Digital Securities, Tokenization RegA+

Speakers

Oscar Jofre

CEO and Co-Founder

KoreConX

Oscar Jofre

CEO and Co-Founder

Oscar is currently one of the Top 10 Global Thought Leaders in Equity Crowdfunding, a Top 5 Fintech Influencer, Top 10 Blockchain and a Top 50 InsureTech. He has published an eBook that has been downloaded in over 20 countries, and been distributed by partners worldwide. Oscar is a featured speaker on Fintech, regulated, equity crowdfunding, compliance, shareholder management, investor relations, and transparency in the USA, Australia, UK, Germany, France, Netherlands, Canada, Singapore, Indonesia and China. He speaks to audiences covering alternative finance, RegTech, insurance, banking, legal, and crowdfunding. Oscar also advises the world’s leading research, accounting, law firms and insurance companies on the impact Fintech, RegTech, LegalTech, InsurTech and OrgTech is having in their business.

Dr. Kiran Garimella

Chief Scientist & CTO

KoreConX

Dr. Kiran Garimella

Chief Scientist & CTO

Kiran Garimella, Ph.D., is the chief scientist and chief technology officer at KoreConX, leading the strategy and development of blockchain and machine learning solutions. A sought after speaker and author, Kiran has more than 25 years experience in information technology, consulting and financial services. Previously, Kiran held roles such as global CIO and chief architect at a General Electric company and vice president and chief evangelist for BPM at Software AG. He is also an advisor to the Alliance of Merger & Acquisition Advisors and the MidMarket Alliance, principal founder of iKnowCentral and co-founder of CognitiveWorld.com.

Elliot Chun

Managing Director

Emergents @ Weild & Co.

Elliot Chun

Managing Director

Elliot Chun is Managing Director of Emergents @ Weild & Co., a middle-market investment bank and broker dealer. The Emergents team specializes in working with Issuers to raise capital through Digital Asset structures. Elliot brings 20 years of Capital Markets experience across functions (Investment Banking, Buy-Side, Consulting, Sell-Side) and across asset classes (Digital Assets, Equities, FX, Fixed Income, Privates).

Oscar Jofre  00:27

All right, everyone. Well, good afternoon. My name is Oscar Jofre, and welcome once again, to our wonderful KoreConX KoreSummit webinar series 2021. Today we have an exciting topic. This is a great one because this is a collision. Yes, a collision discussion, bringing a very interesting industry and with a new way of delivering that industry. So before we get into the topic at hand today, obviously we have our great panelists with us. I want to if they could take a moment, please, Elliot.

 

Elliot Chun  01:06

Hey, Oscar, hey, Dr. Kiran. Elliot Chun here. Part of Emergents at Weild & Co. We are an emerging technology and digital asset team under the Weild & Co banner, we will have been co was founded by David Weild, who among many things, a lot of his efforts have laid the foundation for the JOBS Act. So Reg CF and RegA plus, and happy to be here to talk about and I like that term collision, Oscar, that’s a new one. That it is really a collision.

 

Oscar Jofre  01:42

It really is. I think it’s there two things coming together. And now we’re gonna have a good discussion on this. And of course, our next guest, the one and only Dr. Kiran Garimella, please.

 

Dr. Kiran Garimella  01:57

Thank you, Oscar, I hope the one and only Thank you so much. Hi, Elliot, good to see you on the call today. The KoreSummit. I’d love to chat. You know, I like the collision analogy. But I don’t know I probably prefer the volcano analogy, [uncertain] but it creates new ground, very fertile soil, right, volcanic ash. So well, let’s see, we can take that analogy. I am the chief scientist and CTO for KoreConX. And I’ve been in this business of FinTech and blockchain for many, many years, and very exciting times.

 

Oscar Jofre  02:32

Perfect. Well, thank you both. You know, I didn’t want to just dive into digital securities, and I was thinking about this, how we could bring this together. And I think this is really important that why we added Elliott to it because this is part of the collision that people thought that the whole idea of digitization or tokenization, was to remove the intermediary. And in fact, it’s quite the opposite. It’s embedding the intermediary role into it, to make sure that whatever it is you’re doing is going to be fully compliant, then I want to make sure I give scope to everyone this is a compliance discussion. This is not a discussion of what you know, without intermediaries, this is all about intermediaries and how to utilize this great technology. And, and bringing these two worlds together, meaning a technologist with a registered individual, and how they need to work together to deliver something to us. So we can represent what we need it to do in a fully compliant manner. So that’s what this discussion is going to be. That’s why it’s titled, digital securities tokenization. So, before I get started with that, I want to really go on top and ask the question, we’re using these two words, not interchangeably, but we’ve made a definition of it. But I’m really curious to hear yours, Elliot on the difference between digital securities and tokenization for the audience.

 

Elliot Chun  04:12

So well, first, one comment on your comment now is the thought that it may remove intermediaries. I will say that my view of both tokenization and digital securities is it’s a more efficient way of operating something that has been tried and proven in our current capital market structure. Right. And so, I don’t believe at any point in time in the near future, that we’re going to remove certain functions that are required in the capital market process. My hope is that this new functionality will allow for more efficiencies, and those benefits being returned to both the investor as well as the issuer. So lining that up, what is the definition of tokenization versus digital securities? I don’t even know if there is like an official, there certainly isn’t a Webster’s definition of tokenization.

