The Medium Rules Episode 9: Security Tokens Explained, with Atomic Capital
What exactly is a security token? How is it expressed on the blockchain? How is it traded? Why is a security token better than an electronic share? What are the downsides? And, beyond all that, what are the limits of tokenization? And what are the political and philosophical implications?
On this episode of The Medium Rules, Alan is joined in the HBA podcast studio by Alex Blum and Peter Lyons, respectively the CEO and CIO of the NYS-based security token platform, Atomic Capital. Atomic Capital is split up into three lines of business – advisory, broker-dealer, and investment bank/capital raising. In this episode of The Medium Rules, Alan and his guests walk through the basics of security tokens, i.e., what are they, how are they sold and how are they traded?
Alan then engages Alex and Peter in a more philosophical conversation related to global inequality, disruption, decentralization, and anarchism. Both Alex and Peter have deep experience in the global non-profit/NGO sector – Alex at the Peace Corps and the Bill and Melinda Gates Foundation, and Peter at the World Economic Forum. We hope you’re both engaged and educated listening to this conversation, and if so please rate and share The Medium Rules.
Finally, some of you may have noticed HBA Media & Tech’s “Podcast Pick of the Week” which we do every Friday. Please send us your #PPOTW suggestions to themediumrules@hballp.com and, if we use your suggestion, we’ll send you a The Medium Rules black, v-neck T-shirt.
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Transcript:
Alan BALDACHIN: I’m delighted to welcome to the HBA podcast studio today, Alex Blum and Peter Lyons, respectively The CEO and CIO at Atomic Capital. Atomic has a startup financial institution dedicated to the emerging security token market and it is split up into three lines of business: advisory broker, dealer and investment bank capital raising.
Today, we’re going to try and accomplish two things. First, we’re going to walk through the basics of security tokens i.e. what are they, how are they sold, and how are they traded. Second, we’re going to use this technological innovation as a launching pad for a more philosophical conversation related to global inequality, disruption, decentralization, and even anarchism. Both Alex and Peter have deep experience in the global nonprofit NGO sector, Alex at the Peace Corps and at the Gates Foundation and Peter at the World Economic Forum.
Now for this all seems like we’re going to be running around the podcast studio today in tin foil hats, then please keep listening. But before we get into the meat of the security token discussion, I’m going to call them minor audible today in that I’m actually interested to get your guys’ take on the current severe pullback in crypto prices and what you guys think that pretends for the broader story of digital assets.
So with that, let’s get started. Alex and Peter, thanks so much for being on The Medium Rules. Welcome to the podcast studio, and looking forward to what I think will be a really fascinating discussion today.
ALEX BLUM: Great. Thanks.
BALDACHIN: All right, thanks. So as I said, I think I’d like to just take note of what’s going on in the crypto market currently. I looked this morning Bitcoin in the last seven days is down 19.28%; Ether, 26.3%; Bitcoin Cash, 32.9%; Stellar, little less so, 16.47%. And in fact, XRP is only down 6.61% so that Stellar and XRP are obviously linked. iOS down 24.71%, and Litecoin down 26.86%.
So I mean there are obviously billions of dollars of market cap there that had been wiped out in the last week, so continuing volatility after a relatively sort of stable plateau. And here we are with Bitcoin about to dip below $5,000 a coin. Any thoughts, guys? Not so much why it’s happening, but how does that impact how you think about the market for digital assets? How does it impact your business? Does it not? What are you talking about and what are you hearing these days in terms of the market?
BLUM: Sure. So, a few things, I think it’s important to know that there’s a really strong correlation between the price of Bitcoin and pretty much any other Blockchain based token or digital asset. And so it’s not like there’s 30,000 different companies that are all tanking at the same time. It’s really just the price of Bitcoin is tanking and the associated value of other things that are predicated upon the value of Bitcoin being valuable are going down in tandem, usually in a pretty close correlation.
And it’s actually interesting to look at which things are ofhave a direct one to one kind of correlation and which things it’s hard to find any with a negative correlation in those with a, you know, things that go down more than the price of Bitcoin by percentage and things that go down less than what that says about the relationship between those technologies and the core of Bitcoin price value.
That being said, I think that, you know, we’re really thinking about the securities market, which is a, you know, hundreds of trillions of dollars valued market and what we’re talking about is a few hundred billion dollars which is relatively insignificant relative to the value of all securities that exists.
And so, though it’s interesting to watch the price move, I’ve been in this market for a number of years and so it’s kind of par for the course. And then B, the things that we’re selling are securities related to things that already have known values or known prices in the regular world economy. And so it doesn’t really matter what the price of like Ethereum token is if I have a house that’s owned—the ownership of it is represented on an Ethereum Blockchain, it’s still worth what a house is worth, right? You know, I think thinking about how to understand your wealth, whether that’s in USD value or Bitcoin value as the kind of foundational currency of what things are worth is an interesting discussion. But as far as like the daily fluctuation, I don’t think it really— it doesn’t really impact or it’s not really something I haven’t paid that much attention to.
