PrefLogic: Closing the custody loop for traditional investors
February 6, 2018: Jay Clayton, Chairman of the SEC, made a profound statement during a senate hearing this day, “I believe every ICO I’ve seen is a security”. This was the moment that the concept for PrefLogic was born, and not a moment has been wasted since. While watching that senate hearing live, PrefLogic founder, Todd Wier, realized that through the benefits of the JOBS Act, the internet and blockchain technology, the power of raising capital could be properly harnessed if regulation and custody solutions were to develop and mature.
The $20B raised through ICO’s in 2017–2018 came with numerous lessons. The power of the internet and network effects when raising capital from a global audience was clearly demonstrated. Another lesson learned was the importance of qualified custody, and the fact that most traditional investors are simply not going to take the time and the risk to be involved in taking custody of digital coins.
With ICO’s came the concept of self-custody of tokens, hard wallets, cold storage and intimidating strings of numbers and letters. The latter can represent the transaction ID, the block signature or “hash”, the receiving address and the owner’s “public” and “private” keys. Users of a PC or mobile phone don’t need to know how “1s” and “0s” make it all work. However, for ICO investors, the tedious process of self-custody is hard enough, but it also comes with the added risks of fraud, scams and hackers.
So, what was the vision for PrefLogic? In completing their fully integrated solution, PrefLogic has thoroughly vetted various technology providers.
“By trying make the right choice again and again, we fully expect that when our Securities Matrix and Digital Security Ecosystem ‘From Idea to Liquidity’ is commercially launched in the 1st Quarter of 2020, it will be viewed as Best in Class’’, states Wier, PrefLogic Founder/CEO.
The various technology partners needed to build this ecosystem are several, and include:
1. Financial services and custody
2. Transfer agent function
3. Investor verification
3. Trading platform technology
To be truly disruptive, PrefLogic’s SaaS product needs to offer access to point of contact banking, custody, escrow and other services at various stages of engagement and at differing locations within the ecosystem. Today’s traditional banks can offer some of the services needed but are not equipped to offer the speed necessary for the custody of blockchain-based digital assets.
If you believe Robert Greifeld, Former Chairman & CEO of NASDAQ “…in five years, 100% of the stocks and bonds on Wall Street will be tokenized.”¹ then the banks of today have a tremendous amount of work to complete if they are going to be involved.
PrefLogic has chosen Prime Trust as its technology provider for financial services, custody and several other trust related functions. Prime Trust is a Nevada (US) chartered Trust company and registered financial institution that is tech-driven to service both blockchain and traditional industries.
Founder and CEO, Scott Purcell, was gracious to take the time to do a phone interview with me. Shortly after passage of the JOBS Act in 2012, he describes founding FundAmerica, and becoming the go-to provider for custody, compliance, escrow, transaction technology, funds processing, broker dealer compliance and AML/KYC services for Equity CrowdFunding. “We were the 800-pound gorilla but standing in a small wading pool.”
In 2016 Purcell founded Prime Trust, and through that entity, acquired FundAmerica and its technology. “Now instead of servicing a market that represents hundreds of millions, we are the financial institution for a market that represents hundreds of billions….and in fact trillions.”
Prime Trust offers custody for digital assets and cryptocurrencies such as Bitcoin, Ethereum and Stablecoins. Stablecoins represent the tokenization of dollars, and in some cases the tokenization of gold. Prime Trust serves as the qualified 3rd party trustee for those dollars.
Through the relationship with Prime Trust and the seamless integration of Prime Trust’s APIs with PrefLogic’s Digital Security Ecosystem, PrefLogic will be able to offer funding, trading and asset flow using not only USD, but these other currencies as well.
As digital securities (security tokens) begin to tokenize the world’s assets, Prime Trust serves as a technology provider at various stages, and for essentially every participant in that ecosystem. This includes the issuance companies, broker dealers, transfer agents, issuers and investors. Looking back, the core services developed for FundAmerica have now been fine-tuned, and through partnerships with companies like PrefLogic, are available to an ever-growing list of clients as they touch and reshape the global capital markets.
With the sheer magnitude of assets under custody and Trust, comes tremendous responsibility for Prime Trust to “insure” those assets. Through a syndicate of 600 banks, they can offer up to $150M of FDIC-insurance on USD per customer’s tax ID.
In describing where we are in the maturity of the digital security ecosystem, Scott Purcell references a talk by Tim Draper comparing the collapse of the ICO market to the dot.com bubble and bust. “We are now in the building phase…just like the phase when internet 1.0 companies such as Amazon, eBay and Google found their legs.” says Purcell.
Traditional banks can have difficulty acting quickly on strategic changes. Most of their business software involves numerous legacy systems deployed over decades and layered upon each other, thereby creating technological disadvantage.
What does this disadvantage look like? Prime Trust is the financial institution, trust company and technology partner for many blockchain-based exchanges, as well as the new class of emerging Alternative Trading Systems (“ATS”) that are gearing up to create secondary markets for private securities. They also provide their services to many US and global digital security issuance companies currently existing, especially in the fast-moving real estate and crowdfunding sectors. I’m sure that competition will emerge, but right now they are the end-to-end banking and trust provider for the tokenization of trillions.
In closing my interview with Scott Purcell, I had two final questions:
1. As you do business with many of the existing digital security issuance companies, are there providers that you see separating themselves either through technology or business model?
“We’ve seen the initial waves of early participants wash out of the industry, both crowdfunding and securities token issuers. The remaining firms such as StartEngine, Republic, Coinlist, Vertalo, Polymath, PrefLogic and others are forming the foundation for the future of our capital markets — the tokenization and trading of private securities and real estate.”
2. What is your outlook for the growth and scale of Prime Trust and the digital security industry as a whole?
“The word ‘exponential’ comes to mind. It will take longer than the early movers expected, as is always the case when people are required to change behavior and become educated on something new. But the inertia is giving way and momentum will build toward a whole new world of capital and wealth generation.”
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¹The North American Bitcoin Conference, January 18, 2018, Miami
Patrick Byrne: “A Blockchain Tech Stack for Civilization”
By: R. Jeffrey Cole, MD
Advisor to PrefLogic
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DISCLOSURE REGARDING ENDORSER. Dr. R. Jeffrey Cole, the author of this blog, owns a promissory note that is convertible into a significant number of shares of PrefLogic common stock at a fixed conversion price. In addition, PrefLogic has issued to Dr. Cole shares of PrefLogic common stock to compensate him for providing management and marketing advice to PrefLogic.