 

Oscar Jofre  05:30

We’re gonna do it right here today.

 

Elliot Chun  05:32

It is changing constantly. Right. But I think it’s the combination of the two words, I think it’s the digitization of capital markets. Why the problem with tokenization is, I think it gets misconstrued with what the tokens represent. Right? Right. The reason why we like to use the word digital securities or digital assets, even broader is that the digitization of what that thing represents is an actual, in this case, security. It is a registered investment vehicle. And that’s important to distinguish between tokenization, which in the earlier forms and call it, you know, 2015 – 2017 could have been any digital representation of something that facilitated a particular ecosystem, right, so I’m thinking utility tokens. So when those came to market, that term tokenization is when it started getting quote, unquote, coined. And I think it’s brought along a not the best indications of the strength, the compliance, the regulation, the legal, all the things that are required to go in to really support a quote-unquote, digital security. So we like digital securities, we like digital assets, because we think it appropriately communicates the level of time effort, and most important security, for investors that are using this as a method towards investing in particular issues.

 

Oscar Jofre  07:34

You should really become a politician. That was really well said because I would have been more blunt. And you know, I am. In my view, I mean I’m not a broker-dealer. So I look at it merely from the eyes of the investors, because I think we also need to couple that I think what you said is correct. I think digital securities does grasp everything that is required is not trying to remove the intermediaries, the broker-dealers, or anybody involved, in fact, is working with them to be part of the solution, not to extract them and make that component. But I think overall, I think tokenization The reason we put it in the subject matter is so people could become aware of it. What’s the sentiment within investors? And that I think that’s even a bigger element into answering the question is, the sentiment towards this particular term is been you know, depending who you speak with, they’ve actually been lost, they’ve been hurt by it. Digital security, digital assets, everybody knows this kind of grown-up. There are real players in the game. There’s the Goldman Sachs, the Weild & Co’s, the big names are associated, they are embracing it because it encompasses everyone. So I like your definition, though. It’s very, very nice, well-articulated, well prepared. Thank you. Would you not say, Alright, so we, we’ve hashed that over. So now the real key is, obviously, we’re embracing this new digital asset world with digital securities, we have this amazing regulation that is now going to go live on the 15th of March to be increased from 50 to 75 million, which we all know now it’s going to open up a whole brand new asset class into the sector. And it’s going to transform things dramatically. And so I’m going to ask each of you this question, that based on what we just mentioned, the definition of the two, where do you see the impact they give a security’s having in this particular regulation. So I’ll start with you Elliot and then I’m going to you Kiran. 

 

Elliot Chun  09:51

So I am very excited about the potential impact is of digital securities. Particularly to Reg A, I mean, we’re talking transformative stuff where it matters. And if you look at the history of capital markets and where we are today, it took us 100 years plus to get to the 2021 version of the stock market, which is, and I’ll use that as the closest comparison to an existing security today that people understand. Also, stocks are publicly traded. And so the access to be able to own equities is something that normal people everyday people can understand and can grasp. What they don’t currently understand and grasp is that the existing infrastructure that is built, that supports public equities and investing in them, is very old. It’s antiquated. It was built because we didn’t have the technological tools that we do today in 2021. So it’s fascinating that with this collision of RegA plus, with digital securities, that we are now allowing a 2021 infrastructure for investing into these new securities, using 2021 tools, is going to pave the way in my opinion, for a more efficient, a fairer, and a more accessible capital market to both investors and issuers and done in a regulatory compliant form. Now, the one challenge is that it’s still new, we’re still so early into this. People, generally speaking, do not know what a digital security is, they do not know what tokenization is. Bitcoin has helped some of that. But we’re still very much in an awareness phase, we’re not even close to the education or the training and implementation phase. So while the exciting parts are that the infrastructure I believe is there today, I don’t know if we can say the same thing about adoption, which is why events like this are vital to the rollout of this collision between RegA plus and digital securities. 

 

Oscar Jofre  12:38

You are on the ball, and it’s only Tuesday. I’m really impressed. It must be that San Francisco, whether you’re getting. No, this is great. No, I’m I didn’t expect that. But I’m going to come back. I got a couple of questions out of that. So now I’m going to ask a technologist because so when Kiran and I first met, you know what it’s like when you talk to a technologist, it’s one thing they get all excited about that shiny light and Kiran was no different than anyone else. But we get understood that in order to create this digital security, they need to be different. But like anything else, until you’re deep in, you don’t appreciate. So you’re now deep into RegA, not only deep and you’re actually alongside broker-dealer’s clients, you’re seeing it from all sides. How do you see digital securities, having an impact on RegA as we move forward with adoption?