BALDACHIN: Okay, that’s great. I mean, that’s interesting. And I guess maybe too—and Peter, I’ll give you a chance to chime in, but that’s going to beg the question of what is it that you do think about, which is obviously security tokens. I guess my question for you, Pete, would be, is there a negative halo effect to some extent where people associate the drop in crypto and the drop in coin prices and this severe pullback having a sort of a negative wash-over effect on Blockchain technology, on anything that is expressed on a distributed ledger, zero trust, or do you think that the market is sophisticated enough to make distinctions?
PETER LYONS: I think the market is…The different underlying technologies are meant to evolve and I think if you look at those that are sort of least able to evolve and scale and keep up with the requirements are going to be the ones where investors are perhaps more prone to lose favor more quickly, but I think it just points to a direction where the technology has to go in terms of transactions per second and scalability and all these kinds of things.
And I would say that, you know, there’s just going to be constant growth and renewal in the space. And you know, what we have today might not be what we have in a year from now. I think that it’s hard to really sort of take a lot of meaning from individuals, sort of a corrections or fluctuations in value. But I would say the overall trend is towards more development in the space, and I think we’re still at a very early stage in terms of, you know, we’re at the Wright brothers stage still.
BALDACHIN: Okay, yeah, all right. Okay. So I’m gonna sort of—you’ll be able to just cut this in real soon. So, let’s take that actually and then segue into what I think is the meat of what I think we want to talk about today, which is sort of explaining the security token market.
And let me start with you Alex. Take a crack, and I know you’ve done this in media before and you’ve done a great job, but I think it’s helpful to just to set the table for you to talk about when we talk about a security token, what is a security token and how is it distinct from Ether, Bitcoin, what people might associate with it? Because I think there’s a lot of still confusion out there in terms of just defining these categories.
BLUM: Yeah. Well, I think to start before that really is a question asking what even is financial security, which actually the definition of that varies from country to country and jurisdiction to jurisdiction, and there are multiple different forms of securities that exist. I think the things that are unifying across all of those different security is one that is a definition that is adjudicated by a government entity and with the ability to remediate any kind of errors or things that have gone outside of that permitted type of behavior being able for the government to then take some kind of action to enforce whatever rules they have.
And then I think the—we’re talking about securities are things that have permissions built into them, related to who can own and purchase them and the behavior of the way those things can function that are beyond just what any kind of token that can move around to anybody will typically allow for. So when I think about what a security token is, it’s something that allows for both essentially government to take action if something fraudulent or illegal has happened outside of what they’re permitting and then B, allows for essentially permissioned types of transfer capability so that not everybody can receive or send every single type of security.
BALDACHIN: Okay. Pete, take a shot.
LYONS: I would say it’s really about taking what a security is and just adding a sort of wrapper around a security to allow it to be compliance aware essentially to know itself at the security and at the wallet level who it can go to and when, and it can pay out the relevant dividend payments. There’s all kinds of mechanisms that today are done by people that ultimately can be done more efficiently by a smart contract. And that’s just simply code that just says that the security will pay out as dividends with this amount of frequency or the security is subject to a one-year lock up period. And after that point, it can go to a particular type of investor or it can, you know, if it’s a non US investor, the security can’t come back in to the country before the lock up period has expired. It’s about just sort of managing the regulations and the compliance around existing securities.
BLUM: So I guess to add to that, what that really requires on a technical level is that any wallet is assigned to the identity of a verified person, which isn’t always done in most Blockchains are most Blockchain wallets. And then also allows permissioned user types, so there’s not just one type of wallet holder, but different people with different layers of permissions, which are very significant things that a lot of Blockchains don’t possess in our requirements to really make a security took and work and also will be major requirements I think of making Blockchain adoption in general useful thing. So it’s basically putting adoption and permission layer types, permission user types onto a Blockchain, and then allowing for the flexibility of those things to adopt a different use cases essentially.
BALDACHIN: Right. So the way I sort of hear that is you’ve got the economic layer and then you’ve got the compliance identity layer and then the ability as to how the digital asset or the digital share or digital ownership is traded or tradable, including lockup, including rag ass, which is the non us buyer with respect to a US security. So all those rules, if you will, are written into a smart contract which lives on the Blockchain and then governs all aspects of how that digital asset, that digital share, that digital security behaves. Is that…?
BLUM: Yeah, I think that’s…
BALDACHIN: That’s sort of the useful way to think about it-ish?
BLUM: Yeah.
BALDACHIN: Okay. [Laughing]
BLUM: [Laughing] You’re further confused.
BALDACHIN: I’m going forward here. Okay. All right. So, we’re talking about sort of digital shares or ownership, equity ownership of some form or another, whether rev share or whether dividends, whether liquidation preference, some version of a governance, who can own it. And I think on the ‘who can own,’ you have compliance written in there. So you’re gonna make sure that the owners have to be accredited investors, maybe…
BLUM: If that’s reqiured, yeah.
