include , which enabled the tokenization of the Aspen project on Indiegogo, as well as Coinbase-backed startup , which had facilitated the tokenization of two blockchain investment funds, and . Templum Securitize Blockchain Capital SPiCE VC Rounding off the list of services necessary are trust companies and custodians — a category of companies that are absolutely integral to making tokenization tick, especially in the case of most assets that are not (i.e. today’s “ ” assets such as stocks, real estate and art). Their jobs as custodians are to ensure that these assets — be it the stock certificate, property title deed, physical painting — are being held in a secure location, with token-holder ownership rights being clearly defined and legally upheld, and that the tokens in issue that represent them are always counter-balanced in a 1:1 ratio by the underlying asset. Key players to have established this niche for themselves are and . natively-digital real-world PrimeTrust BitGo Secondary Market Trading Finally at the very top, secondary market trading is the layer which provides security tokens with their much-heralded benefits of liquidity and 24/7 trading & settlement. An intuitive, easy-to-use trading interface constitutes table stakes for any form of digital asset exchange product these days. For any STO exchange to materially value-add to the user experience, they will have to be cognisant of the rules of the legal jurisdiction that they operate in, as well as that of its customer clientele. For instance, they may automatically facilitate reporting on capital gains taxes applicable for American users who have profited through trading on the secondary market, but not for Singaporean users (where capital gains taxes do not apply for retail investments). Other differentiating factors relate to the user experience journey. Exchanges can be set up such that they give users the option of self-custody of their own digital assets, or — for those who are less savvy technically with managing private keys — provide them with just a simple, user account plus password system. Exchanges can also help reduce the time taken for trade settlements on their platforms through the use of . Stablecoins will allow for such trades to happen atomically, which implies that I receive my sales proceeds the moment that my sell order gets paired with an interested buyer, with my security token going the other way in one single, simultaneous action. This is an exponential improvement over the settlement speed for securities trading in existence today, where T+2 represents the gold standard (cross-border stock trading settlement sometimes require T+5 days even!). stablecoins A couple of juggernauts have already made their mark. has raced ahead on the partnerships front, forming a to list the tokens issued by an assortment of niche issuance platforms. , a blockchain subsidiary of NASDAQ-listed company Overstock, has built up a sizeable war chest after the conclusion of its own US$134M in August. Purchasers of their tokens are promised regular dividend payouts tied to the profits generated by their exchange business. OpenFinance Network whole slew of collaborations tZERO STO round The Land Grab Race Is On Calling the space fragmented would be an understatement at this point in time; slide not an exhaustive representation of all notable players The current landscape remains largely fragmented with players finding their niches and gradually establishing partnerships. While there are unique cases of projects such as that are seeking to provide a complete end-to-end solution for potential STO issuers — or rather ETO (equity token offering) issuers, as they have chosen to term it, most are specializing within a certain layer within the stack , before partnering with other projects that complement them. For example, — a tokenized fund specializing in investing in blockchain startups (deal-flow) has partnered with Securitize for the issuance of their tokens, and also with OpenFinance Network to enable the of their tokens. Neufund SPiCE VC future subsequent trading Another observation to make would be that the structure of most of these blockchain startups are rather akin to that of a “traditional” tech startup, operating on a service revenue-based business model. Exceptions include those which have made use of STOs to coordinate platform incentives and/or raise capital (e.g. Neufund, SPiCE and tZero) from investors in exchange for the promise of future dividends, along with several others which have done ICOs (e.g. Polymath, Rate3 and TrustToken) or have distributed their tokens via mining incentives (e.g. Ravencoin). Finally, it is also noteworthy to mention that the large majority of these players are based in the United States, highlighting the immaturity — as well as the consequent potential — of the asset tokenization space in other markets. Still Early Days On The Regulatory Front While acknowledging that there have been several forward-thinking, tokenization projects that have made news headlines recently, one cannot stress enough on the infancy of the entire security token space as a whole. Most of the marquee, flag-bearing tokenization proof-of-concept projects so far are just that — PoCs that are being sold to a small, of investors only, in order to stay on the right side of regulators. Mass retail adoption are still some significant way off. ‘real-world’ select group accredited Having said that, it is apparent — and heartening — that the clarity of regulatory exemptions available within the United States has resulted in many security token ecosystem projects and partnerships flourishing there. Ken Nguyen, founder and CEO of Republic was recently interviewed in a great podcast, in the process demystifying the various US regulatory exemptions which STO projects could seek: It does not appear long before other Asian ‘pro-crypto’ jurisdictions such as Singapore and Japan start embracing STO innovations on their shores as well, allowing for the retail investor masses — — portfolio exposure to security tokens serving as proxies for investments which they may never have got the access to otherwise. not just accredited investors This is a thought which truly excites me; imagine the multi-fold returns of having been able to invest in one of the early rounds of equity fundraising for startups such as Grab or Gojek. Think of the whole new design space which issuers could work with to increase customer engagement and loyalty, such as, for example, allowing for priority booking for token-holders. With jurisdictions like the United States laying the groundwork for others to observe and adapt, what was once solely the domain of the rich and connected may soon become within touching distance of the masses within the near future. Disclosure: I work at Rate3 Network , a protocol that handles asset-tokenization and identity management across both Ethereum and Stellar blockchains.

Why You Need To Know The Security Token Value Chain (aka Yet Another Stack)

Capital Formation — the killer app for blockchain?

Liquidity is one of the golden promises of security tokens as a new asset class. Unfortunately, until now, the security tokens have shown an almost concerning lack of liquidity. Most people tend to see liquidity as a factor related to the maturity of the market and assume that it will develop organically in the security token space. The truth is a bit more complex. Liquidity is in fact a sign of maturity in financial asset classes but only those with the right infrastructure. Many mature financial asset classes remain highly illiquid as they don’t possess the correct building blocks for nurturing organic liquidity. Similarly, other asset classes with the right liquidity framework take years fail to achieve relevant levels of liquidity in its early days. Today, I would like to explore some of the key building blocks that need to in place to enable liquidity in security tokens both from the technical and financial standpoint. If there is a single principle I want you to take away from this article it would be this: In the context of security tokens, the market could remain highly illiquid unless we establish the right infrastructure for the different participants to engage in trade dynamics. “In financial markets, liquidity is something you build for not something that happens”. From the perspective of traditional financial markets, liquidity manifests in two main dimensions: funding and market. Funding liquidity is typically associated with the availability of credit or funding mechanisms that allow institutions to borrow money or take on leverage. Complementary, market liquidity refers to the ability of market participants to transact or of the overall market to absorb large purchases or sales without affecting the overall prices. Both market and funding liquidity are closely related and mutually reinforcing dynamics. When funding liquidity is abundant, traders have the resources with which to finance trading positions that smooth price shocks and make markets liquid. In order to build funding and market liquidity, security tokens need to establish the basic protocols for the funding and trading of assets. Differently from other financial asset classes, security token liquidity is an infrastructure building exercise rather than a financial engineering process. Liquidity pools for security tokens are relatively available as they are a combination of traditional security investors and crypto advocates. However, the bridges for those liquidity pools to participate in the security token market are not available. Without those bridges, liquidity in security tokens will remain an elusive goal that can impact the evolution of the entire space. The Exchange Liquidity Myth Arguably, one of the biggest fallacies in the security token space is associating liquidity with the availability of the new generation of security token exchanges. By exchanges, I am specifically referring to centralized marketplaces such as tZero, OpenFinance or Malta’s Security Token Exchange which will enable the listing and trading of crypto-securities. Exchanges are certainly an important component to achieve liquidity in security tokens but they are far from being an enabler of that market dynamic. Without infrastructure artifacts such as disclosures, custody or liquidity protocols and without high quality projects, security token exchanges will be just a centralized marketplace for highly illiquid, digital assets. There is also the question of whether security tokens will be actively traded in centralized marketplaces or in a peer-to-peer fashion( I will cover this in a future article) which is not exactly trivial to answer. Considering all those factors, centralized exchanges should almost be seen as one of the latest manifestations, rather than an enabler, of a liquid security token market. The Building Blocks of Liquidity If centralized exchanges are not the answer to liquidity then what is it? In my opinion, liquidity will be the result of building not one but a series of infrastructure building blocks and protocols. The following figure attempts to provide an evolutionary view of liquidity in security token markets considering some of the fundamental building blocks that will act as enablers of this market dynamic. Disclosures If you have no information about a crypto-asset how could you possibly engage in any level of fair trade? Disclosures are the most basic block that needs to be in place to fight information asymmetry and illiquidity in the security token space. A security token disclosures protocol should be associated with any crypto security and integrated into exchanges and marketplaces. Protocols like incorporate some interesting ideas about disclosures that can be relevant to the security token space. TruSet Liquidity Protocols Programmability is the biggest advantage of security tokens compared to traditional securities. As a result, many of the market dynamics in security tokens can be express as programmable protocols and liquidity is not the exception. Protocols that facilitate liquid trade dynamics must become a key building block of the security token space. Efforts like or are very relevant in this area. Fuidity’s Two-Token-Waterfall Bancor P2P-Swap Trading Protocols I believe that a significant percentage of security token trading won’t take place in centralized exchanges but in peer-to-peer decentralized models. For that to happen, p2p or swap protocols should incorporate aspects of crypto-securities like compliance or regulation. Protocols like or are incredibly well positioned to lead this effort. AirSwap Kyber Network Debt Tokens Nothing increases liquidity in an illiquid market like cash flow and, for that, debt vehicles are ideal. Compared to equity tokens, tokenized debt represents a lower barrier of entry for most investors into the security token space and one that can offer higher level of short term liquidity. I believe debt tokens are going to become one of the most prominent forms of liquid crypto-securities in the short term. Protocols like provide a foundation for debt protocols that can be applied to the security token space. Dharma Decentralized Marketplaces If many security tokens are going to be traded in a decentralized model, then we are going to need some marketplaces to enable that. Decentralized marketplaces are likely to become relevant for some forms of crypto securities. is a good effort in this space. AirSwap’s Spaces Custody Custody is one of the aspects that helps to legitimize any financial market and increase its liquidity. Security token custodian products have the potential to unlock new forms of liquidity that are just not viable in the current market. Established financial players such as , , and are well positioned to lead this segment of the market. Fidelity Digital Assets Northern Trust Goldman Sachs Intercontinental Exchange Centralized Exchanges As mentioned before, centralized security token exchanges are certainly an important component for achieving liquidity in the security token market. Protocols in areas such as disclosures or custody should be incorporated into centralized exchanges. Efforts like tZero, OpenFinance and the Malta’s Security Token Exchange are leading the charge in this area. Futures Futures is a vehicle often used to increase and hedge liquidity in a financial market. As security tokens evolve, we are likely to see futures as the first form of derivative that can increase the levels of liquidity in the space. Other Derivatives In financial markets, liquidity foments the creation of new products that, in turn, help to increase liquidity. Derivatives is one of the most prominent financial models that can unlock new forms of liquidity not available to traditional asset-backed products. Options, exchange traded funds(ETFs), composed products like collateralized debt obligations(CDOs) are some of the products that are likely to achieve relevance in this space. These are some of the building blocks that are necessary to build and unlock liquidity in security tokens. As the security token market evolves, programmability might unlock new forms of liquidity that are not available in other forms of securities.