 

Dr. Kiran Garimella  13:43

Alright, as a technologist, you’re quite right. But you know, I’ve seen so many bright lights and shiny objects. No, I just [uncertain] hypnotized by these things all the time, right? So but having been seduced by all these bright lights and shiny objects with over the years, at heart, I’m really a business guy, I’m a FinTech guy, come from the large enterprise system, and, you know, supporting entrepreneurs. And there are many things that I see started off as major problems in this industry with the concept of tokens. And as Elliot was pointing out, that’s a very broad term. It’s like saying, Let’s go to the zoo, right? We’ve got so many different types of animals within the zoo, some are really dangerous, some are very nice. So we have to understand what we are actually dealing with. So if I go back and take a look at the journey, you know, back into 2016, and 2017, tokenization stood for willy nilly we’ll tokenize everything, coins, and utility tokens and assets and securities and all kind of came into one bucket. It’s like putting the sheep and the tiger and the lion all in one compound, and assuming that there’ll be no blood and chaos, right? But we know that’s never going to happen. So What we’re seeing now is at least among the more responsible parts of the capital markets ecosystem is people are recognizing that this has to be a much more responsible well thought out way of architecting this entire thing. It just cannot be about you know, let’s get rid of the lawyers so let’s get rid of the regulators. It is not about disintermediation. It’s about intermediation, but with the right efficiency and the right focus, what does all this mean? It basically means that with the new digital securities and as we are seeing in the RegA space, but that’s not the only thing. There are many other regulations that may come into play in the future, what we have to be doing with digital securities, all us, is leverage their ability to handle new forms of innovation, all kinds of innovation happening in regulation, regulation limits, new forms of constraints on how regulation can actually work, how investors and broker-dealers can work effectively and efficiently under various types of regulation or the constraints the rules that the capture new instruments that you know, not only the regulator’s but the broker-dealers and issuers can come up with. And of course, how do you deal with all the variety of agreements we are seeing, as you know, Oscar, and Elliott, there are so many different types of agreements that can happen in the space, from RegD, RegA to Reg CF, and so on. And how do we encapsulate them in such a nice way, so that we can efficiently deal with them, we don’t have to go back to paper, a lot of the issues that we see today in the public markets, on one side, they’re very efficient, fast execution, high volume trading, we got that, but in many other administrative matters, what happens in the [uncertain], after all that is, it’s a nightmare of all kinds of paperwork and middle linkages and siloed applications. And we are seeing a lot of that happen. Now, even with all the traditional, you know, entities in the public market space as well. You take all that into magnifying that by 100. That’s what we’re facing in the private capital markets. And that’s what digital securities can help solve.

 

Oscar Jofre  17:27

Very interesting. So. And one of the things that, you know, normally I would go through technology, I was going to people wondering, why isn’t he asking about smart contracts? Because I think one of the things that I want to unravel here from both your perspective is that we have this great regulation, we talk about adoption, and then you need to be knee-deep in to actually see it. What are all the things that are taking place? So I’m going to bring this now to this term that is often associated with tokenization. Interesting enough with tokenization. And then people that times don’t think that happens in digital securities. So, Elliot, I’m going to go to you. So I’m going to bring all this back here a little bit, because he just explained all the elements ’cause he’s knee-deep in, right. So now we’re going to talk about smart contracts in the context of both tokenization and digital securities. Back again, to you.

 

Elliot Chun  18:26

Well, I mean, the thing I appreciate about technologists that understand the business side is not that they’re rare. But it’s a lot more difficult than most appreciate, to be able to understand the step-by-step processes that happen in any security transaction. And then to be able to present a method and an elegant solution that is able to facilitate that process. And, and that’s what essentially this smart contract is in the digital security or tokenization side, you are embedding a relatively complex process, especially when you think about each step that it actually takes. And just because we have technology that has innovated that step, generally speaking, that step still needs to occur in some way, shape, or form. And what’s the consequence of that step not occurring? It could be very bad. It could be a significant risk from a capital perspective, a loss. It could be a mis-movement of capital. It could be an incorrect investor that’s not qualified to invest in something. There are a significant number of risks that, actually it’s not significant, every single step is open to a mistake when you translate a complicated process like buying and selling, or owning any security, and try to put it into a more elegant and efficient wrapper like a digital security that has the rules embedded in it through smart contracts, right. And so it is, it’s tough. And because of that level of complexity, because of the number of different parties in you know, we use the word intermediaries, but I want to move away from that because it’s not like an intermediary is almost like I need to do this. And you are in the way between me and end-to-end users. It’s more facilitators because these functions and processes must happen. But they must be facilitated in a way that is efficient and cost-effective. And look, things are all for the rest of humanity, there are always going to be mistakes, you need facilitators to be able to step in with the market knowledge to be able to understand what happened, and then how to fix that. So smart contracts are great. Maybe, although you know, that definition needs to change, right? Because change because they’re neither smart nor their contracts. But it’s important to understand that the amount of information that is going into the coding of a digital security, to make sure that it is operating as expected. It’s immense. And so, you know, while we’re sitting here at this time saying, Yeah, this is great, we can get digital securities in the RegA plus format, and we can be buying and selling these things, they’re going to this process is going to continue to evolve, it’s going to get better, there’s going to be some mistakes along the way, but not anything. There are mistakes that are happening now with people sending either settling bad securities or wiring money where it shouldn’t have been wired. These are processes that we’ve had for hundreds of years. So expect some of these little bumps to happen from a digital security side. But if you were to give us five years, I think there’s going to be a very strong case for why a digital security wrapper is a far superior way for execution, administering maintenance, transferring all the processes that happen in a securities transaction. It’s more elegant, and it’s more efficient in a digital security wrapper.