BALDACHIN: Unless you’ve got a listed security that’s publicly tradable. It’s going to have KYC and AML, if that’s part of the jurisdictional layer or the compliance layer etc. So I think for listeners thinking about it, if you are thinking about a security that we might normally think of that we’ve dealt with for years and years that just lives on the Blockchain and is expressed through a smart contract, maybe one way to think about it. So, it’s really, really different than Bitcoin, Ethereum or a utility token that people maybe have heard of.
BLUM: Yeah. I think that when you’re talking about Bitcoin or Ethereum, really what you’re talking about as a system of wallets and tokens and the way those things interact and communicate with one another, as well as how new tokens are generated. And so what we’re talking about are specific instances of those generalized systems in a way that can comply and work with a securities law globally.
BALDACHIN: What are some a classic use cases for security tokens? [Laughing]
BLUM: [Laughing] I think it’s so early. It’s hard to talk about classic. I think maybe…
BALDACHIN: That’s fair.
BLUM: …Maybe a better way to talk about it is like what’s feasible when things are…
BALDACHIN: What’s the low-hanging fruit?
BLUM: …In early days.Yeah. And so, you know, the things that make sense you one of the primary kind of value propositions of security tokens right now or to bring liquidity to things that aren’t typically liquid and to appeal to a investment base that you otherwise wouldn’t be able to appeal to.
And so the thing that I’m seeing is very popular are tokenized LP shares in a venture capital funds. So instead of being stuck in a VC fund for seven to 10 years, you could potentially get out of one out of after just a few months depending upon who bought and where. So that’s kind of one of the lowest pieces of hanging fruit. A lot of people talk about real estate though. I think things that don’t have a potential for some kind of exponential upside on as far as I’m going to buy this and I’m going to take all this risk, uncertainty around this technology and understand it has to be because I think it could go up 100x.
So a lot of people talk about real estate as being another kind of prime target. It makes a lot of sense for the person selling real estate and for the person that wants to sell fractionalized shares of some kind of real estate, but I’m not sure who the buyer is for that at this point when…The value of real estate is going to be the value of real estate and regardless of if it’s on a piece of paper or Blockchain. And so the things I’m seeing that makes most sense for both sides of the transaction are really LP shares and venture capital funds.
BALDACHIN: And I would think private equity—same idea. And I know I’ve heard people talk about, for example, art, things like classic cars. Again, asset classes that typically are out of reach for most people and have very low liquidity, which all of a sudden you can fractionalize. Let me ask you this; at Atomic capital, what are people—and I want to get into in a little bit more about your company and sort of your origin story, but what kinds of pitches and ideas are you fielding from people like from the crazy kooky to the down the middle? What conversations are you having?
LYONS: I mean, I think people approach this space with varying degrees of readiness, you know, in terms of they want to raise capital. They have a project in various stages of readiness. And so a lot of the conversations are first really based around establishing where they are in their process. And you know, you do have some projects that are basically refurbished ICOs. And I think that we try to gear ourselves more towards the higher level of maturity projects. Those that have assets with intrinsic value that are an established business with a strong team. I think that it’s much easier ultimately to go to investors and present them something that is backed by a strong team and revenue, right? And the mechanism by which the investors invest in that opportunity, it’s almost incidental in many cases, right? So if it’s a good opportunity, it’s a good opportunity, and if you bring this additional layer of earlier liquidity, then that’s an added bonus. But I think we try to approach this as like the, these are investments in particular opportunities and they have very attractive characteristics for investors.
And I think investors are going to be looking for more and more mainstream type investment opportunities. I think one thing that the current market state of crypto says to me is, those that are going to participate in the security or the digital security space are going to be more of the traditional investors. It’s not going to be the crypto wales; it’s not going to be those that havehistorically speculated on cryptocurrencies. I think it’s going through a growing up phase right now, which is very important.
BLUM: To answer your question a bit about just kind of weird stuff. I’ve seen tougher group trying to tokenize Michelangelo sculptures. I mean there’s a website called Masterworks that I know that’s tokenizing ownership of classic works of art, Picasso, things like that, which is a separate group. I’ve talked to other groups trying to tokenize people’s future income and the rights to some of that income and every kind of real estate thing you can imagine from equity in single asset real estate to real estate funds to insurance on real estate to real estate debt. Anything you could imagine there. Tokenizing equity in companies is pretty straightforward. Tokenizing revenue share, tokenizing revenue share with extra benefits of using the token on the platform. Really anything you can imagine from artwork to regular companies.
BALDACHIN: That’s great. So just pausing on the tokenizing somebody’s future income stream, you know, I don’t know if you guys…
BLUM: Bowie Bonds you’re talking about?
