NEO Digital Asset Alliance Round Table Meeting #4

Digital Asset Alliance is a NEO backed initiative discussing security token related issues. We aim at building an open-source platform for the security token life-cycle service providers, and developing best practices for the growth of tokenized networks.

Date: 2019–03–21

Location: Zoom


10:00–11:30p.m., GMT+8


Projects Introductions and Discussions



1. Attendees:

➢ Martin Rerak (TokenSquare , )

➢ Balder Bomans (Maven 11, )

➢ Stephen Hyduchak (Bridge Protocol, )

➢ Rey Fernando Verboonen (Curio Captial, )

➢ Lili Zhao, Jiaying Li , Sarah Song, and David Chen (NGD team, )

2. Sarah: What’s the differences between IEO (Initial Exchange Offering) and STO/digital security offering? What’s the strength and weakness of it compared with IEO?


“I think the Initial Exchange Offering is more for the utility token being sold. The exchange even does not have broker dealer license. STO is obviously at an early stage and for small-medium size companies as an additional tool to raise funds. From my perspective, they’re quite incomparable. The Initial Exchange Offering is hot, but it feels like a little bit unsustainable.”


“I think if these exchanges can start involving high net worth individuals, family offices and start security token offerings, there’s significant potential. They already have this massive volume of active and interested parties. If they could just make sure that they’ll be compliant and start extending that into security tokens, that would be really interesting.”

3. Sarah: What’s the influence of having more traditional financial institutions joining this area?


“I think it’s interesting because a lot of people from US market and from Asia is looking at this scope. So, if we explain to family offices and high net worth individuals a new better investment product (digital securities) to be invested in, they will be a lot more interested than one year ago. I also think custody is another solution which must be solved for institutions to get into the market and obviously this has been solved so far especially with the players like Fidelity comes into this space. I think the effect of Fidelity’s way is very much underestimated because it’s so much different if a player with rich experiences of eighty to hundreds years of asset management industry comes into the digital asset space which is so much bigger than old players which we’ve seen from the tech side so far. And we hope that there will be a lot of more interesting things to this space.”

4. Sarah: Why Car is a good asset to tokenize?


“We come from the industry selling collectible assets, both super cars and paintings. And when we look at the performance in the last 10 years, we noticed that there’s not only a terrific performance in terms of the revaluation of the cars increasing, there’s also a very defined user base. We see a lot of car enthusiasts, but the market was only viable for elite investors. So, we decided to top up on our expertise and bring what we learn about selling those cars as an investment to the blockchain part.

5. Sarah: What’s the essential factors in the process of tokenizing car or other assets in the automotive sector?


“Now what is very important for us is to remain as lean as possible. And when it comes to collectible assets, they’re both a passion but also an investment. So basically, what we’re bringing on top of that is the expertise of storing these assets, making sure it remains a very lean framework for us to not bring one car, but to scale as the prior growth. We’re not buying the car beforehand. We just have an option to acquire if we find enough stock holders who want to invest in the car. Secondly, there’s clarity and transparency in terms of how the offering mechanism works. Like how much the car costs, what can Curio do with the cars or cannot and when can you sell it or cannot? etc. It’s very important to just be sure everything remains transparent and there’s no hidden fees anywhere. And we work with Liechtenstein based regulators in order to define what would be one of the world’s first asset backed tokens with number. And this was very interesting for many stakeholders in the industry because by having the number to be attached to tokens, it makes a bankable asset. Of course, we still don’t have digital security exchanges, but this is coming in Switzerland with the SIX Swiss Exchange building capabilities and in Liechtenstein with Liechtenstein crypto exchange. So, in the future, Curio will not only sell to the end customers, but also work with institutional entities that distribute these assets to their clients.

One more crucial aspect that I would like to add is the topic of the centralized versus decentralized governance. The moment you bring tangible assets, it becomes a question of what happens if Curio goes bankrupt, who sells the asset, who has the right to decide what price to resell it. These are very important to define beforehand in order to make sure that all the stakeholders are well protected and well informed. We feel that people are not yet ready to embrace a fully decentralized manner and we need a legacy system from the regulatory perspective.”