 

Oscar Jofre  22:58

Perfect. So I wrote down some notes and I’ll wait to the end a little bit to give you an update on digital securities from RM but Korean, obviously smart contracts, right? So there’s a complexity to this. In the early days, it was simplified. We now heard from Elliott, that it’s not so much about the intermediaries. It’s about the complexities of legal and facilitating the processes that things need to be followed, that if you do skip it to his point, if money if this money is done first before that, the whole deal gets on Bravo, where people go, what’s the difference? Well, that’s a difference. The process, please.

 

Dr. Kiran Garimella  23:44

If we keep in mind, and we all should, what Elliot said about the rapper and the complexities around any digital signals securities transaction, forget if it’s digital or not, it’s a securities transaction. If you keep that, that big vision of all the things that are important for that, there are so compare that with the generally popular notion of a smart contract as it exists in sort of the public domain today, right. From that perspective, the current or the existing view of people in the public domain about what a smart contract is up there are two things we should know about that one, number one, they’re not smart. Number two, they’re not contracts. So we think are smart contracts. In fact, the phrase smart contracts was a misnomer. And it originally came about through some flight of fancy as they themselves admitted that and they said, No, we should have actually recorded a stored procedure. So they have admitted that it isn’t really it’s like a stored procedure in the database. That’s what it really does, right. But to be fair, when you look at the way we think about data In this ecosystem, we’re looking at Digital securities in the capital’s right. securities are a very different instrument that not like cryptocurrencies, they’re not like tokens. They’re not like other digital assets, securities are subject to securities laws. There are three major areas where I think people need to understand what it requires to keep smart contracts, fully functional and effective in the securities world. So number one, not all securities are the same. Not all securities in the same country are the same. Right? You’ve got different types of securities? And how do you deal with all of those? And what are the various restrictions or rules, the regulations around it? They’re all very different, right? What is the point is that every country has its own rules. There are some broad rules about securities, we get that. But there are some specialties that actually happen. What are the whole periods in different countries that can trade with those that are sanctioned countries, and there are all these lists being maintained? Right, so there’s a lot of that happening. So that’s number two. And second, all the offerings are not the same. They all have different perks and bonuses and terms with our offerings, all of those things need to be encapsulated in a very efficient way in this wrapper that he was talking about. And that’s the only way we can make all this entire ecosystem efficient, right? We can simply willy nilly say, Oh, you know, there are six functions for smart contracts and use a protocol. And let’s do it. Hello, there’s more to it than that. Right? The one that one of the biggest learning lessons that we all should take away is that securities contracts are not the same as cryptocurrency transfers and payments, they’re very, very different. You know, if I’m sorry, if I have a private security, I’m selling that to Elliot through a platform, a sheep farmer sitting in New Zealand has no business trying to validate that they have no clue what validating a security means from their end, right? This business-level validation is one of the most integral parts of smart contracts. And if they are the right wrapper, rightly wrapped around digital securities, that’s the only way to go.

 

Oscar Jofre  27:13

That’s interesting, you know, that that that’s been my one element you’ve touched on is validation. So you got this great technology, you have this smart contract that we now just discussed that, in order to put a security in it, it’s there isn’t one shoe that fits all, that would mean that every single company out there is the same, that doesn’t happen. And this has been kind of the eye-opener that people need to realize, when people if you look at all the companies that raise money, year in year out, forget about every company, let’s just look at venture-backed companies. They’re all different. The only thing that looks the same series, A, B, C, D, E, F, G, that’s it. Everything else in between, it’s like, well up. And so that complexity you touched on it earlier, was really, really important. So we got complexity, obviously, we know that technology can facilitate that. But the validators This is an important element in, in securities law, whatever jurisdiction you go to, is that the validators are the true people that can say, yes, this is the transaction, we indicate. And we pass it through, we have Elliot and Kiran that want to transact and the validators are people, the Board of Directors, or the shareholders of the company, or somebody assigned, so that that’s, that’s a really important element that I think needs to be captured here. So people have a very good understanding of the impact that it could have on them is understanding how the, you’re going to utilize this in the marketplace. So obviously, the impact for RegA so let’s talk about another component of digital securities that often gets brought out there. Listen, demystify cuz this, you know what I’m hoping that comes out of this. People go, Wait a minute, I didn’t know this. I didn’t know. You know, there’s, here’s what this is. Here’s how it works. Obviously, you saw that we never got into the, you know, how much valuation the value No, it’s all about the specific but another component that gets brought up in digital securities, because it is a security, it’s an asset, there’s the word custody, and the word transfer agent. And so, these are two very distinctive roles, and regulated entities that perform these functions. And so I’m gonna go to you, Elliott. I hope you know, custody and die now just joking, please, if you can just give everybody an overview. The difference between a custodian and a transfer agent.