BALDACHIN: [Laughing] You guys are old enough to know about Bowie Bonds.
BLUM: I’m not, but I’ve heard of it.
BALDACHIN: Yeah, that was a right at the beginning of my career. So David Bowie actually in effect syndicated through—he borrowed against his future income and it was called Bowie Bond. It was the first time that happened. And then I guess who was the…? Arian Foster then kind of sold his future income, and a few actors did that. For a moment it looked like it would take off and it never did. But maybe now this tokenization is the way for… Is the idea that everyone and anyone could, or is this really celebrities or is it…? Like, in other words, I’m graduating, I’ve got a Harvard MBA, presumably there’s a market for my future income. Is it as broad as that? With all its philosophical and ethical implications, which would be mind blowing.
BLUM: I think on a technical level, it’s as simple as that. I think there’s like, oh, what’s technically possible, and then how do you enforce whatever agreement that you’ve made and then see like who’s the market trying to buy it and then how do you assess risk actually? But sure, anybody would like to sell their future income if they could get some cash up front and do something with it now, it’s just, how do you actually do that in a way that’s meaningful and doesn’t tank? You have to find someone because…
BALDACHIN: Presumably, it’s an ETF, right? Presumably, it’s like a basket, huh?
BLUM: It could be.
BALDACHIN: All of a sudden you have a thousand people, right, that you’ve rolled up like mortgages.
BLUM: Yeah, I mean it could work that way. I think the, because we’re both a tech developer ourselves and also are a group that has to go sell these things and has to go look people in the face and say, “You should buy this.” I think we look at it a bit different lens. Like on a technical level, yes, we could do anything. We can tokenize this microphone and say the microphones were $100, so you’re going to get a dollar and you can go use that, the grocery store. But like we also think about like, you know, the grocery store has to go along with the scheme and like you have to be able to go collect, and what happens if the microphone breaks. And so it’s really not a question what’s technically possible. Technically, you could almost do anything you could possibly imagine, but getting someone to agree with it and adopt it in a way that’s meaningful in a global marketplace is a different.
BALDACHIN: 100%
BLUM: And then the timing of when that is things that are going to make sense in 10 years but could happen now but still don’t make sense as far as the business marketplace perspective. It doesn’t really matter how interesting it is, like it’s not going to happen, you know?
BALDACHIN: That’s where the rubber hits the road because you do hear, you know, all these crazy ideas with respect to tokenization but then the flip, the other side of it is how many parties actually need to interact to make it work and how much friction is there.
BLUM: Yeah.
BALDACHIN: That’s a great answer. Okay. So you guys have done your security token offering on behalf of XYZ Co company, I have bought security tokens of that company. Just the nuts and bolts of how I then can trade that because one of the, one of the big promises of, I think of security tokens is, is greater liquidity. Tell me why that’s the case. Presumably, I’ve still got an unregistered security. Why is it any more liquid than a share of a company I might’ve bought 10 years ago of an early stage startup, let’s say if I’m tokenizing it?
BLUM: Sure. Well, I mean, just turns out that a lot of what are –don’t require you know, you can basically fall under private place, an exemption rules, which means they don’t have to be reporting companies to the SEC, you just file some paperwork and says, “We did this thing. We’re making it aware of it and we’ve raised money using that exemption is really the classic things that people are targeting as this new liquidity form and the reason they can be liquid is because there are laid waste illegally create, essentially like stock markets, but they’re called ats alternative trading systems, or we could just exchange them between people. It’s just that prior to them being in a Blockchain based or tokenized form, it was very difficult to find A, a marketplace for those things and B, an efficient way for that transaction to occur that wasn’t more expensive than the thing being transacted in the first place. And because of the immutability and the way to believe that something is what it says it is because it’s on a Blockchain allows for a lot of the friction and expense involved with doing those kind of transactions to be significantly lower to the point where it makes sense for there to be a marketplace for them.
BALDACHIN: Okay. Let’s talk a little bit about Atomic Capital. Tell me how you guys kind of got started, what the background is, how you guys came together, how your founding team game together, and then I’d like to just talk about what you guys are doing different, how you guys are, you know, innovating with your technology, with your approach. What do you see as the market opportunity? But let’s back up; tell me about Atomic Capital. I gave the intro as advisory broker dealer, investment bank.
BLUM: I forget the exact a tagline we have on our website, but essentially we call ourselves a digital investment bank; what it really means is we’re providing both the technology and the regulatory status of FINRA licensed reps to go out and sell securities…
BALDACHIN: You take a transactional fee.
BLUM: Exactly, a comissionbased fee. So that’s kind of what we are broadly. What that means in is I think you’ve seen some groups that are at the technologists that are just making things like what’s possible. And then there are other groups that are trying to sell it, but don’t really understand how one interacts with the actual technology or have the really the ability to assess that. Because we’re doing both and actually are legally on the line for doing both of those things, I think we just have a kind of a knowledge and level of accountability that you don’t find a cross a lot of other companies. As far as, I guess the other question was just how it kind of arose?