Some Big Picture Thoughts About Liquidity and Security Tokens

Promising greenfield for new entrants or battlefield of incumbents? In our first publication — The Era of Tokenization — market outlook on a $24trn business opportunity , we outlined our granular market sizing of tokenized assets and the potential of a $24trn industry by 2027. As shown, in the short-term tokenization will especially affect standardized issuing products such as Equity or Bonds , benefitting from significantly lower issuance and transaction costs (e.g. a substitution of smaller IPOs with STOs). Subsequently, we expect the accelerating tokenization of smaller and more illiquid and non-fungible assets (e.g. SME shares or Real Estate), attributed to the benefit of easy ownership transfer leveraged by blockchain technology. While the benefits of asset tokenization seem obvious, mainstream adoption and the capturing of full market potential will not only require the current crypto ecosystem to professionalize, but will also require existing business models in the traditional financial industry to adapt. The often-seen reluctance of incumbents to enter the space provides FinTechs and other startups with a multi-billion dollar market opportunity. Business Opportunities At a very high level, the financial services landscape for tokenized assets can be consolidated under the following framework: Within this article, we will focus on the financial services opportunities, while just briefly touching on the infrastructure layers. A. Retail Banking (Opportunity for new entrants: low to middle) In our framework we allocate standard banking products such as savings/checking accounts, loans, debit/credit cards payments, mortgages (and many more) to Retail Banking. To allow mainstream adoption of tokenized assets in the private sector, especially of cryptocurrencies, innovative Retail Banking accounts will evolve, or incumbents will adapt existing accounts to crypto-methodology. We observe this field being divided into three main groups of market participants: FinTech players with a hybrid model (FIAT & Crypto) combining traditional finance with digital assets — e.g. (United Kingdom) Revolut FinTech players with a crypto focus — e.g. (Germany), (Singapore) Bitwala TenX Traditional Banks launching crypto-offering — e.g. (Liechtenstein) Bank Frick Within the first category, has been the first mover, offering their strong “traditional” retail customer base the option to buy/sell a range of cryptocurrencies. While their biggest European competitor has yet not entered the battlefield, we expect them to do so in the near future.Within the second category we can list several projects that are struggling to succeed (i.e. , WaveCrest, ) due to regulatory risks or because of collapsing business models, as traditional banks refuse to partner/process, for example, credit card payments. Revolut N26 TenX Amon Traditional banks in the third group are yet the most reluctant to enter the space, mainly because of regulatory uncertainty that results in the risk of jeopardizing their traditional revenue streams. Overall, the hybrid model of FinTech players seems to be the most likely to capture the market potential at this point in time. B. Corporate Banking (Opportunity for new entrants: low to middle) Traditional Corporate Banking products include loans, syndicated loans, trade and project finance, among others. Over the last months, we have especially seen more development of trade finance use cases for blockchain technology. Incumbents are trying to defend disruption through formation of industry consortia (e.g. / ), leveraging blockchain technology to digitize letters of credit and bills of ladings, track payment guarantees, and expedite receivable discounting. Startups like and (both USA) already show significant traction in the space, while a win against strong industry consortia won’t come easy. R3 Corda Flexport Tradeshift C. Merchant Banking (Opportunity for new entrants: high) As in the traditional financial landscape, buy-and-sell side services (Merchant Banking Services) complement financial services for digital assets. Service providers (sell-side) for issuers will be required to develop, register, and sell securities to finance their operations. Those service providers will need to cover compliant KYC/AML processes, technological capabilities of structuring tokenized assets, as well as distribution channels towards the investor side (buy-side). We currently see several new entrants trying to establish market standards for security tokens with their own protocols/token-structures, such as (Canada), (USA), (Germany) and (USA). It has to be determined whether this will be a race to the bottom or if several protocols across different jurisdictions will survive. Polymath Securitize Neufund Harbor To properly develop buy-and-sell side services, close cooperation with technology standards/protocols, law firms, and market makers will be required, consolidated under the roof of “full-service providers” (e2e tokenization services). D. Brokerage (Opportunity for new entrants: middle) Facilitators in the buying and selling of assets are needed for tokenized assets just as much as they are for traditional financial assets, since they are the key to trigger sufficient market volumes/liquidity and provide efficiency through investment advice and market information/transparency. The current crypto ecosystem suffers from low-volume order books across a fragmented landscape of exchanges. For a “big money” inflow from the institutional side, brokerage infrastructure has to evolve in order to allow liquidity for high-volume transactions while avoiding significant market movements/manipulations. Several new players are working on OTC solutions, reducing overall transaction costs and ensuring best-price-execution, such as and (both USA) as well as (United Kingdom) in Europe. Some of these new players are even backed by traditional institutions as in the case of , with Goldman Sachs. Circle XTRD Huobi Circle E. Custody (Opportunity for new entrants: high) Lack of institutional custody solutions is one of the key roadblocks for accelerated growth in the current tokenized assets ecosystem. In the majority of jurisdictions, qualified custodians (licensed) are required by regulators — for example once a fund-size grows beyond a certain threshold (e.g. >$100mn). However, these players are currently non-existent or are offering unsophisticated product offerings. Even without the regulatory requirement of qualified custodians, asset managers are craving custody solutions that help them to store the private keys to their tokenized assets, as safeguarding of assets is not among their core capabilities. Furthermore, investors of the asset manager’s fund demand sophisticated security mechanisms, only to be provided by custodians. As of today, the combination of regulatory requirements and lack of trusted institutional custody solutions keeps a vast majority of traditional asset managers from taking positions in tokenized assets. To ensure sophisticated blockchain functionalities such as staking (as in proof-of-stake) or dividing/voting rights (as in tokenized common shares), online/hot-storage custodians are required. F. Exchanges (Opportunity for new entrants: middle to high) Over the last few years, a large number of crypto-exchanges have evolved, providing liquidity to the secondary market of cryptocurrencies and utility tokens. The vast majority of those are not yet regulated by their local regulating bodies and, hence, not qualified to offer security tokens representing, for example, equity — which is expected to trigger the next wave in the ecosystem. This subsequent lack of liquidity and market depth is a significant roadblock for accelerated growth and can only be conquered with a rapid evolution of licensed exchanges or traditional exchanges entering the digital asset space. Promising new entrants are as well as Overstock’s (both USA), which are among the first US-based regulated security token platforms. Rumors continue to swirl that traditional stock exchange (USA) may be close to entering the battlefield, which still remains unconfirmed by the organization. In Europe, (GSX), (MSX), as well as (SIX) are known to launch digital asset operations the first half of 2019. Overall, traditional exchanges seem to have better cards to win this business opportunity, as security regulation (e.g., German BörsG) foresees that exchange market participants need to be “qualified” — leading to the tiered system that banks participate in exchanges (and not end clients) in the traditional world. This would likely also happen to crypto-exchanges, leaving them with advantage due to their strong B2C (end client) focus. OpenFinance tZERO Nasdaq Gibraltar Stock Exchange Malta Stock Exchange Swiss Exchange I.-IV. Infrastructure Layer The infrastructure layer is the necessary basis for the foundation of a solid landscape of financial services for tokenized assets: Ongoing technological innovation and maturity of blockchain technology I. Technology: Consistent and clear regulatory guides across jurisdictions with regional/global standards. (The current situation shows jurisdictions moving independently — e.g. Malta VFA license). II. Regulation: Transparent taxation methodology and legislative guidance III. Tax & Legal: Increasing insurance and reinsurance offerings for tokenized assets for risk-diversification IV. Insurance: To unlock the ~$24trn business opportunity, significant development across the financial landscape of tokenized assets is required. The infrastructure layer is the basis for a solid foundation of the ecosystem, but core-value will be captured across the key financial pillars. In the foreseeable future, Custody, as well as Merchant Banking services, are expected to contain the most significant business opportunities for new entrants, as they are crucial for the professionalization of the landscape. In our next article, we will dive deeper into the custody landscape of tokenized assets, outlining the current product offering and introducing promising new market entrants. - Follow us on for future articles: Medium @Finoa_Banking - Visit our website to learn more about us: https://finoa.io/ - To always remain up-to-date follow us on and scan the QR Code to subscribe to our newsletter Twitter