 

Elliot Chun  30:04

So, broadly speaking, when you think of both of these, this is, from an investor perspective, this is your comfy blanket wrapper. This is your comfy blanket that you go into knowing that your securities are safe, they’re secure, they’re not going to get hacked, you have access to it. And that it is a place that you can have confidence that is being held in the right ways. Okay. It’s important for that, because people that don’t, when you think about, again, going to the equity side, this, this is you have custodians, that, literally their function was to hold your physical stock certificates. That’s what the custody business grew up as from an equity perspective, it was literally the place where you, you sent your physical stock certificates to be stored, they would also help with when you bought or sold, the stock certificates, there is a whole process that happens in the back, where those physical certificates are actually being transferred between different custodians that that one names during the process. Humans have gotten accustomed to the efficiencies of not having to deal with physical stock certificates. The comfy blanket comes off when you move into the digital securities arena, because the function of the custodian and the transfer agent is still well, you can go back and forth on where you want to custody the if you want to hold on yourself or not. Right. So you ask new quit anytime you’re putting in a new process. This is the digital security side, you have to ask yourself new questions. And the questions here are, why should I pay for a custodian? Can I hold it myself? And these are good questions to ask, we should be asking these questions. From a digital security side. Technically, you can answer that question yourself. Do I hold it in my own wallet or my own custody vehicle? Or do I hold it in a third party, custodian? And then when you think about transfer agents, they’re actually required in this process? You can’t go anywhere in the issuance of a new security without having a transfer agent in place. Right. So the transfer agent required still custody? Maybe, maybe not. And I think when part of the hesitation for investors who have been investing their whole lives, to invest into a digital security, the first question we get is all right, well, how do I hold it? And what are the implications of me owning it in a digital security structure versus a, you know, analog paper structure? And that has been a friction point in the process, because, again, the awareness and education, we’re still out there. But the assumption with new investors that are looking to invest into a digital security offering, the question that they get hung up is okay, well, I don’t want to hold it. I don’t want to be responsible for holding it. I was never responsible for holding my equity stock certificates, even though you are and even though you’re paying a significant amount to do that. Nobody really looks at the cost of custody for equities. But in this new digital security form, you have these questions that you need to answer. And the industry needs to do a really, really good job of making it very open, transparent, and easy to understand what the options are, and who they should go to for that help.

 

Oscar Jofre  34:39

Okay, I’m just going to add a little bit to that because I think you touched on some really good points there. And the way that I’m a pocket guy. I’m all about buckets. So I always go, did you have a security says here, it’s a way of delivering. I’m gonna use the word away. Delivering the ownership. Okay. And I’m going to say, based on the regulation, you may be able to deliver that security in this way. So and so that that’s one component. The second component is if I’m using that regulation, and I’m using an intermediary, how does that affect the way I can deliver that security. And then number three, the regulation that I’m using with the, with the intermediary or no intermediary, the type of investor I’m delivering it to, what does that mean, and this is something people have not realized that these are all the different components. And to his point, there are times where the word custody is used, because the investor, part of their regulation is that they cannot hold a security. A custodian needs to hold the security. And the transfer agent and the custodian work together when the regulation requires the issuer, the company to have a transfer agent, who so it’s, I love this personally, for me, I think it’s exciting because in no people’s brains, like what the hell is he talking about? Well, Regulation A Regulation A requires you to file a form winning. You don’t need to indicate whether it’s digital securities or not, we do it every day. So to Elliott’s point, it’s not a big deal. It’s done, we take the smart contract is easy to do. Because once you get your form one file and qualified by the SEC, boom, all those rights and everything cleared Bell right there, that’s, but the issue is, under the regulation, the company is required to have a registered transfer agent, and to protect the investor at the other end, and to have, you know, regulatory oversight of the company’s cap table real-time. But there could be an instance where any investor that comes into this space, who is not just your retail investor and institution, who says yes, I can invest like an RA, which we’ve now gone through where they need the custodial impact. Along with the transfer working side by side, I often hear where you see the word custodian a lot is in the crypto. And sometimes people think that custodian is the same thing for securities, only if you’re a certain type of investor, and under the regulation, so yes, even investors are regulated how you can hold a security in India, as retail investors. It’s no worries unless you’re investing with your IRA and your IRA custodian will get involved. Or you’re working with a registered investment advisor RIA. And they will have again, we complicated, no, we’re just indicating all the different ways. So you can imagine when you’re designing a smart contract, or a digital security, all of these things need to be taken into effect, as is Elliott indicated in order to be effective in the marketplace. Otherwise, it won’t work. Right, Grant? I mean, look, you’re knee-deep in wheat. So what we did two grand, you’re gonna love this. So do you know how technology people go? So what is this thing with compliance, I mean, unless they’ve been, so what we did with Korean, we’d throw them right in there. We throw them in there with broker-dealers. And we throw him in with clients. And, and to be able to be at all sides of it, to be able to understand that the technology is great to create, but you’ve got to be living it to understand the errors to your point and errors do occur. So I want everybody to have this one thing in their head with Elliott nailed. I’m not going to forget this. I told you I was going to get back to this. He said if you get something incorrectly done in a digital, you know digital security tokenization and you get the steps wrong. You’re looking at refunding everybody. It’s a nightmare.