BALDACHIN: Yes. And maybe I’ll ask Pete to talk about that, but are you guys going out and selling these offerings? In other words, do you have presumably a whole kind of…?
BLUM: Portfolio?
BALDACHIN: No, I was going to say buyers. You’ve got presumably the other end of that which is you’re out talking to people who are, you know, are interested in buying security tokens and who are qualified. And is there a sales force? What does that look like? How do I, you know, it’s one thing to create the tokens and then it’s another thing to have technology, but you’ve obviously got to have a market if you’re an investment bank.
BLUM: Right? So we number of us on the team have FINRA licenses 0763 to legally go out and take a commission on the sale of securities as well. So structure those securities in the first place. We have a large pool, I think we published online that represents over 500 billion in AUM between both direct buyers, which are hedge funds, venture capital groups, private equity groups, as well as the ability to syndicate deals out to other broker dealers and investment banks where they can go sell to their end buyers and share fees on those sales of the commission.
BALDACHIN: Not on like a traditional syndicated?
BLUM: That’s what it is. It’s the same exact thing. At the end of the day, it’s just money moving between different people. It’s just that the ownership of something is represented in a different form.
BALDACHIN: Yes. So all your old models and thinking about how investment banks market deals apply.
BLUM: Yep, yep, it’s pretty much the same thing.
BALDACHIN: Peter, how did you get involved with – tell me a little bit about Atomic Capital, how long have you been around, how you guys all kind of hooked up and decided you wanted to do this?
LYONS: Sure. So atomic capital as a entity has existed since June of this year. I think that a lot of the work and a lot of the team and a lot of the people, the relationships, the connections existed long before that. And Alex can talk to a bit about what he was doing before Atomic. But essentially, I was at the World Economic Forum at the time until joining atomic this past august. And what I kept seeing at the forum was a lot of talk about the need for investment in critical infrastructure for future proofing, you know, making the world more resilient, right? But then everyone kept coming back to this point that the way capital markets are currently structured just really does not support the kind of a capital formation and the kind of a investment that is necessary.
So around this time, I really, you know, Alex and I have known each other for a few years and when I understood what he was trying to accomplish and really like just the magnitude of the problem that digital securities can address, it made me feel like I could spend the rest of my career in an esteemed international organization talking about possible solutions or actually come over and be part of building the and actually designing the scaffolding for this new way of managing resources and capital that is, it’s absolutely critical for, you know, the world to adapt to the changes that are coming. So for me, it was a no brainer. It was really, you know, do I spend all of my energy and resources and connection talking about something or put that into actually building it?
BALDACHIN: Interesting. And so far so good in that regard?
BLUM: Yeah, I mean, it’s really exciting. And what I’ve realized is there’s a different perception of time in the space.
BLUM: [Laughing] take us a year, yeah?
LYONS: It’s like dog years, right? So, you know, when talking with Alex for example, he’s been in this space since 2013 and I mentioned that to people that are familiar with the space and they’re just like “2013? Like he’s like one of the elders, like he’s one of the originals.” And it’s been five years. You know, it’s like such a, you know, I think it’s part of a broader trend I feel,in that when the pace of change accelerates, I feel that, you know, we start noticing it in these kinds of ways. You start seeing like from one year to the next, the amount of change, the amount of like investment flowing into a space really can be astounding.
But then at the same time, there’s this also this sort of reflexive action where maybe it was too fast, maybe it was too much, and then you see this volatility in this pullback and I think the broader crypto spaces is seeing this like you know, this, this volatility as a result of like all that is flowing in in such a short period of time. What have taken like a decade or two decades, you know, within my lifetime frankly, is now happening in a year, two years. It’s remarkable.
BALDACHIN: It is amazing how much churn you sort of sense or churning, and like this incredible sort of creative activity or creative destruction, obviously the brains and the energy flowing into Blockchain technology globally in such a short period of time. You can’t have been sort of paying attention even remotely and not notice that. It must be pretty exciting to be a part of. But let me ask you this, Pete. You talked about you know, you didn’t want to think about it and talk about it. You wanted to be a part of this massive change that was going to address some of these things that were going to be coming at us globally. Can you unpack that a little bit in terms of what you mean? Do you mean challenges of globalism? Do you mean challenges climate related? In other words, what is the real alignment that you would say tokenization is in part addresses?
LYONS: Yeah, so I think today if you look at the total value of all assets in the world and you see what percentage of them are actually securities, I think it’s single digits, maybe just a few percentage points. And so you have capital that is essentially like frozen on the sidelines. But the need for a capital to do everything from upgrading a municipal infrastructure and you know, public transport, I mean I live on 14th Street and witnessing the slow motion, slow moving response to hurricane Sandy, right? I mean it’s now six years later and they haven’t even begun the major construction to basically put the L back together. Yeah. And they’re going to have to shut down the hill for a year and a half, probably two years to be able to do that. And if you imagine that these broader mega trends are sort of like…
BALDACHIN: Only accelerating.