Mapping business opportunities in The Era of Tokenization — a $24trn game

Over the last 9 months, I’ve been working with my partners at to successfully issue a regulatory compliant digital security under US law. Our goal has been to use digital securities to create greater access and liquidity to venture capital, and throughout this process, I’ve received a lot of questions from people across all sectors about whether or not they should tokenize an asset or equity in their company. I’ve created this overview on digital security issuance to help others understand where the ecosystem currently stands and to bring more focus and prosperity to the industry as a whole. CityBlock Capital Background: Digital securities have the opportunity to upgrade our global financial system by creating efficiencies in capital formation, regulatory compliance, and liquidity via secondary trading. But the realities of the digital security ecosystem of 2018 is just that: . The Digital Security Offering (“DSO” or Security Token Offering, “STO”) was as a regulatory compliant alternative to an ICO. In many ways, BCap’s incredible crowdfunding success ($10M in six hours) sent the digital security industry down an ill advised path of shadowing a frothy fundraising trend in hopes crypto investors would eventually migrate toward compliant offerings. As ICOs have gone under intense SEC scrutiny in 2018, DSOs have not been able to capture the same investor momentum because of accreditation standards and vastly different expectations on return potential and liquidity. This context is important for potential issuers because it means throwing around the word does not create new markets for regulated assets and you should have the same target investor today as you did before tokenization existed. If you’re interested in tokenizing an asset because you believe there is value for your company to be a part of a burgeoning industry, it’s important to decouple crowdfunding as a necessary step for issuing a digital security and to take a measured approach on the value you are trying to create by going through this process. As a general rule of thumb, issuing a digital security should not define or distract the value proposition of your core business. an opportunity pioneered by Blockchain Capital in 2017 ‘token’ The question you gotta ask yourself is…are you ready for this? (Pictured: Blockchain Capital’s Brock Pierce) Crowdfunding with DSOs: As previously mentioned, Capital issued the first digital security when they tokenized a venture fund, and they were followed by Science Blockchain Fund, SPiCE VC, 22X and tZero who also took an ICO-style, crowdfunding approach. Crowdfunding is inherently necessary for ICOs and launching decentralized networks, and the and Ethereum networks are vastly more efficient for pooling capital then bank wire transfers, but digital securities are not decentralized networks and crowdfunding will continue to exist outside digital assets (i.e. Kickstarter, Angel List). Make no mistake about it, when crowdfunding works, it’s incredible. There are few things more exciting as an entrepreneur then to have a stranger discover your DSO from the other side of the world, go through a five step application process, instantly transfer cryptocurrency into an escrow account and complete the purchase of a SEC compliant security within 10 minutes (pending KYC/AML). This user experience represents a giant leap in terms of how we might buy and sell assets in a unified global marketplace, but in 2018, consistently capturing the magic of crowdfunding is a mirage in a vast internet desert. If your company or idea doesn’t have a highly engaged crowd today, it’s going to cost you a lot of time and money to create one. To efficiently crowdfund your DSO, you likely need to fall into one or both of the following categories: Blockchain Bitcoin Your offering is backed by highly visible crypto investors, and your raise is tapping into syndicates and networks willing to make an exception from their normal playbooks, particularly your one year lockup period and uncertainty around liquidity. (Ex: Blockchain Capital). Your offering has a real viral hook that inspires sharing across the internet or avid communities. Securing a notable advisor, a celebrity tweeting or community managers schilling in telegram groups doesn’t qualify as a viral hook. You need to be selling a security or have a narrative that the media is willing to create millions of impressions around or else be prepared to spend hundreds of thousands of dollars in advertising across multiple channels. Crowdfunding can produce exciting results but there are important tradeoffs to consider. (Pictured: CityBlock Capital meet-up in Tokyo, Japan) To execute a compliant DSO crowdfunding campaign with retail and accredited investors, your offering needs to file a Reg A+ exemption with the SEC which can be cost and time prohibitive for early-stage companies. Most private placements over $1M that generally solicit are through Reg D/S exemptions that don’t need to file with the SEC but are limited to 2000 total investors (99 or 250 US in the US depending on the size and structure of the offering) and all US investors must be accredited. Generally speaking, it’s not realistic for a typical Reg D/S offering to rely on crowdfunding as a primary source for capital because of the strict limitations on the issuer’s ability to create a crowd of accredited investors. Crowdfunding via DSO also presents compliance challenges that need to be considered. In our experience, we’re seeing increased scrutiny on AML compliance if you accepted bitcoin or ethereum as a currency. Simply put, many service providers (ie. banks, escrow agents, insurance providers, fund administrators) aren’t comfortable verifying the source of the funds when you receive bitcoin as an investment. That’s not to say you won’t find vendors who will work with you, but it will be at a premium and any changes to the AML regulations could create an existential threat to your business. , which is necessary if you accept international investors, can be cost prohibitive because many vendors quote on a ‘ ’. If your crowdfunding campaign ends up acquiring 1000 international investors, $150 per investor per year to meet FATCA / CRS requirements could easily exceed the value of the investment over the long-term. FATCA / CRS compliance per investor, per year basis The other important consideration for crowdfunding via DSO is whether or not you want to make investor / community management a core part of your business. Telegram groups, email marketing, social media campaigns and proactive corporate communication are just a few of the marketing initiatives that crowdfunding participants have come to expect to take an offering seriously. These efforts will also bring in people who will publicly disparage your company if they take issue with your offering or if there is a customer service issue. Additionally, you’re likely to attract ‘fast money’ investors, i.e., people looking to flip your offering and get rich quick. Most private placements can take years to generate any meaningful returns so you have to ask yourself if you really want to be spending significant time and resources over the next 5–10 years on a ‘community’ of investors that might be misaligned on the realities of your business. Asset Ownership with DSOs If you skip crowdfunding as your part of your DSO, it means you raised money through private networks or you’ve hired a FINRA registered broker-dealer. The primary reason to issue a digital security in this context is to enable secondary trading, but keep in mind, issuing a digital security today is going to create more friction with your investors and / or broker-dealer then just using paper. If you think migrating your cap table over to Carta was difficult, try getting that same investor group to create and use a ERC-20 compatible wallet. Moreover, the SEC regulated secondary exchanges for digital securities are just beginning to go live with startups OpenFinance, tZero, Fluidity and Templum converging with established players Coinbase, NASDAQ and NYSE, but there’s no immediately timeline for these platforms to become fully functional with meaningful trade volume. 11/1/18: we’re still very early in the development of the industry Even if secondary exchanges for private digital securities progress as planned and you can get listed, it’s important to set a reasonable expectation with your investors of the level of liquidity your asset can generate. Sure, there are late-stage VC and private equity firms that create strong secondary markets for equity in top-tier private companies like Uber, Lyft, SpaceX and Coinbase but your average private company or asset does not create this type of demand and there will always be limited supply based on the number of shareholders. Like in countless industries before it, digital replace paper and inefficiencies around the secondary trading of private placements will be eliminated from the transaction (brokers, special purpose vehicles, unnecessary legal fees), but the market for these assets will likely operate more like eBay then E-Trade. For example, (AirSwap), and their recently launched product, has taken a user-centric approach on compliant discovery and 1:1 conversations which they believe creates the best environment for facilitating private digital security transactions . With this in mind, potential issuers have to determine if there is enough real demand from investors for liquidity to justify the current costs of engaging one of the issuance platforms. Remember, just because an asset is structured to be more liquid doesn’t mean there is a market for it. will Fluidity and bulletin board spaces (translation: this is not Binance for STOs) The last point on asset ownership is that cryptocurrencies and ICOs have created misconceptions about how digital securities should be issued and custodied. Digital securities are NOT bearer instruments, meaning if you lose the private keys for the wallet holding your digital security the issuer can simply create a new one from a centralized ledger. If you lose your private keys for the wallet holding bitcoin or other cryptocurrencies, you’re completely out of luck. This critical difference should be top of mind as you think about executing your digital security issuance strategy because it means no one is going to care about holding their tokens unless they want to sell them which might never happen over the lifespan of the asset. In general, the issuance process will need to become commoditized to a price point and user-experience typical of ubiquitous enterprise SaaS products for digital securities to emerge as the new standard for asset ownership. Looking Ahead Digital securities are still in their very early days with a lot of hard work ahead of us. In general, I believe that the sooner we isolate digital security ownership from crowdfunding / ICOs, the quicker we will see broader adoption of the technology. The key is repetition: every issuer that goes through this process will identify new problems, come up with solutions, introduce new vendors and investors to the technology, and overtime, the industry will scale until every security becomes a digital security. Once there is scale, I believe the disruption will be felt most by legacy financial institutions, their back office operations, and eventually the derivatives products they sell, and less so by private issuers. The critical decision for you as a potential issuer is to determine if there is intrinsic value in being part of the building process or if you want to come back in 24 months when things are further along. At CityBlock Capital, we’re investing in equity of digital security infrastructure so going through the issuance process has made us more informed on the opportunities in the industry and we’re in this for the long haul. I’ll leave you with the video below of the CityBlock Capital team discussing what a fully digitized financial system might look like. It’s inspiring to think about, and there is a lot of money to be made in the picks and shovels of this industry, but it’s certainly not happening overnight. If you are going through the issuance process and want to talk shop, feel free to shoot me a note at max@cityblockcapital.com. Disclaimer : The information in this blog post is provided for general informational purposes only and no information contained in this post should be construed as financial or legal advice.