 

Dr. Kiran Garimella  39:30

Right, Karen? Absolutely. I know you threw me into the compliance side. But you know, for a number of years, I’ve been a trader I used to trade all kinds of instruments and currencies and futures and you know everything else. And I knew the complexities of that. If you remember Oscar when we started building out the smart contract for trade, for example, is simple trade with no other complications behind it. Had we have nailed down 25 different validations that need to happen for The trade to be valid and compliant. And one of the big things that I have understood is that validation is such a large word and you use an Oscar, there is a technical validation, and there is a business of validation, this both need to be done, the technology will handle the technical validations. But to make the business validations efficient, that’s where the smart contracts come in. But the fiscally responsible person behind that entity behind that has to be one of the regulated parties, otherwise, the whole thing doesn’t make sense. And now that I got thrown into the compliance side of it, I am seeing this firsthand day in and day out the amazing amount of complexities of so many exceptions that actually happened. And you know, just thinking about how can all this play correctly. And that’s if we can deal with that. And we are, that’s where the power of smart contracts and digital securities will come into play.

 

Oscar Jofre  41:00

So here comes downtown 10 2015, digital securities, tokenization, liquidity, liquidity, liquidity, right, that was the big bang, right? liquidity, I saved the best for last. So I don’t use the word liquidity. It’s monetization for investors. So it’s a way for them to offer enter investment. But let’s talk about the impact of digital securities to the very last step for the investor journey. So we know there’s gonna be things here, but obviously, people think of every single time you hear digital securities tokenization people go, whoo, I can treat this liquidity. Oh, yes.

 

Elliot Chun  41:41

Yeah, it, it is and will continue to remain one of the most valuable components to an investor that’s going into a private investment is that you have access to your capital, after a certain lockup period, which is 12 months, but you still have access to your capital, which is much better than the current alternative, which is typically 10 years, sometimes even more into a private investment. The digital security innovation, and its ability to transact, in a regulated fashion, in an orderly marketplace. Huge that that innovation is it is game-changing for the private markets. And it may be arguably the most important innovation to private markets, particularly when you think about who has access to invest in private markets. And typically before 98% of the people did not have the ability to invest in any private investment. Because you either had to know the people because they were in your dorm room, or they were in your friends and family. If you didn’t have anyone within that immediate circle. You weren’t getting access to invest in the deals or you’re investing into a fund that provided you access. So now we’re talking about having access to invest and the secondary market. The fascinating market as it is in 2021. And there’s a couple of unfortunate things that were things that were not ready yet. The first is we don’t have enough names. We don’t have enough good quality names and examples for investors to go and invest time into understanding Hey, what is out there in the RegA space? What is something that I believe in? Or I believe in their mission? I aligned with their values, I believe their vision, whatever that is. We need more examples. So we’re working on that industry is working on that. The second is having an understanding of how the actual markets function, which we’re still working on that as well. Yes, we have the ability to trade but generally speaking, you should also know what it’s like on the other side when you want to buy in, what are some of the restrictions. This is a new asset class we had mentioned earlier. The other very fascinating thing is that every digital security is likely different. Right? It’s not like equities were an equity is an equity and it’s an equity generally speaking and the only thing it’s like oh, I get a dividend or not a digital securities have a lot of different benefits that you could do. They have a lot of different functionality triggers that you can build into How the security operates. That is complex for investors that are coming in. So there’s a lot of other different considerations that have to happen for a digital security in the private markets, but we are just coming to the cusp of now being able to provide that marketplace in an orderly way, so that investors can access their money. Now the biggest difference, you know, we’re not using liquidity, we’re saying off-ramp, we’re saying access to your capital, that may or may not come at a price. And it may not come at a price that you think is fair or not. The innovation today isn’t a liquid market or a price at which I would expect to be able to sell my position at a reasonable number. So we just need to make sure that we’re very clear that we’re bifurcating those two, it’s not liquid. I’m not I don’t know, I think the whole industry is hoping When can we start saying something like that term. But generally speaking, we’re not using that off-ramp, access to your capital. And that step alone is massive in major and will have great benefits to the investor.

 

Oscar Jofre  46:22

Well, actually, it’s not even the industry itself is the SEC. In fact, when a company follows a form one egg for the RegA offering, I’ve seen this where companies go, but there’s a secondary market, I can offer them liquidity, the SEC will not allow you to say that, because that’s not what you’re offering them, you’re offering them an off-ramp, where there’s a venue, a registered venue, a FINRA broker-dealer with an ETS license is specifically to allow you to monetize that investment. And so it is part of an educational element that we are bringing out just a sneak peek for everyone. Because of this great discussion of the secondary market, we’re having a half summit coming up, specifically all around the mystifying secondary market. Because to Elliott’s point, I think the term liquidity has been terribly misused tokenization really took it out of context is you can take a security anywhere you can see if that was the case, then why do we have securities regulators if that wasn’t going to go away? Um, can we make it smoother, less friction? The answer’s yes. Can we make it that an investor who invests $100 in a company and to be able to tray, you know, to be able to place their securities on a secondary market and be able to have others look at it and do it at a cost-effective manner for everyone involved? issuer broker-dealer transfer agent ETS? And the answer is yes. So what y’all were, there’s an announcement coming. So the point is to Elliot, and just as that doesn’t mean, there’s liquidity. I didn’t say there’s a great I just said, the venue is there. And that’s all it will take time for that venue to build, please.