LYONS: Only accelerating more hurricane Sandy’s in the 2030s, how are we possibly going to adapt? How do we avoid everything just basically like for lack of efficient capital allocation, everything just falling apart?
BALDACHIN: And tokenization promises to efficiently…?
LYONS: To free more of the capital that exists in the world. We’re not creating something from nothing. We’re just actually putting value in providing liquidity to the existing assets that are out there and bring more of that online because it’s like trying to solve these big mega trends with just a fraction of the capital that is potentially out there. I mean it doesn’t work.
BALDACHIN: Okay. And I know this was Pete’s point, Alex, but I’m gonna throw this one to you. Is this an idea of, let’s say how municipalities, governments, big, big infrastructure projects are capitalized? I’m not sure I’m totally getting the connection as to sort of how tokenization and would address let’s say, because right now for these big infrastructure projects, let’s say that, that maybe pete’s thinking about these, these global challenges, whether they be the L train that got destroyed by Sandy or let’s say it to you even like global poverty, which presumablywith somebody from the world economic forum, I mean, that’s something you maybe have some experience with without, without necessarily knowing that, you know, what you focused on there. But how does tokenization in that really, really mega global way, how is that promising to pool capital? Again, just making it easier for people to invest? Or is it so inefficient right now is to have capitals pooled from all sorts of things?
BLUM: I think speaks to the question of like, you know, how is basically power and money used today in the world and you know, why are there only massive companies that are investing into these projects and what kind of leverage and power does that give them over dictating the way that money functions? And so, part of the issue is we’ve talked to groups that are acquiring national telecom rights, for example. It’s a multibillion-dollar undertaking and it’s also very, very complicated and expensive to even understand what the opportunity is, if it’s really what people claim it is, if the technology they intend to use is going to work. It takes months and months just to assess the opportunity which is millions and millions of dollars by itself. And then if you can give the funds to put together some kind of project like that also. Not many people have that money to give. And so it’s only brilliant government’s sovereign wealth funds or very massive private equity groups.
And so what you end up happening, which end up seeing is they have a ton of say over the way the terms of that dealer dictated, and somebody in that kind of relationship is not getting exactly what they want or they’re compromising the way they would go about actually executing the project or the way they go about paying for it or where the money comes from because of the fact that there’s only a few people that can even give them money and can assess the opportunity.
So I think the idea is that if you can open up those types of investments to a larger pool of people where perhaps there is…Imagine like I’m raising money for a venture capital investment, but I actually have this pool of just retail accredited investors that are willing to give me the money on certain terms and not take that many rights and permissions because it’s more of retail based sale.
And then at the same time there’s a giant VC fund or like softbank or something I trying to dictate terms against me when all I’m trying to do is make a business that does something in a new way. Suddenly I have a lot more leverage over softbank bank for example, because every different source and I have a different group that’s pricing it in a different way and asking for different things.
Additionally, the difficulty in distributing those funds over time is much more feasible so I can actually use a Blockchain based smart contract to distribute those funds in a way that costs a lot less than keeping extensive files and having an administrator and all this paperwork being executed and trying to keep track of it all. All that stuff can be basically automated. And so basically the cost of complying with securities laws, distributing those funds out and getting basically a different pool of people to get involved gives me a lot more power as a business or entity or an individual over just a few basically oligopolistic, oligopoly or oligarchy kind of powers that can dictate—like right now today, if somebody say, “Hey, $500,000,000 for you. Do you want to take it? I want this, this, and this.” Pretty much almost everyone’s gonna say, “Yes, whatever you want.” But there’s a certain level of business and even government development that can be done or you know, have different groups of interest, different interest groups in mind if they don’t have to get the funds on such terms.
BALDACHIN: Okay. That makes sense to me. Which begs the question for me as to what does governance look like generally with respect to, you know, your garden variety down the middle security token project. Is it one vote or…? What does that look like? Or does it look more like I’m sort of a delegated proof of stake or what is governance…? I’m being technical, but what does governance look like as you guys imagine it for security token projects that you’re involved with?
BLUM: I mean there’s governance having a number of levels, right? There’s governance over the way that Blockchain behaves or the rules around almost Meta governance, how you make rules about rules and there’s also governance of a specific security.
BALDACHIN: Let’s say about the specific securities, let’s stick with security tokens and not necessarily the Meta governance of let’s say the underlying Blockchain. So I come to you, I want to tokenize instead of going to VCs, I’m going…Well, let’s just say, you guys I know did you know, when we first met, Pete, you said “We eat our own dog food.” You guys raise money doing a security token offering on your platform. That’s how you capitalize Atomic Capital. What is the governance associated with, let’s say I had invested, what kind of governance rights would I have had if I bought Atomic Security?