Digital Securities: Choose Your Own Adventure Guide For Issuers

Security Tokens Series (5 part series — Part 2) You can also watch our video about security tokens, its advantages and how to identify them . here There is no doubt that Blockchain technology is poised to cause major disruptions in almost all industries in existence by making it possible to create a vast array of new business models. It has brought forth useful innovations such as decentralization and trustless networks. One of the significant factors that has contributed to the success of this technology is the use of tokens. Today, utility tokens and tokenized securities are million dollar concepts that startups across the globe are grabbing onto as they crowdfund. But what do these terminologies mean? How different is a utility token from a security token? Let’s dive in and explore the details: What is a Token? A token is a utility, an asset or a unit of value issued by a company. In most cases, tokens are issued when a company launches an initial coin offering (ICO) — that works more or less like an initial public offering (IPO). The difference between an ICO and an IPO is that in an IPO you receive stock in exchange for the investment you make while in an ICO you receive a token in exchange for your investment. Image: Worldspectrum As we mentioned earlier, there are two primary types of tokens that you are likely to meet in the ICO space: Utility tokens Security tokens Confusion often arises in differentiating between security tokens and utility tokens. Even though they may seem complicated at first, they are in fact very easy to understand as you will see in the subsequent sections. What is a Utility Token? Utility tokens are simply app coins or user tokens. They enable future access to the products or services offered by a company. Therefore, utility tokens are not created to be an investment. Just like an electronics dealer might accept orders for a video game that will be released several months later, a startup can create utility tokens and sell digital coupons for the services or products it is developing. A good example is Filecoin, which raised $257 million through the sale of tokens. These tokens will allow users access to its decentralized cloud storage platform. What is a Security Token? A security token is a digital asset that derives its value from an external asset that can be traded. Therefore, these tokens are subject to federal laws that govern securities. Failure to comply with these regulations could result in severe consequences including penalties and potential derailment of the development of a project. On the other hand, security tokens can offer a vast array of applications if the startup abides by all the regulatory requirements. The most promising of these features is the ability to offer tokens as a digital representation of shares of a company’s stock. For instance, Overstock recently announced that tZERO, one of its portfolio companies, would hold an ICO to fund the creation of a licensed security token trading platform. The tZERO tokens will be issued according to SEC regulations. Security Tokens or Utility Tokens? The major difference between security tokens and utility tokens is in the intended use and functionality of the tokens. Security tokens are created as investments. Token holders are given dividends in the form of additional coins every time the company issuing the tokens earns a profit in the market. Users holding the security token also get ownership of the company. Blockchain offers a platform that can be used to create a voting system that allows investors to exercise control on the company’s decision-making process. Utility tokens, on the other hand, are not intended to give their holders the ability to control how decisions are made in a company. They merely enable users to interact with a company’s services. Both security and utility tokens can increase in value if the prices of the tokens appreciate in the market. And since they can both earn some profit, many people may still find it difficult to differentiate them. Here is the formulated by SEC to enable you to classify a cryptocurrency token as either a security or utility token. Howey test The Howey Test This test uses two simple questions to differentiate between security tokens and utility tokens: Are the token holders allowed to provide funding for the company’s capital and receive a portion of the profits? Does the fundraising effort of the ICO entail investment in the project where profits are generated entirely from the effort of individuals other than the creators or founders of the project? The token is likely to be a security token if the answer to any of these two questions is yes. How does the fundamental difference between utility and security tokens affect ICOs? The securities act of 1933 governs securities in the US. The law has two primary objectives which include the prevention of fraudulent activities such as misrepresentations and deceit and ensuring that those issuing the securities provide financial and other relevant information to the investors. Anyone issuing any form of securities must register their investment contracts with the SEC. Failure to make appropriate registration when dealing with securities can result in fines, lawsuits, penalties or even imprisonment. Some of the important disclosure requirements include disclosures related to proxy solicitations and corporate reporting among others. SEC also oversees the security market to prevent unlawful activities such as insider trading. Companies issuing securities have to abide by essential anti-money laundering (AML) and know-your-customer (KYC) requirements, which are not only costly but also time-consuming. Let us examine the current happenings in ICOs First, startups create their whitepapers, tokens, websites and other marketing materials and then launch their ICO. Most ICOs are actually security tokens disguised as utility tokens through the citing of a number of primary use cases. They do this to evade the regulations governing security tokens. They then employ aggressive marketing strategies that promise investors huge profits. Keep in mind that any security sold with the expectation of future profit qualifies as a security. Yet, some startups often fail to abide by the reporting and disclosure rules and they do not register their ICOs with SEC. Such companies are at risk of facing prosecution. Why the regulators step in The cryptocurrency market cap is currently around 300 billion dollars. From January to March 2018, ICOs raised an estimated amount of about $5 billion. With such vast amounts of money pouring in, regulators were bound to act. SEC is not against ICOs in general. Its primary objective is to ensure that all ICOs comply with the regulations. Attempting to undermine the law presents serious risks for the investors and also for future Blockchain based cryptocurrency projects. In case things go wrong investors have no legal recourse against the malpractices. Earlier this year, they stepped in and officially set up a cryptocurrency task force. By now, the task force has already sent notices to noncompliant ICOs such as Centra and Tezos. Nonetheless, most upcoming Blockchain startups have now realized the importance of complying with the regulations, and several SEC-compliant tokens have been issued. Examples of such tokens include; Polymath, Corl, and tZERO. After the tokens has been issued, they can be potentially listed on licensed security token exchanges such as CEZEX or Openfinance. Final word We hope this article was helpful in enabling you to distinguish security tokens from utility tokens, and their impact in the crypto world. What your opinion on how the fundamental differences between utility and security tokens affect ICOs? Do you believe adhering to SEC rules will go a long way in ensuring the growth of the ICO industry for many years to come? Security Tokens Series (Part 1): 10 Important Things to Know About Security Tokens Keen to find out more about Katalyse? Join our crowdfunding revolution conversation on our Telegram group, or follow us on Twitter.

Security Tokens vs. Utility Tokens — How different are they?