 

Elliot Chun  48:17

And along those lines, the word digital security that we’re in there, the security, I think, is important because a lot of our peers in the, I guess in the more crypto market space is hey, we need less regulation, we needed an environment where we’re not centralized. Unfortunately, humanity hasn’t done a very good job of proving that it can’t operate within a ruleset. And I think when we saw what happened with Icos or tokenization, or utility tokens, in 2017, and 2018, really showed the use case of what something digitally can do, right, we saw a lot of liquidity, I’ll use that term to describe Icos because there was a lot of transacting going around. So when you look at, okay, what could this look like? It could look like a quote-unquote, liquid market that we saw during Icos. Now the problem is, is 75 to 85% of that was just bad, bad behavior. Right, right. So I would never that’s why we don’t use the word tokenization anymore, or Icos or utility tokens. I probably haven’t said those in a couple of weeks. Right.

 

Oscar Jofre  49:45

But you mean 90% I just want to correct your topic. 90%

 

Elliot Chun  49:49

over 90% Yeah, maybe even 95 we can even jam that up higher, right, but the point is, is that one we can see what A more active market could look like if more people were transacting in the digital securities world. But it must be done in a regulatory compliant way. And I appreciate Karen’s comment about the global nature of this. Just think today, it is very difficult, for example, to go buy equity in India or in China, or in South Africa, these are very difficult markets to access, especially if you’re in the US. When we talk about digital securities, all of a sudden, we’re opening up this global access. And there are a significant amount of global industry securities regulations that have to come into play. There’s a significant amount in the US when you talk about blue sky laws and all the craziness around that which I know you guys know very well. So it takes time to be able to build the compliant chassis that is able to allow the industry to one day operate in a much higher volume type of environment. But if we don’t have that structure, we’re gonna go down a path, we already saw what that path looks like. And we can’t do that again. And primarily for the investors, because it was just it was a lot of issuer bad behavior that happened. So this is all going in for investors. And sometimes it’s hard to describe that the processes that are in place here and that are being built or to protect them, when they’re like, I just want to buy it, I just want to own it. So yeah, we’re in that kind of give or take, it’s still building the infrastructure, the global compliance engine, and chassis, yet still, hey, we need people to come in, because we need more names here in order to facilitate more transactions.

 

Oscar Jofre  52:12

Good point, good point. And, I mean, it’s, it is coming together, which is good. I mean, obviously, everybody gets attracted to digital or tokenization, immediately because of that return liquidity. So hopefully, for those who are listening in today, please it, you’ll find it, the regulars will allow you to use it. And if they catch you doing it in your presentations, make no mistake, they are listening, because an investor will take liquidity, very much like what happens at an exchange. And it’s, it’s really important that you see what the industry is doing to protect you to make sure that it’s done right. And there are other elements. But the good thing is a lot of great companies are working together to solve that problem, to bring that to fruition. And I think, and just This Is Us, I mean, we’ve created a charter for digital securities for the market, because we believe in certain things. To your point, everything you’ve said earlier is funny. We wrote it. It’s now been five years ago, we wrote it as a charter people laughed at it. And they go, No, no, no, you’re just part of the old system. I go, No, no, no. It’s about making the old system work with the current and watch. It’s amazing. There are people open-minded, and it will be better. To your point. It’s not about, you know, removing intermediaries or forcing intermediaries and it’s to make the process more efficient, frictionless. So if we can keep that in mind, it’s amazing. But you’ve got to you have to understand the entire journey. And you can’t come diluted with you know, I’m a company. I’m raising capital and blah, blah, blah, I’m over here. There are so many little things along the way that need to be part of it. And so today’s discussion was really to unravel the which it happened. And because I wish I had two ideas today, honestly, I had two ideas, he decided to just dig in, whether you know is right, gay, are we seeing digitization or tokenization. So of the 2000 or so filings, there’s only been two. So there are two. There is the third one for a stable coin, which is us. We don’t classify that under digital securities, but it is a different form. But the point is, that’s it. The rest of the people as Elliott said it’s about adoption. The investors are scared they’re generally don’t want to hear the word tokenization or digital asset. Still, we owe it to them after what happened previously, but this education is a key element, educating the market on how it works, what you need in order to do an offering on RegA now. We didn’t say you don’t need your lawyers, your auditors, broker, dealer, escrow provider, all those all the regulator elements, none of it, it’s all part of it. That’s not going to change anytime soon, in order for you to facilitate your digital securities offering for Regulation A, and but it is exciting. So obviously, I’m going to give back to both of you. I mean, I have a, I’m gonna say first, I’m very bullish on what’s about to occur with RegA because there’s another that the attraction now is that was 75 million, we’re attracting a very different type of issuer a real estate ish, where, and if any of you are following the news, any other given day, every single person is trying to launch a platform for real estate tokenization. Because fractionalization is the bane conversation piece. So I’m going to demystify that right away. fractionalization has always been around, it’s never, it’s never been the issue, and I’m sure you’ll say the same Elliott never been the issue. The issue is, could you administrator in a more cost-effective way, Elliott said it more effective, cost-effective way to go through the processes. So that’s been the real key. So I believe that that’s going to have, you know, having digital securities, in real estate in other forms, in particular, when they want to fractionalize even further, is going to be fairly impactful. And but it won’t be sold that way, I just want to be very clear. That is not how it’s gonna get sold. I’m just saying how it’s going to be managed. See, I’m not a believer today, to Elliott’s point, that if you hang up a banner, and you say I’m selling digital securities, that they will come. That’s me, Elliot.