BLUM: So every individual Atomic token or Atom token represents one share of common stock can atomic capital. Right now there are 12 million shares that have been issued and 1.2 million shares or digital security version. So every single token you have gives you one share of voting rights to the decisions made by the company.
BALDACHIN: Similar to a Delaware share voting right?
BLUM: We are a Delaware C-Corp. And if you actually look on a few EMR token even says Atomic Capital Inc, Delaware C-Corp Equity Common One. Like if says all those things actually are listed.
BALDACHIN: Right. Yep. And so, now extrapolating out to this big infrastructure project, like we’re now building the next Hoover Dam and we’re tokenizing that because we’re going to pull that capital from everyone in the country rather than let’s say, you know, borrow from the Saudis or Softbank or whomever. That’s a little bit of maybe the vibe I think that we’re getting at here.
BLUM: Maybe.
BALDACHIN: What would that governance look like and how would that maybe be different?
BLUM: Yeah. Well, so there’s governance over the way, like funds are distributed and there’s also governance over the way the projects executed or how vendors are selected. And so I think some of the things, you don’t want a million people making choices. So if we were advising a company doing something like that, we would advise them to sell some type of security that gave proxy voting rights probably to the primary management company or maybe only voting rights over certain types of very specific decisions. Because part of the power of having like private companies and small groups of teams managing things as they can make decisions quickly and things can get done quickly and I don’t want a seven year debate over if we should use vendor A or vendor B.
And so you know, whatever rules are rights makes sense for that specific instance of a security we can write into a Blockchain, but it’s really the same way governance is decided for any regular company, we can just write that into code and enforce it that way.
LYONS: It can be a bond, it could be preferred share. I mean, I think all of these issues have existed in finance for hundreds of years, right? This is, we’re not reinventing governance necessarily, but in some cases for a particular project you might just want to issue a bond, right? And maybe that’s exactly like what investors have an appetite for. In some cases you can create different types of securities. You could do like a revenue share or some kind of hybrid thing, but ultimately there has to be appetite from investors and understanding of what exactly they’re getting.
BALDACHIN: Do you guys find you have to do a lot of educating?
BLUM: Yes.
BALDACHIN: [Laughing] Like right now.
LYONS: I feel this is part of what we’re doing now.
BALDACHIN: Yeah.
BLUM: Yeah, I think absolutely. And I think a lot of the time the case is that groups think that they’re ready to do this and actually are nowhere near really haven’t considered the different factors that would both make this work on a technical level. And also you have to understand lIke you can actually go sell it to somebody. Like it’s not a theoretical exercise, like we have to go find something to sell it or it’s a giant waste of our time and money also. And so yeah, there’s a lot of work required around that stuff.
BALDACHIN: Okay. How do you think the—and maybe this is a nice sort of way to come to an end of the conversation—how do you guys see your particular part of the space evolving? In other words, do you anticipate…There are a number of security token platforms out there..?
BLUM: Very few that also are licensed with FINRA that could do that part as well. There’s either usually technology companies or there’s companies that will sell.
BALDACHIN: Okay. Do you anticipate sort of some of the big boys coming in? Have you seen any sign of, let’s say…?
BLUM: I spoke to a group from Goldman Sachs yesterday about.
BALDACHIN: Okay, okay. So they’re very interested or interested? Are they doing it now? In other words, are they selling security tokens in this way now? Do you happen to know?
BLUM: I don’t think any of them have not done that.
BALDACHIN: I have done that.
BLUM: We talked to investment banks that are, a lot of them are looking for the right one, but specifically I’m thinking of a specific company where the founders are from Goldman Sachs and Goldman Sachs resources to build basically started this entire ecosystem supported by their existing resources where you’re talking about regular stocks and regular investments alongside a tokenized securities all in one place where they can trade into interoperably.
BALDACHIN: Okay.
BLUM: And they have their own banking arm and they have their own custody that’s insured, like all that stuff packaged up in one place essentially.
BALDACHIN: Does that keep you up at night or do you view that as a…?
BLUM: [Laughing] Yeah, keeps me up. That’s why we’re working so hard. But I think there’s, you know, but like if you look at the regular securities market today, like Goldman Sachs has all that power and they still have partners and they still syndicate deals. And so it’s not like, I don’t think it’d be one group that runs the entire world’s global economy. And so I think it’s both a place to understand that, like this is a serious thing and they’re serious players coming into this market and you better have something to offer beyond just like some cool ideas and B, that it’s validated market, that there’s a real reason to be creating it and that there’ll be increasing supplies of money and interest in people coming into it.