What happened this week in the Crypto markets? Window Dressing Think of the end of the month as a narrative — the chart is a story and market forces determine the plot. Of course, asset managers report their returns monthly. And since, relative to other asset classes, a very small percentage of investors are actively formulating this narrative, it becomes fairly easy to push an agenda either way. If we look back to last month, the price of experienced significant moves on July 31st ($8100) that lasted until August 11th ($6150). The end of this month was no different, as Bitcoin began its move on August 30th ($6850), and currently sits at $7250 as of Sunday. This is no coincidence — July was a great month for those long crypto, so they rushed to lock in gains at the end of the month, leading to a 2-week swoon. Conversely, August was a great month for those short the market, and they rushed to cover positions and lock in gains at month-end. Bitcoin Seeing the Forest Through the Trees But what is the narrative over a longer time horizon? That depends on who you ask. For those who entered the space in 2017, the narrative is that Bitcoin and the rest of crypto is just a speculative bubble, with which Bitcoin has lost ~70% of its value YTD. For those who entered the space much earlier, this is the ebb and flow that we all signed up for — volatile swings in both directions. If we look at the charts, we see that this ‘bear’ market is nothing more than a correction — albeit a long one. The bear market of 2014, following the Mt.Gox crash and subsequent fear in the market, had a different narrative than that of today. It’s worth noting that Bitcoin has not posted a lower low in over 4 months. As such, it becomes increasingly clearer that the nature of this story does not correlate to the story told in 2014. While it is anyone’s guess as to when the market changes its narrative, it is imperative that we distinguish the differences between the two stories, making sure not to correlate what should not be correlated. Ethereum and Futures Markets The CBOE that they will offer Ethereum Futures later this year, and many are drawing similarities to the of Bitcoin Futures, and the subsequent launch on December 18th 2017. When BTC Futures were announced, the price of Bitcoin ran up all the way to the all time high of $19,500 on December 17th 2017. It has been downhill ever since, with Futures markets pushing down the price ever since. announced announcement It can be hypothesized that large market influencers bought enormous quantities of Bitcoin leading up to the announcement, causing market hysteria and inflating the price irrationally. With no order book to support such volatile gains, these influencers then took their Bitcoin and shorted the market using Futures, thus capitalizing on the way up and the way down. However, BTC Futures opened in a bull market, whereas ETH Futures are likely to open in a bear market. The price of Ethereum has moved down on extremely thin volume. When Futures launch, it would make more sense for big market players to go long Ethereum on thin order books — the exact inverse of Bitcoin. This, paired with information that ETH will and lower the block rewards from 3 ETH to 2 ETH in their Constantinople fork in October, offers a scenario where Ethereum may offer good upside returns in the near future. Similar to block halving for Bitcoin, which cuts block rewards in half every 4 years, this EIP will both reduce inflation of the asset and lower sellside pressure from miners. institute EIP-1234 Why are Mining Rewards Correlated with Higher Prices? The answer lies within the heart of Proof of Work (PoW). Every day, miners have a decision to make — are the rewards received worth the cost of mining? If the answer is no, most miners will turn off their rigs, waiting for profitable conditions to return. Since mining is an open market determined by the amount of miners and the amount of transactions, if transactions are kept the same but the amount of miners go down, each miner now mines more blocks — therefore earning more rewards. So, with the profitability of mining ETH going from 3 ETH/block to 2 ETH/block, many miners might argue that a 33% reduction in rewards makes it unprofitable. For the retail miner, it’s a small problem. For large mining operations with a considerable amount of hashrate, this problem is intensified. Turning off millions of dollars worth of machines can be detrimental, as the upfront cost of said machines and the short lifespan of technology puts them in a bind. These miners contribute pretty heavily to the sell side order book of Ethereum (same goes for any PoW-based asset) and could mutually agree to discontinue the selling of ETH until prices increase to a profitable level. Keeping the sell-side of the order books empty will push the price of Ethereum up — no sellers and consistent buyers. It remains to be seen what will happen with Ethereum long term, but with the information available today, Ethereum will offer a litmus test for market economics regarding PoW-based assets not named Bitcoin. I Believe that Children are our Future As reported in a recent Coinbase survey, 18% of US students now own Cryptocurrencies . What do you think will happen when this demographic has real wealth and influence in their late 20s and early 30s? Kudos to the 21 Top 50 Universities that are now offering crypto educational classes. ran with this and went even deeper, pulling the top email domain names of their subscriber base. We’ve heard of a few of these schools, and are pretty confident that graduates of these programs will be prominent in the crypto community for decades to come. Token Economy And of course, we’ve all seen that the CFA Institute . So we ask ourselves…. ‘How many other subjects have made their way into university and higher learning curriculums in such a short period of time? plans to offer Blockchain and Crypto topics to its 2019 exams The argument is no longer about Crypto’s staying power — and instead, becomes all about its power. For specific information about investing in the 3 private Arca Funds, click here . Notable movers and shakers Digibyte (DGB) is up 31.01% week-over-week, with a sudden increase in volume led by Singapore based Huobi (70% of overall daily volume). Digibyte also released v6.16.4 core software this week, which could be a potential catalyst for the positive price action. It is interesting to note that a few weeks ago when the Turkish lira was experiencing hyperinflation, Turkish exchange Sistemkoin experienced a massive influx of people purchasing DGB with their lira. Digibyte is a cryptocurrency similar to Bitcoin, differing in block time (15 seconds), transactions per second (500), and algorithm variance (5). Blockchain Icon (ICX) finished the week up 5%, after news came out on Tuesday that the foundation will be buying back $5 million worth of ICX from the market as a show of good faith in the project. ICX experienced a significant retracement from the all time highs in January (-93%), but looks to be finding a price floor. What we’re reading this week Is Bitcoin the new Safe Haven? A good store of value becomes a vehicle with which to hide out during periods of uncertainty, depressing asset prices, or hyperinflation. A quick country-by-country look at Bitcoin demand shows that emerging markets are continuously using Bitcoin (BTC) as a way to get their money out of their respective countries. The fact that millions of people around the world are flocking to Bitcoin validates its existence. OpenFinance Launches Regulated Trading Platform for Security Tokens You’ve heard us talk about the future of crypto assets, which includes the tokenization of just about any asset, including equity and debt. Platforms like OpenFinance are emerging to facilitate the compliant trading of these vehicles. The irony of using paper and pen to store digital assets Let’s just say these processes will improve, but for now, this is a great read to understand the difficulties and precautions necessary to securely safeguard digital assets. Crypto Exchanges Join Winklevoss Backed Self-Regulatory Group Self-regulation and the creation of best practices is a positive for the industry, and we applaud the Winklevoss group. Bitcoin Transaction Value Reaches $1.3T As It Passes PayPal And Discover Hats off to our friends over at Ark Invest for this great analysis on Bitcoin transaction volume and corresponding value. Despite what you may have heard about Bitcoin not being used enough for actual transactions, it is now far more utilized than just about any other frequently used value transfer mechanism other than Visa and top credit cards. Arca in the News The Bitmain IPO currently being marketed in Hong Kong may have negative effects on Bitcoin (BTC) and Bitcoin Cash (BCH). Arca CIO Steven McClurg . As Steven puts it, “when a company creates an exit for a high margin cash flowing business, it usually indicates diminishing growth or margins. This could also indicate a continued bear market for Bitcoin.” offered his thoughts via Crowdfundinsider.com And That’s Our Two Satoshis! Thanks for reading everyone! Questions or comments, just let us know. - The Arca Portfolio Management Team Steven McClurg — Chief Investment Officer Jeff Dorman — Head Trader Sasha Fleyshman — Trader Katie Talati — Head of Research