6. Sarah: What functions within the digital ID project are required by better serving STO?


“It really depends on the customer and the project. In the ICO boom, companies were doing with basic KYC including email verification, social scoring risk profiles that wouldn’t quantifying our financial services in the US. Now things have evolved here. If you want to do STO, you need to do KYC and AML that means the usual document verification, identity verification and then you have AML that checks things like terrorism, politically exposed persons and so on which is almost a US banking standard, also the way we build our system. And we felt that way will be the best because we saw this coming. So, we have solutions for both ICO and STO. ”

7. Sarah: How to protect the users’ privacy in the process of doing KYC/AML, registration and transaction


“We never code someone’s identity to a blockchain. Our system certified everybody to US banking standards, and we code meta data like 1001101, which means in the logic that you pass money laundering, or you are not a citizen of the US etc. We can see that data when certifying but reducing the risk of storing that data was our compromise on how to protect the users in that field. We thought that was a pretty unique way to do identity.”

8. Balder: Does the digital ID also take local jurisdictions into account? Do you see a role for providing secondary trading of digital securities with digital ID service?


“Firstly, KYC and AML are kind of those things that’re universal. Our system certified over two hundred fifty counties. Secondly, the certification for the secondary trading of digital securities is a long hand holding process and we want to ship it into the software. We work with a company which automated all the process of what you’re talking about. Whatever you will use like Reg A/D/CF, they automate those forms and there’s basic logic behind the token meaning they basically will white list all those addresses that were from accredited investors. They will also put a time on it before those people can either unlock those tokens or can trade those tokens. I think that’s the rule of how you will do STO. But I’m hoping that STO is not the only option and we can get more clear guidelines in the future. ”

9. Sarah:What’s the strength and weakness of different jurisdictions (including EU\Asia\USA) to do STO


“What we did in our case was to find one jurisdiction that was a bit ahead to make sure that we leverage upon the certainty the regulators provide. And this is the reason why we went to Liechtenstein. Soon after we realized that it was a very good decision because by working with Liechtenstein, we were automatically compliant both with Switzerland and EU. This is already a four hundred-million-person market that becomes very attractive. Unfortunately, we cannot sell the tokens in the US or Asia. We are bounded to the residential location of our investors as well as citizenship because these are security tokens.

We learned that most of the ICOs in 2017 essentially took place in Switzerland. But in the last month a lot of this attention on issuance of ICOs have essentially moved outside of Switzerland given these uncertain guidelines and moved to offshore locations like Caymans. We’ve seen many examples that have raised several million dollars in Caymans. So it might depend on the end customer in your distribution channels that you want to sell these tokens to. If you want to sell to retail investors, you might want to register in Liechtenstein. Or if you want to go global with utility token, you might be better to do it in Caymans.”


“There’s an important distinction that has to be made, which is the issuer jurisdiction and the actual investor jurisdiction. We can put tax purposes aside and friendliness aside. It depends on who you’re selling the token to. And it’s not just who you are selling the token to in your initial offering, but who is potentially a beneficial owner or investor of that asset. Therefore, there is such a focus on USA. A lot of American companies are setting up their entities in Bermuda, Caymans or Switzerland, but they’re still abiding by US regulation because the SEC reach, as has been demonstrated several times is really global.”

I found the ICO craze extremely frustrating over the past three years. Projects are looking at the Howey Test to determine whether something is a security. There’s also a thing called a Bright-line test, which means that if you’re in front of a judge and you had a duck and you dressed it up like a dog and you taught it to bark, if the judge still thinks it’s a duck, then it’s a duck. So, it doesn’t matter how creative you get with the verbiage you use for your token offering, or how you try to delay the delivery of that token, or how you build out your ecosystem. Passing something like the Howey Test is not enough to be safe and say we’re not a security token. In fact, that entire distinction between security and utility is as far as I’m concerned is a joke. You could tokenize an album or a song and it’s not a security. But a year later that artist could say’ if you own my album, I will give you a share of the revenue that I generate from streaming or from my concerts’. Suddenly, your utility token is a security. The motivation behind working with a compliant broker dealer and setting up TokenSquare in fact was that there’s all this misinformation that I can go to the Lichtenstein or Caymans and all of a sudden, I’m exempt. So, make sure you’re compliant in every major country if you want to launch anything that’s a security.”