And I kind of think of it like we were trying to speak to you at the beginning of this conversation as potentially like the “killer app” of a Blockchain, in that it forces people to put actual verified identity and actual. I’m verified things of value onto a Blockchain in a way that can scale enough so much that it actually become useful. Because, like all the technology in the world, I always say like Facebook, like if there were only three users of Facebook, it doesn’t really work, it doesn’t really matter. And so a lot of it’s just user adoption regardless of the idea or how cool something is, like it actually only starts to work when there is a network using it on. So groups like that just…And security Higgins in general is the way that that’s going to come to be, I believe.
BALDACHIN: What do you guys sort of think you’ve got to run fastest with respect to in terms of is technology, is it team, is it reliable a book of buyers and investors? Is it educating and adoption to sort of stay ahead and be successful? What are the key drivers for you?
BLUM: Well, I think they’re like, I think you’re talking about these individually companies trying to create custody and the other companies trying to create secondary markets and a primary issuance. I think all of those specific things are multibillion-dollar businesses. And so to me it’s more just about executing on what things become executable for us. So like I don’t have the capacity to raise $100, billion dollars by myself today, so I don’t think that we’re going to put our flag in the ground in that place. But just execution and showing that we can do different aspects of that ecosystem in a way that complies with the law is a pretty big deal. A lot of it has to do with also having the correct legal licensing to provide those services. And so to me it’s just having, you know, putting things together and just showing that like everyone else, I think you’ll find that if you actually take downs a lot of this stuff, a lot of groups are talking about it or they’re claiming they can do things are not legally allowed to do and we’re just actually doing the thing instead of talking about it too much. And it’s really more about—our kind of biggest challenges, just focusing where we put our time more so than it is like trying to find opportunity right now.
BALDACHIN: Okay.
LYONS: I think education is a really critical component for investors in particular. I think you have to sort of disaggregate in the mind of investors, this sense of like crypto is one thing and that digital securities are some kind of like subset of the crypto world. And I think it’s really a matter of like developing a level of sophistication around like, “Well actually, you know, what we’re talking about is multilayered and there’s the technology that underlies how some of these things can happen and then there’s the applications of that particular technology and Bitcoin and Ethereum and Stellar are all particular instances or applications of the technology.” And I think for investors to understand what this is, is actually something that they already are familiar with. I think that’s going to be really important for bringing a, you know, for the gravity to really bring in, attract the amount of capital that’s right now sort of looking at other things, right?
So I think you have to really help people understand that they actually already know this stuff, right? It’s not just about the technology or you know, you don’t, you don’t really need to know that your broker dealer has a voiceover ip connection or you know, the particular type of like internet speed that they, that they need to be able to like place an order for you unless you’re like a high frequency trader. So it’s like we have to sort of extract the discussion and sort of take it up at a higher level and just, you know, “Hey, this is actually understood. We’re not reinventing the wheel here.”
BALDACHIN: Okay. I asked this question and to finish off, what sort of keeps you up at night the most in terms of your business? What is the thing that you worry about the most? What’s the biggest…?
BLUM: To me the thing is just all the kind of noise and BS and hype and people doing things that are either illegal or just don’t make sense and just marketing it really well. Whereas, you know, we go through all the hoops and hurdles of doing these things correctly. And so I don’t know if it keeps me up at night so much as just like frustrates me and actually when the SEC puts out actions against fraudulent groups or the news comes out that, oh, it turns out like the law applies to things that actually just further validation of what we’re doing and actually kind of is a nice thing because we have a lot of those boxes checked. So it’s really just like how to be, you know, just continue to move forward while I guess… Yeah, I mean to answer question, I think it’s just making sure that at some point that people can…There’s some point where people can have to differ between what’s just hype and what’s the real deal.
BALDACHIN: What do you do about custody? Do you guys…?
BLUM: That’s a good question. I think there are a number of groups that either claims they provide custody or they claim they provide insurance on custody or their qualified custodians. And if you really digging down into the SEC definition of things and what people consider insurance to be it doesn’t really exist. And so right now we provide, like people can keep custody of themselves of securities
BALDACHIN: Do you have your own proprietary solution or do you have…?
BLUM: I’ve developed the technology for it, but I think if you can provide. The problem is there’s not reasonable insurance. I’ve talked to AIG. I’ve talked to a lot of groups that they don’t understand how to assess the risk of it, they don’t understand the technology, and so they won’t provide insurance at a rate that anywhere near reasonable, so it doesn’t really exist. And I can’t insure billions of dollars of digital assets and so I can’t do it by myself. But, they’re companies out there making money providing qualified custodian services when by the definition of any institution, no such thing exists today. If it’s not insured, it’s not really very meaningful. And so in fact, like I don’t think the tech part of it is really that complicated. I think companies make a business out of making it sound complicated, but no institution would ever engage in it. And so it doesn’t really exist.
BALDACHIN: Okay. Well guys, thank you. Thanks so much. This has been extremely informational and as I anticipated it would be very interesting. I think we covered a lot of ground. Would really look forward to watching the market, seeing you guys how you guys do and then having you back.
BLUM: Great. Thanks.
BALDACHIN: Thanks guys.