“That’s our Two Satoshis” — Crypto Market Recap September 11, 2018

What happened this week in the Crypto markets? Window Dressing Think of the end of the month as a narrative — the chart is a story and market forces determine the plot. Of course, asset managers report their returns monthly. And since, relative to other asset classes, a very small percentage of investors are actively formulating this narrative, it becomes fairly easy to push an agenda either way. If we look back to last month, the price of experienced significant moves on July 31st ($8100) that lasted until August 11th ($6150). The end of this month was no different, as Bitcoin began its move on August 30th ($6850), and currently sits at $7250 as of Sunday. This is no coincidence — July was a great month for those long crypto, so they rushed to lock in gains at the end of the month, leading to a 2-week swoon. Conversely, August was a great month for those short the market, and they rushed to cover positions and lock in gains at month-end. Bitcoin Seeing the Forest Through the Trees But what is the narrative over a longer time horizon? That depends on who you ask. For those who entered the space in 2017, the narrative is that Bitcoin and the rest of crypto is just a speculative bubble, with which Bitcoin has lost ~70% of its value YTD. For those who entered the space much earlier, this is the ebb and flow that we all signed up for — volatile swings in both directions. If we look at the charts, we see that this ‘bear’ market is nothing more than a correction — albeit a long one. The bear market of 2014, following the Mt.Gox crash and subsequent fear in the market, had a different narrative than that of today. It’s worth noting that Bitcoin has not posted a lower low in over 4 months. As such, it becomes increasingly clearer that the nature of this story does not correlate to the story told in 2014. While it is anyone’s guess as to when the market changes its narrative, it is imperative that we distinguish the differences between the two stories, making sure not to correlate what should not be correlated. Ethereum and Futures Markets The CBOE that they will offer Ethereum Futures later this year, and many are drawing similarities to the of Bitcoin Futures, and the subsequent launch on December 18th 2017. When BTC Futures were announced, the price of Bitcoin ran up all the way to the all time high of $19,500 on December 17th 2017. It has been downhill ever since, with Futures markets pushing down the price ever since. announced announcement It can be hypothesized that large market influencers bought enormous quantities of Bitcoin leading up to the announcement, causing market hysteria and inflating the price irrationally. With no order book to support such volatile gains, these influencers then took their Bitcoin and shorted the market using Futures, thus capitalizing on the way up and the way down. However, BTC Futures opened in a bull market, whereas ETH Futures are likely to open in a bear market. The price of Ethereum has moved down on extremely thin volume. When Futures launch, it would make more sense for big market players to go long Ethereum on thin order books — the exact inverse of Bitcoin. This, paired with information that ETH will and lower the block rewards from 3 ETH to 2 ETH in their Constantinople fork in October, offers a scenario where Ethereum may offer good upside returns in the near future. Similar to block halving for Bitcoin, which cuts block rewards in half every 4 years, this EIP will both reduce inflation of the asset and lower sellside pressure from miners. institute EIP-1234 Why are Mining Rewards Correlated with Higher Prices? The answer lies within the heart of Proof of Work (PoW). Every day, miners have a decision to make — are the rewards received worth the cost of mining? If the answer is no, most miners will turn off their rigs, waiting for profitable conditions to return. Since mining is an open market determined by the amount of miners and the amount of transactions, if transactions are kept the same but the amount of miners go down, each miner now mines more blocks — therefore earning more rewards. So, with the profitability of mining ETH going from 3 ETH/block to 2 ETH/block, many miners might argue that a 33% reduction in rewards makes it unprofitable. For the retail miner, it’s a small problem. For large mining operations with a considerable amount of hashrate, this problem is intensified. Turning off millions of dollars worth of machines can be detrimental, as the upfront cost of said machines and the short lifespan of technology puts them in a bind. These miners contribute pretty heavily to the sell side order book of Ethereum (same goes for any PoW-based asset) and could mutually agree to discontinue the selling of ETH until prices increase to a profitable level. Keeping the sell-side of the order books empty will push the price of Ethereum up — no sellers and consistent buyers. It remains to be seen what will happen with Ethereum long term, but with the information available today, Ethereum will offer a litmus test for market economics regarding PoW-based assets not named Bitcoin. I Believe that Children are our Future As reported in a recent Coinbase survey, . What do you think will happen when this demographic has real wealth and influence in their late 20s and early 30s? Kudos to the that are now offering crypto educational classes. 18% of US students now own Cryptocurrencies 21 Top 50 Universities ran with this and went even deeper, pulling the top email domain names of their subscriber base. We’ve heard of a few of these schools, and are pretty confident that graduates of these programs will be prominent in the crypto community for decades to come. Token Economy And of course, we’ve all seen that the CFA Institute . So we ask ourselves…. ‘How many other subjects have made their way into university and higher learning curriculums in such a short period of time? plans to offer Blockchain and Crypto topics to its 2019 exams The argument is no longer about Crypto’s staying power — and instead, becomes all about its power. For specific information about investing in the 3 private Arca Funds, click here . Notable movers and shakers Digibyte (DGB) is up 31.01% week-over-week, with a sudden increase in volume led by Singapore based Huobi (70% of overall daily volume). Digibyte also released v6.16.4 Blockchain core software this week, which could be a potential catalyst for the positive price action. It is interesting to note that a few weeks ago when the Turkish lira was experiencing hyperinflation, Turkish exchange Sistemkoin experienced a massive influx of people purchasing DGB with their lira. Digibyte is a similar to Bitcoin, differing in block time (15 seconds), transactions per second (500), and algorithm variance (5). cryptocurrency Eos (EOS) gained 32.3% last week, after strong buy interest was noticed on Binance — a single buy order of over $1 Million USD was placed at $5.17, driving the price up 5% in 20 minutes. The order books continued that growth throughout the rest of the week, even after an initial scare regarding malicious attacks against RAM, freezing developers/users ability to deploy smart contracts. Icon (ICX) finished the week up 5%, after news came out on Tuesday that the foundation will be buying back $5 million worth of ICX from the market as a show of good faith in the project. ICX experienced a significant retracement from the all time highs in January (-93%), but looks to be finding a price floor. What we’re reading this week Is Bitcoin the new Safe Haven? A good store of value becomes a vehicle with which to hide out during periods of uncertainty, depressing asset prices, or hyperinflation. A quick country-by-country look at Bitcoin demand shows that emerging markets are continuously using Bitcoin (BTC) as a way to get their money out of their respective countries. The fact that millions of people around the world are flocking to Bitcoin validates its existence. OpenFinance Launches Regulated Trading Platform for Security Tokens You’ve heard us talk about the future of crypto assets, which includes the tokenization of just about any asset, including equity and debt. Platforms like OpenFinance are emerging to facilitate the compliant trading of these vehicles. The irony of using paper and pen to store digital assets Let’s just say these processes will improve, but for now, this is a great read to understand the difficulties and precautions necessary to securely safeguard digital assets. Crypto Exchanges Join Winklevoss Backed Self-Regulatory Group Self-regulation and the creation of best practices is a positive for the industry, and we applaud the Winklevoss group. Bitcoin Transaction Value Reaches $1.3T As It Passes PayPal And Discover Hats off to our friends over at Ark Invest for this great analysis on Bitcoin transaction volume and corresponding value. Despite what you may have heard about Bitcoin not being used enough for actual transactions, it is now far more utilized than just about any other frequently used value transfer mechanism other than Visa and top credit cards. Arca in the News The Bitmain IPO currently being marketed in Hong Kong may have negative effects on Bitcoin (BTC) and Bitcoin Cash (BCH). Arca CIO Steven McClurg . As Steven puts it, “when a company creates an exit for a high margin cash flowing business, it usually indicates diminishing growth or margins. This could also indicate a continued bear market for Bitcoin.” offered his thoughts via Crowdfundinsider.com And That’s Our Two Satoshis! Thanks for reading everyone! Questions or comments, just let us know. - The Arca Portfolio Management Team Steven McClurg — Chief Investment OfficerJeff Dorman — Head TraderSasha Fleyshman — TraderKatie Talati — Head of Research “Satoshi” promo code gets 3 free job postings on Hacker Noon’s job board. Disclaimer: This commentary is provided as general information only and is in no way intended as investment advice, investment research, a research report or a recommendation. Any decision to invest or take any other action with respect to the securities discussed in this commentary may involve risks not discussed herein and such decisions should not be based solely on the information contained in this document. Statements in this communication may include forward-looking information and/or may be based on various assumptions. The forward-looking statements and other views or opinions expressed herein are made as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated and there is no guarantee that any particular outcome will come to pass. The statements made herein are subject to change at any time. Arca Funds disclaims any obligation to update or revise any statements or views expressed herein. In considering any performance information included in this commentary, it should be noted that past performance is not a guarantee of future results and there can be no assurance that future results will be realized. Some or all of the information provided herein may be or be based on statements of opinion. In addition, certain information provided herein may be based on third-party sources, which information, although believed to be accurate, has not been independently verified. Arca Funds and/or certain of its affiliates and/or clients hold and may, in the future, hold a financial interest in securities that are the same as or substantially similar to the securities discussed in this commentary. No claims are made as to the profitability of such financial interests, now, in the past or in the future and Arca Funds and/or its clients may sell such financial interests at any time. The information provided herein is not intended to be, nor should it be construed as an offer to sell or a solicitation of any offer to buy any securities. This commentary has not been reviewed or approved by any regulatory authority and has been prepared without regard to the individual financial circumstances or objectives of persons who may receive it. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

“That’s Our Two Satoshis” — Crypto Market Recap September 4, 2018

🌟 Checkout our Cast for the Movie What Crypto Rich Asians are reading. is the newly released movie that every. Asian. person. is talking about. For those of you who may not be aware of it’s importance to the Asian (American) community, it’s the first Asian all-cast mainstream movie in the US since the Joy Luck Club. But, alas, the $$ theme was there, but the Crypto theme was missing. Why couldn’t these guys make the movie Crazy Rich Asians even more relatable? This is my version of Crypto Rich Asians TWEET If we had a Crypto Rich Asians movie and the cast reflected real world Crypto Rich Asians, the story and plot would have been so juicy. Here are the people I’d like to see on screen. These guys are in no specific order, because once you have over $1bn in net worth, does it really matter how much you have? I am sure many people in Crypto will disagree with me on this one. ¯\_(ツ)_/¯ more money Jihan Wu and Micree Zhang of Bitmain- with Bitmain supposedly looking to IPO in the , Jihan and Micree will make the most out of it. The company didn’t give away too much equity given that they didn’t raise a series A until . range of $40-$50bn 4 years after the company started Zhao Changpeng of Binance- CZ has a co-founder named He Yi who is responsible for marketing and business, but he probably owns majority share of Binance. Whether the market is up or down, Binance will always have business, and CZ will always win. Li Xiaolai of INBlock- with him admittingly earning , we think he is probably doing ok**.** On EOS: This one project alone will probably make me the world’s best angel investor in 2017, because it’s growing so fast” 200x from his EOS investment “ . We spent $1.5 million for 5% of the stock at a valuation of $30mn USD. Now it is worth $6bn USD, a 200x Da Fei Hong — Neo founder, been there since the early days of Crypto in China Justin Sun — with Tron’s token market cap at $1.5bn and Justin Sun’s business savviness, we don’t think Tron will go away anytime soon Litecoin- Charlie Lee. Now that he’s sold all his litecoin, he realizes that it wasn’t the right decision Bo Shen — with Vitalik being an advisor to the fund Fenbushi Partner, And many more…. I am probably missing too many. There’ll have to be sequels. who do YOU think should be on the list? Subscribe now 🌟 Top News in Asia from Wednesday through Friday Binance LCX, a joint venture between Binance and Liechtenstein Cryptoassets Exchange is the . launching of a fiat-to-crypto exchange http://bit.ly/2vSS7mH As of August 7, 2018, there are 274 legal cases related to cryptocurrency in China. Most recently, Chinese courts made its decision without directly discussing whether Bitcoin trading platform is illegal. http://bit.ly/2vPU3N4 How the singer in Africa and subsequently now Akoin. $1 billion line of credit from Chinese investors China Jiangsu International helped launch Akon http://bit.ly/2OKH6uC A series of new tweets are fueling speculation that Binance is about to make a big move with XRP. http://bit.ly/2OKlEpO 💰 Deals and Venture round led by Tribe Capital and Social Capital. SFOX, a cryptocurrency dealer for high-volume traders and institutional investors, has raised $22.7 million in a Series A funding http://bit.ly/2MxagQE Exchange Huobi has made a significant investment in the US-compliant security token trading platform OpenFinance Network. http://bit.ly/2ONqiUa Krungsri Finnovate, a venture capital fund of Krungsri (Thailand Bank of Ayudhya) marking its fourth deal since inception. committed to invest in Japan’s SBI AI & Blockchain Fund, http://bit.ly/2vVqkSE Dymon Asia Ventures has hit the final close for -focused fund. its maiden $50-million fintech http://bit.ly/2OHnpnF Sino-US investment firms are targeting over $4 billion for new funds launched this year. GGV registered a $1.8bn fund with SEC. https://tcrn.ch/2vUfoVt Japanese social messaging app . LINE announced the creation of a $10 million blockchain venture fund http://bit.ly/2vZN8kv 💰 Coin and Token News Official launch of ICX Station, . a global accelerator program sponsored by the ICON Foundation http://bit.ly/2MEJtSJ Tron acquires blockchain.org domain name. with its blockchain-based payments tech, exec says. Ripple ‘definitely’ wants to target China https://cnb.cx/2L1OQXd 💸 Exchange News Chinese exchange Huobi and its partners are l aunching cryptocurrency exchanges in five regions: the Philippines, Russia, Taiwan, Indonesia, and Canada. http://bit.ly/2vRWfUd including Huobi Automated Listing Platform, Huobi Show Center for Blockchain Projects and HADAX Public Voting Platform. Huobi launches brand new HADAX 2.0 http://bit.ly/2KZ39f3 🎌 Regulation News *China Media* to upgrade the area with innovation and manufacturing upgrade, including blockchain initiatives. Shanghai Municipal Government signed a strategic cooperation agreement with Alibaba and Ant Financial Google translated as part of the formalization of the country’s domestic market. Thai regulators have so far approved seven business entities to conduct cryptocurrency operations http://bit.ly/2MAZwAL Throughout the past two months, investors in the local crypto market of South Korea have continuously expressed their optimism towards a drastic change in the regulatory landscape of crypto. http://bit.ly/2MAAqSG from the classification of venture firms. Cryptocurrency exchanges in South Korea have condemned their exclusion by the country’s government http://bit.ly/2vUcj7L 💼 Business News to help enterprise customers build, host and use their own blockchain applications for operations management. Chinese retailer JD.com is launching a new blockchain technology platform http://bit.ly/2vRYl6x have entered into a partnership to explore blockchain for payments. State-backed Bank of China and financial services corporation ChinaUnionPay http://bit.ly/2MAfNGb CoinDrop, a service that helps anyone easily receive “airdrops” of cryptocurrency. http://bit.ly/2MxNrMx anywhere with cheap electricity. Chinese miners exiled to Russia, Kyrgyzstan, Mongolia, http://bit.ly/2vUlO74 . American seed accelerator Y Combinator appointed Baidu’s former COO Lu Qi as its CEO http://bit.ly/2MEKNoF Chinese games are rapidly eroding the Korean market. It is happening while China blocked the distribution of new Korean games in China. http://bit.ly/2MAMkM8 🌹🌹🌹What did you guys think of our thus far? What do you want to read or learn more about on Asia? Global Coin podcast Check our past 7 weekly pieces on , , , , , , and Southeast Asia Cryptocurrency Developments A Guide to Asia Crypto funds/investors Takeaways on Asia Crypto from Techcrunch Zug Cryptokitties Binance Bitmain China’s Crypto winners Subscribe