 

Dr. Kiran Garimella  57:04

Yeah,

 

Elliot Chun  57:05

I would love to be able to say that. I think the anyone in digital securities today, not just RegA plus, just, generally speaking, even some of the other regs. We’re not where we would like to be. And, you know, that’s the that’s big question for the industry is When is that going to come? I’m not I’m not sure. Right. I don’t think anybody knows in the industry, I will say that, with what’s happening with kind of Bitcoin, broadly, it is bringing a brand new type of person to the table. And I think as it relates to digital securities, I think career we say we say this, that career risk is starting to flip. Right? So when we jumped into this space, people were saying, Well, what the hell are you? What is going on? Why would you do this? I think we’re coming to a moment where now it’s, well, how come the career risk is on someone who’s not considering what these types of innovations and the infrastructure that’s being built today is happening, and how that they can start planning, not to necessarily get involved, but start planning, we’re considering what this new innovative infrastructure is going to look like, and how it’s going to provide value to investors and issuers. And then one final thought, all it’s gonna take is one very high profile person, that people follow everywhere to come in and saying, I’m going to raise in a RegA plus in a digital security structure for my new initiative. And you’re gonna have a stampede in right and, and so we’re patiently waiting for that. The patient part is tough in 2021, for those that are big believers in this, I don’t know if that happens in 2020 to 2025, but it will come at some point. And we’re ready. And the last thing I’ll say is, everybody in this industry, which I appreciate is very approachable. So please reach out. Say hi, if you have questions. It is someone that is something that you know, we all want the industry to succeed in the right way.

 

Oscar Jofre  59:32

Yeah, no, I agree. I agree. Kiran, your words. 

 

Dr. Kiran Garimella  59:37

So I’ll just give you my very quick technologists wind up so to speak. You know, I’m sure there are many automobile engineers that love to build wonderful cars that do nothing but sit there in the showroom. They can’t drive them anywhere. Right now. We are seeing this evolution of investors who are real investors with real money and Now asking the questions, why doesn’t the contract Can we do that? From a technologist? I’m, you know, I’m the kind of guy who actually likes to build cars that have people driving right very effectively and safely. So I’m looking towards all these wonderful challenges about how we can create smart contracts, digital securities, all these safety provisions using blockchain permission blockchain technologies. So anyone has, you know, would love to chat more about that, you know, like, Are we all very approachable? We’re definitely more than welcome. Those kinds of conversations, but I’m, like, super excited about it.

 

Oscar Jofre  1:00:37

It is pretty exciting to see where we’re heading with this. And there is going to be an art to Elliott’s point, you know, high profile individual will that be, um, and it’s got to be the right one because we saw this in cannabis. So I’m sorry, why am I playing cannabis, because cannabis was the same way. It wanted high-profile individuals to bring the clout and the investors in it did. But nobody was watching how it was being properly done. So I want to just echo your words with a following the right individual that has a lot of clout that can bring and draw people in, but with all the necessary items, regulatory items, intermediaries, to ensure that there is no slip up for this thing to be refunded. Because in the company in the cannabis sector, it went the other way. It was powwow all the smoke up in the air and then give all the money back to the investors. Because again, it’s one thing having one part, I just want to make sure we’re clear on the parts. But this does not mean that your company cannot go out there. I mean, we have clients at KoreConX that every day do RegA, and they don’t need to sell it as a digital securities, but it’s how it’s getting stored. For the efficiency, it is a digital security that I mean, [uncertain] us is that it’s not a big deal anymore. It’s everyday life, it’s we do it for efficiencies. Again, I’m going to keep quoting Elliot on this because it’s important to make it more efficient for the processes that we have internally, reducing our costs. See, by doing that it reduces our costs, reduces your costs. So it becomes a win-win. So this is only the beginning of our phenomenal discussion. And I kid you not we are these digital securities is just as Elliott indicated, and Kiran, we’re just getting started, a lot of players are going to get involved. There’s a lot of different components. But try to remember what I said earlier. You have to when you’re looking at this, you have to look at all the elements, the regulation that you’re about to use the interviews, you’re going to the investors you’re going to target that’s going to make a lot of different decisions for you on how you need to package all this correctly. anybody tells you that you don’t need to worry about that. Run. Till then, as I said before, you can reach any of our speakers, our panelists at KoreSummit.io where you can see our YouTube Live channel KoreConX. We want to thank you for a wonderful, wonderful afternoon spending with us today talking about digital securities tokenization for a regulation a stay tuned because we have a lot of great topics coming in the month of March. Elliot Thank you, Kiran.

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