“What happened in these days is that people decided to move to either Malta or the countries where it was easiest to issue a token with less regulation and away from regulators etc. In Europe, if you want to issue a security token in Holland or in Germany for example, the rules are quite already in place to make sure that you can issue a security token without giving away any governance. You can raise 5 million on a yearly basis. So, the rules are quite lenient already towards issuing security tokens. And then we still see companies moving to Malta or other counties. And I think on an investor’s point of view, it’s starting to be a huge red flag in a sense that if you do not take time or any efforts to list or issue the token in the major countries.”

10. Sarah: What’s the most important issues for an asset owner to consider at the start of doing STO? In which jurisdictions that investors can more easily accept digital security and bring better liquidity in your mind?


“First of all, you want to make sure that your business case has all the traditional elements. That you’ve done a background check on your Directors and Officers and you’ve disclosed everything in the business plan. For example, you have financial forecasts and you have all appropriate disclosures and assumptions. The second part is you need to build an airtight legal case. What I mean is before you start, you need to discuss how are you going to structure the token, which protocol will be used, etc. You need to have the appropriate legal counsel to review the business case and all these materials and then you can look at how to structure this to be compliant for both the jurisdictions where you’re issuing the tokens as well as the investors that you would like to accept.”

11. Lili: Martin, as a consultant, have you seen your client profile changed in last few years?


“Yes, in the last three years we have the conversation with real estate projects, diamond exchanges, cannabis supply chain, startups, etc. Projects don’t want to dilute the equity, so they want to launch a ‘utility token’, which effectively means that you’re pre selling a good or a service so you should pay tax on that unearned revenue. However, the projects also don’t want to pay tax. That’s why we didn’t engage with 99% of the clients’ projects after the first or third consultation in the last year. This has changed drastically. The projects that are coming into the space are no longer pre revenue and would like to raise capital but don’t want to go down the traditional route of an IPO. They’re consulting with us for tokenizing their assets, equity or preferred shares and organizing dividend structures. They’re not doing this just to raise money and not dilute equity or just to get a quick buck. They’re doing this because this is a way to help them grow their company or the business to the next level. They want to be extremely compliant.”

12. Lili: Balder , what other factors you will look at when you’re making investment evaluation?


“There’re some key things which have become even more important as time has passed. Team is always the no. 1 and we do every extensive background check on what they’ve done before and what things are they working on. For instance, when you must work on a project for six months and then continue to the next project, we don’t even have to look any further on the project. The second one is obviously which markets are they trying to target at and the third one is how they can disrupt this market.”

13. Lili: What’s your current priority or biggest challenge in terms of your business?


“Our biggest challenge is the technology and the way that the token issued around the world. On investment scope, we’re investing on a global reach and keeping up with the latest information on how regulators are perceiving our technology and the change of technology in different jurisdictions. It would be definitely helpful if we can get more information on how SEC is supporting security tokens or utility tokens and around Asia.”


“Our biggest challenge is the technology to be blended. It’s very cumbersome and it’s undocumented to integrate X token with other tokens or other platforms. It’s a huge time and resource expenditure and frankly that’s not sustainable and especially in the market that the valuable tokens become less. That’s the reason we’re open sourced project. We wanted to be adopted from other projects on NEO like Moonlight to encode that into a universal ID type extension which is kind of how we pack setup for the customer. The biggest hurdle is how to make it a sustainable model that profitable and how do you integrate with multiple platforms.”


“Our current priorities are two. One is business development of high caliber security token clients. It’s really challenging right now to distinguish a consulting practice like TokenSquare given that there are thousands of individuals on LinkedIn who call themselves blockchain experts in their profile just because they read 100 hours of articles. The parallel priority to that is building out a network of trusted advisors that are able to fill other gaps that businesses have like legal, smart contract development, etc..”


“Our current priority is to confirm the proof of concept that our business model is focusing on. And the biggest challenge is although every suggest that we will be compliant from the issuers’ perspective, but there’s a regulatory uncertainty unless we get a legal opinion across each single jurisdiction.”

NGD will keep holding roundtables with different players which including issuance platform, KYC/AML provider, broker-dealer, OTC platform, security token exchange, custodian, and etc.

The team has also created Global Blockchain Compliance hub:

We’d like to invite NEO global community to join us, and together create a public sourcing platform of compliance and regulation.

Disclaimer: The information contained in this article has got approvals from all attendees for publishing, and should not be construed as legal advice on any subject matter.