Crypto Rich Asians

The security token liquidity hype is in full swing. Time and time again we hear: tokenization makes illiquid assets liquid. But just how much is security token liquidity a reality versus a dream? I’ve decided to address this question by addressing 3 main areas: How do security tokens create private asset liquidity? 2. What is the state of liquidity for security tokens today? 3. What could security token liquidity look like in the future? TLDR: Liquidity is coming, but it is not here (yet). How do security tokens create private asset liquidity? Liquidity is the ability to turn an asset into cash. Private securities have traditionally been highly illiquid. Take real estate for example. Even if you woke up determined to sell a property, you even had a buyer ready, it would still most likely take weeks if not months for a deal to close. Tokenized real estate on the other hand, you wake up one morning wanting to sell a property — you could complete the deal in minutes. Tokenized private securities can be traded on the secondary markets without the administrative burdens of traditional private securities. Blockchain technology can create a simplified, automated transfer of ownership while still adhering to traditional private securities laws. Harbor, one of the leading technology companies in the securities tokenization space outlines in their whitepaper the current market inefficiencies that create illiquidity of traditional private securities: “Secondary trading of private securities often requires various middlemen (such as brokers and exchanges). In addition, the process for tracking trade activity is manual and costly, and there is a significant burden on issuers to safeguard against potential regulatory risk. These inefficiencies can often lead to issuers imposing trade restrictions, making private securities illiquid. To account for the lack of liquidity, the value of private securities is discounted (i.e. the “illiquidity discount”), preventing issuers from capturing the full value of the underlying asset.” Harbor Whitepaper Their white paper even has this nice little diagram about it: Blockchain technology holds the potential to solve this market inefficiencies via security tokens. The full scope of securities compliance and regulation can occur ‘on chain.’ All the necessary AML/KYC checks, investor accreditation checks, compliance checks in both the buyer and seller’s jurisdictions. Automatic integrations with institutions such as broker-dealers, custodians and transfer agents can allow these trusted intermediaries to execute their necessary roles without any friction. Blockchain and security tokens while remaining as they reduce administrative burden and eliminate middlemen. create liquidity cost effective Jamie Lynn, Co-Founder and President of Securitize, another security token market leader says: “I have little doubt the future will be tokenized. I don’t know when it will happen … This is just fundamentally better.” Source What is the state of liquidity for security tokens today? A lot of people have promised a lot of things, but actual data backed proof of security token liquidity is not really here. On June 28, 2018 OpenFinance was the first security token exchange to launch. OpenFinance brings liquidity by providing a compliant and efficient trading platform for security tokens. In a letter from their CEO, he declared: “Beyond just security token trading, OpenFinance Network has set out to fundamentally change how issuers and investors alike work with alternative assets. Our goal is to democratize finance and disrupt financial markets as we know them today.” Source OpenFinance’s launch marks a major development in the security token ecosystem as it is the beginning for security token trading to be tested in the real world. While initial trading volume for OpenFinance has not been announced — their CPO Thomas Mcinerney stated in the OpenFinance Telegram channel that they “had a lot more signups than expected.” Demand is there. While OpenFinace is the first to launch, it is by no means the only company in the security token exchange space. There are some major players that are trying to take a chunk of the security token trading pie — a good news for liquidity sake. Some honorable mentions: Coinbase: Coinbase, you know, that unicorn with tens of millions of users, announced in June their intention to operate a regulated broker-dealer. In by their President & COO, Asiff Hirji he explained that they have already acquired a broker-dealer license (B-D), an alternative trading system license (ATS), and a registered investment advisor (RIA) license. They hope to work alongside regulators to tokenize existing securities bring benefits such as: 24/7 trading, real-time settlement, and chain of title. a blog Bnk to the Future: BnkToTheFuture is an exchange that has been trading since 2015. They have raised over $300 million over three years from more than 50,000 qualified investors, accredited investors, from the U.S. They are now focusing on security tokens. In February, 2018 they raised an additional $33M to build a decentralized security exchange. Their goal: launch a compliance-driven, Blockchain based and transparent liquid secondary market for securities. They have a goal to launch by the end of 2018. View their token offering page: https://bf-token.bnktothefuture.com/ tZero: tZero, a subsidiary of Overstock.com is building a security token exchange designed to trade security tokens in an “easy, compliant, and user-friendly manner.” They believe they will be instrumental at bringing greater efficiency and transparency to capital markets both in the US and abroad. Investors have noticed, during tZero’s Security Token Offering they raised 134 million. Furthermore, in August 2018 Chinese private equity firm GSR Capital announced they would lead a 270 million investment in tZero. Swiss Stock Exchange: In July 2018, the SIX Swiss Exchange their latest initiative — called the SIX Digital Exchange (SDX) — their first goal is to build up a regulated exchange platform. Their goal: have a full end-to-end and fully integrated digital asset trading, settlement and custody service. announced According to Thomas Zeeb, Head Securities & Exchanges, SIX, “The digital space currently faces a number of key challenges. These include the absence of regulation that ensures official safety, security, stability, transparency and accountability — all of which contribute to a lack of trust. The challenge is less in the trading of assets but rather in the custody and asset servicing, including asset safety. Do you adopt a model with many sub-custodians, including inefficient interfaces and with inherent risks, or do you go with a recognised and regulated infrastructure provider who provides all steps of the chain in an integrated and secure model? We believe that the latter has significant value. As the stock exchange infrastructure for Switzerland, we know what it takes to build and run mission-critical and scalable, systemically important services.” The first services will be rolled out in mid-2019. Nasdaq(?!): While there is no official announcement of NASDAQ building their own security token exchange (yet) — the regulated exchange is already providing its technology to other crypto exchanges. Speaking on CNBC, NASDAQ CEO Adena Friedman stated: she continued by emphasizing added Freidman. It is just a matter of time as to how long it will take for crypto to mature. “Certainly NASDAQ would consider becoming a crypto exchange over time,” “I believe that digital currencies will be something that will continue to persist,” Source What could security token liquidity look like in the future? In security tokens a day is a week, a week is a month, a month is a year. Things are moving fast… but, . it is early days Security token liquidity is still more of a promise then a verifiable reality. That being said, more and more MAJOR players — think governments and unicorns — are announcing their intent to enter the security token space. A growing list of stakeholders are determined to make security tokens become the bridge between crypto assets with the broader financial ecosystem. Right now security tokens are still nascent. In 5 years time, they could be the norm for how you raise capital. However for that to happen, major gaps in the security token ecosystem need to be solved. For the promise of security token liquidity to become an actuality, more and more people need to step up to solve these fundamental infrastructure level problems. The industry needs more people with deep technology, financial and regulatory know how building out the security token infrastructure. Thankfully within the small yet mighty security token community— there is already signs of massive collaboration — an excitement to work together to disrupt a financial system that is hundreds of years in the making. IMO: The potential for security tokens to achieve liquidity looks bright. 💡 About the author: Julianne is an analyst at Leaseum Partners . Leaseum Partners is a blockchain-based Real Estate investment manager.

Can security tokens fulfill their promise of liquidity?

Last week I wrote some ideas about some blockchain protocols I believe could serve as inspiration to the next generation of security token platforms. Today, I would like to take the idea of security tokens 2.0 a step further and present a first iteration of a technology stack to power the next phase of security token platforms. My objective is neither to present an exhaustive list of technologies nor a constrained architecture guideline but rather to summarize some observations about the future of security token platforms that I’ve been sharing with some thought leaders in the space. Security Tokens Today The current generation of security tokens platforms is focused on two main areas: · Toke Issuance · Security Token Exchanges Let’s keep things in perspective, the entire security token space is about one year old and, regardless of how fast its evolving, remains very immature technologically. Whereas some people seem to enjoy to continuously claim that security tokens are going to be the next Wall Street; most of those claims are not backed by any technological, economical or financial engineering rigor. The fact remains that, for security tokens to become a viable financial asset class, the platforms need to evolve and incorporate protocols/capabilities that are present in the newest wave of blockchain technologies. Strategically speaking, the biggest issue that the security token movement needs to fix is to become attractive for sophisticated institutional investors. For that to happen, there are three major roadblocks that need to be removed: Access to large pools of capital by institutional investors. Liquidity: Custody and insurance models for tokenized assets. Custody/Insurance: Tokenized products that are match the financial sophistication of securitization offerings. Sophisticated Investor Products: Security token 2.0 platforms will fundamentally focused on enabling the third item in that list, to ultimately enable the creation of sophisticated tokenized products. However, it turns out that point #3 is also a requirement for points 1–2. From that perspective, the evolution of the current generation of security token platforms into security token 2.0 stacks is vital for the The Security Tokens 2.0 Technology Stack Security Tokens 2.0 sounds like a bad marketing buzzword when we are just getting started in the first phase of this financial movement. The concept of security token 2.0 is to simply provide an umbrella under which we can group many of the relevant technology building blocks that are going to be relevant for the mainstream adoption of security tokens. I took a first pass to put together a diagram that groups many of the security token 2.0 technical components. Most likely, this diagram is incomplete and inaccurate in some areas but hopefully it can serve as a good first step towards conceptualizing the next phase of security token platforms. Most of the components in the previous diagram are self-explanatory but I would like to highlight some interesting observations about some of the building blocks · This group includes the current tokenization platforms such as Securitize, Polymath or Harbor. Token Issuance Platforms: · Today, the privacy of security token transactions is relying on basic Ethereum smart contracts. In the future, protocols such as zk_SNARKS or multi-ring signatures are going to be important to enable different levels of privacy in security tokens. Privacy Protocols: · Consistent identity protocols for representing issuers, investors and entities its essential to model sophisticated security token workflows. Technologies like bring some very interesting ideas in this area. Identity: Civic · Consensus protocols are key to enable voting and governance dynamics in security tokens. Delegated consensus models like can be relevant in this area. Consensus Protocols: DFINITY · One of the challenges of security tokens is that many of the on-chain activities need to be translated into off-chain legal artifacts. For that, we need legal protocols such as to join the security token platforms Legal Protocols: OpenLaw · Security token 2.0 platforms should provide an easy way to model many of the voting/governance mechanisms that are present in corporations or securitized products. Voting/Governance Protocols: · Not all security tokens can be priced equally. As part of security token 2.0 platforms, we need statistical pricing models that factor risk, dividend payment, market conditions and other elements unique to each token. I wrote about that topic Pricing Protocols: here… · The issuance of security tokens needs to start considering different collateralization models can accurately model the financial behavior of a security token. Collateralization Protocols: · Different financial instruments should be translated into different types of security tokens. At a bare minimum we should consider three types of security tokens Token Models: — Represent debt instruments such as real estate leases or cash loans. is a super interesting technology in this space. Debt Tokens: Dharma Protocol Tokens that represent shares in companies or special purpose vehicles. — Equity Tokens: Tokens that can covert debt into equity and vice-versa. — Hybrid Tokens: · Security token derivatives are likely to become one of the most relevant trends in this space. I wrote about their importance here…Technologies like and are setting up a strong foundation in this area. Derivative Tokens: {Set}Protocol dYdX · Today, tokenization platform are mostly focused on enabling KYC/AML compliance. However, there are hundreds of other regulatory models that need to be followed for security tokens to be tradeable on specific geographies or industries. To enable that, security token 2.0 platforms need to incorporate a rich catalog of Oracles for different data fees or compliance models that need to be followed by tokenized assets. Protocols like or are very interesting in this space. Oracle Registry: ChainLink RLay · For security tokens to become attractive to large institutional investors, they need to show a level of analytics and intelligence that is comparable with financial securities. If I invest in a tokenized pool of real estate leases, I would like to know how the performance of that asset compares to the market’s REITs or real estate ETFs. A solid data intelligence layer should be a key component of security token 2.0 platforms. Data Intelligence: · Access to large pools of investors is one of the main challenges of security tokens today. Technologies such as , or bring interesting ideas in this space. Liquidity Pools: Bancor BnkToTheFuture SwarmFund · Security token exchanges are evolving extremely fast and we should see the addition of more sophisticated financial products in the near future. Technologies like and are leading the charge in this space. Exchanges: OpenFinance tZero · Ultimately, security token 2.0 platforms should offer tokenized products that are appealing to large institutional investors. These products will mimic existing financial vehicles such as ETFs, Index Funds, Mutual Funds, etc. Investor Products: I hope this is a good starting point to give you about the architecture of the next generation of security token platforms. I plan to deep dive into several of these areas in a future post.

The Security Token 2.0 Stack

The Promise and Peril of Tokenized Funds

Blockchain technology is being used to revolutionize a number of industries, including the fixed-income market. represent a sector of this market, as these products are pools of financial assets that are brought together to form a new security, which is then divided and sold to investors. Securitized products Securitization describes the process of pooling financial assets and turning them into tradable securities. For example, home mortgages were the first products to be securitized. This was followed by commercial mortgages, auto loans, student loans and many other financial assets. Bonds backed by home mortgages are commonly referred to as mortgage-backed securities (MBS). Bonds backed by non-mortgage-related financial assets are called asset-backed securities (ABS). Both of these bonds are examples of a “securitized product.” While the process of creating a securitized bond is relatively simple, there are many middlemen involved. For example, when a financial institution (also known as the issuer) has assets to securitize, they are sold to a special-purpose vehicle (SPV). This is a separate entity from the financial institution and only exists for the purpose of purchasing the institution’s assets. Once the assets are sold to the SPV, the issuer receives cash and removes the assets from their balance sheets. This allows the issuer to have better financial flexibility. The SPV then issues bonds to finance the purchase of the assets, which can be traded on Wall Street as “securitized products.” Blockchain Technology To Issue and Sell Securities Securitization issuance, including agency and non-agency mortgage-backed securities (MBS) and asset-backed securities (ABS), . This represents a 9.3% increase from 2015 ($2 trillion). totaled $2.2 trillion in 2016 And as this market continues to grow, decentralized trading platforms are demonstrating how blockchain technology can be applied to allow issuers to sell securities themselves, without having to go through any middlemen. As a result, a number of benefits become evident, such as more revenue going directly to e-commerce providers, along with assets that are fully secure and transparent over the blockchain. “When looking at the fixed-income market, the question comes to mind: Why do I need a human broker to issue and sell securities? We want to use blockchain technology to make this task fully automated,” said Dr. Michael Yuan, Chief Scientist at CyberMiles. For example, s is focused on building a public blockchain platform that is optimized for e-commerce applications. Since securitization of cash flow is widely used in e-commerce, the project plans to use blockchain technology to issue fully regulation-compliant security tokens. CyberMile One reason for applying blockchain technology to this industry is because e-commerce platforms generate very little revenue from selling products, as the profit margin is usually razor thin. Yet these platforms can make a huge amount of money by monetizing other people’s cash flow with tools like securitization. “It is well understood that Wall Street makes far more money by reselling subprime loans for used cars as securities than the combined profit of all used car dealers. That is just one of the most visible cases (thanks to a full hour HBO expose by John Oliver). Such opportunities for securitization is everywhere, especially within the e-commerce value chain,” explained Yuan. And recently, e-commerce giant, JD.com released plans to issue . According to China’s Securities Regulatory Commission (CSRC), subsidiary JD Finance will issue the ABS in conjunction with Huatai Securities and Xingye Bank. asset-backed securities (ABSs) on the blockchain Together, the partners will evaluate blockchain’s potential to ensure asset security, according to JD Finance head, Hao Yanshan. “…The alliance chain must meet the actual needs of all participants in the asset securitization business in order to fully reflect the application value of blockchain technology,” he explained. JD Finance aims to issue the securities using a consortium blockchain that will see each party act as a node, recording the transactions in a transparent manner. This will demonstrate if the blockchain can meet the demands of the various parties involved in the asset securitization process, such as issuers, underwriters and buyers. Moreover, one of the partners CyberMiles works with is , which aims to become the first compliant security token trading platform in the US. To date, many of the security token projects looking to list on OFN have been issued by investment funds or are real estate related. OpenFinance Network (OFN) “The goal of the OFN is to support a broad ecosystem of high-quality service providers, working with the most innovative companies to issue security tokens,” said Juan Hernandez, founder and CEO of OFN. “We share an unrelenting commitment with these partners to advance this industry and to keep raising the bar.” OFN is currently working with leading banks, brokerage houses, custodians, and transfer agents that are all a part of alternative markets. This venture may provide a new vehicle for asset liquidity.

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